Table of Contents    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  (Mark One)  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended July 31, 2008  or  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from ___________________  to  _____________  Commission File Number 333-134875  RATHGIBSON, INC. (Exact name of registrant as specified in its charter)  Delaware22-3683283(State or other jurisdiction of incorporation or(I.R.S. Employer Identification No.)organization)475 Half Day Road, Suite 210, Lincolnshire, Illinois60069(Address of principal executive offices)(Zip Code)(847) 276-2100(Registrants telephone number, including area code)N/A(Former name, former address and former fiscal year, if changed since last report)  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 o No ý  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 oAccelerated filer oNon-accelerated filer ý(Do not check if a smaller reporting company)Smaller reporting company o  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo ý  At September 12, 2008, 100 shares of Common Stock were outstanding.   Table of Contents  RATHGIBSON, INC.   TABLE OF CONTENTS  FOR THE QUARTERLY PERIOD ENDED JULY 31, 2008    PagePART I - FINANCIAL INFORMATIONItem 1.Financial StatementsCondensed Consolidated Balance Sheets at July 31, 2008 and January 31,2008 (Unaudited)3Condensed Consolidated Statements of Operations for the Three MonthsEnded July 31, 2008, the Period June 16, 2007 through July 31, 2007and the Period May 1, 2007 through June 15, 2007 (Unaudited)4Condensed Consolidated Statements of Operations for the Six MonthsEnded July 31, 2008, the Period June 16, 2007 through July 31, 2007and the Period February 1, 2007 through June 15, 2007 (Unaudited)5Condensed Consolidated Statements of Cash Flows for the Six MonthsEnded July 31, 2008, the Period June 16, 2007 through July 31, 2007and the Period February 1, 2007 through June 15, 2007 (Unaudited)6Notes to Condensed Consolidated Financial Statements (Unaudited)7Item 2.Managements Discussion and Analysis of Financial Condition and Results ofOperations37Item 3.Quantitative and Qualitative Disclosures about Market Risk50Item 4.Controls and Procedures51Item 4T.Controls and Procedures51PART II - OTHER INFORMATIONItem 1.Legal Proceedings51Item 1A.Risk Factors51Item 2.Unregistered Sales of Equity Securities and Use of Proceeds52Item 3.Defaults Upon Senior Securities52Item 4.Submission of Matters to a Vote of Securities Holders52Item 5.Other Information52Item 6.Exhibits53     2  Table of Contents  PART I   Item 1. Financial Statements.  RATHGIBSON, INC. AND SUBSIDIARY   CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited)    July 31,January 31,20082008AssetsCurrent assets:Cash$2,126$680Restricted cash-2,000Accounts receivable, net of reserves of $326 and $328 at July31, 2008 and January 31, 2008, respectively53,67154,754Inventories84,30765,597Prepaid expenses and other2,8812,524Refundable income taxes6593,419Deferred income taxes1,2551,438Total current assets144,899130,412Property, plant and equipment, net51,65250,843Goodwill246,472231,769Other intangible assets, net151,527148,516Deferred financing costs and other678383Total assets$595,228$561,923Liabilities and Stockholders EquityCurrent liabilities:Current installments of long-term debt$250$244Accounts payable23,58129,965Accrued expenses20,47817,757Income taxes payable119-Total current liabilities44,42847,996Long-term debt, less current installments274,122248,045Deferred income taxes65,79862,666Stockholders equity:Common stock, $.01 par value; 260,000 shares authorized, 100 sharesissued and outstanding--Additional paid-in capital214,306208,175Accumulated deficit(3,426)(4,929)Total stockholders equity210,880203,246Total liabilities and stockholders equity$595,228$561,923     The accompanying notes are an integral part of these condensed consolidated financial statements.  3  Table of Contents  RATHGIBSON, INC. AND SUBSIDIARY   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (Unaudited)  SuccessorPredecessorThreePeriodPeriodMonthsJune 16,May 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Net sales$88,615$48,674$49,233Cost of goods sold69,71541,95737,265Gross profit18,9006,71711,968Operating expenses:Selling, general and administrative7,5943,02414,961Amortization2,8604,32078810,4547,34415,749Income (loss) from operations8,446(627)(3,781)Interest expense6,2213,3533,353Income (loss) before income taxes2,225(3,980)(7,134)Income tax expense (benefit)1,044(712)(1,193)Net income (loss)$1,181$(3,268)$(5,941)                                 The accompanying notes are an integral part of these condensed consolidated financial statements.  4  Table of Contents   RATHGIBSON, INC. AND SUBSIDIARY   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (Unaudited)  SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Net sales$175,038$48,674$138,239Cost of goods sold139,69141,957106,422Gross profit35,3476,71731,817Operating expenses:Selling, general and administrative14,1603,02421,044Amortization6,0364,3202,36320,1967,34423,407Income (loss) from operations15,151(627)8,410Interest expense12,4103,3539,991Income (loss) before income taxes2,741(3,980)(1,581)Income tax expense (benefit)1,238(712)930Net income (loss)$1,503$(3,268)$(2,511)                      The accompanying notes are an integral part of these condensed consolidated financial statements.  5  Table of Contents  RATHGIBSON, INC. AND SUBSIDIARY   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)    SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Cash flows from operating activities:Net income (loss)$1,503$(3,268)$(2,511)Adjustments to reconcile net income (loss) to net cashused in operating activities:Depreciation and amortization9,2665,0304,551Net amortization of deferred debt expenses andbond premium(563)48576Expensing of write-up of inventory6662,864-Loss on disposal of property, plantand equipment--16Deferred income taxes(524)(2,479)(1,846)Incentive unit expense1311664,079Change in assets and liabilities, net of acquisition:Accounts receivable2,769274(5,850)Inventories(11,372)1,568(17,014)Other current and non-current assets(510)416598Accounts payable(6,747)(5,839)14,188Accrued expenses8542,708(7,767)Income taxes2,879(2,579)(202)Net cash used in operating activities(1,648)(1,091)(11,182)Cash flows from investing activities:Acquisition of property, plant and equipment(5,297)(912)(2,269)Decrease in restricted cash2,000--Cash paid for acquisition, net of cash acquired(20,136)--Net cash used in investing activities(23,433)(912)(2,269)Cash flows from financing activities:Net proceeds from Revolving Credit Facility26,8514,94112,324Payments on long-term debt(121)--Dividend-(3,800)-Proceeds from parent company-1,962-Payments of financing fees(203)(151)(50)Net cash provided by financing activities26,5272,95212,274Net increase (decrease) in cash1,446949(1,177)Cash at beginning of period6804,4545,631Cash at end of period$2,126$5,403$4,454    The accompanying notes are an integral part of these condensed consolidated financial statements.   6  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   (1) ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION  RathGibson, Inc. (RathGibson) and its subsidiary (together with RathGibson, the Company) is one of the worlds leading specialty manufacturers of highly engineered premium stainless steel and alloy tubular products.  The Companys products are designed to meet customer specifications and are used in environments that require high-performance characteristics, such as exceptional strength and the ability to withstand highly corrosive materials, extreme temperatures or high-pressure.  The Company sells over 1,000 products globally to diverse end-markets, including (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial.  The Company sells these products to value-added tubing distributors, original equipment manufacturers, or OEMs, and engineering firms that often recommend the Companys products for projects on which they are engaged.  The Companys primary trade brands, RathTM, Gibson Tube®and GTC®, are recognized as industry leaders and the Companys products have won numerous awards for quality and reliability from customers.  On June 15, 2007, RGCH Holdings Corp. (RGCH Corp.), the direct parent of RathGibson, and RGCH Holdings LLC (RGCH LLC), an indirect parent of RathGibson, completed the sale of 100% of RGCH Corp. to RG Tube Holdings LLC (RG Tube), an affiliate of DLJ Merchant Banking Partners IV, L.P. and affiliated investment funds (DLJ Funds) and certain members of RathGibsons senior management who exchanged a portion of their equity interest in RGCH LLC for equity interest in RG Tube in lieu of cash (referred to as the DLJ Acquisition).  The aggregate purchase price was $211,834, including a contingent payment of $3,376 made by RG Tube in the second quarter of fiscal 2008.  The contingent payment was equal to Adjusted Net Income (as defined in the stock purchase agreement) for the period May 1, 2007 through June 15, 2007, up to a maximum contingent payment of $4,000.  The DLJ Acquisition was financed through a combination of debt and equity.  In connection with the DLJ Acquisition, RGCH Corp. issued $115,000 of 13.5% pay-in-kind notes (PIK Notes) due on June 15, 2015.  The Company, however, is not a party to any agreement related to the PIK Notes and does not have any obligations (including any guarantee obligations) in respect of the PIK Notes and accordingly, the debt and related interest are not recognized in the accompanying financial statements.  In addition, the Company entered into a second amendment to its senior secured revolving credit facility (Revolving Credit Facility) for which the borrowing capacity was increased by $20,000 to $80,000, subject to borrowing base availability.  The contingent payment of $3,376 made by RG Tube was financed by a dividend of $3,800 from RathGibson in the period June 16, 2007 through July 31, 2007.  In connection with the DLJ Acquisition, the Company recorded (i) $4,844 of fees and related charges for the termination of its management agreement with Castle Harlan, Inc. (Castle Harlan), a private equity investment firm which managed Castle Harlan Partners IV, L.P. (CHP IV), a private equity investment fund affiliated with RGCH LLC, which was settled at closing (Note 12); (ii) $2,973 of compensation expense relating to employee bonuses, of which $2,000 and $973 was settled at closing and in the third quarter of fiscal 2008, respectively; and (iii) $3,989 of non-cash incentive unit expense (Note 11).  The foregoing transactions were recorded as selling, general and administrative expenses within the Consolidated Statements of Operations for the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007.  7  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   The following table summarizes the purchase price allocation in the DLJ Acquisition:  Current assets$153,527Property, plant and equipment46,224Goodwill231,769Other intangible assets153,000Deferred financing costs and other342Total assets acquired584,862Current liabilities(57,936)Long-term debt(251,868)Deferred income tax liability(63,224)Total liabilities assumed(373,028)Purchase price paid$211,834  Approximately $32,600 of the goodwill recorded as part of the DLJ Acquisition will be deductible for income tax purposes.  The results for the six months ended July 31, 2008 include the Companys results after the DLJ Acquisition (Successor).  The results for the six months ended July 31, 2007 include the Companys results through June 15, 2007 (Predecessor) and after the DLJ Acquisition (Successor).  The DLJ Acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations for periods subsequent to the consummation of the DLJ Acquisition will not necessarily be comparable to prior periods.  The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been made.  Interim results are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending January 31, 2009.  For further information, refer to the audited consolidated financial statements and notes included in the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2008.  The balance sheet at January 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements.  (2) PRINCIPLES OF CONSOLIDATION  All significant intercompany balances and transactions have been eliminated in consolidation.  8  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    (3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS  In May 2008, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS)No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.  SFAS 162 is effective 60 days following the Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.  The adoption of SFAS 162 will not have a material impact on the Companys consolidated financial position and results of operations.  In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161).  SFAS 161 establishes the disclosure requirements for derivative instruments and for hedging activities with the intent to provide financial statement users with an enhanced understanding of the entitys use of derivative instruments, the accounting of derivative instruments and related hedged items under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and the effects of these instruments on the entitys financial position, results of operations and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is assessing the impact the adoption of SFAS 161 will have on the Companys consolidated financial position and results of operations for fiscal 2010.  In December 2007, the FASB issued SFAS No. 141R, Business Combinations, (SFAS 141R) to create greater consistency in the accounting and financial reporting of business combinations.  SFAS 141R requires a company to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity to be measured at their fair values as of the acquisition date.  SFAS 141R also requires companies to recognize the fair value of assets acquired, the liabilities assumed and any noncontrolling interest in acquisitions of less than a one hundred percent interest when the acquisition constitutes a change in control of the acquired entity.  In addition, SFAS 141R requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred.  SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company is assessing the impact the adoption of SFAS 141R will have on the Companys consolidated financial position and results of operations for fiscal 2010.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159).  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The adoption of SFAS 159 did not have a material impact on the Companys consolidated financial position and results of operations for the three and six months ended July 31, 2008.  9  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures related to the use of fair value measurements.  SFAS 157 applies under other accounting pronouncements that require or permit fair value measurement.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued Statement of Financial Position No. 157-2 (FSP 157-2) which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (at least annually).  FSP 157-2 defers the effective date of FAS 157 pertaining to nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008.  The adoption of SFAS 157 pertaining to financial assets and financial liabilities did not have a material impact on the Companys consolidated financial position and results of operations for the three and six months ended July 31, 2008.  The Company does not expect the adoption of SFAS 157 pertaining to nonfinancial assets and nonfinancial liabilities will have a material impact on the Companys consolidated financial position and results of operations for fiscal 2010.  (4) BUSINESS COMBINATIONS  On February 27, 2008, RathGibson entered into an asset purchase agreement with Mid-South Control Line, Inc. (Mid-South) and the stockholders of Mid-South providing for the acquisition by RathGibson of substantially all of the assets and the assumption of certain liabilities of Mid-South, in exchange for an aggregate purchase price of approximately $26,136 (net of cash acquired of $1,098).  The foregoing transaction is referred to as the Mid-South Acquisition.  Certain stockholders of Mid-South received equity interests in RG Tube of $6,000 in lieu of cash purchase consideration.  Additionally, RG Tube and the Company agreed to reduce its cash payment to the stockholders of Mid-South by $6,000, which was recorded by the Company as an equity contribution from RG Tube.  Mid-South is a distributor of stainless steel and nickel alloy tubing and accessories to the United States and international oil and gas industry, a significant portion of which is purchased from the Companys New Jersey segment.This transaction was financed with the funds available from the Companys Revolving Credit Facility.  The results of Mid-Souths operations have been included in the consolidated financial statements since the date of such acquisition.  The Mid-South Acquisition was accounted for under the purchase method of accounting and in accordance with SFAS No. 141, Business Combinations.  The Company allocated the purchase price on a preliminary basis to the tangible assets, liabilities and identifiable intangible assets.  Each was recorded at their respective estimated fair values based on information currently available.  The excess of cost over the currently estimated aggregate fair values was recorded to goodwill.  The following table summarizes the preliminary purchase price allocation in the Mid-South Acquisition:  Current assets$14,827Machinery and equipment292Goodwill14,703Other intangible assets8,662Other assets23Total assets acquired38,507Current liabilities(8,532)Deferred income tax liability(3,839)Total liabilities assumed(12,371)Purchase price paid, net of cash acquired$26,136   10  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Approximately $20,700 of goodwill will be deductible for income tax purposes.  At July 31, 2008, the allocation of the purchase price has been made on a preliminary basis and the Company is awaiting finalization of valuations of the estimated fair value of the assets acquired and liabilities assumed.  These valuations are expected to be completed during fiscal 2009.  The ultimate value assigned to the tangible and intangible assets and liabilities may vary significantly from the preliminary estimates.  Significant judgments involved in the final valuation of the tangible and intangible assets and liabilities will include estimates of market values, future cash flows and useful lives.  The unaudited pro forma financial information in the table below summarizes the consolidated results of operations for the three months ended July 31, 2007 and the six months ended July 31, 2008 and 2007 as if the Mid-South Acquisition had occurred on February 1, 2008 and 2007.  The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Mid-South Acquisition had taken place at February 1, 2008 or 2007.  The unaudited pro forma financial information includes the elimination of intersegment sales and profits, purchase accounting adjustments on historical Mid-South inventory, amortization of acquired intangible assets, adjustments to interest expense and related tax effects.  The unaudited pro forma financial information does not include pro forma adjustments relating to costs of integration or post-integration cost reductions that may be incurred or realized by the Company in excess of actual amounts incurred or realized. ThreeMonthsEndedSix Months EndedJuly 31July 31,200720082007Net sales$103,400$177,444$196,943Net income (loss)(8,937)1,877(6,013)  (5) INVENTORIES  Inventories consist of the following:  July 31,January 31,20082008Raw materials$55,831$46,147Work in process7,0366,186Finished goods21,44013,264Total inventories$84,307$65,597   11  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    (6) PROPERTY, PLANT AND EQUIPMENT, NET  Property, plant and equipment, net consist of the following:  July 31,January 31,20082008Leasehold improvements$2,099$1,620Machinery and equipment51,81642,994Office equipment, furniture and other1,238926Construction in progress3,3818,95558,53454,495Less accumulated depreciation(6,882)(3,652)Total property, plant and equipment, net$51,652$50,843  Depreciation expense for the three months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period May 1, 2007 through June 15, 2007 was $1,736, $710 and $757, respectively.  Depreciation expense for the six months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period February 1, 2007 through June 15, 2007 was $3,230, $710 and $2,188, respectively.  (7) GOODWILL AND OTHER INTANGIBLE ASSETS  In connection with each of the DLJ Acquisition and Mid-South Acquisition, the Company recorded the excess purchase price over their respective fair values of the identifiable assets and liabilities to goodwill (Notes 1 and 4).  The gross carrying amount and accumulated amortization of the Companys intangible assets, other than goodwill, are as follows:  July 31, 2008January 31, 2008GrossNetGrossNetCarryingAccumulatedBookCarryingAccumulatedBookAmountAmortizationValueAmountAmortizationValueCustomer lists$132,662$10,135$122,527$124,000$4,484$119,516Tradenames29,000-29,00029,000-29,000Total intangibles$161,662$10,135$151,527$153,000$4,484$148,516  The Company recorded intangible assets, other than goodwill, in connection with the DLJ Acquisition and Mid-South Acquisition (Notes 1 and 4).  12  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Amortizable intangible assets consist primarily of customer lists.  Subsequent to the DLJ Acquisition, amortizable intangible assets are amortized principally by an accelerated method over their estimated useful lives of 15 years.  Prior to the DLJ Acquisition, amortizable intangible assets were amortized principally by the straight-line method over their estimated useful lives of 15 years.  The Company recorded backlog of $5,200 and $385 in connection with the DLJ Acquisition and Mid-South Acquisition, respectively.  The DLJ Acquisition backlog was fully amortized in the period June 16, 2007 through January 31, 2008.  The Mid-South Acquisition backlog was fully amortized in the first quarter of fiscal 2009.  Amortization expense consists of the following:  SuccessorPredecessorThreePeriodPeriodMonthsJune 16,May 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Intangibles$2,860$758$788Backlog-3,562-Total amortization expense$2,860$4,320$788   SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Intangibles$5,651$758$2,363Backlog3853,562-Total amortization expense$6,036$4,320$2,363     13  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   The estimated future amortization expense of intangible assets at July 31, 2008 is as follows:  Fiscal years ending January 31,2009 (remaining six months)$5,722201011,324201110,888201210,485201310,055  (8) ACCRUED EXPENSES  Accrued expenses consist of the following:  July 31,January 31,20082008Accrued compensation$3,707$4,315Interest payable10,42110,385Customer advances3,168-Other3,1823,057Total accrued expenses$20,478$17,757  (9) LONG-TERM DEBT  A summary of the Companys long-term debt is as follows:  July 31,January 31,20082008Revolving Credit Facility$62,670$35,819Senior Notes209,838210,485IRB1,8641,985Total long-term debt274,372248,289Less current installments(250)(244)Total long-term debt, less current installments$274,122$248,045   14  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   On February 7, 2006, RathGibson entered into a five-year, $90,000 senior secured Revolving Credit Facility, as amended.  Concurrently with the closing of the DLJ Acquisition, the Company entered into a second amendment to the Revolving Credit Facility for which the borrowing capacity was increased by $20,000 to a total of $80,000, subject to borrowing base availability.  On April 8, 2008, Company entered into a fifth amendment to its Revolving Credit Facility for which the borrowing capacity was increased by $10,000 to $90,000, subject to borrowing base availability, and the interest rate charged on the borrowings under the Revolving Credit Facility was increased to prime plus 1.25% or LIBOR plus 2.25%.  There were no material changes to the covenants as a result of these amendments.  Borrowings under the Revolving Credit Facility bear interest payable at various dates with floating rates of either (i) prime plus 1.25% (6.25% at July 31, 2008) or (ii) LIBOR plus 2.25% (4.71% at July 31, 2008).  At July 31, 2008, the Company had $27,330 available under the Revolving Credit Facility after giving effect to its borrowing base requirements.  Borrowings under the Revolving Credit Facility are collateralized by substantially all assets of the Company.  The Revolving Credit Facility contains various covenants customary to similar credit facilities.  The Company was in compliance with all such covenants at July 31, 2008.  On February 7, 2006, RathGibson issued $200,000 aggregate principal amount of senior notes (Senior Notes) due February 15, 2014.  These notes bear interest at 11.25% per annum payable in semi-annual installments on February 15 and August 15 each year commencing August 15, 2006.  The indenture governing the Senior Notes contains covenants that, among other things, restrict the Companys ability to incur or guarantee additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into certain transactions with affiliates, enter into certain sale and leaseback transactions, merge or consolidate, and transfer or sell assets.  The Company was in compliance with all such covenants at July 31, 2008.  In connection with the purchase accounting for the DLJ Acquisition, the Company adjusted the fair value of its Senior Notes to $211,250.  The bond premium associated with this adjustment is amortized into interest expense over the remaining term of the Senior Notes using the interest method.  Amortization of this bond premium amounted to $328 and $149 for the three months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, respectively.  Amortization of this bond premium amounted to $647 for the six months ended July 31, 2008.  The unamortized bond premium included in the Senior Notes was $9,838 and $10,485 at July 31, 2008 and January 31, 2008, respectively.  On December 14, 2007, Greenville Tube Company (Greenville), a wholly-owned subsidiary of RathGibson, closed on a $2,000 industrial development revenue bond (IRB) with the City of Clarksville, Arkansas, due December 30, 2014.  The proceeds were used to finance the acquisition and installation of machinery and equipment for a degreasing system and a bench automation project (IRB Equipment).  RathGibson is a guarantor of the obligation.  The IRB requires monthly payments of $29 with interest payable at 5.32%.  In connection with the IRB, the Company entered into a third amendment to its Revolving Credit Facility for which the IRB Equipment was released from collateral under the Revolving Credit Facility and permitted Greenville and RathGibson, as guarantor, to enter into the IRB.  (10) INCOME TAXES  The effective tax rate and resulting income tax expense used in this interim period is based on the Companys projections for the remainder of fiscal 2009 and the estimated tax provision to tax return adjustments recorded in the three and six months ended July 31, 2008 which related to the anticipated filing of the Companys income tax returns for the period February 1, 2007 through June 15, 2007 and the period June 16, 2007 through January 31, 2008.  The tax provision to tax return adjustments were not material to fiscal 2008 or the three and six months ended July 31, 2008.To the extent that actual results differ from the projections for the remainder of fiscal 2009 or changes to the tax provision to tax return adjustments related to the filing of the Companys income tax returns, the effective income tax rate and resulting income tax expense may change.   15  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   (11) EQUITY BASED COMPENSATION  Successor - RG Tube has allocated certain of its Class B units for incentive based grants primarily to executives and key employees of the Company.   The incentive units primarily vest based on the following:  (i) 33% vest ratably over certain specified periods of continuing employment; and (ii) 67% vest on the achievement of certain performance-based targets.  Vesting of certain units may be accelerated upon a change of control.  A summary of incentive unit activity during the six months ended July 31, 2008 is presented below:  WeightedAverageNumber ofWeightedRemainingIncentiveAveragePeriodAwardsFair Value(Years)Outstanding at February 1, 2008154,978$16.33Granted55,39316.88Forfeited(1,558)16.41Repurchased(2,756)16.41Outstanding at July 31, 2008206,05716.544.2Vested at July 31, 200832,30916.46  Although the incentive units are issued by RG Tube, the incentive units relate to the employment of executives and key employees of the Company; accordingly, the expense is recognized in the Companys condensed consolidated financial statements.  Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $70 and $166 for the three months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, respectively.  Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $131 for the six months ended July 31, 2008.  At July 31, 2008, total unrecognized incentive unit cost was approximately $1,000.  Predecessor - Prior to the DLJ Acquisition, RGCH LLC allocated certain of its Class B units for incentive based grants to executives and key employees of the Company.   The incentive units primarily vested based on the following:  (i) 25% vested ratably over certain specified periods of continuing employment; (ii) 35% vested on the achievement of certain performance-based targets established annually by the board of directors; and (iii) 40% vested upon the occurrence of a change of control or a public equity offering given the achievement of specified target internal rates of return by CHP IV and its affiliates.  Vesting of units may be accelerated upon a change of control.  No incentive units were granted or forfeited during the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007.  In connection with the DLJ Acquisition, 70,278 nonvested incentive units became vested.  Accordingly, the Company recognized incentive unit expense of $3,989 during the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007.  79,295 incentive units were purchased in connection with the DLJ Acquisition.   16  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Although the incentive units were issued by RGCH LLC, the incentive units related to the employment of executives and key employees of the Company; accordingly, the expense was recognized in the Companys condensed consolidated financial statements.  Incentive unit expense recognized within the condensed consolidated statements of operations amounted to $4,019 and $4,079 for the period May 1, 2007 through June 15, 2007 and the period February 1, 2007 through June 15, 2007, respectively.  (12) ADVISORY AND MANAGEMENT FEES  The Company entered into an advisory services agreement, as amended, with DLJ Merchant Banking, Inc. (DLJMB), an affiliate of DLJ Funds, under which DLJMB acts as a financial advisor with respect to the following services: (i) assisting in analyzing operations and historical performance; (ii) analyzing future prospects; (iii) assisting with respect to future proposals for tender offers, acquisitions, sales, mergers, financings, exchange offers, recapitalizations, restructurings or other similar transactions; and (iv) assisting in strategic planning.  The advisory services agreement is for an initial term expiring June 15, 2012 and is subject to renewal for consecutive one-year terms unless terminated by DLJMB or the Company, RGCH Corp. or RG Tube with 30 days notice prior to the expiration of the initial term or any annual renewal.  For services rendered, annual advisory fees of $900 and $100 are payable to DLJMB and certain consultants for DLJMB who also serve as directors of RG Tube, respectively, in equal quarterly installments on the first business day of each calendar quarter.During the three and six months ended July 31, 2008, the Company recorded an expense of $250 and $500, respectively, to selling, general and administrative expenses within the condensed consolidated statements of operations.  The Company entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provided business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC.  The management agreement was terminated as a result of the DLJ Acquisition.  During the period May 1, 2007 through June 15, 2007, the Company recorded an expense of $5,088 (including $4,844 of fees and charges related to the termination of the management agreement) to selling, general and administrative expenses within the condensed consolidated statements of operations.  During the period February 1, 2007 through June 15, 2007, the Company recorded an expense of $5,577 (including $4,844 of fees and charges related to the termination of the management agreement) to selling, general and administrative expenses within the condensed consolidated statements of operations.  17  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    (13) SUPPLEMENTAL CASH FLOW INFORMATION  The following table presents supplemental cash flow information for the respective periods:   SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Cash paid (received) during the period for:Interest$12,987$408$12,281Income taxes(1,085)4,3462,978Non-cash investing activities:Additions to property, plant and equipmentin accounts payable129-183Non-cash investing and financing activity:Equity contribution from RG Tube in lieu of cashpayment to stockholders of Mid-South (Note 4)6,000--  (14) SEGMENT REPORTING  The Company is primarily a manufacturer of highly engineered premium stainless steel and alloy tubular products.  The Company has determined it has four reportable segments, Wisconsin, New Jersey, Louisiana and Arkansas, due to the historical economic characteristics of each business.  The accounting practices for each segment are the same as those described in the Critical Accounting Policies.  Straight tubing products are manufactured primarily in the Wisconsin (welded) and Arkansas (seamless) plants and coiled tubing products are manufactured primarily in the New Jersey plant.  The Companys Louisiana segment is primarily a distribution facility where a significant portion of its products are purchased from the New Jersey segment.  The Wisconsin segment includes corporate expenses and assets such as certain general and administrative expenses, depreciation and interest expense.  18  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Information about each segment is summarized as follows:  SuccessorNewWisconsinJerseyLouisianaArkansasTotalThree months ended July 31, 2008:Net sales from external customersChemical/petrochemical processingand power generation products$23,573$2,158$-$4,773$30,504Energy products-7,43213,18235120,965Food, beverage andpharmaceutical products10,156508--10,664General commercial products12,2035,177-9,10226,48245,93215,27513,18214,22688,615Intersegment net sales1,1427,435-438,620Income from operations3,0081,3821,0063,0868,482Interest expense (income)6,227--(6)6,221Income tax expense59--1,0021,061Depreciation and amortization2,1751,4722207294,596Capital expenditures959539101,0002,508   SuccessorNewWisconsinJerseyLouisianaArkansasTotalPeriod June 16, 2007 through July 31, 2007:Net sales from external customersChemical/petrochemical processingand power generation products$21,189$1,134$-$1,417$23,740Energy products-6,660-3657,025Food, beverage andpharmaceutical products5,046512-765,634General commercial products4,9953,142-4,13812,27531,23011,448-5,99648,674Intersegment net sales1,433---1,433Income (loss) from operations(1,258)100-531(627)Interest expense (income)3,391--(38)3,353Income tax expense (benefit)(923)--211(712)Depreciation and amortization3,303971-7565,030Capital expenditures523375-14912  19  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    PredecessorNewWisconsinJerseyLouisianaArkansasTotalPeriod May 1, 2007 through June 15, 2007:Net sales from external customersChemical/petrochemical processingand power generation products$19,783$1,113$-$1,482$22,378Energy products-7,100-3917,491Food, beverage andpharmaceutical products5,215433-1735,821General commercial products6,1142,653-4,77613,54331,11211,299-6,82249,233Intersegment net sales51(9)--42Income (loss) from operations(7,228)1,177-2,270(3,781)Interest expense (income)3,379--(26)3,353Income tax expense (benefit)(1,930)--737(1,193)Depreciation and amortization752613-1801,545Capital expenditures(73)342-30299  SuccessorNewWisconsinJerseyLouisianaArkansasTotalSix months ended July 31, 2008:Net sales from external customersChemical/petrochemical processingand power generation products$49,494$3,818$-$9,063$62,375Energy products-14,22920,93586936,033Food, beverage andpharmaceutical products22,0681,871--23,939General commercial products25,05910,326-17,30652,69196,62130,24420,93527,238175,038Intersegment net sales2,95912,598-11515,672Income from operations5,4563,3264736,39115,646Interest expense (income)12,413--(3)12,410Income tax expense (benefit)(755)--2,1781,423Depreciation and amortization4,1782,9057521,4319,266Capital expenditures2,7311,155131,3985,297   20  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    SuccessorNewWisconsinJerseyLouisianaArkansasTotalPeriod June 16, 2007 through July 31, 2007:Net sales from external customersChemical/petrochemical processingand power generation products$21,189$1,134$-$1,417$23,740Energy products-6,660-3657,025Food, beverage andpharmaceutical products5,046512-765,634General commercial products4,9953,142-4,13812,27531,23011,448-5,99648,674Intersegment net sales1,433---1,433Income (loss) from operations(1,258)100-531(627)Interest expense (income)3,391--(38)3,353Income tax expense (benefit)(923)--211(712)Depreciation and amortization3,303971-7565,030Capital expenditures523375-14912  PredecessorNewWisconsinJerseyLouisianaArkansasTotalPeriod February 1, 2007 through June 15, 2007:Net sales from external customersChemical/petrochemical processingand power generation products$50,655$3,059$-$4,813$58,527Energy products-21,332-1,11822,450Food, beverage andpharmaceutical products14,4811,709-41816,608General commercial products19,8218,067-12,76640,65484,95734,167-19,115138,239Intersegment net sales27334--307Income (loss) from operations(927)3,163-6,1748,410Interest expense (income)10,062--(71)9,991Income tax expense (benefit)(1,276)--2,206930Depreciation and amortization2,1651,832-5544,551Capital expenditures664965-6402,269   21  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   The following tables present a reconciliation of income (loss) from operations from the reportable segment totals to the Companys consolidated totals: SuccessorPredecessorThreePeriodPeriodMonthsJune 16,May 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Total income (loss) from operationsfor reportable segments$8,482$(627)$(3,781)Elimination of intersegment profits(36)--Consolidated income (loss) from operations$8,446$(627)$(3,781)   SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Total income (loss) from operationsfor reportable segments$15,646$(627)$8,410Elimination of intersegment profits(495)--Consolidated income (loss) from operations$15,151$(627)$8,410  The following tables present a reconciliation of income tax expense (benefit) from the reportable segment totals to the Companys consolidated totals: SuccessorPredecessorThreePeriodPeriodMonthsJune 16,May 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Total income tax expense (benefit)for reportable segments$1,061$(712)$(1,193)Income tax benefit from elimination of intersegmentprofits(17)--Consolidated income tax expense (benefit)$1,044$(712)$(1,193)   22  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Total income tax expense (benefit)for reportable segments$1,423$(712)$930Income tax benefit from elimination of intersegmentprofits(185)--Consolidated income tax expense (benefit)$1,238$(712)$930  The following table presents segment identifiable asset information:  July 31,January 31,20082008Total assets:Wisconsin$563,510$533,727New Jersey121,556118,378Louisiana40,557-Intersegment eliminations(147,408)(108,834)578,215543,271Arkansas117,456118,009Intersegment eliminations(100,443)(99,357)Total assets$595,228$561,923  The following table presents segment goodwill information:  July 31,January 31,20082008Goodwill:Wisconsin$156,624$156,624New Jersey26,93326,933Louisiana14,703-Arkansas48,21248,212Total goodwill$246,472$231,769  Goodwill recorded in connection with the Mid-South Acquisition is a preliminary balance and is expected to change once the Company obtains third party appraisals and valuation studies on inventories, property, plant and equipment and intangible assets.  23  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    (15) SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION  On February 7, 2006, RathGibson issued its Senior Notes.  Greenville has fully and unconditionally guaranteed on a joint and several basis RathGibsons obligations to pay principal, premium and interest relative to the Senior Notes.  The following supplemental guarantor financial information presents:  (i) condensed consolidating balance sheets at July 31, 2008 and January 31, 2008; (ii) condensed consolidating statements of operations for the three months ended July 31, 2008, the period June 16, 2007 through July 31, 2007, the period May 1, 2007 through June 15, 2007, the six months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period February 1, 2007 through June 15, 2007; and (iii) condensed consolidating statements of cash flows for the six months ended July 31, 2008, the period June 16, 2007 through July 31, 2007 and the period February 1, 2007 through June 15, 2007.    24  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Balance Sheet At July 31, 2008  SuccessorRathGibsonGreenvilleEliminationsConsolidatedAssetsCurrent assets:Cash$1,724$402$-$2,126Accounts receivable, net46,5207,151-53,671Intercompany account and note receivable61972(1,033)-Inventories62,06422,289(46)84,307Prepaid expenses and other2,316565-2,881Refundable income taxes2,35564(1,760)659Deferred income taxes1,022233-1,255Total current assets116,06231,676(2,839)144,899Property, plant and equipment, net44,6956,957-51,652Goodwill198,26048,212-246,472Other intangible assets, net120,95730,570-151,527Deferred financing costs and other63741-678Investment in subsidiary97,604-(97,604)-Total assets$578,215$117,456$(100,443)$595,228Liabilities and Stockholders EquityCurrent liabilities:Current installments of long-term debt$-$250$-$250Accounts payable20,7352,846-23,581Intercompany account and note payable97261(1,033)-Accrued expenses19,639839-20,478Income taxes payable1,136759(1,776)119Total current liabilities42,4824,755(2,809)44,428Long-term debt, less current installments272,5081,614-274,122Deferred income taxes52,31513,483-65,798Mandatorily redeemable preferred stock-2,100(2,100)-Stockholders equity:Common stock-1(1)-Additional paid-in capital214,30687,041(87,041)214,306Retained earnings (accumulated deficit)(3,396)8,462(8,492)(3,426)Total stockholders equity210,91095,504(95,534)210,880Total liabilities and stockholders equity$578,215$117,456$(100,443)$595,228   25  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Balance Sheet At January 31, 2008  SuccessorRathGibsonGreenvilleEliminationsConsolidatedAssetsCurrent assets:Cash$237$443$-$680Restricted cash-2,000-2,000Accounts receivable, net48,5416,213-54,754Intercompany account and note receivable1812,415(2,596)-Inventories45,18220,415-65,597Prepaid expenses and other2,131393-2,524Refundable income taxes6,78111(3,373)3,419Deferred income taxes1,325113-1,438Total current assets104,37832,003(5,969)130,412Property, plant and equipment, net44,8555,988-50,843Goodwill183,55748,212-231,769Other intangible assets, net116,77631,740-148,516Deferred financing costs and other31766-383Investment in subsidiary93,388-(93,388)-Total assets$543,271$118,009$(99,357)$561,923Liabilities and Stockholders EquityCurrent liabilities:Current installments of long-term debt$-$244$-$244Accounts payable25,9634,002-29,965Intercompany account and note payable2,415181(2,596)-Accrued expenses16,4901,267-17,757Income taxes payable-3,373(3,373)-Total current liabilities44,8689,067(5,969)47,966Long-term debt, less current installments246,3041,741-248,045Deferred income taxes48,85313,813-62,666Mandatorily redeemable preferred stock-2,100(2,100)-Stockholders equity:Common stock-1(1)-Additional paid-in capital208,17587,041(87,041)208,175Retained earnings (accumulated deficit)(4,929)4,246(4,246)(4,929)Total stockholders equity203,24691,288(91,288)203,246Total liabilities and stockholders equity$543,271$118,009$(99,357)$561,923   26  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Operations For the Three Months Ended July 31, 2008   SuccessorRathGibsonGreenvilleEliminationsConsolidatedNet sales$74,804$14,269$(458)$88,615Cost of goods sold60,08310,073(441)69,715Gross profit14,7214,196(17)18,900Operating expenses:Selling, general and administrative7,069525-7,594Amortization2,275585-2,8609,3441,110-10,454Income from operations5,3773,086(17)8,446Interest expense (income)6,227(6)-6,221Income (loss) before equity in earnings ofsubsidiary and income taxes(850)3,092(17)2,225Equity in earnings of subsidiary(2,090)-2,090-Income before income taxes1,2403,092(2,107)2,225Income tax expense481,002(6)1,044Net income$1,192$2,090$(2,101)$1,181   27  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Operations For the Period June 16, 2007 through July 31, 2007  SuccessorRathGibsonGreenvilleEliminationsConsolidatedNet sales$43,413$5,996$(735)$48,674Cost of goods sold38,3804,312(735)41,957Gross profit5,0331,684-6,717Operating expenses:Selling, general and administrative2,566458-3,024Amortization3,625695-4,3206,1911,153-7,344Income (loss) from operations(1,158)531-(627)Interest expense (income)3,391(38)-3,353Income (loss) before equity in earnings ofsubsidiary and income taxes(4,549)569-(3,980)Equity in earnings of subsidiary(358)-358-Income (loss) before income taxes(4,191)569(358)(3,980)Income tax expense (benefit)(923)211-(712)Net income (loss)$(3,268)$358$(358)$(3,268)   28  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Operations For the Period May 1, 2007 through June 15, 2007  PredecessorRathGibsonGreenvilleEliminationsConsolidatedNet sales$42,462$6,822$(51)$49,233Cost of goods sold33,3813,935(51)37,265Gross profit9,0812,887-11,968Operating expenses:Selling, general and administrative14,465496-14,961Amortization667121-78815,132617-15,749Income (loss) from operations(6,051)2,270-(3,781)Interest expense (income)3,379(26)-3,353Income (loss) before equity in earnings ofsubsidiary and income taxes(9,430)2,296-(7,134)Equity in earnings of subsidiary(1,559)-1,559-Income (loss) before income taxes(7,871)2,296(1,559)(7,134)Income tax expense (benefit)(1,930)737-(1,193)Net income (loss)$(5,941)$1,559$(1,559)$(5,941)   29  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Operations For the Six Months Ended July 31, 2008   SuccessorRathGibsonGreenvilleEliminationsConsolidatedNet sales$149,731$27,353$(2,046)$175,038Cost of goods sold123,16518,526(2,000)139,691Gross profit26,5668,827(46)35,347Operating expenses:Selling, general and administrative12,8941,266-14,160Amortization4,8661,170-6,03617,7602,436-20,196Income from operations8,8066,391(46)15,151Interest expense (income)12,413(3)-12,410Income (loss) before equity in earnings ofsubsidiary and income taxes(3,607)6,394(46)2,741Equity in earnings of subsidiary(4,216)-4,216-Income before income taxes6096,394(4,262)2,741Income tax expense (benefit)(924)2,178(16)1,238Net income$1,533$4,216$(4,246)$1,503   30  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Operations For the Period June 16, 2007 through July 31, 2007  SuccessorRathGibsonGreenvilleEliminationsConsolidatedNet sales$43,413$5,996$(735)$48,674Cost of goods sold38,3804,312(735)41,957Gross profit5,0331,684-6,717Operating expenses:Selling, general and administrative2,566458-3,024Amortization3,625695-4,3206,1911,153-7,344Income (loss) from operations(1,158)531-(627)Interest expense (income)3,391(38)-3,353Income (loss) before equity in earnings ofsubsidiary and income taxes(4,549)569-(3,980)Equity in earnings of subsidiary(358)-358-Income (loss) before income taxes(4,191)569(358)(3,980)Income tax expense (benefit)(923)211-(712)Net income (loss)$(3,268)$358$(358)$(3,268)   31  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Operations For the Period February 1, 2007 through June 15, 2007  PredecessorRathGibsonGreenvilleEliminationsConsolidatedNet sales$119,245$19,115$(121)$138,239Cost of goods sold95,38411,159(121)106,422Gross profit23,8617,956-31,817Operating expenses:Selling, general and administrative19,6251,419-21,044Amortization2,000363-2,36321,6251,782-23,407Income from operations2,2366,174-8,410Interest expense (income)10,062(71)-9,991Income (loss) before equity in earnings ofsubsidiary and income taxes(7,826)6,245-(1,581)Equity in earnings of subsidiary(4,039)-4,039-Income (loss) before income taxes(3,787)6,245(4,039)(1,581)Income tax expense (benefit)(1,276)2,206-930Net income (loss)$(2,511)$4,039$(4,039)$(2,511)        32  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Cash Flows For the Six Months Ended July 31, 2008  SuccessorRathGibsonGreenvilleEliminationsConsolidatedCash flows from operating activities:Net income$1,533$4,216$(4,246)$1,503Adjustments to reconcile net income to net cashused in (provided by) operating activities:Depreciation and amortization7,8351,431-9,266Net amortization of deferred debt expenses andbond premium(566)3-(563)Expensing of write-up of inventory666--666Deferred income taxes(74)(450)-(524)Incentive unit expense131--131Equity in earnings of subsidiary(4,216)-4,216-Change in assets and liabilities, net of acquisition:Accounts receivable3,707(938)-2,769Intercompany account receivable and payable127(127)--Inventories(9,544)(1,874)46(11,372)Other current and non-current assets(338)(172)-(510)Accounts payable(5,759)(988)-(6,747)Accrued expenses1,282(428)-854Income taxes5,562(2,667)(16)2,879Net cash provided by(used in) operating activities346(1,994)-(1,648)Cash flows from investing activities:Acquisition of property, plant and equipment(3,899)(1,398)-(5,297)Decrease in restricted cash-2,000-2,000Intercompany note receivable-1,450(1,450)-Cash paid for acquisition, net of cash acquired(20,136)--(20,136)Net cash provided by(used in) investing activities(24,035)2,052(1,450)(23,433)Cash flows from financing activities:Net proceeds from Revolving Credit Facility26,851--26,851Payments on long-term debt-(121)-(121)Intercompany note payable(1,450)-1,450-Payments (refunds) of financing fees(225)22-(203)Net cash provided by(used in) financing activities25,176(99)1,45026,527Net increase (decrease) in cash1,487(41)-1,446Cash at beginning of period237443-680Cash at end of period$1,724402$-$2,126   33  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)   Condensed Consolidating Statement of Cash Flows For the Period June 16, 2007 through July 31, 2007  SuccessorRathGibsonGreenvilleEliminationsConsolidatedCash flows from operating activities:Net income (loss)$(3,268)$358$(358)$(3,268)Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities:Depreciation and amortization4,274756-5,030Net amortization of deferred debt expenses andbond premium48--48Expensing of write-up of inventory2,579285-2,864Deferred income taxes(2,163)(316)-(2,479)Incentive unit expense166--166Equity in earnings of subsidiary(358)-358-Change in assets and liabilities:Accounts receivable(69)343-274Intercompany account receivable and payable(500)500--Inventories3,505(1,937)-1,568Other current and non-current assets452(36)-416Accounts payable(7,401)1,562-(5,839)Accrued expenses2,61296-2,708Income taxes(2,279)(300)-(2,579)Net cash provided by (used in)operating activities(2,402)1,311-(1,091)Cash flows from investing activities:Acquisition of property, plant and equipment(898)(14)-(912)Intercompany note receivable-(662)662-Net cash used in investing activities(898)(676)662(912)Cash flows from financing activities:Net proceeds from Revolving Credit Facility4,941--4,941Dividend(3,800)--(3,800)Proceeds from parent company1,962--1,962Intercompany note payable662-(662)-Payments of financing fees(151)--(151)Net cash provided by financing activities3,614-(662)2,952Net increase in cash314635-949Cash at beginning of period3,848606-4,454Cash at end of period$4,162$1,241$-$5,403     34  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    Condensed Consolidating Statement of Cash Flows For the Period February 1, 2007 through June 15, 2007  PredecessorRathGibsonGreenvilleEliminationsConsolidatedCash flows from operating activities:Net income (loss)$(2,511)$4,039$(4,039)$(2,511)Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities:Depreciation and amortization3,997554-4,551Amortization of deferred debt expenses576--576Loss on disposal of property, plant and equipment-16-16Deferred income taxes(1,541)(305)-(1,846)Incentive unit expense4,079--4,079Equity in earnings of subsidiary(4,039)-4,039-Change in assets and liabilities:Accounts receivable(3,666)(2,184)-(5,850)Intercompany account receivable and payable(8)8--Inventories(17,846)832-(17,014)Other current and non-current assets316282-598Accounts payable15,547(1,359)-14,188Accrued expenses(7,249)(518)-(7,767)Income taxes(1,403)1,201-(202)Net cash provided by (used in)operating activities(13,748)2,566-(11,182)Cash flows from investing activities:Acquisition of property, plant and equipment(1,629)(640)-(2,269)Intercompany note receivable-(1,525)1,525-Net cash used in investing activities(1,629)(2,165)1,525(2,269)Cash flows from financing activities:Net proceeds from Revolving Credit Facility12,324--12,324Intercompany note payable1,525-(1,525)-Payments of financing fees(50)--(50)Net cash provided by financing activities13,799-(1,525)12,274Net increase (decrease) in cash(1,578)401-(1,177)Cash at beginning of period5,426205-5,631Cash at end of period$3,848$606$-$4,454       35  Table of Contents RATHGIBSON, INC. AND SUBSIDIARY  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  July 31, 2008 (Unaudited) (Dollars in thousands, except share data)    (16) SUBSEQUENT EVENT  On August 6, 2008, the Company announced the departure of its chairman and chief executive officer effective as of August 6, 2008.  The Company will record approximately $1,260 in severance costs in the third quarter of fiscal 2009 which will be paid pursuant to terms of the employment agreement, as amended.   36


Table of Contents   Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.  The following discussion and analysis of financial condition and results of operations has been derived from, and should be read in conjunction with, the unaudited condensed consolidated financial statements, including the notes thereto, contained herein.  See the discussion of Successor and Predecessor under Note 1 to the unaudited condensed consolidated financial statements.  Future results could differ materially from those discussed below.  See the discussion under Forward Looking Statements.  Forward-Looking Statements  This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements may be identified by the use of forward-looking terminology such as anticipate, believe, continue, could, estimate, expect, intend, may, might, plan, potential, predict, or should, or the negative thereof or other variations thereon or comparable terminology.  The Company has based these forward-looking statements on current expectations, assumptions, estimates and projections.  While the Company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the Companys control.  These and other important factors may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.  Some of the key factors that could cause actual results, performance or achievements to differ from the Companys expectations include:  § competitive pressures and trends in the industry;  § liquidity and capital resources;  § fluctuations in the price and/or supply of steel and other raw materials;  § general economic conditions;  § legal proceedings and regulatory matters;  § ability to identify acquisition opportunities and effectively and cost efficiently integrate acquisitions that the Company consummates;  § technological changes; and  § those other risks and uncertainties discussed under Item 1A to the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2008.  Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof.  Executive Summary  The Company is one of the worlds leading specialty manufacturers of highly engineered premium stainless steel and alloy tubular products.  The Companys products are designed to meet customer specifications and are used in environments that require high-performance characteristics, such as exceptional strength and the ability to withstand highly corrosive materials, extreme temperatures or high-pressure.  The Company sells over 1,000 products globally to diverse end-markets, including (i) chemical/petrochemical processing and power generation; (ii) energy; (iii) food, beverage and pharmaceuticals; and (iv) general commercial.


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Table of Contents   The Companys highlights for the three and six months ended July 31, 2008 included the following:  § the acquisition of Mid-South on February 27, 2008;  § the amendment to the Revolving Credit Facility increasing the borrowing capacity by $10.0 million to $90.0 million;  § decrease in net sales of 9.5% to $88.6 million for the second quarter of fiscal 2009, as compared to $97.9 million in total for the periods May 1, 2007 through June 15, 2007 ($49.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million); decrease in net sales of 6.4% to $175.0 million for the six months ended July 31, 2008, as compared to $186.9 million in total for the periods February 1, 2007 through June 15, 2007 ($138.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million);  § decrease in gross profit of 8.3% to $35.4 million for the six months ended July 31, 2008, as compared to $38.5 million in total for the periods February 1, 2007 through June 15, 2007 ($31.8 million) and June 16, 2007 through July 31, 2007 ($6.7 million);  § increase in gross profit margin for the second quarter of fiscal 2009 to 21.3% from 19.1% in total for the periods May 1, 2007 through June 15, 2007 (24.3%) and June 16, 2007 through July 31, 2007 (13.8%); and  § Adjusted EBITDA(1)decrease of 22.5% to $13.1 million for the second quarter of fiscal 2009, as compared to $16.8 million in total for the periods May 1, 2007 through June 15, 2007 ($9.5 million) and June 16, 2007 through July 31, 2007 ($7.3 million); Adjusted EBITDA(1)decrease of 21.7% to $25.1 million for the six months ended July 31, 2008, as compared to $32.0 million in total for the periods February 1, 2007 through June 15, 2007 ($24.7 million) and June 16, 2007 through July 31, 2007 ($7.3 million).  (1) As used herein, Adjusted EBITDA represents net income plus (i) income tax expense (benefit); (ii) interest expense; (iii) depreciation and amortization; and (iv) other expenses associated with the DLJ Acquisition and Mid-South Acquisition as shown below (in thousands):  SuccessorPredecessorThreePeriodPeriodMonthsJune 16,May 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Net income (loss)$1,181$(3,268)$(5,941)Income tax expense (benefit)1,044(712)(1,193)Interest expense6,2213,3533,353Depreciation and amortization4,5965,0301,545EBITDA13,0424,403(2,236)Expensing of write-up of inventory-2,864-Equity compensation expense--3,989Fees and charges-termination ofmanagement agreement--4,844Compensation expense--2,962Adjusted EBITDA$13,042$7,267$9,559


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Table of Contents    SuccessorPredecessorSixPeriodPeriodMonthsJune 16,February 1,Ended2007 through2007 throughJuly 31,July 31,June 15,200820072007Net income (loss)$1,503$(3,268)$(2,511)Income tax expense (benefit)1,238(712)930Interest expense12,4103,3539,991Depreciation and amortization9,2665,0304,551EBITDA24,4174,40312,961Expensing of write-up of inventory6662,864-Equity compensation expense--3,989Fees and charges-termination ofmanagement agreement--4,844Compensation expense--2,962Adjusted EBITDA$25,083$7,267$24,756  The Company has included information concerning Adjusted EBITDA in this Quarterly Report on Form 10-Q because the Company believes that such information is used by certain investors, securities analysts and others as one measure of performance and historical ability to service debt.  In addition, the Company uses Adjusted EBITDA when interpreting operating trends and results of operations of the business.  Executive compensation is based, in part, on the Companys Adjusted EBITDA performance measured against targets.  Adjusted EBITDA is also used by the Company and others in the industry to evaluate proposed capital expenditures and to evaluate and to price potential acquisition candidates.  Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to, or more meaningful than, net income, income from operations, cash flows from operations or other traditional indications of a companys operating performance or liquidity.  The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation, or as a substitute for analysis of the Companys results as reported under GAAP.  Some of these limitations are:  § Adjusted EBITDA does not reflect the Companys current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments;  § Adjusted EBITDA does not reflect changes in, or cash requirements for, the Companys working capital needs;  § Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on the Companys debt; and  § although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacement.  Because of these limitations, Adjusted EBITDA should not be considered as discretionary cash available to the Company to reinvest in the growth of its business or as a measure of cash that will be available to the Company to meet its obligations.  You should compensate for these limitations by relying primarily on the Companys GAAP results and using Adjusted EBITDA only supplementally.


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Table of Contents   The following tables set forth selected financial data (i) as a percentage of net sales; and (ii) the percentage change in dollars in those reported items from the comparable period:  SuccessorPredecessorTotal*ThreePeriodPeriodThreeMonthsJune 16,May 1,MonthsEnded2007 through2007 throughEndedJuly 31,July 31,June 15,July 31,%2008200720072007ChangeNet sales100.0%100.0%100.0%100.0%(9.5)%Cost of good sold78.786.275.780.9(12.0)Gross profit21.313.824.319.11.2Operating expenses:Selling, general and administrative8.66.230.418.4(57.8)Amortization3.28.91.65.2(44.0)11.815.132.023.6(54.7)Income (loss) from operations9.5(1.3)(7.7)(4.5)(291.6)Interest expense7.06.96.86.8(7.2)Income (loss) before income taxes2.5(8.2)(14.5)(11.3)(120.0)Income tax expense (benefit)1.2(1.5)(2.4)(1.9)(154.8)Net income (loss)1.3%(6.7)%(12.1)%(9.4)%(112.8)   SuccessorPredecessorTotal*SixPeriodPeriodSixMonthsJune 16,February 1,MonthsEnded2007 through2007 throughEndedJuly 31,July 31,June 15,July 31,%2008200720072007ChangeNet sales100.0%100.0%100.0%100.0%(6.4)%Cost of good sold79.886.277.079.4(5.9)Gross profit20.213.823.020.6(8.3)Operating expenses:Selling, general and administrative8.16.215.212.9(41.2)Amortization3.48.91.73.6(9.7)11.515.116.916.5(34.3)Income (loss) from operations8.7(1.3)6.14.194.7Interest expense7.16.97.27.1(7.0)Income (loss) before income taxes1.6(8.2)(1.1)(3.0)(149.3)Income tax expense (benefit).7(1.5).7.1467.9Net income (loss).9%(6.7)%(1.8)%(3.1)%(126.0)  * Used for comparative purposes  Selected Factors that Affect Operating Results  The Companys business, financial condition and results of operations are significantly influenced by (i) overall demand for the Companys products; (ii) costs of stainless steel and other raw materials; and (iii) oil and gas production and exploration.  Overall demand for stainless steel, specialty alloy and titanium tubing products had been robust during fiscal 2007 and the first half of fiscal 2008, driven by continued growth in general economic conditions and strong demand for high performance materials for chemical/petrochemical processing, power generation, energy and other applications.


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Table of Contents   During the second half of fiscal 2008, sharply declining prices encouraged customers to delay purchases which the Company believes caused volume of shipments to decline.  Furthermore, demand for tubing used in the installation of ethanol plants has declined significantly and contributed to increased competitive pressures for heat exchanger and general commercial products.  The following table presents the Companys sales volumes and raw material cost indices:  Three Months EndedSix Months EndedJuly 31,July 31,2008200720082007Feet shipped (millions)33.836.366.674.6Stainless steel price index*200.6245.0197.5237.2  *Source CRU International  Stainless steel prices have historically been dependent on supply and demand and costs of raw materials such as chrome, nickel, molybdenum and titanium. While the Company is able to pass through changes in the cost of raw materials to customers, significant changes can lead customers to temporarily delay purchases, substitute materials and/or cancel capital projects.  The specialty steel industry has experienced significant changes in the cost of raw materials such as nickel, molybdenum and titanium over the last several years.  In products containing nickel and titanium, the Company has experienced continued softness, beginning in the second half of fiscal 2008, which the Company believes is attributable to customers depleting existing inventories and assessing whether the rapid change in price levels will continue.  Fluctuations in Quarterly Results of Operations  Quarterly results may be materially affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions, variations in costs of products sold, the mix of products sold and general economic conditions.  Results for any quarter may not be indicative of the results for any subsequent fiscal quarter or for a full fiscal year. There is generally no significant seasonality in demand for the Companys products or operations as a whole.  Results of Operations  Three Months Ended July 31, 2008 as Compared to the Periods May 1, 2007 through June 15, 2007 and June 16, 2007 through July 31, 2007  Net Sales  Overall - For the second quarter of fiscal 2009, net sales decreased $9.3 million, or 9.5%, to $88.6 million, as compared to $97.9 million in total for the periods May 1, 2007 through June 15, 2007 ($49.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million).  This decrease in overall sales was primarily due to (i) decreases in the sales volume of heat exchanger, nickel and sub-sea umbilical products ($7.1 million), offset by increases in the sales volume of high purity/electropolished and general commercial products ($3.2 million) and incremental sales from the acquisition of Mid-South on February 27, 2008 ($5.6 million); and (ii) decreases in the average selling price of heat exchanger, nickel, high purity/electropolished and general commercial products ($12.6 million), offset by an increase in the average selling price of sub-sea umbilical products ($2.1 million).  Total feet shipped during the second quarter of fiscal 2009 decreased by 6.8% to 33.8 million feet, as compared to 36.3 million feet in total for the periods May 1, 2007 through June 15, 2007 (18.7 million feet) and June 16, 2007 through July 31, 2007 (17.6 million feet).  This decrease in total feet shipped was primarily due to decreases in the sales volume of heat exchanger, nickel and beverage coil products, offset by an increase in the sales volume of general commercial products and incremental footage from the acquisition of Mid-South.


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Table of Contents   Chemical/Petrochemical Processing and Power Generation Products -For the second quarter of fiscal 2009, net sales of chemical/petrochemical processing and power generation products decreased $15.6 million, or 33.9%, to $30.5 million, as compared to $46.1 million in total for the periods May 1, 2007 through June 15, 2007 ($22.4 million) and June 16, 2007 through July 31, 2007 ($23.7 million).  This decrease in sales was primarily due to decreases in the sales volume and average selling price of heat exchanger and nickel products which the Company believes was due to lower demand for stainless steel and nickel alloy tubing in heat exchanger applications, increased concern about the slowing general manufacturing economy and lower material cost market values as compared to the same period in fiscal 2008.  Feet shipped of chemical/petrochemical processing and power generation products during the second quarter of fiscal 2009 decreased by 19.5% to 8.7 million feet, as compared to 10.8 million feet in total for the periods May 1, 2007 through June 15, 2007 (5.2 million feet) and June 16, 2007 through July 31, 2007 (5.6 million feet).  This decrease was primarily due to decreases in the sales volume of heat exchanger and nickel products including lower sales volume for applications in ethanol and desalination plants.  Energy Products -  For the second quarter of fiscal 2009, net sales of energy products increased $6.4 million, or 44.4%, to $20.9 million, as compared to $14.5 million in total for the periods May 1, 2007 through June 15, 2007 ($7.5 million) and June 16, 2007 through July 31, 2007 ($7.0 million).  The increase in sales was primarily due to (i) incremental sales from the acquisition of Mid-South ($5.6 million); and (ii) an increase in the average selling price of sub-sea umbilical products ($2.1 million), offset by a decrease in the sales volume of sub-sea umbilical products ($1.4 million).  Feet shipped of energy products during the second quarter of fiscal 2009 increased by 2.1% to 10.5 million feet, as compared to 10.3 million feet in total for the periods May 1, 2007 through June 15, 2007 (5.6 million feet) and June 16, 2007 through July 31, 2007 (4.7 million feet).  This increase was primarily due to incremental footage from the acquisition of Mid-South.  Food, Beverage and Pharmaceutical Products-For the second quarter of fiscal 2009, net sales of food, beverage and pharmaceutical products decreased $.8 million, or 6.9%, to $10.7 million, as compared to $11.5 million in total for the periods May 1, 2007 through June 15, 2007 ($5.8 million) and June 16, 2007 through July 31, 2007 ($5.7 million).  This decrease in sales was primarily due to a decrease in the average selling price of high purity/electropolished products due to lower material cost market values, offset by an increase in the demand for these products.  Feet shipped of food, beverage and pharmaceuticals products during the second quarter of fiscal 2009 decreased by 28.0% to 2.7 million feet, as compared to 3.8 million feet in total for the periods May 1, 2007 through June 15, 2007 (1.8 million feet) and June 16, 2007 through July 31, 2007 (2.0 million feet).  This decrease in feet shipped was primarily due to a decrease in the sales volume of beverage coil products.  General Commercial Products- For the second quarter of fiscal 2009, net sales of general commercial products increased $.7 million, or 2.6%, to $26.5 million, as compared to $25.8 million in total for the periods May 1, 2007 through June 15, 2007 ($13.5 million) and June 16, 2007 through July 31, 2007 ($12.3 million).  This increase in sales was primarily due to an increase in the sales volume of general commercial products ($1.9 million), offset by a decrease in the average selling price of these products ($1.2 million).  Feet shipped of general commercial products during the second quarter of fiscal 2009 increased by 4.2% to 11.9 million feet, as compared to 11.4 million feet in total for the periods May 1, 2007 through June 15, 2007 (6.1 million feet) and June 16, 2007 through July 31, 2007 (5.3 million feet).  This increase in feet shipped was primarily due to increases in the sales volume of substantially all of the general commercial products.  Gross Profit  Cost of goods sold consists of manufacturing costs (primarily material, labor, consumables, utilities, maintenance, occupancy and depreciation), inbound freight charges, shipping and handling costs, certain purchasing costs, receiving costs and warehousing costs (which include internal transfer costs).  The Companys gross profit margins may not be comparable to the gross profit margins of other entities due to the classification of certain costs.


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Table of Contents   Gross profit for the second quarter of fiscal 2009 was $18.9 million, an increase of $.2 million, or 1.2%, as compared to $18.7 million in total for the periods May 1, 2007 through June 15, 2007 ($12.0 million) and June 16, 2007 through July 31, 2007 ($6.7 million).  The increase in gross profit was primarily due to incremental profit of $2.0 million from the acquisition of Mid-South, offset by a reduction in net sales of the Company and non-recurring, non-cash purchase accounting adjustments of $2.9 million recorded in the period June 16, 2007 through July 31, 2007.  In accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value in connection with the DLJ Acquisition, which were $6.0 million greater than their historical cost.  $2.9 million of the purchase accounting adjustment was expensed in cost of goods sold within the condensed consolidated statements of operations during the period June 16, 2007 through July 31, 2007 as the associated inventories were sold.  Gross profit margin for the second quarter of fiscal 2009 increased to 21.3% from 19.1% in total for the periods May 1, 2007 through June 15, 2007 (24.3%) and June 16, 2007 through July 31, 2007 (13.8%).  The increase in gross profit margin was primarily due to non-recurring, non-cash purchase accounting adjustments of $2.9 million recorded in the period June 16, 2007 through July 31, 2007, offset by the acquisition of Mid-South and reduction in selling prices due to a decline in the market value of nickel and the lagging effect of replacement inventory cost as compared to a positive effect on gross profit margin in the same period in fiscal 2008.  Gross profit per foot shipped for the second quarter of fiscal 2009 amounted to $.56/foot, as compared to $.51/foot ($.59/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.08/foot) in total for the periods May 1, 2007 through June 15, 2007 ($.64/foot) and June 16, 2007 through July 31, 2007 ($.38/foot).  Operating Expenses  Selling, general and administrative expense consists primarily of management, administrative and sales compensation, benefits, travel, communications, occupancy and insurance expenses, legal and professional fees.  Selling, general and administrative expenses decreased $10.3 million, or 57.8%, to $7.6 million in the second quarter of fiscal 2009, as compared to $17.9 million in total for the periods May 1, 2007 through June 15, 2007 ($14.9 million) and June 16, 2007 through July 31, 2007 ($3.0 million).  This decrease in selling, general and administrative expense was primarily due to $11.8 million in non-recurring acquisition related expenses recorded in connection with the DLJ Acquisition and a decrease in annual advisory and management fees of $.2 million.  During the period May 1, 2007 through June 15, 2007, the Company recorded the following non-recurring acquisition related expenses:  (i) $4.8 million of fees and related charges for the termination of the Companys management agreement with Castle Harlan; (ii) $3.0 million of compensation expense relating to employee bonuses; and (iii) $4.0 million of non-cash incentive unit expense.  This decrease was offset by (i) an increase in salaries and wages amounting to $.4 million as a result of increases in annual employee compensation and the number of employees; and (ii) the acquisition of Mid-South ($.9 million).  Amortization expense decreased $2.2 million, or 44.0%, to $2.9 million in the second quarter of fiscal 2009, as compared to $5.1 million in total for the periods May 1, 2007 through June 15, 2007 ($.8 million) and June 16, 2007 through July 31, 2007 ($4.3 million).  The decrease in amortization expense results from the non-recurring amortization of $3.6 million recorded in the period June 16, 2007 through July 31, 2007 related to an intangible asset-backlog recorded in connection with the DLJ Acquisition purchase accounting, offset by an increase in amortization due to the acquisition of Mid-South.  Interest Expense  Interest expense for the second quarter of fiscal 2009 decreased $.5 million, or 7.2%, to $6.2 million, as compared to $6.7 million in total for the periods May 1, 2007 through June 15, 2007 ($3.4 million) and June 16, 2007 through July 31, 2007 ($3.3 million).  The decrease in interest expense was primarily due to (i) the elimination of $8.6 million of deferred financing costs in connection with the purchase accounting for the DLJ Acquisition and the corresponding decrease in amortization recorded to interest expense for the period; (ii) an increase of $.2 million in the amortization of the bond premium recorded in connection with the purchase accounting for the DLJ Acquisition; and (iii) the reduction in the weighted average interest rates on the Companys Revolving Credit Facility.  These decreases were offset by an increased principal amount of indebtedness for the period.  The Companys credit agreements assessed interest at a weighted average rate of 9.8% and 10.4% at July 31, 2008 and January 31, 2008, respectively.


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Table of Contents   Income Tax Expense  Income tax expense amounted to $1.0 million in the second quarter of fiscal 2009, as compared to an income tax benefit of $1.9 million in total for the periods May 1, 2007 through June 15, 2007 ($1.2 million) and June 16, 2007 through July 31, 2007 ($.7 million).  These tax provisions reflect effective tax rates of 46.9% for the second quarter of fiscal 2009, as compared to 17.1% in total for the periods May 1, 2007 through June 15, 2007 (16.7%) and June 16, 2007 through July 31, 2007 (17.8%).  The increase in the effective tax rate is primarily due to estimated tax provision to tax return adjustments recorded in the second quarter of fiscal 2009 related to the anticipated filing of the Companys income tax returns for the period February 1, 2007 through June 15, 2007 and the period June 16, 2007 through January 31, 2008, offset by the non-deductibility of incentive unit expense amounting to $4.0 million in the period May 1, 2007 through June 15, 2007 and the relationship between the amount of permanent income tax differences and the projected loss before income taxes for fiscal 2008.  The difference between the actual effective tax rates and the U.S. federal statutory rate is principally due to (i) state income tax provisions; (ii) a deduction for domestic production activity; and (iii) non-deductible incentive unit expense.  Results of Operations  Six Months Ended July 31, 2008 as Compared to the Periods February 1, 2007 through June 15, 2007 and June 16, 2007 through July 31, 2007  Net Sales  Overall - For the six months ended July 31, 2008, net sales decreased $11.9 million, or 6.4%, to $175.0 million, as compared to $186.9 million in total for the periods February 1, 2007 through June 15, 2007 ($138.2 million) and June 16, 2007 through July 31, 2007 ($48.7 million).  This decrease in overall sales was primarily due to (i) decreases in the sales volume of heat exchanger, nickel, pressure coil, encapsulated wire and sub-sea umbilical products ($20.2 million), offset by increases in the sales volume of high purity/electropolished and general commercial products ($6.4 million) and incremental sales from the acquisition of Mid-South on February 27, 2008 ($8.2 million); and (ii) decreases in the average selling price of heat exchanger, nickel, high purity/electropolished and general commercial products ($11.0 million), offset by increases in the average selling price of pressure coil and sub-sea umbilical products ($5.1 million).  Total feet shipped during the six months ended July 31, 2008 decreased by 10.8% to 66.6 million feet, as compared to 74.6 million feet in total for the periods February 1, 2007 through June 15, 2007 (57.0 million feet) and June 16, 2007 through July 31, 2007 (17.6 million feet).  This decrease in total feet shipped was primarily due to decreases in the sales volume of heat exchanger, nickel, pressure coil, encapsulated wire and beverage coil products, offset by incremental footage from the acquisition of Mid-South.  Chemical/Petrochemical Processing and Power Generation Products -For the six months ended July 31, 2008, net sales of chemical/petrochemical processing and power generation products decreased $19.8 million, or 24.2%, to $62.4 million, as compared to $82.2 million in total for the periods February 1, 2007 through June 15, 2007 ($58.5 million) and June 16, 2007 through July 31, 2007 ($23.7 million).  This decrease in sales was primarily due to decreases in the sales volume and average selling price of heat exchanger and nickel products which the Company believes was due to the destocking of distribution channel inventories which followed the declining trend of nickel prices during the second half of fiscal 2008, increased concern about the slowing general manufacturing economy and lower material cost market values as compared to the same period in fiscal 2008.  Feet shipped of chemical/petrochemical processing and power generation products during the six months ended July 31, 2008 decreased by 19.9% to 16.7 million feet, as compared to 20.8 million feet in total for the periods February 1, 2007 through June 15, 2007 (15.2 million feet) and June 16, 2007 through July 31, 2007 (5.6 million feet).  This decrease was primarily due to decreases in the sales volume of heat exchanger and nickel products including lower sales volume for applications in ethanol and desalination plants.  Energy Products -  For the six months ended July 31, 2008, net sales of energy products increased $6.5 million, or 22.2%, to $36.0 million, as compared to $29.5 million in total for the periods February 1, 2007 through June 15, 2007 ($22.5 million) and June 16, 2007 through July 31, 2007 ($7.0 million).  The increase in sales was primarily due to (i) incremental sales from the acquisition of Mid-South ($8.2 million); and (ii) increases in the average selling price of pressure coil and sub-sea umbilical products ($5.2 million), offset by decreases in the sales volume of pressure coil, encapsulated wire and sub-sea umbilical products ($7.2 million).


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Table of Contents   Feet shipped of energy products during the six months ended July 31, 2008 decreased by 16.8% to 17.2 million feet, as compared to 20.7 million feet in total for the periods February 1, 2007 through June 15, 2007 (16.0 million feet) and June 16, 2007 through July 31, 2007 (4.7 million feet).  This decrease was primarily due a decrease in the sales volume of substantially all of the energy products, offset by incremental footage from the acquisition of Mid-South.  Food, Beverage and Pharmaceutical Products - For the six months ended July 31, 2008, net sales of food, beverage and pharmaceutical products increased $1.6 million, or 7.6%, to $23.9 million, as compared to $22.3 million in total for the periods February 1, 2007 through June 15, 2007 ($16.6 million) and June 16, 2007 through July 31, 2007 ($5.7 million).  This increase in sales was primarily due to an increase in the demand for high purity/electropolished products particularly for sanitary condenser applications, offset by a decrease in the average selling price of these products due mostly to lower material cost market values.  Feet shipped of food, beverage and pharmaceuticals products during the six months ended July 31, 2008 decreased by 5.8% to 8.5 million feet, as compared to 9.0 million feet in total for the periods February 1, 2007 through June 15, 2007 (7.0 million feet) and June 16, 2007 through July 31, 2007 (2.0 million feet).  This decrease in feet shipped was primarily due to a decrease in the sales volume of beverage coil products.  General Commercial Products- For the six months ended July 31, 2008, net sales of general commercial products decreased $.2 million, or .4%, to $52.7 million, as compared to $52.9 million in total for the periods February 1, 2007 through June 15, 2007 ($40.6 million) and June 16, 2007 through July 31, 2007 ($12.3 million).  This decrease in sales was primarily due to a decrease in the average selling price of general commercial products, offset by an increase in the sales volume of these products.  Feet shipped of general commercial products during the six months ended July 31, 2008 increased by .3% to 24.2 million feet, as compared to 24.1 million feet in total for the periods February 1, 2007 through June 15, 2007 (18.8 million feet) and June 16, 2007 through July 31, 2007 (5.3 million feet).  This increase in feet shipped was primarily due to increases in the sales volume of substantially all of the general commercial products.  Gross Profit  Gross profit for the six months ended July 31, 2008 was $35.4 million, a decrease of $3.1 million, or 8.3%, as compared to $38.5 million in total for the periods February 1, 2007 through June 15, 2007 ($31.8 million) and June 16, 2007 through July 31, 2007 ($6.7 million).  The decrease in gross profit was primarily due to a reduction in net sales of the Company, offset by incremental profit of $2.1 million from the acquisition of Mid-South and a $2.2 million decrease in non-recurring, non-cash purchase accounting adjustments to $.7 million in the six months ended July 31, 2008, as compared to $2.9 million in the period June 16, 2007 through July 31, 2007.  In accordance with the purchase method of accounting under GAAP, certain inventories were valued at fair value in connection with the Mid-South Acquisition and DLJ Acquisition, which were $.7 million and $6.0 million, respectively, greater than their historical cost.  $.7 million and $2.9 million of the purchase accounting adjustment was expensed in cost of goods sold within the condensed consolidated statements of operations during the six months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, respectively, as the associated inventories were sold.  Gross profit margin for the six months ended July 31, 2008 decreased to 20.2% from 20.6% in total for the periods February 1, 2007 through June 15, 2007 (23.0%) and June 16, 2007 through July 31, 2007 (13.8%).  The decrease in gross profit margin was primarily due to the acquisition of Mid-South and reduction in selling prices due to a decline in the market value of nickel and the lagging effect of replacement inventory cost as compared to a positive effect on gross profit margin in the same period in fiscal 2008, offset by a $2.2 million decrease in non-recurring, non-cash purchase accounting adjustments to $.7 million in the six months ended July 31, 2008, as compared to $2.9 million in the period June 16, 2007 through July 31, 2007.  Gross profit per foot shipped for the six months ended July 31, 2008 amounted to $.53/foot ($.54/foot excluding a non-recurring, non-cash purchase accounting adjustment amounting to $.01/foot), as compared to $.52/foot ($.55/foot excluding non-recurring, non-cash purchase accounting adjustments amounting to $.03/foot) in total for the periods February 1, 2007 through June 15, 2007 ($.56/foot) and June 16, 2007 through July 31, 2007 ($.38/foot).


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Table of Contents   Operating Expenses  Selling, general and administrative expenses decreased $9.8 million, or 41.2%, to $14.2 million in the six months ended July 31, 2008, as compared to $24.0 million in total for the periods February 1, 2007 through June 15, 2007 ($21.0 million) and June 16, 2007 through July 31, 2007 ($3.0 million).  This decrease in selling, general and administrative expense was primarily due to $11.8 million in non-recurring acquisition related expenses recorded in connection with the DLJ Acquisition and a decrease in annual advisory and management fees of $.4 million.  During the period May 1, 2007 through June 15, 2007, the Company recorded the following non-recurring acquisition related expenses:  (i) $4.8 million of fees and related charges for the termination of the Companys management agreement with Castle Harlan; (ii) $3.0 million of compensation expense relating to employee bonuses; and (iii) $4.0 million of non-cash incentive unit expense.  This decrease was offset by (i) an increase in salaries and wages amounting to $.5 million as a result of increases in annual employee compensation and the number of employees; and (ii) the acquisition of Mid-South ($1.4 million).  Amortization expense decreased $.6 million, or 9.7%, to $6.1 million in the six months ended July 31, 2008, as compared to $6.7 million in total for the periods February 1, 2007 through June 15, 2007 ($2.4 million) and June 16, 2007 through July 31, 2007 ($4.3 million).  The decrease in amortization expense results from a $3.2 million decrease in non-recurring, intangible asset-backlog amortization to $.4 million in the six months ended July 31, 2008, as compared to $3.6 million in the period June 16, 2007 through July 31, 2007, offset by an increase in amortization expense due to the allocation of the purchase price for each of the DLJ Acquisition and Mid-South Acquisition to intangible assets and the corresponding higher amount of amortization expense for the period.  Interest Expense  Interest expense for the six months ended July 31, 2008 decreased $.9 million, or 7.0%, to $12.4 million, as compared to $13.3 million in total for the periods February 1, 2007 through June 15, 2007 ($10.0 million) and June 16, 2007 through July 31, 2007 ($3.3 million).  The decrease in interest expense was primarily due to (i) the elimination of $8.6 million of deferred financing costs in connection with the purchase accounting for the DLJ Acquisition and the corresponding decrease in amortization recorded to interest expense for the period; (ii) an increase of $.5 million in the amortization of the bond premium recorded in connection with the purchase accounting for the DLJ Acquisition; and (iii) the reduction in the weighted average interest rates on the Companys Revolving Credit Facility.  These decreases were offset by an increased principal amount of indebtedness for the period.  The Companys credit agreements assessed interest at a weighted average rate of 9.8% and 10.4% at July 31, 2008 and January 31, 2008, respectively.  Income Tax Expense  Income tax expense amounted to $1.2 million in the six months ended July 31, 2008, as compared to $.2 million in total for the periods February 1, 2007 through June 15, 2007 ($.9 million of income tax expense) and June 16, 2007 through July 31, 2007 ($.7 million of income tax benefit).  These tax provisions reflect effective tax rates of 45.2% for the six months ended July 31, 2008, as compared to -3.9% in total for the periods February 1, 2007 through June 15, 2007 (-58.8%) and June 16, 2007 through July 31, 2007 (17.8%).  The increase in the effective tax rate is primarily due to estimated tax provision to tax return adjustments recorded in the six months ended July 31, 2008 related to the anticipated filing of the Companys income tax returns for the period February 1, 2007 through June 15, 2007 and the period June 16, 2007 through January 31, 2008, offset by the non-deductibility of incentive unit expense amounting to $4.0 million in the period May 1, 2007 through June 15, 2007 and the relationship between the amount of permanent income tax differences and the projected loss before income taxes for fiscal 2008.  The difference between the actual effective tax rates and the U.S. federal statutory rate is principally due to (i) state income tax provisions; (ii) a deduction for domestic production activity; and (iii) non-deductible incentive unit expense.  Sales Order Backlog  The Companys sales order backlog was $71.8 million at July 31, 2008 compared to $49.4 million at January 31, 2008.  The increase in the Companys sales order backlog was primarily due to the acquisition of Mid-South and growth in sales order bookings related to the Companys international business.  Management believes that approximately 80% of the sales order backlog will be fulfilled during the remainder of the current fiscal year.  There is no seasonality with respect to the Companys sales order backlog.


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Table of Contents   Liquidity and Capital Resources  Overview  The Companys principal liquidity requirements are to service debt and meet working capital and capital expenditure needs.  The Company expects that cash generated from operating activities and availability under its Revolving Credit Facility will be the principal sources of liquidity.  The Companys ability to make payments on and to refinance its indebtedness, including the Revolving Credit Facility and Senior Notes, and to fund working capital needs, planned capital expenditures and future acquisitions, will depend on the Companys ability to generate cash in the future.  This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond the Companys control.  Based on the current level of operations, the Company believes the cash flow from operations and available borrowings under the Revolving Credit Facility will be adequate to meet liquidity needs for at least the next twelve months.  Additionally, the Company does not expect to pay dividends to RGCH Corp. for the foreseeable future to service the interest requirements on RGCH Corp.s PIK Notes.  Debt and Other Obligations  On February 7, 2006, the Company entered into a $90.0 million Revolving Credit Facility, as amended, that matures on February 7, 2011.  Concurrently with the closing of the DLJ Acquisition, the Company entered into a second amendment to the Revolving Credit Facility for which the borrowing capacity was increased by $20.0 million to a total of $80.0 million, subject to borrowing base availability.  On April 8, 2008, the Company entered into a fifth amendment to its Revolving Credit Facility for which the borrowing capacity was increased by $10.0 million to $90.0 million, subject to borrowing base availability and the interest rate charged on the borrowings under the Revolving Credit Facility was increased to prime plus 1.25% or LIBOR plus 2.25%.  Borrowings under the Revolving Credit Facility bear interest payable at various dates with floating rates of either (i) prime plus 1.25% (6.25% at July 31, 2008) or (ii) LIBOR plus 2.25% (4.71% at July 31, 2008).  At July 31, 2008, the Company had $62.7 million outstanding and $27.3 million available under the Revolving Credit Facility after giving effect to its borrowing base requirements.  The Revolving Credit Facility contains various covenants that, among other things, restrict the Companys ability to incur or guarantee debt, pay dividends, make certain investments, repurchase stocks, incur liens, enter into certain transactions with affiliates, enter into certain sales and leaseback transactions and transfer or sell assets.  The Company was in compliance with all such covenants at July 31, 2008.  On February 7, 2006, the Company issued $200.0 million aggregate principal amount of Senior Notes due February 15, 2014.  These notes bear interest at 11.25% per annum payable in semi-annual installments on February 15 and August 15 each year commencing August 15, 2006.  The indenture governing the Senior Notes contains covenants that, among other things, restrict the Companys ability to incur or guarantee additional debt, pay dividends and make distributions, make certain investments, repurchase stock, incur liens, enter into certain transactions with affiliates, enter into certain sale and leaseback transactions, merge or consolidate, and transfer or sell assets.  The Company was in compliance with all such covenants at July 31, 2008.  On December 14, 2007, Greenville closed on a $2.0 million IRB with the City of Clarksville, Arkansas, due December 30, 2014.  The proceeds were used to finance the IRB Equipment.  RathGibson is a guarantor of the obligation.  The IRB requires monthly payments of less than $.1 million with interest payable at 5.32%.  In connection with the IRB, the Company entered into a third amendment to its Revolving Credit Facility for which the IRB Equipment was released from collateral under the Revolving Credit Facility and permitted Greenville and RathGibson, as guarantor, to enter into the IRB.


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Table of Contents   On June 15, 2007, the Company, together with RGCH Corp. and RG Tube, entered into an advisory services agreement, as amended, with DLJMB, an affiliate of DLJ Funds, under which DLJMB acts as a financial advisor with respect to the following services: (i) assisting in analyzing operations and historical performance; (ii) analyzing future prospects; (iii) assisting with respect to future proposals for tender offers, acquisitions, sales, mergers, financings, exchange offers, recapitalizations, restructurings or other similar transactions; and (iv) assisting in strategic planning.  The advisory services agreement is for an initial term expiring June 15, 2012 and is subject to renewal for consecutive one-year terms unless terminated by DLJMB or the Company, RGCH Corp. or RG Tube with 30 days notice prior to the expiration of the initial term or any annual renewal.  For services rendered, annual advisory fees of $.9 million and $.1 million are payable to DLJMB and certain consultants for DLJMB who also serve as directors of RG Tube, respectively, in equal quarterly installments on the first business day of each calendar quarter.  For any debt or equity financing or refinancing consummated during the term of this agreement, the Company has an obligation to pay an advisory fee not to exceed the greater of $.5 million or one percent of the aggregate transaction value.  During the three months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, $.2 million and $.1 million, respectively of annual advisory fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  During the six months ended July 31, 2008 and the period June 16, 2007 through July 31, 2007, $.5 million and $.1 million, respectively of annual advisory fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  On February 7, 2006, the Company entered into a management agreement with Castle Harlan, as manager, under which Castle Harlan provided business and organizational strategy, financial and investment management, advisory, merchant and investment banking services to the Company, RGCH Corp. or RGCH LLC.  The management agreement was terminated as a result of the DLJ Acquisition.  During the period May 1, 2007 through June 15, 2007, $.3 million of management fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  During the period February 1, 2007 through June 15, 2007, $.8 million of management fees was amortized to selling, general and administrative expenses within the condensed consolidated statements of operations.  Working Capital  At July 31, 2008, the Company had working capital of $100.5 million, an increase of $18.1 million from $82.4 million at January 31, 2008.  Cash Flows  Cash increased $1.4 million in the six months ended June 30, 2008, ending the period at $2.1 million.  Cash decreased $1.2 million in the period February 1, 2007 through June 15, 2007 and increased $1.0 million in the period June 16, 2007 through July 31, 2007, and in total for both periods decreased $.2 million, ending the period at $5.4 million.  The increase in the generation of cash in the six months ended July 31, 2008, as compared to the same period in fiscal 2008, is primarily due to the following:  Operating Activities - The Company used cash for operating activities of $1.7 million in the six months ended June 30, 2008, as compared to $12.2 million in total for the periods February 1, 2007 through June 15, 2007 ($11.2 million) and June 16, 2007 through July 31, 2007 ($1.0 million).  The decrease in the use of cash flows from operating activities was primarily due to a reduction working capital needs.  Investing Activities - The Company used cash for investing activities of $23.4 million in the six months ended June 30, 2008, as compared to $3.2 million in total for the periods February 1, 2007 through June 15, 2007 ($2.3 million) and June 16, 2007 through July 31, 2007 ($.9 million).  Capital expenditures to replace and upgrade existing equipment and install new equipment to provide additional operating efficiencies amounted $5.3 million in the six months ended June 30, 2008, as compared $3.2 million in total for the periods February 1, 2007 through June 15, 2007 ($2.3 million) and June 16, 2007 through July 31, 2007 ($.9 million).  In the six months ended June 30, 2008, the Company used cash of $20.1 million, net of cash acquired, to acquire Mid-South.  The Company expects capital expenditures for the remainder of fiscal 2009 to be approximately $4.0 million, primarily relating to the purchase of new equipment for the purpose of reducing manufacturing costs, increasing productive capacity and maintenance.


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Table of Contents   Financing Activities - Financing activities provided cash of $26.5 million in the six months ended June 30, 2008, as compared to $15.2 million in total for the periods February 1, 2007 through June 15, 2007 ($12.3 million) and June 16, 2007 through July 31, 2007 ($2.9 million).   Net principal proceeds from the Revolving Credit Facility of $26.8 million in the six months ended June 30, 2008 were used primarily to fund the acquisition of Mid-South and working capital requirements.  Net principal proceeds from the Revolving Credit Facility of $17.3 million in total for the periods February 1, 2007 through June 15, 2007 ($12.3 million) and June 16, 2007 through July 31, 2007 ($5.0 million) were used primarily to fund working capital requirements.  In the period June 16, 2007 through July 31, 2007, the Company paid a dividend of $3.8 million, which was used to finance the contingent payment of $3.4 million made by RG Tube in connection with the DLJ Acquisition.  Off-balance Sheet Arrangements  At July 31, 2008, the Company did not have any off-balance sheet arrangements.  Critical Accounting Policies  The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect: (i) the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements; (ii) the disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements; and (iii) the reported amounts of revenues and expenses during the reporting period.  The Company bases its estimates on historical experience and other assumptions that are believed to be reasonable under circumstances, the results of which form the basis for the Companys judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The Companys actual results may differ from these estimates under different circumstances or conditions.  If actual amounts are ultimately different from these estimates, the revisions are included in the Companys results of operations for the period in which the actual amounts become known.  The Company believes the following critical accounting policies represent the more significant judgments and estimates used in preparing the condensed consolidated financial statements.  There have been no material changes made to the Companys critical accounting policies and estimates during the periods presented in the condensed consolidated financial statements.  Accounts Receivable    Accounts receivables consist of amounts billed and currently due from customers.  The Company extends credit to customers in the normal course of business and generally does not require collateral to support its accounts receivable balances.  The Company maintains a reserve for estimated losses resulting from the inability or unwillingness of customers to make required payments.  The reserve for estimated losses is based on the Companys historical experience, existing economic conditions and any specific customer collection issues the Company has identified.  Long-Lived Assets  The Company accounts for the impairment or disposal of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires long-lived assets, such as property, plant and equipment and amortizable intangible assets other than goodwill and indefinite-lived intangible assets, which are tested separately for impairment, to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  When evaluating long-lived and amortizable assets for potential impairment, the Company first compares the carrying value of the asset to the assets estimated future cash flows (undiscounted and without interest charges).  If the estimated future cash flows are less than the carrying value of the asset, the Company calculates an impairment loss.  The impairment loss calculation compares the carrying value of the asset to the assets estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges).  The Company recognizes an impairment loss if the amount of the assets carrying value exceeds the assets estimated fair value.  If the Company recognizes an impairment loss, the adjusted carrying amount becomes its new cost basis.


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Table of Contents   Goodwill and Other Intangible Assets  The Company evaluates goodwill for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill is written off immediately.  The provisions of SFAS No. 142, Goodwill and Other Intangible Assets, require that a two-step impairment test be performed annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  The first step of the test for impairment compares the book value of the Companys reporting unit to its estimated fair value.  The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, compares the implied fair value of goodwill to its book value to determine the amount of the impairment required.  The Company evaluated its goodwill at January 31, 2008, and determined that there was no impairment of goodwill.  The Company evaluates tradenames for impairment at least annually, or more frequently if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired tradenames is written off immediately.  The Company evaluated its tradenames at January 31, 2008 and determined that there were no impairment of tradenames.  Amortizable intangible assets consist primarily of customer lists.  Subsequent to the DLJ Acquisition, amortizable intangible assets are amortized principally by an accelerated method over their estimated useful lives of 15 years.  Prior to the DLJ Acquisition, amortizable intangible assets were amortized principally by the straight-line method over their estimated useful lives of 15 years.  The Company may evaluate customer lists for impairment if events or circumstances indicate that the assets may be impaired, by applying a fair value based test and, if impairment occurs, the amount of impaired customer lists is written off immediately.  Goodwill and other intangible assets recorded in connection with the Mid-South Acquisition are preliminary balances and are expected to change once the Company obtains third party appraisals and valuation studies on inventories, property, plant and equipment and intangible assets.  These appraisals and valuation studies are expected to be completed during fiscal 2009.  Income Taxes  Deferred income taxes are provided using the asset and liability method, whereby deferred income taxes are recognized for temporary differences between the reported amounts of assets and liabilities herein and their income tax basis and for net operating loss and tax credit carryforwards. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized.  Deferred income tax assets and liabilities are computed using the income tax rates in effect in the years in which the temporary differences are expected to reverse.  Revenue Recognition  Revenues are recognized when persuasive evidence of a selling arrangement exists, delivery has occurred, the Companys price to the customer is fixed or determinable and collectibility is reasonably assured.  These criteria are generally satisfied upon shipment of product.   Item 3.  Quantitative and Qualitative Disclosures About Market Risk.  Credit Risk  The Company provides credit in the normal course of business to its customers, which are primarily value-added tubing distributors, OEMs, and engineering firms.  The Company performs ongoing credit evaluations of its customers, maintains reserves for potential credit losses and generally does not require collateral to support its accounts receivable balances.  The Companys two largest customers accounted for approximately 19% of the Companys nets sales in fiscal 2008 and 30% of the Companys accounts receivable at January 31, 2008.  Accordingly, a bankruptcy or a significant deterioration in the financial condition of any of these significant customers could have a material adverse effect on the Companys financial condition and results of operations due to a reduction in purchases, a longer collection cycle or an inability to collect accounts receivable.


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Table of Contents   Commodity Price Risk  The Company purchases certain raw materials such as stainless steel, nickel alloys, titanium, argon and hydrogen that are subject to price volatility caused by unpredictable factors.  Stainless steel, principally 304L grade and 316L grade, is the primary raw material the Company uses to manufacture products.  Stainless steel prices have historically been dependent on supply and demand and costs of raw materials such as chrome, nickel, molybdenum and titanium.  Where possible, the Company employs fixed price raw material purchase contracts.  Historically, the Company has been able to pass along increases in raw material costs to its customers, and the Company expects to continue to pass along such costs to customers.  While the Company is able to pass through changes in the cost of raw materials to its customers, significant and sudden changes can lead customers to reduce or delay purchases, substitute materials and/or cancel capital projects, which may have an adverse effect on the Companys results of operations and financial condition due to changes in sales volume and the lagging effect of replacement inventory cost.  The Company has not, in the past, used derivatives to manage commodity price risk.  Interest Rate Risk  Changes in interest rates can potentially impact the Companys profitability and its ability to realize assets and satisfy liabilities.  Interest rate risk is resident primarily in the Companys Revolving Credit Facility, which typically has variable interest rates based on Prime or LIBOR rates.  Assuming no other change in financial structure, an increase of 100 basis points in the Companys variable interest rate would decrease pre-tax earnings for fiscal 2009 by approximately $.4 million.  This amount is determined by considering the impact of a 1% increase in interest rates on the average debt estimated to be outstanding in fiscal 2009.   Item 4. Controls and Procedures.  Not applicable.   Item 4T. Controls and Procedures.  Evaluation of Disclosure Controls and Procedures  Under the supervision and with the participation of management, including the Companys principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report, and based on their evaluation, the principal executive officer and principal financial officer have concluded that these controls and procedures are effective.  Changes in Internal Control over Financial Reporting  There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the second quarter of fiscal 2009 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.   PART II   Item 1. Legal Proceedings.  During the second quarter of fiscal 2009, there were no material changes to the Companys previously disclosed legal proceedings.  In addition, the Company is involved in various claims and legal actions that arise in the ordinary course of business.  The Company does not believe that the ultimate resolution of any of these actions will have a material adverse effect on the Companys financial position, results of operations, liquidity or capital resources.   Item 1A. Risk Factors.  There have been no material changes from the risk factors previously disclosed under Item 1A to the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2008.


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Table of Contents   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  None   Item 3. Defaults Upon Senior Securities.  None   Item 4. Submission of Matters to a Vote of Security Holders.  None   Item 5. Other Information.  None


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Table of Contents   Item 6. Exhibits.  ExhibitNumberDescription31.1*Rule 13a-14(a)/15d-14(a) Certifications.31.2*Rule 13a-14(a)/15d-14(a) Certifications.  * Filed herewith.


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Table of Contents   SIGNATURES  Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.   Date:  September 12, 2008/s/ Barry C. NussBarry C. NussChief Financial Officer(Authorized Signatory andPrincipal Financial and Accounting Officer)


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