-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M3ooOU+eN1z6uBOUPDBd5w/Njd3Alop4BDkGvk+W/EliUsPMJtgFVj5xEQ+u65kZ 7hF/WshGygoU8JAwRakVkw== 0000891020-95-000533.txt : 19951119 0000891020-95-000533.hdr.sgml : 19951119 ACCESSION NUMBER: 0000891020-95-000533 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN SPORTSWEAR INC CENTRAL INDEX KEY: 0000856711 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 911132690 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18054 FILM NUMBER: 95592384 BUSINESS ADDRESS: STREET 1: 6520 SOUTH 190TH ST CITY: KENT STATE: WA ZIP: 98032 BUSINESS PHONE: 2062513565 10-Q 1 FORM 10-Q FOR THE PERIOD ENDING 9/30/95 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarterly period ended SEPTEMBER 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File Number 0-18054 SUN SPORTSWEAR, INC. (Exact name of registrant as specified in its charter) Washington 91-1132690 (State or other jurisdiction (IRS Employer of incorporation of Identification No.) organization) 6520 South 190th Street, Kent, Washington 98032 (Address of principal executive offices) (Zip Code) (206) 251-3565 (Registrant's telephone number including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 X NO --- --- As of November 6, 1995 the Registrant had 5,748,500 shares of common stock outstanding. Page 1 of 16 2 SUN SPORTSWEAR, INC. INDEX
Page ---- Part I. Financial Information Item 1. Financial Statements: Balance Sheets at September 30, 1995 3 - 4 (Unaudited) and December 31, 1994 Statements of Income for the three 5 months ended September 30, 1995 and 1994 (Unaudited) and for the nine months ended September 30,1995 and 1994 (Unaudited) Statements of Cash Flows 6 for the nine months ended September 30, 1995 and 1994 (Unaudited) Notes to Financial Statements 7 - 8 Item 2. Management's Discussion and Analysis 9 - 14 of Financial Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults upon Senior Securities 15 Item 4. Submission of Matters to a Vote of 15 Security Holders Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature Page 16
Page 2 of 16 3 SUN SPORTSWEAR, INC. BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 288,869 $ 1,217,171 Accounts receivable, net of allowance for doubtful accounts of $46,524 and $46,524, respectively 13,177,639 24,424,834 Inventories (Note 2) 29,803,273 30,155,618 Prepaid expenses and other current assets 720,383 596,919 Deferred income taxes 760,710 760,710 Federal income tax receivable 1,483,441 -0- ----------- ----------- Total current assets 46,234,315 57,155,252 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net: (Note 3) 5,023,994 5,216,920 OTHER ASSETS: 19,107 11,943 ----------- ----------- Total assets $51,277,416 $62,384,115 =========== ===========
(continued) See accompanying notes to financial statements Page 3 of 16 4 SUN SPORTSWEAR, INC. BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------ (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $12,596,000 $15,987,000 Accounts payable 8,272,331 13,038,144 Accrued royalties payable 1,653,669 1,720,536 Accrued wages and taxes payable 901,667 781,651 Accrued interest payable 56,268 53,813 Current portion of long term debt 376,826 376,636 Federal income tax payable -0- 166,059 ----------- ----------- Total current liabilities 23,856,761 32,123,839 ----------- ----------- NONCURRENT LIABILITIES: Long term debt, net of current portion 130,064 338,005 Deferred income taxes 172,046 172,046 ----------- ----------- Total noncurrent liabilities 302,110 510,051 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, no par value 20,000,000 shares authorized; 5,748,500 shares at 9/30/95 and 5,747,125 shares at 12/31/94 issued and outstanding 21,618,339 21,613,691 Retained earnings 5,500,206 8,136,534 ----------- ----------- Total shareholders equity 27,118,545 29,750,225 ----------- ----------- COMMITMENTS AND CONTINGENCIES: Total liabilities and shareholders' equity $51,277,416 $62,384,115 =========== ===========
See accompanying notes to financial statements Page 4 of 16 5 SUN SPORTSWEAR, INC. STATEMENTS OF INCOME (UNAUDITED)
For the three months ended For the nine months ended September 30, September 30, ---------------------------- ---------------------------- 1995 1994 1995 1994 ------------ ------------ ------------ ------------ Proprietary sales $ 2,843,584 $ 6,684,740 $ 13,273,455 $ 24,550,352 Licensed sales 14,056,260 20,978,288 61,403,890 59,819,948 Sales deductions (675,266) (1,029,241) (2,150,700) (3,137,672) ------------ ------------ ------------ ------------ Net sales (Note 4) 16,224,578 26,633,787 72,526,645 81,232,628 Cost of goods sold 17,097,761 23,230,396 64,930,346 68,402,764 ------------ ------------ ------------ ------------ Gross margin (873,183) 3,403,391 7,596,299 12,829,864 ------------ ------------ ------------ ------------ Operating expenses: Selling 914,315 914,775 2,801,000 2,918,944 Design and pattern 571,100 643,411 1,830,082 1,948,848 General and administrative 1,928,714 1,552,175 6,042,717 4,884,148 Provision for doubtful accounts and factoring fees 90,614 19,163 120,467 55,120 ------------ ------------ ------------ ------------ 3,504,743 3,129,524 10,794,266 9,807,060 ------------ ------------ ------------ ------------ Operating income (4,377,926) 273,867 (3,197,967) 3,022,804 ------------ ------------ ------------ ------------ Other (income) expense: Interest expense 264,453 182,555 969,506 413,580 Other, net (111,659) (14,970) (172,645) (117,502) ------------ ------------ ------------ ------------ 152,794 167,585 796,861 296,078 ------------ ------------ ------------ ------------ Income before provision for income taxes (4,530,720) 106,282 (3,994,828) 2,726,726 Provision for income taxes (1,540,500) 51,808 (1,358,500) 927,387 ------------ ------------ ------------ ------------ Net income $ (2,990,220) $ 54,474 $ (2,636,328) $ 1,799,339 ------------ ------------ ------------ ------------ Earnings per share $ (0.52) $ 0.01 $(0.46) $ 0.31 ------------ ------------ ------------ ------------ Weighted average shares outstanding 5,748,500 5,739,315 5,748,165 5,714,045
See accompanying notes to financial statements Page 5 of 16 6 SUN SPORTSWEAR, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended September 30, --------------------------------------- 1995 1994 ------------ ------------ Cash flows from operating activities: Net income $ (2,636,328) $ 1,799,339 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,131,097 920,425 (Gain) on disposal of equipment (11,252) (17,082) Decrease (increase) in accounts receivable 11,247,195 (288,661) Decrease (increase) in inventories 352,345 (4,829,169) (Increase) in deferred income taxes and accrued federal income tax receivable (1,649,500) (330,325) (Decrease) increase in accounts payable (3,491,769) 1,476,464 Increase in accrued liabilities 55,604 653,772 (Increase) in other assets (130,628) (139,315) ------------ ------------ Net cash provided by (used in) operating activities 4,866,764 (754,552) ------------ ------------ Cash flows from investing activities: Capital expenditures (966,203) (1,811,611) Proceeds from sale of equipment 39,283 70,956 ------------ ------------ Net cash used in investing activities (926,920) (1,740,655) ------------ ------------ Cash flows from financing activities: Net (repayment) borrowings under short-term debt (3,391,000) 6,368,000 Proceeds from issuance of long term debt -0- -0- Principal payments under long-term debt and capital lease obligations (207,751) (2,393,682) Proceeds from issuance of common stock for employee stock options 4,648 370,602 (Decrease) in outstanding checks in excess of funds on deposit (1,274,043) (1,008,944) ------------ ------------ Net cash (used in) provided by financing activities (4,868,146) 3,335,976 ------------ ------------ Net (decrease) increase in cash (928,302) 840,769 Cash at beginning of period 1,217,171 649,088 ------------ ------------ Cash at end of period $ 288,869 $ 1,489,857 ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 967,052 $ 390,920 Income taxes $ 291,000 $ 1,101,000
See accompanying notes to financial statements Page 6 of 16 7 SUN SPORTSWEAR, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL STATEMENTS The accompanying financial statements at September 30, 1995 and for the three and nine months ended September 30, 1995 and 1994 are unaudited. These unaudited interim financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying condensed financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results for the interim periods. The results of operations and cash flows for the nine months ended September 30, 1995 and 1994 are not necessarily indicative of the results of operations and cash flows that may be expected for the entire year, which are subject to year-end adjustments in conjunction with the annual audit by the Company's independent public accountant. The accompanying condensed financial statements and related notes should be read in conjunction with the financial statements and footnotes thereto included in Sun Sportswear, Inc.'s (the "Company") 1994 Form 10-K and Annual Report to Shareholders. See also "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Quarterly Net Sales - - Seasonality" on page 13 of this report. RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts (including reclassification of distribution costs from "operating expenses" to "cost of goods sold") to conform to the presentation of the September 30, 1995 financial statements. NOTE 2 - INVENTORIES: Inventories are comprised as follows:
September 30, December 31, 1995 1994 ------------- ------------ Garments in process $ 3,127,153 $ 2,205,577 Unprinted finished garments 23,837,949 24,218,586 Printed finished garments 6,584,100 5,965,455 Supplies 384,537 521,000 Lower of Cost or Market Allowance (4,130,466) (2,755,000) ------------ ------------ $ 29,803,273 $ 30,155,618 ============ ============
Page 7 of 16 8 NOTE 3 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are summarized by major classifications as follows:
Estimated September 30, December 31, useful lives 1995 1994 ------------ ------------- ------------ Production equipment 5-7 $ 3,620,417 $ 3,500,342 Leasehold improvements 5-10 1,219,423 1,157,422 Computer hardware and software 3-5 2,952,530 1,507,205 Furniture and fixtures 5 1,133,044 1,111,640 Distribution equipment 5-10 1,411,023 1,395,543 Warehouse equipment 5-7 395,797 338,507 Vehicles 5 12,417 27,317 ------------ ------------ 10,744,651 9,037,976 Construction in progress -0- 922,373 LESS - Accumulated depreciation (5,720,657) (4,743,429) ------------ ------------ $ 5,023,994 $ 5,216,920 ============ ============
NOTE 4 - MAJOR CUSTOMERS: The Company operates almost exclusively in one industry, which is the wholesale distribution of imprinted, dyed and decorated casual apparel. The Company has three major customers, all of whom are mass merchants. The percentage of gross sales for each customer and the total percentage of gross sales for the three customers are as follows:
Total percentage Percentage of gross of gross sales for sales for each customer the three customers ----------------------- ------------------- For the nine months ended September 30, 1995 19%, 25% and 44% 88% 1994 18%, 34% and 36% 88% For the year ended December 31, 1994 19%, 29%, and 40% 88%
Page 8 of 16 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of certain income statement items to net sales and the dollar increase or decrease as a percentage of such items from period to period:
Dollar increase/(decrease) as a percentage 1994 to 1995 -------------------------- Three months Nine months three nine ended September 30, ended September 30, months months ------------------- ------------------- ended ended 1995 1994 1995 1994 Sept. 30, Sept. 30, ---- ---- ---- ---- --------- --------- Gross sales Proprietary sales 17.5% 25.1% 18.3% 30.2% (57.5)% (45.9)% Licensed sales 86.6 78.8 84.7 73.6 (33.0) 2.6 Sales deductions (4.1) (3.9) (3.0) (3.8) (34.4) (31.5) ----- ----- ----- ----- Net sales 100.0 100.0 100.0 100.0 (39.1) (10.7) Cost of goods sold 105.4 87.2 89.5 84.2 (26.4) (5.1) Gross margin (5.4) 12.8 10.5 15.8 (125.7) (40.8) Operating expenses 21.6 11.8 14.9 12.1 12.0 10.1 Interest expense 1.6 0.7 1.3 0.5 44.9 134.4 Other (income) expense (0.7) (0.1) (0.2) (0.1) 645.9 46.9 Provision for income taxes (9.5) 0.2 (1.9) 1.1 (3073.5) (246.5) ----- ----- ----- ----- Net income (18.4)% 0.2% (3.6)% 2.2% (5589.3) (246.5) ===== ===== ===== =====
THIRD QUARTER OF 1995, THIRD QUARTER OF 1994, AND FUTURE OUTLOOK NET SALES. Net sales for the quarter ended September 30, 1995 decreased 39% to $16.2 million from $26.6 million in the same period of 1994. The primary reasons for this decrease were a soft retail environment and decreases in the sales of licensed products. Gross sales of licensed products decreased by 33% to $14.1 million in the third quarter of 1995 from $21.0 million in the third quarter of 1994. The decrease in licensed sales was primarily attributable to the soft retail environment, the non-renewal of the Company's joint Looney Tunes((C) Warner Bros.) and National Football League(R) license (see "Non-Renewal of Joint Looney Tunes(C)/National Football League(R) License" below) and a decrease in sales of garments bearing Looney Tunes designs. Looney Tunes((C) Warner Bros.) and joint Looney Tunes((C) Warner Bros.) licensed product sales decreased to $6.2 million in the third quarter of 1995 from $14.8 million in 1994. The Company, on an ongoing basis, is actively seeking additional licenses and brands to add to its existing stable of licensed properties. Recent license acquisitions include Winnie the Pooh characters((C) Disney) and The Hunchback of Notre Dame ((C) Disney's animated movie scheduled for summer 1996 release). There can be no assurances, however, that any license acquisitions will receive positive market acceptance by Sun's customers. Page 9 of 16 10 Gross sales of proprietary products decreased by 57% to $2.8 million in the third quarter of 1995 from $6.7 million in the third quarter of 1994. The Company believes this decrease was primarily the result of the soft retail environment and competition from garments bearing licensed characters and trademarks. Gross sales of women's and girls' products decreased 41% to $9.7 from $16.5 million in the comparable quarter of 1994. Gross sales of men's and boys' products decreased 35% to $7.0 million in the third quarter of 1995 from $10.8 million in the same period of 1994. These decreases were primarily the result of the factors discussed above. Gross sales to Sun's largest three customers decreased 42% in the third quarter of 1995 versus the comparable period in 1994. Gross sales to Sun's other customers decreased 17% in 1995 versus 1994. These decreases were primarily the result of the factors discussed above. Sales deductions, consisting of sales returns, discounts and allowances, decreased to $675,000 in 1995 from $1.0 million in the third quarter of 1994. This decrease was primarily due to decreases in the amount of product returns in the third quarter of 1995. The Company expects that fourth quarter 1995 sales will be greater than third quarter 1995 sales, but less than fourth quarter 1994 sales. GROSS MARGIN. Gross margin as a percentage of net sales decreased to -5.4% in the third quarter of 1995 from 12.8% in 1994 (see "Note 1 to Financial Statements" above). This decrease was primarily the result of four factors. First, the reduced overall sales levels in 1995 had a disproportionate effect on gross margin due to the diminished capacity to cover the Company's fixed costs. Second, in the 1995 quarter, the Company accrued over $2.0 million in inventory markdowns arising from expected losses on the sale of surplus inventory. The Company believes these markdowns were necessary because of the sluggish retail market and competitive selling pressures in the screen print environment. Third, 1995 margins were negatively impacted by efforts to reduce men's inventory, including customer incentives and substitution of existing, higher value inventory to fill customer orders for lower value product. The Company is continuing these efforts to reduce its inventory, and as a result of such reduction efforts, the Company believes its gross margin will be negatively impacted in the last quarter of 1995 and the first quarter of 1996 by 1.0% to 2.0% of net sales (see "Liquidity and Capital Resources" below). Fourth, in the 1995 quarter, the Company recorded over $350,000 in charges arising from minimum royalty commitments the Company made pursuant to its license contracts that are not anticipated to be recovered through licensed product sales. The Company believes these reserves for unmet minimum royalty obligations are necessary - in large part - because of the overall soft retail market. OPERATING EXPENSES. Operating expenses increased to $3.5 million (or 21.6% of net sales) in 1995 from $3.1 million (or 11.9% of net sales) in the third quarter of 1994 (see "Note 1 to Financial Statements" above). This dollar increase was primarily attributable to increases in general and administrative expense. General and administrative expenses increased to $1.9 million (or 11.9% of net sales), in 1995 from $1.6 million (or 5.8% of net sales), in the third quarter of 1994. This increase was primarily the result of added costs associated with the Company's new management information system (see "Addition of Integrated Management Information System" below), and $240,000 in consulting costs associated with the Company's re-engineering efforts to reduce its sourcing, printing and distribution costs (see "Re- engineering Efforts" below). Page 10 of 16 11 INTEREST EXPENSE. Interest expense increased 45% to $264,000 in the third quarter of 1995 from $183,000 in 1994 primarily as a result of higher borrowing levels and higher interest rates in the 1995 quarter. NET (LOSS) INCOME. The Company experienced a net loss of $3.0 million in the third quarter of 1995 compared to net income of $54,000 in the same period of 1994, as a result of the factors described above. RE-ENGINEERING EFFORTS. The Company believes it can reduce its sourcing, printing and distribution costs, by re-engineering its operating processes. To assist in these re-engineering efforts, in the first quarter of 1995 the Company hired re-engineering, sourcing and business development experts. The Company incurred $640,000 in consulting expense in the first nine months of 1995, and believes it will incur $90,000 in such expenses during the remainder of 1995 for these consultants. As has been previously disclosed in the Company's public documents, in October 1995, the Company appointed one of its re-engineering consultants, William S. Wiley, as Chief Executive Officer, President and Director. ADDITION OF INTEGRATED MANAGEMENT INFORMATION SYSTEM. In order to decrease manufacturing costs and decrease inventory levels, the Company acquired and began installing an integrated management information system in 1994 (at a cost of approximately $1.5 million). Presently, the new system is over 80% operative. The Company expects its operating costs will rise as a result of this new system until the end of 1995, at which time it expects to begin realizing cost savings from utilization of the new system. NON-RENEWAL OF JOINT LOONEY TUNES(C)/NATIONAL FOOTBALL LEAGUE(R) LICENSE. The National Football League(R) did not renew Sun's joint license for Looney Tunes ((C) Warner Bros.) characters combined with National Football League(R) team trademarks (the sell-off period under this license expired June 30, 1995). The National Football League indicated to the Company that the NFL did not renew in order to strategically consolidate the number of licensees holding rights to its properties. The Company believes its other Looney Tunes(C) and joint Looney Tunes(C) licenses will not be affected by this action. Sales of Looney Tunes(C)/National Football League(R) products were $4.5 million in 1994. FIRST NINE MONTHS OF 1995 AND FIRST NINE MONTHS OF 1994 NET SALES. Net sales for the nine months ended September 30, 1995 decreased 11% to $72.5 million from $81.2 million in the same period of 1994. The primary reason for this decrease was the sales decline suffered by the Company in the third quarter of 1995 caused by the soft retail environment, and decreases in the sales of men's and boys' products. Gross sales of men's and boys' products decreased 31% to $26.3 million in the first nine months of 1995 from $38.0 million in the same period of 1994. The Company believes this decrease is primarily the result of the Major League Baseball strike, the non-renewal of the Company's joint Looney Tunes(C)/National Football League(R) license and a difficult retail sales environment. Women's and girls' gross sales increased by 5% to $47.9 million in the first nine months of 1995 from $45.7 million in the 1994 period. The Company believes this increase is due to the strength of the women's and girls' license portfolio. Gross sales of licensed products increased by 3% to $61.4 million in the first nine months of 1995 from $59.8 million in the same period of 1994. The increase in licensed product sales was primarily the result of increased sales of Pocahontas((C) Disney), 101 Dalmations((C) Disney), Winnie the Pooh((C) Disney) Page 11 of 16 12 and Warner Bros. Batman Forever((TM) and (C) DC Comics) licensed products. These licensed sales increases were partially offset by a decrease in sales of garments bearing Looney Tunes((C) Warner Bros.) designs. Gross sales of proprietary products decreased by 46% to $13.3 million in the first nine months of 1995 from $24.6 million in the first nine months of 1994. The Company believes this decrease was primarily the result of the soft retail environment and increased competition from garments bearing licensed characters and trademarks. Gross sales to Sun's largest three customers decreased 12% in the first nine months of 1995 versus the comparable period in 1994. Gross sales to Sun's other customers decreased 4% in 1995 versus 1994. These decreases were primarily the result of the factors discussed above. Sales deductions, consisting of sales returns, discounts and allowances, decreased to $2.1 million in 1995 from $3.1 million in the first nine months of 1994. This decrease was primarily due to decreases in the amount of product returns. GROSS MARGIN. Gross margin as a percentage of net sales decreased to 10.5 % in the first nine months of 1995 from 15.8% in 1994 (see "Note 1 to Financial Statements" above). This decrease was primarily the result of four factors. First, the reduced overall sales levels in 1995 had a disproportionate effect on gross margin due to the diminished capacity to cover the Company's fixed costs. Second, in the third quarter of 1995, the Company accrued over $2.0 million in inventory markdowns arising from expected losses on the sale of surplus inventory. The Company believes these markdowns were necessary because of the sluggish retail market and competitive selling pressures in the screen print environment. Third, 1995 margins were negatively impacted by efforts to reduce men's inventory, including customer incentives and substitution of existing, higher value inventory to fill customer orders for lower value product. Fourth, in the third quarter of 1995, the Company recorded over $350,000 in charges arising from minimum royalty commitments the Company made (with regard to certain of its license contracts) which are not anticipated to be recovered through licensed product sales. The Company believes these reserves for unmet minimum royalty obligations are necessary - in part because of the overall sluggish retail market and competitive selling pressures in the screen print environment. OPERATING EXPENSES. Operating expenses increased to $10.8 million (or 14.9% of net sales) in 1995 from $9.8 million (or 12.1% of net sales) in the first nine months of 1994 (see "Note 1 to Financial Statements" above). This increase was primarily attributable to an increase in general and administrative expenses. General and administrative expenses increased to $6.0 million (or 8.3% of net sales) in 1995 from $4.9 million (or 6.0% of net sales) in 1994. This increase was primarily the result of added costs associated with the Company's new management information system (see "Addition of Integrated Management Information System" above), and $630,000 in consulting costs associated with the Company's ongoing re-engineering efforts to reduce its sourcing, printing and distribution costs (see "Re-engineering Efforts" above). INTEREST EXPENSE. Interest expense increased 134% to $970,000 in the first nine months of 1995 from $414,000 in 1994 primarily as a result of higher borrowing levels and higher interest rates in the 1995 period. Page 12 of 16 13 NET (LOSS) INCOME. The Company experienced a net loss of $2.6 million for the first nine months of 1995 compared to net income of $1.8 million in the same period of 1994, as a result of the factors described above. QUARTERLY NET SALES - SEASONALITY The Company's net sales fluctuate from quarter to quarter. Quarterly net sales for 1995 and 1994 are set forth below.
Net Sales (Dollar amounts in thousands) 1995 1994 -------------------------- -------------------------- Percent of Percent of Amount Annual Sales Amount Annual Sales -------- ------------ -------- ------------ First Quarter $ 25,721 * $ 27,224 24.0% Second Quarter 30,581 * 27,375 24.2 Third Quarter 16,225 * 26,634 23.6 Fourth Quarter 31,980 28.2 -------- -------- ----- Total $ 72,527 $113,213 100.0% ======== ======== ===== * Unknown
The Company's highest sales and heaviest production demands historically occur in the first, second and fourth quarters of each year. During the first, second and fourth quarters, spring and summer products - which include T-shirts, tank tops, shorts and similar garments - and back-to-school products are primarily produced and sold. During the third and part of the fourth quarter, winter season products - which include sweatshirts and long sleeve T-shirts - and holiday products are primarily produced and sold. LIQUIDITY AND CAPITAL RESOURCES The Company finances working capital needs primarily from "internally generated funds" (which the Company defines as net income plus depreciation) and short term borrowing under a line of credit. The credit line provides for a borrowing limit of $27.0 million, including commercial letters of credit and a maximum of $2.7 million for standby letters of credit, and expires March 1996. The borrowing rate for the revolving portion of the line is the prime rate or lower. Under the agreement, the amount borrowed at any time, together with letters of credit issued by the Bank on behalf of the Company, may not exceed 80% of eligible accounts receivable (70% in the case of Kmart accounts receivable) and 35% of inventory - up to $8.4 million. The agreement was amended in the fourth quarter of 1995 to, among other things, delete the prohibition against borrowing against inventory for any 90 consecutive days each calendar year (see "Exhibit 10.6.4", below). The agreement contains covenants common to such agreements, including a restriction on dividend payments without the lender's consent, and provides for obligations under the agreement to be secured by all of the Company's assets, including accounts receivable and inventory. At September 30, 1995, approximately $5.6 million was available for borrowing. The Company is in compliance with its debt covenants, or a waiver has been obtained. Inventory levels decreased by $352,000 or 1% from December 31, 1994 to September 30, 1995. The Company believes there was over $3.0 million (net of inventory markdown reserves of $4.1 million) of Page 13 of 16 14 impaired surplus inventory on hand at September 30, 1995, which is expected to be sold at little or no margin in 1995 and the first half of 1996 (see "Third Quarter of 1995 - Gross Margin", above). Accounts receivable decreased by 46% to $13.2 million at September 30, 1995 versus $24.4 million at December 31, 1994 as a result of lower sales in the third quarter of 1995 than in the fourth quarter of 1994. Effective January 1993, the Company entered into an agreement with Heller Financial intended to transfer the collection risk to Heller for Sun's accounts receivable for essentially all of its customers other than Kmart, Target and Wal-Mart (which three customers accounted for 19%, 25% and 44%, respectively, of Sun's total sales in the first nine months of 1995). Under the agreement, Heller assumes the collection risk in exchange for a fee equal to .55% of the gross face amount of covered receivables. Heller is party to an intercreditor agreement with Sun's Banks, and both Heller and Sun's Banks hold security interests in the Company's receivables. Notes payable (borrowings under the Company's bank line of credit) decreased $3.4 million or 21% and accounts payable decreased $4.8 million or 37% from December 31, 1994 to September 30, 1995. The net decrease in notes payable and accounts payable was primarily the result of lower accounts receivable in the third quarter of 1995 than in the fourth quarter of 1994, and lower levels of garment purchases in the third quarter of 1995 than in the fourth quarter of 1994. During the first nine months of 1995, the Company purchased approximately $966,000 of machinery and equipment for production, warehouse, distribution and office use. The Company anticipates that total expenditures for machinery and equipment will be less than $200,000 during the remainder of 1995. Sun's primary ongoing cash needs are for working capital, long-term debt repayments and capital expenditures. The Company believes that its cash needs through the remainder of 1995 will be met by internally generated funds and borrowings under its credit facility. INFLATION From time to time, Sun's suppliers of blank garments and materials increase their prices. Further, Sun increases its employees' compensation relative to increases in the cost of living. Sun's mass merchant customers have historically sold Sun's more basic products at predetermined sales price points, many of which have not risen during the last few years. Because Sun's customers generally operate on a fixed markup, their strategy of not increasing their sales price points has made it difficult for the Company to pass on any cost increases relative to its more basic products. Page 14 of 16 15 PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS No material change. ITEM 2 - CHANGES IN SECURITIES 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. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Page ---- a) Exhibit 10.6.4 Amendment to the Credit Agreement between Registrant and U.S. Bank of Washington, N.A. and West One Bank, N.A. 17-18 b) Form 8-K was filed on October 6, 1995
Page 15 of 16 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUN SPORTSWEAR, INC. DATE: November 10, 1995 BY: /s/ William S. Wiley ------------------------ --------------------------- William S. Wiley Chief Executive Officer and President DATE: November 10, 1995 BY: /s/ Kevin C. James ------------------------ --------------------------- Kevin C. James Senior Vice President and Chief Financial Officer Page 16 of 16 EX-10.6.4 2 AMENDMENT TO THE CREDIT AGREEMENT 1 EXHIBIT 10.6.4 U.S. BANK NATIONAL CORPORATE BANKING DIVISION 1420 Fifth Avenue Seattle, WA 98101 November 10, 1995 Mr. Kevin James Senior Vice President, CFO Sun Sportswear, Inc. 6520 South 190th Street Kent, WA 98032 Re: Revolving and Term Loan Agreement dated November 19, 1991, as Amended, the "Agreement" Dear Kevin, U.S. Bank of Washington, National Association, as Agent for the Banks in the referenced credit agreement hereby confirms that the Agent and Banks agree to amend the Agreement to eliminate the requirement within the Agreement that Sun Sportswear maintain a ninety consecutive day period in each year during which time the Aggregate Current Amount shall not exceed Eligible Accounts Receivable. Further, subject to the terms hereof, the Agent and Banks agree to waive non-compliance with such requirement for the year and fiscal quarter ended September 30, 1995. Both the elimination and the waiver are subject to the following terms and conditions (all of which are to be included in an Amendment to the Agreement acceptable to Agent and Banks). o Conversion to daily settlement of the line of credit with A/R payments to be made directly to a bank-controlled lockbox, o Modification of the Agreement to reduce the advance rate on receivables due from K Mart to 70%, and limit the maximum amount of gross receivables from K Mart in the Borrowing Base to $2,500,000, except that in the event that K Mart files for protection under bankruptcy laws, all K Mart receivables shall be excluded from the Borrowing Base, o Addition of a new financial covenant testing interest coverage (to be defined as the sum of GAAP earnings before interest, taxes, depreciation and amortization, all divided by interest expense, with a minimum requirement of 1.0 for the quarter ended December 31, 1995 and each quarter thereafter), o Increase the frequency of compliance reporting from quarterly to monthly (except for the coverage test which shall be measured quarterly), 17 2 o Increase in the Applicable Margin for Libor loans to 2.0% effective as of the date of this letter, o Payment of a fee (to be split by the Banks pro-rata based on their commitments) of $12,500, and all other expenses and fees incurred in connection with the Amendment to the Agreement, o Waiver of defenses and claims. All other terms and conditions of the Agreement remain in full force and effect. If these terms are acceptable to Sun, please indicate so by signing and returning the attached copy of this letter by November 17, 1995, after which time this offer shall expire. Oral agreements or oral commitments to loan money, extend credit or to forbear from enforcing repayment of a debt are not enforceable under Washington law. Please let me know if you have any questions regarding this matter. Sincerely, /s/ Matthew S. Thoreson - ----------------------- Matthew S. Thoreson cc: Jason Gill, West One Bank, Washington Agreed and Accepted: SUN SPORTSWEAR, INC. BY: /s/ Kevin James ---------------- ITS: Senior Vice President and Chief Financial Officer DATE: November 10, 1995 18 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000856711 SUN SPORTSWEAR, INC. 1 U.S. DOLLAR 9-MOS DEC-31-1994 JAN-01-1995 SEP-30-1995 1 288,869 0 13,224,163 46,524 29,803,273 46,234,315 10,744,651 5,720,657 51,277,416 23,856,761 302,110 21,618,339 0 0 5,500,206 51,277,416 72,526,645 72,526,645 64,930,346 75,724,612 (172,645) 0 969,506 (3,994,828) (1,358,500) (2,636,328) 0 0 0 (2,636,328) (0.46) (0.46)
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