Broder Bros. saw net sales for the second quarter fall 31.0% to $177.7 million compared to $257.6 million for the second quarter 2008. Income from operations for the second quarter 2009 was $1.0 million compared to income from operations of $8.5 million for the second quarter 2008. Including an extraordinary gain of $19.9 million in the second quarter 2009 resulting from the exchange of Senior Notes, net income was $15.2 million compared to a net loss of $0.7 million for the second quarter 2008.

For the second quarter 2009, the company reported earnings before interest, other financing costs, taxes, depreciation, amortization and the extraordinary item (EBITDA) of $5.4 million compared to EBITDA of $13.3 million for the second quarter 2008.

Results include the impact of certain restructuring and other highlighted charges discussed below. Excluding these highlighted charges, EBITDA was $5.8 million for the second quarter 2009 and $14.8 million for the second quarter 2008.

Second quarter 2009 gross profit was $30.2 million compared to $45.4 million for the second quarter 2008. Second quarter 2009 gross margin was 17.0% compared to gross margin of 17.6% in the prior period. The decrease in gross profit primarily resulted from lower unit volume due to weak demand in the market, insufficient vendor financing during the first half of the quarter and customer concerns about Broder's future. Volumes were impacted by soft demand for the products the company sells due to weakened U.S. economic conditions and were reflected in a 17% decline in overall industry unit shipments as reported by STARS. The decline in the market was an improvement over the first quarter 2009, in which industry unit volumes were 18% lower than the first quarter 2008. Volumes were also impacted by insufficient vendor financing through mid-May 2009 when the company announced that it had successfully completed its exchange offer for 95% of its $225.0 million in aggregate principal amount of 11 % Senior Notes due 2010. Despite having increased credit limits from key suppliers restored to sufficient levels immediately following the exchange offer, the company's inventory quality had not improved until June 2009 due to inventory lead times.

The company has three operating segments: “Broder,” “Alpha” and “NES.” The Broder division generated second quarter 2009 net sales of $71.8 million compared to $98.8 million in the second quarter 2008. The Alpha division generated second quarter 2009 revenue of $80.9 million compared to $124.3 million in the second quarter 2008. The NES division generated net sales of $25.0 million in the second quarter 2009 compared to $34.5 million in the second quarter 2008.

Highlighted Charges
Results for the three and six months ended June 27, 2009 and June 28, 2008 include certain charges as follows:

                           (dollars in millions)
Three Months Six Months
Ended Ended
——- ——-
2009 2008 2009 2008
—- —- —- —-
Restructuring charges, net $0.1 $0.6 $0.6 $0.9
Stock-based compensation 0.3 0.1 0.3 0.2
Management fees 0.0 0.8 0.0 0.9
Other highlighted charges 0.0 0.0 0.5 0.1
— — — —
Total highlighted charges $0.4 $1.5 $1.4 $2.1

Restructuring charges recorded during the second quarter 2008 consisted of interest accretion on restructuring charges for closed facilities and $0.4 million resulting from changes in sublease assumptions for closed facilities. Restructuring charges recorded during the first quarter 2008 consisted of $0.1 million in severance and interest accretion.

Business Outlook
Having successfully completed the financial restructuring, management is refocusing its attention on marketing and selling initiatives. Management believes that the company can outgrow its competition by having high quality inventory, high quality operations, and competitive pricing.

After the successful completion of the exchange offer, management worked with suppliers to obtain the trade credit necessary for restocking its depleted inventory. Even prior to the conclusion of the exchange offer, Broder developed purchase orders for what was required to return depleted inventory to appropriate levels of inventory based on market conditions. Once the exchange offer was successful, suppliers began to ship the large quantities of goods so that Broder would be in-stock.

As soon as inventory levels reached target levels, Broder communicated to customers that it was in-stock through a series of promotions. Since then Broder has begun to restate its value proposition to its customers with “three promises.” The first of the three promises is that Broder will be in-stock in the most popular products. The second is that Broder will ship the order accurately. The third is that Broder will not be under sold. During the first three weeks since restating Broder's value proposition, Broder's strong product availability, high-quality operations, and competitive pricing have resulted in few service failures, minimal claims expense, and an encouraging improvement in sales performance relative to second quarter 2009 performance.

Management sees no reason not to expand its in-stock guarantee to all of its popular products as supply chain improvements increase the quality of its inventory.

Management continues to focus on strengthening operations. Distribution centers and call centers continue to increase both productivity and quality. Fixed costs which were eliminated in the fourth quarter 2008 and first quarter 2009 resulted in $4.1 million of savings in the second quarter 2009. Excess inventory is being depleted through sales at normal margins.

Liquidity Position
The company relies primarily upon cash flow from operations and borrowings under its revolving credit facility to finance operations, capital expenditures and debt service requirements. Borrowings and availability under the revolving credit facility fluctuate due to seasonal demands. Historical borrowing levels have reached peaks during the middle of a given year and low points during the last quarter of the year. Borrowings under the revolving credit facility were $127.7 million at June 27, 2009 compared to $150.0 million at December 27, 2008 and $146.2 million at June 28, 2008. The reduction in revolver debt was mainly due to a reduction in inventory (net of a smaller decrease in accounts payable) partially offset by payment of transaction costs in connection with the exchange offer. Borrowing base availability at June 27, 2009, December 27, 2008 and June 28, 2008 was $26.6 million, $35.9 million and $64.1 million, respectively.

Selected Balance Sheet Information

                          (dollars in millions)
June 27, December 27, June 28,
2009 2008 2008
—- —- —-
Accounts Receivable, Net $69.6 $72.4 $102.2
Inventory (1) 198.0 235.5 260.8
Accounts Payable (1) 91.2 87.6 142.6
Revolving Credit Debt 127.7 150.0 146.2
—– —– —–
48.7 70.3 74.2
2010 Notes $11.5 $225.0 $225.0
2013 Notes $153.1 $- $-
Shareholders' Deficit $(83.5) $(126.9) $(72.2)
(1) Inventory and accounts payable at June 2009, December
2007 and June 2008 include accruals for inventory in-transit
between suppliers and Company distribution centers of
$8.2 million, $12.8 million and $16.4 million, respectively.

Debt Restructuring
In May 2009, the company completed the exchange offer for its outstanding 2010 Notes. An aggregate of $213.5 million in principal amount of 2010 Notes were exchanged for $94.9 million aggregate principal amount of newly issued 2013 Notes and a pro rata share of 96% of the outstanding newly issued common stock of the company. This transaction qualified as a Troubled Debt Restructuring under the guidance provided by Financial Accounting Standard No. 15 “Accounting by Debtors and Creditors for Troubled Debt Restructuring” (“SFAS 15”). As a result of this transaction, the company recorded a net non-cash gain of $19.9 million during the quarter ended June 30, 2009. This gain is calculated as the difference between the carrying amount of the liabilities settled (reduced for the fair value of the equity issued) and the total future cash payments under the terms of the 2013 Notes. SFAS 15 requires that the company offset any gain by the costs directly attributable to the debt restructuring. The company reduced the gain by $5.7 million relating to legal and financing fees incurred in connection with the debt restructuring. The net gain is recorded as an extraordinary item on the company's statement of operations.

As of June 30, 2009, the 2013 Notes are recorded on the balance sheet at $153.1 million which represents the total future cash payments under the terms of the Notes, including both principal and interest payments, as required under SFAS 15. As a result, the company does not anticipate recognizing any interest expense on the 2013 Notes through their maturity. The calculation of the value of the total future cash payments includes the assumption that the interest payments on the 2013 Notes which are due in 2010 are paid in cash rather than additional notes. The calculation of the total future cash payments also includes the second consent fee of $2.1 million due in October 2009, the payment of the interest due in October 2009 in additional notes, as required under the indenture governing the 2013 Notes, and the payment of all additional interest payments due on the 2013 Notes in cash, also as required under the indenture governing the 2013 Notes.