-----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, WJQc95mj8qeKugKiWSpSf1BIzcwa710s2VtoNktzmVShbfko2QbUw7IGJJExdrfg Zi2GrTyN2aVUajH2eI58+Q== 0000891020-96-000922.txt : 19960814 0000891020-96-000922.hdr.sgml : 19960814 ACCESSION NUMBER: 0000891020-96-000922 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN SPORTSWEAR INC CENTRAL INDEX KEY: 0000856711 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] 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: 96610282 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 QUARTER ENDED 6/30/96 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 JUNE 30, 1996 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 August 9, 1996 the Registrant had 5,748,500 shares of common stock outstanding. Page 1 of 13 2 SUN SPORTSWEAR, INC. INDEX Page Part I. Financial Information Item 1. Financial Statements: Balance Sheets at June 30, 1996 3-4 (unaudited) and December 31, 1995 Statements of Income 5 for the three months ended June 30, 1996 and 1995 (unaudited) and for the six months ended June 30, 1996 and 1995 (unaudited) Statements of Cash Flows 6 for the six months ended June 30, 1996 and 1995 (unaudited) Notes to Financial Statements 7-8 Item 2. Management's Discussion and Analysis 8-12 of Financial Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults upon Senior Securities 12 Item 4. Submission of Matters to a Vote of 12 Security Holders Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 Signature Page 13 Page 2 of 13 3 SUN SPORTSWEAR, INC. BALANCE SHEETS
JUNE 30, DECEMBER 31, 1996 1995 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 111,094 $ 2,006,633 Accounts receivable, net of allowance for doubtful accounts of $45,904 and $46,317, respectively 16,133,426 13,102,275 Inventories, net (Note 2) 18,766,448 23,631,358 Prepaid expenses and other current assets 1,054,264 959,872 Deferred income taxes 788,332 788,332 Federal income tax receivable 247,387 1,979,535 ----------- ----------- Total current assets 37,100,951 42,468,005 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET (Note 3) 4,384,122 4,831,994 OTHER ASSETS 14,500 15,107 ----------- ----------- Total assets $41,499,573 $47,315,106 =========== ===========
(continued) See accompanying notes to financial statements Page 3 of 13 4 SUN SPORTSWEAR, INC. BALANCE SHEETS (CONTINUED)
JUNE 30, DECEMBER 31, 1996 1995 ------------ ----------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 7,349,470 $13,500,000 Accounts payable 5,300,123 4,985,953 Accrued royalties payable 1,776,377 1,753,745 Accrued wages and taxes payable 557,694 512,078 Accrued interest payable 54,851 51,263 Current portion of long-term debt -0- 245,652 ----------- ----------- Total current liabilities 15,038,515 21,048,691 ----------- ----------- NONCURRENT LIABILITIES: Long-term debt, net of current portion -0- 92,354 Deferred income taxes 155,642 155,642 ----------- ----------- Total noncurrent liabilities 155,642 247,996 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, no par value, 20,000,000 shares authorized; 5,748,500 shares at 6/30/96 and 5,748,500 shares at 12/31/95 issued and outstanding 21,618,339 21,618,339 Retained earnings 4,687,077 4,400,080 ----------- ----------- Total shareholders' equity 26,305,416 26,018,419 ----------- ----------- COMMITMENTS AND CONTINGENCIES Total liabilities and shareholders' equity $41,499,573 $47,315,106 =========== ===========
See accompanying notes to financial statements Page 4 of 13 5 SUN SPORTSWEAR, INC. STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------- -------------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Proprietary sales $ 5,703,323 $ 4,397,014 $ 10,325,687 $ 10,429,871 Licensed sales 14,762,315 26,791,188 35,221,953 47,347,630 Sales deductions (431,073) (606,697) (1,079,635) (1,475,434) ------------ ------------ ------------ ------------ Net sales (Note 4): 20,034,565 30,581,505 44,468,005 56,302,067 Cost of goods sold 16,871,903 25,310,087 37,495,432 47,832,585 ------------ ------------ ------------ ------------ Gross margin 3,162,662 5,271,418 6,972,573 8,469,482 ------------ ------------ ------------ ------------ Operating expenses: Selling 741,110 899,060 1,516,179 1,886,685 Design and pattern 681,697 614,839 1,343,958 1,258,982 General and administrative 1,514,732 2,132,007 3,227,429 4,114,003 Provision for doubtful accounts and factoring fees 46,513 16,189 78,484 29,853 ------------ ------------ ------------ ------------ 2,984,052 3,662,095 6,166,050 7,289,523 ------------ ------------ ------------ ------------ Operating income 178,610 1,609,323 806,523 1,179,959 ------------ ------------ ------------ ------------ Other expense (income): Interest expense 176,390 360,735 417,381 705,053 Other, net (27,052) (46,702) (44,856) (60,987) ------------ ------------ ------------ ------------ 149,338 314,033 372,525 644,066 ------------ ------------ ------------ ------------ Income before provision for income taxes 29,272 1,295,290 433,998 535,893 Provision for income taxes 9,000 440,000 147,000 182,000 ------------ ------------ ------------ ------------ Net income $ 20,272 $ 855,290 $ 286,998 $ 353,893 ============ ============ ============ ============ Earnings per share: $ 0.00 $ 0.15 $ 0.05 $ 0.06 ============ ============ ============ ============ Weighted average shares 5,748,500 5,748,451 5,748,500 5,747,997 outstanding
See accompanying notes to financial statements Page 5 of 13 6 SUN SPORTSWEAR, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 1995 ----------- ------------- Cash flows from operating activities: Net income $ 286,998 $ 353,893 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 806,787 738,815 Gain on disposal of equipment (10,196) (5,984) Increase in accounts receivable (3,031,151) (77,647) Decrease in inventories 4,864,910 4,614,177 Decrease (increase) in federal income tax receivable, accrued and deferred 1,732,148 (109,000) (Decrease) increase in other assets (93,785) 188,365 Increase (decrease) in accounts payable 165,867 (6,178,832) Increase (decrease) in accrued liabilities 71,836 (60,003) ----------- ----------- Net cash provided by (used in) operating activities 4,793,414 (536,216) ----------- ----------- Cash flows from investing activities: Capital expenditures (359,827) (812,458) Proceeds from sale of equipment 11,108 34,015 ----------- ----------- Net cash used in investing activities (348,719) (778,443) ----------- ----------- Cash flows from financing activities: Increase (decrease) in outstanding checks in excess of funds on deposit 148,303 (1,138,604) Net (repayments) borrowings under line of credit agreement (6,150,530) 1,655,000 Principal payments under long-term debt (338,007) (137,517) Proceeds from issuance of common stock for employee stock options -0- 4,648 ----------- ----------- Net cash (used in) provided by financing activities (6,340,234) 383,527 ----------- ----------- Net decrease in cash (1,895,539) (931,132) Cash at beginning of period 2,006,633 1,217,171 ----------- ----------- Cash at end of period $ 111,094 $ 286,039 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 413,792 $ 708,775 Income taxes ($1,585,148) $ 291,000
See accompanying notes to financial statements Page 6 of 13 7 SUN SPORTSWEAR, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL STATEMENTS The accompanying financial statements at June 30, 1996 for the three and six months ended June 30, 1996 and June 30, 1995 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 six months ended June 30, 1996 and 1995 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 accountants. 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") 1995 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 11 of this report. NOTE 2 - INVENTORIES: Inventories are composed as follows:
June 30, December 31, 1996 1995 ------------ ------------- Garments in process $ 2,251,396 $ 2,244,781 Unprinted finished garments 16,307,466 19,827,823 Printed finished garments 2,257,446 5,617,347 Supplies 931,689 407,064 Lower of cost or market allowance (2,981,549) (4,465,657) ------------ ------------- $ 18,766,448 $ 23,631,358 ============ ============
NOTE 3 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are summarized by major classifications as follows:
Estimated June 30, December 31, useful lives 1996 1995 ------------ ------------ ------------ Production equipment 5-7 $ 3,791,581 $ 3,658,861 Leasehold improvements 5-10 1,286,329 1,271,542 Design system hardware and software 3-5 954,333 851,056 Information system hardware and software 3-5 1,889,172 2,145,582 Furniture and fixtures 5 1,052,506 1,116,112 Distribution equipment 5-10 1,481,340 1,452,716 Warehouse equipment 5-7 385,201 395,797 Vehicles 5 12,417 12,417 ------------ ------------ 10,852,879 10,904,083 LESS - Accumulated depreciation (6,468,757) (6,072,089) ------------ ------------ $ 4,384,122 $ 4,831,994 ============ ============
Page 7 of 13 8 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:
Percentage of gross sales for Total percentage the Company's three largest of gross sales for customers the three customers For the six months ended June 30, 1996 12%, 25% and 48% 85% 1995 19%, 27% and 41% 87% For the year ended December 31, 1995 17%, 24% and 47% 88%
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 (decrease)/increase as a percentage 1995 to 1996 ------------------- -------------------- --------------------- Three months Six months ended three six ended June 30, June 30, months months ------------------- -------------------- ended ended 1996 1995 1996 1995 June 30, June 30, ---- ---- ---- ---- ------- ------- Gross sales Proprietary sales 28.5% 14.4% 23.2% 18.5% 29.7% (1.0)% Licensed sales 73.7 87.6 79.2 84.1 (44.9) (25.6) Sales deductions (2.2) (2.0) (2.4) (2.6) (28.9) (26.8) ----- ----- ----- ----- Net sales 100.0 100.0 100.0 100.0 (34.5) (21.0) Cost of goods sold 84.2 82.8 84.3 85.0 (33.3) (21.6) Gross margin 15.8 17.2 15.7 15.0 (40.0) (17.7) Operating expenses 14.9 12.0 13.9 12.9 (18.5) (15.4) Interest expense 0.9 1.2 0.9 1.3 (51.1) (40.8) Other (income) and expense (0.1) (0.2) (0.1) (0.1) (42.1) (26.4) Provision (benefit) for income taxes 0.0 1.4 0.3 0.3 (98.0) (19.2) ----- ----- ----- ----- Net income 0.1% 2.8% 0.7% 0.6% (97.6) (18.9) ===== ===== ===== =====
SECOND QUARTER OF 1996 AND SECOND QUARTER OF 1995 NET SALES. Net sales for the quarter ended June 30, 1996 decreased 34% to $20.0 million from $30.6 million in the same period of 1995. Gross sales of men's and boys' products decreased 44% to $4.7 million in the second quarter of 1996 from $8.4 million in the same period of 1995. Women's and girls' gross sales decreased by 31% to $15.7 million in the second quarter of 1996 from $22.7 million in the same period of 1995. The Company believes these sales decreases were the result of the soft retail environment. Page 8 of 13 9 The Company expects its third quarter 1996 sales to be below its third quarter 1995 sales as a result of this soft retail environment (see "Quarterly Net Sales - Seasonality" below). The Company is working to improve its results by focusing on new customers, on the private label needs of its mid-tier and mass market customers, and building its men's and boys' business. To assist in these efforts, the Company is in the process of upgrading and enlarging its sales staff, has recently begun a formal program of new customer development and is expanding its product design capabilities to encompass private label business. Gross sales of licensed products decreased to $14.8 million in the second quarter of 1996 versus $26.8 million in the second quarter of 1995. The Company believes this sales decrease was the result of the soft retail environment. 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 Disney Enterprises' 1996 live action movie release, 101 Dalmatians((C) Disney) and a Budweiser(R) license from Anheuser-Busch. There can be no assurances, however, that any license acquisitions will receive positive market acceptance by Sun's customers. The Company is currently negotiating to renew its two top selling licenses, both of which expire at the end of 1996 (these two licenses accounted for 26% and 25% of the Company's gross revenues in the first six months of 1996). While the Company hopes to renew these and other licenses, there can be no assurance that any license held by the Company will be renewed by the licensor. Gross sales of proprietary products increased by 30% to $5.7 million in the 1996 quarter from $4.4 million in the 1995 quarter. The Company believes this increase was primarily the result of the Company's concerted effort to increase its private label business with such customers as J.C. Penneys (Arizona Jeans(R) label) and Sears (Canyon River Blues(R) label). Gross sales to Sun's largest three customers decreased 41% in the second quarter of 1996 versus sales in the same period of 1995, primarily as a result of the soft retail environment. Gross sales to Sun's other customers increased 12% in the second three months of 1996 versus the same period of 1995, primarily as a result of the Company's concerted efforts to increase its private label business. Sales deductions, consisting of sales returns, discounts and allowances, decreased to $431,000 in the 1996 quarter from $607,000 in 1995. 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 15.8% in the second quarter of 1996 from 17.2% in the second quarter of 1995. The decrease primarily resulted from the fact that the reduced overall sales level in 1996 had a disproportionate effect on gross margin (as a percentage of net sales) due to the diminished capacity to cover the Company's fixed costs. The above factor was partially offset by the Company's efforts to re-engineer its operating processes, begun in 1995, which lowered Sun's manufacturing costs in the second quarter of 1996, and the fact that customer returns were down in the 1996 quarter versus 1995. OPERATING EXPENSES. Operating expenses decreased to $3.0 million (or 14.9% of net sales) in 1996 from $3.7 million (or 12.0% of net sales) in the second quarter of 1995. The dollar decrease was primarily attributable to decreases in selling, and general and administrative expenses. The increase as a percentage of sales was the result of the lower sales volume in 1996, compared to the 1995 quarter. General and administrative expenses decreased to $1.5 million (or 7.6% of net sales) in the second quarter of 1996 from $2.1 million (or 7.0% of net sales) in the same period of 1995. The dollar decrease was primarily the result of elimination of positions under a restructuring plan implemented by the Company in the first quarter of 1996 (see "First Quarter 1996 Restructuring" below). The increase as a percentage of sales was the result of the lower sales volume in 1996, compared to the 1995 quarter. Selling expense decreased to $741,000 (or 3.7% of net sales) in the second quarter of 1996 from $899,000 (or 2.9% of net sales) in the same period of 1995. The dollar decrease was primarily the result of the elimination of positions under a restructuring plan implemented by the Company in the first quarter Page 9 of 13 10 of 1996 (see "First Quarter 1996 Restructuring" below). The increase as a percentage of sales was the result of the lower sales volume in 1996, compared to the 1995 quarter. INTEREST EXPENSE. Quarterly interest expense decreased 51% to $176,000 in the second quarter of 1996 from $361,000 in 1995 primarily as a result of lower borrowing levels in the 1996 quarter. NET INCOME. Net income decreased to $20,000 in the second quarter of 1996 from a net income of $855,000 in the same period of 1995, as a result of the factors described above. FIRST QUARTER 1996 RESTRUCTURING. In February 1996, the Company initiated a restructuring plan, that, among other things, resulted in the combining of Sun's Women's and Girls' Division and Men's and Boys' Division. The restructuring plan also resulted in the elimination of approximately 30 indirect positions from the Company's workforce. FIRST SIX MONTHS OF 1996 AND FIRST SIX MONTHS OF 1995 NET SALES. Net sales for the six months ended June 30, 1996 decreased 21% to $44.5 million from $56.3 million in the same period of 1995. Gross sales of women's and girls' apparel decreased 16% to $32.1 million in 1996 from $38.4 million in 1995. Sales of men's and boys' products decreased 31% to $13.4 million in the first six months of 1996 from $19.4 million in the same period of 1995. The Company believes the primary reason for these decreases was the soft retail environment. Gross sales of licensed products decreased by 26% to $35.2 million in the first half of 1996 from $47.3 million in the first half of 1995. The Company believes the primary reason for this decrease was the soft retail environment. Gross sales of proprietary products remained virtually unchanged at $10.3 million in the first six months of 1996 versus $10.4 million in the first six months of 1995. The Company believes that sales of proprietary products held relatively firm primarily as a result of the Company's concerted effort to increase its private label business. Gross sales to Sun's largest three customers decreased 24% in the first six months of 1996 versus the comparable period in 1995, primarily as a result of the soft retail environment. Gross sales to Sun's other customers remained virtually unchanged in the first half 1996 versus the first half of 1995, primarily as a result of the Company's concerted efforts to increase its private label business. Sales deductions, consisting of sales returns, discounts and allowances, decreased to $1.1 million in 1996 from $1.5 million in the first half of 1995. This decrease was primarily due to decreases in the amount of product returns in the first half of 1996. GROSS MARGIN. Gross margin as a percentage of net sales increased to 15.7% in the first half of 1996 from 15.0% in 1995. This increase was primarily the result of three factors. First, customer returns were down in the first half of 1996 versus the first half of 1995. Second, 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, while the first six months of 1996 were not impacted by such actions. Third, the Company's efforts to re-engineer its operating processes, begun in 1995, lowered Sun's manufacturing costs in the first half of 1996. The above factors were partially offset by the reduced overall sales level in 1996 which had a negative effect on gross margin (as a percentage of net sales) due to the diminished capacity to cover the Company's fixed costs. OPERATING EXPENSES. Operating expenses decreased to $6.2 million (or 13.9% of net sales) in 1996 from $7.3 million (or 12.9% of net sales) in the first half of 1995. The dollar decrease was primarily attributable to decreases in selling, and general and administrative expenses. The increase as a percentage of sales is a result of the lower sales volume in 1996, compared to 1995. General and administrative expenses decreased to $3.2 million (or 7.3% of net sales) in 1996 from $4.1 million (or 7.3% of net sales) in 1995. This dollar decrease was primarily the result of elimination of positions under a restructuring plan implemented by the Company in the first quarter of 1996 (see "First Quarter 1996 Restructuring" above). Page 10 of 13 11 Selling expense decreased to $1.5 million (or 3.4% of net sales) in the first half of 1996 from $1.9 million (or 3.4% of net sales) in the same period of 1995. The dollar decrease was primarily the result of elimination of positions under a restructuring plan implemented by the Company in the first quarter of 1996 (see "First Quarter 1996 Restructuring" above). INTEREST EXPENSE. Interest expense decreased 41% to $417,000 in the first half of 1996 from $705,000 in 1995 primarily as a result of lower borrowing levels in the 1996 half. NET INCOME. Net income decreased to $287,000 in the first half of 1996 from $354,000 in the same period of 1995, 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 1996 and 1995 are set forth below.
1996 1995 ----------------------- ------------------------------- Amount Percent Amount Percent First Quarter $ 24,433 * $ 25,720 27.4% Second Quarter 20,035 * 30,582 32.5 Third Quarter 16,225 17.3 Fourth Quarter 21,438 22.8 --------- -------- --------- ---- Total $ 44,468 $ 93,965 100.0% ========= ========= ===== * 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 credit agreement. In February 1996, the Company entered into a credit agreement with Heller Financial, Inc. The Heller credit agreement provides for a line of credit (including commercial letters of credit) of up to $24 million and expires in February 1998. At June 30, 1996, approximately $11.7 million was available for borrowing. The borrowing rate for the revolving portion of the line is the prime rate. All the Company's assets, including accounts receivable and inventories, are pledged as security for borrowings under the Heller credit agreement. Under the agreement, the amount borrowed at any time, together with letters of credit issued on behalf of the Company, may not exceed 85% of eligible accounts receivable and 60% of eligible inventory - up to $8.5 million. The Heller credit agreement requires compliance with certain financial covenants principally relating to working capital, tangible net worth, ratio of debt to equity, expenditures for fixed assets, minimum earnings (before taxes, interest and depreciation), restrictions on the payment of dividends and restrictions on the incurrence of long-term debt. The Company was in compliance with the Heller debt covenants at June 30, 1996. Inventory levels decreased by $4.9 million or 21% from December 31, 1995 to June 30, 1996 primarily as a result of the Company's concerted efforts to operate its business with lower levels of inventory. The Company believes there was approximately $2.8 million (net of inventory markdown reserves of $3.1 million) of impaired surplus inventory on hand at June 30, 1996, which is expected to be sold at little or no margin throughout 1996. As a result, the Company believes its gross margin will be negatively impacted in the last half of 1996 by 1% to 2% of net sales. Page 11 of 13 12 Accounts receivable increased by 23% to $16.1 million at June 30, 1996 from $13.1 million at December 31, 1995 as a result of a temporary problem with a customer's automated payment system (the problem was rectified shortly after June 30, 1996). The Company has an agreement with Heller Financial, Inc., that is intended to transfer the collection risk to Heller, for Sun's accounts receivable for essentially all of its customers other than Target and Wal-Mart. Under the agreement, Heller assumes 100% of the collection risk associated with the Company's covered receivables and Heller receives a fee equal to .65% of the gross amount of Kmart receivables and .55% of the gross amount of all other covered receivables for assuming such collection risk. The agreement was amended in the third quarter of 1996 to provide that Heller assumes 100% of the collection risk associated with Kmart. Notes payable (borrowings under the Company's line of credit) decreased $6.2 million or 46% from December 31, 1995 to June 30, 1996. The decrease in notes payable was primarily the result of the reduction in inventory that occurred during the first half of 1996. During the first half of 1996, the Company purchased approximately $360,000 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 1996. Sun's primary ongoing cash needs are for working capital and capital expenditures. The Company believes that its cash needs through the remainder of 1996 will be met by borrowings under its Heller 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. 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 None Page 12 of 13 13 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: August 9, 1996 BY: /s/ William S. Wiley ---------------------------------------- William S. Wiley Chairman of the Board, Chief Executive Officer and President DATE: August 9, 1996 BY: /s/ Kevin C. James ---------------------------------------- Kevin C. James Senior Vice President and Chief Financial Officer Page 13 of 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000856711 SUN SPORTSWEAR, INC. 1 U.S. DOLLARS 6-MOS DEC-31-1995 JAN-01-1996 JUN-30-1996 1 111,094 0 16,179,330 45,904 18,766,448 37,100,951 10,852,879 6,468,757 41,499,573 15,038,515 155,642 0 0 21,618,339 0 26,305,416 44,468,005 44,468,005 37,495,432 43,661,482 (44,856) 78,484 417,381 433,998 147,000 286,998 0 0 0 286,998 .05 .05
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