SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Period Ended July 6, 1996
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 1-63
MUNSINGWEAR, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 41-0429620
(State of Incorporation) (I.R.S. Employer Identification No.)
8000 W. 78TH STREET, SUITE 400, MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (612) 943-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of 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 _X_ NO ___
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES _X_ NO ___
The number of shares of common stock outstanding at July 6, 1996 was 2,058,078.
MUNSINGWEAR, INC.
INDEX
Page No.
PART I: FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets -
July 6, 1996 and January 6, 1996 . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
for the Three and Six Months ended July 6, 1996
and July 8, 1995 . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the Three and Six Months ended July 6, 1996
and July 8, 1995 . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 7
PART II: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 11
<TABLE>
<CAPTION>
MUNSINGWEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
July 6, January 6,
1996 1996
------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 68 $ 62
Accounts receivable, less allowances of $615 and $511 ......... 10,259 8,537
Inventories .................................................... 8,359 14,641
Prepaid expenses and other ..................................... 877 1,004
------- --------
Total current assets ......................................... 19,563 24,244
------- --------
Property, plant and equipment, less accumulated
depreciation and amortization of $1,978 and $1,584 ............. 3,128 2,927
Deferred taxes, net of valuation allowance of $11,796 ........... 775 2,309
Trademarks, net of amortization of $1,656 and $1,274 ............. 3,791 4,173
------- --------
$27,257 $ 33,653
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit borrowings ...................................... $ 1,726 $ 10,890
Current maturities of long-term debt ........................... 22 21
Accounts payable ............................................... 4,755 5,008
Accrued payroll and employee benefits .......................... 1,298 1,009
Unearned royalty income ........................................ 1,317 2,993
Other accrued expenses ......................................... 1,588 397
------- --------
Total current liabilities .................................... 10,706 20,318
------- --------
Long-term debt, less current maturities .......................... 12 22
Postretirement medical benefits .................................. 319 319
Unearned royalty income .......................................... -- 10
------- --------
331 351
------- --------
Stockholders' equity:
Common Stock, $.01 par value:
2,058,078 and 2,026,768 shares issued ........................ 21 21
Capital in excess of par value ................................. 15,261 15,112
Retained earnings (deficit) ................................... 938 (2,149)
------- --------
Total stockholders' equity ................................... 16,220 12,984
------- --------
$27,257 $ 33,653
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
MUNSINGWEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts unaudited and in thousands, except per share data)
Three Months Ended Six Months Ended
July 6, July 8, July 6, July 8,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Net sales .............................. $ 18,021 $ 15,106 $ 32,717 $ 29,728
Royalties .............................. 1,125 1,163 2,269 2,464
-------- -------- -------- --------
19,146 16,269 34,986 32,192
-------- -------- -------- --------
EXPENSES:
Cost of goods sold ..................... 14,610 11,748 26,389 23,347
Selling, general and administrative .... 3,815 3,355 7,490 6,954
Restructuring costs .................... -- 400 -- 400
-------- -------- -------- --------
18,425 15,503 33,879 30,701
-------- -------- -------- --------
OPERATING INCOME ......................... 721 766 1,107 1,491
Interest expense, net .................... (358) (308) (717) (558)
Other .................................... 20 (11) 33 (8)
-------- -------- -------- --------
Income before tax and gain on sale of
trademarks ............................. 383 447 423 925
Gain on sale of trademarks ............... 4,383 -- 4,383 --
-------- -------- -------- --------
Income before taxes ...................... 4,766 447 4,806 925
Provision for income taxes ............... 1,691 179 1,719 369
-------- -------- -------- --------
NET INCOME ............................. $ 3,075 $ 268 $ 3,087 $ 556
======== ======== ======== ========
NET INCOME PER COMMON SHARE ............ $ 1.47 $ 0.13 $ 1.48 $ 0.27
======== ======== ======== ========
Weighted average number of shares of
common stock ........................... 2,096 2,066 2,086 2,066
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
MUNSINGWEAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts unaudited and in thousands)
Six Months Six Months
Ended Ended
July 6, 1996 July 8, 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income from operations .............................. $ 3,087 $ 556
Reconciling items:
Depreciation and amortization ......................... 529 361
Provision for losses on accounts receivable ........... 75 62
Gain on sale of trademarks ............................ (4,383) --
Unearned royalty income ............................... (1,556) 1,286
Utilization of net operating loss carryforwards ....... 1,534 315
Changes in operating assets and liabilities:
Receivables ......................................... (1,797) (3,643)
Inventories ......................................... 6,282 (594)
Prepaid expenses .................................... 127 212
Accounts payable .................................... (383) 949
Other current liabilities ........................... 113 209
------- -------
Net cash provided by (used in) operating activities 3,628 (287)
------- -------
INVESTING ACTIVITIES
Purchase of property, plant and equipment ............... (598) (527)
Proceeds from sale of trademarks ........................ 5,000 --
Deposit received on pending sale of trademarks .......... 1,000 --
------- -------
Net cash provided by (used in) investing activities 5,402 (527)
------- -------
FINANCING ACTIVITIES
Net change in line of credit borrowings ................. (9,164) 762
Principal payments on long-term debt
and capital lease obligations ......................... (9) (4)
Proceeds from exercise of stock options ................. 149 --
------- -------
Net cash (used in) provided by financing activities (9,024) 758
------- -------
Increase (decrease) in cash and cash equivalents ........ 6 (56)
Cash and cash equivalents at beginning of period ........ 62 73
------- -------
Cash and cash equivalents at end of period .............. $ 68 $ 17
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
MUNSINGWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statement Presentation
The condensed consolidated financial statements for the three months and six
months ended July 6, 1996 of Munsingwear, Inc. (the Company) have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect, in the
opinion of management, all normal recurring adjustments necessary to present
fairly the results of operations for the period. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although management
believes the disclosures are adequate to make the information presented not
misleading.
These financial statements should be read in conjunction with the Company's
most recent audited financial statements included in its 1995 Annual Report
to Stockholders and its 1995 Form 10-K, including amendments.
The results of operations for the interim period presented are not
necessarily indicative of the results to be expected for the full fiscal
year, since the Company typically reports disproportionately higher revenues
in its first and second quarters due to the seasonality of its product line
and because of the transactions discussed in Note 4, below.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of:
(000's omitted)
---------------
July 6, January 6,
1996 1996
---- ----
Raw materials. . . . . . . . . . . . . . . . $ 1,639 $ 1,359
Work in process. . . . . . . . . . . . . . . 1,377 639
Finished goods . . . . . . . . . . . . . . . 5,343 12,643
----- ------
$ 8,359 $14,641
======= =======
3. Financing Arrangements
The Company maintains a bank line of credit under which up to $20,000,000 is
available for borrowings and letters of credit. At July 6, 1996, borrowings
were $1,726,000 and amounts utilized for outstanding letters of credit were
$1,397,000. On July 6, 1996, additional availability on this bank line of
credit was $7,441,000, and the Company was in compliance with all related
covenants.
4. On May 22, 1996, the Company entered into a purchase and sale agreement with
Supreme International Corporation for the sale of all Munsingwear rights to
its trademarks, excluding trademarks for certain Far East countries, and
certain associated assets relating to the retail and professional golf
businesses for approximately $18,000,000 in cash. Since this transaction
represents a substantial portion of the Company's assets, stockholder
approval of the transaction is required and will be solicited in a Proxy
Statement to be mailed to stockholders in early August. Stockholders of
record at the close of business on July 16, 1996 will be entitled to vote at
the Annual Meeting of Stockholders of the Company, which is expected to be
held in early September. Approximately 35% of the outstanding Munsingwear
common stock is held by directors and executive officers of Munsingwear and
their affiliates, each of whom has indicated an intention to vote in favor
of the sale to Supreme. As of July 16, 1996, the record date, there were
2,058,078 shares of Munsingwear common stock outstanding.
On June 28, 1996, the Company transferred its trademarks and pending
trademark applications to China, Macau, Vietnam and the U.S. Territories of
Guam and the Northern Mariana Islands to ITOCHU Corporation, Toyobo Co.,
Ltd., and Descente, Ltd. for $5,000,000 cash. Proceeds were used to pay down
the Company's line of credit borrowings. As a result of the sale, the
Company realized a $4,383,000 gain before income taxes which was recorded in
the results for the quarter ended July 6, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST SIX MONTHS
NET SALES for the quarter increased 19% over the same period last year. The
Company's Premium/Advertising Specialty Incentive (ASI) markets business
(premium business) increased 61%, continuing a trend experienced over the prior
two years and forecasted by management to continue throughout 1996. Sales to
retail and professional golf customers, collectively, were up 3%. For the first
six months of 1996, net sales were up 10%, which included an 84% increase in the
Company's premium business. Sales to retail and professional golf customers
declined 12% vs. the first six months of 1995 as retailers practiced
conservative inventory management due to the continued sluggish retail apparel
marketplace.
The Company's backlog of unfilled orders at the end of the second quarter was
approximately $6,800,000 compared to $7,900,000 at the same time a year ago. The
reduction in order backlog is the result of the Company's product mix shifting
toward the premium business, where orders are normally received less than 30
days prior to requested delivery vs. department and chain stores' practice of
placing orders three to four months in advance of delivery date. For the first
six months of 1996, 38% of the Company's sales were to premium customers
compared to 23% during the same period last year. In May the Company announced
it had signed a purchase agreement with Supreme International Corporation
(Supreme), a Florida corporation, for the sale of all Munsingwear rights to its
trademarks and certain associated assets relating to the retail and professional
golf businesses. As a result of this sale, the Company has not processed orders
from those customers for shipments beyond August 1996. The closing is expected
to be in early September, after which the Company will no longer sell to
department stores, specialty stores, national chain stores and professional golf
shops and will no longer receive royalty income from existing license
agreements.
GROSS PROFIT in the second quarter of 1996 was 18.9% compared to 22.2% for the
same period last year. During the quarter the Company experienced aggressive
markdown and chargeback practices by retailers in response to the sluggish
retail apparel marketplace. The Company also experienced increased costs in its
manufacturing facility as a result of changeovers to fulfill final retail
business orders prior to the pending sale to Supreme while at the same time
increasing production to meet the increased demand for premium product. As a
result of the sale to Supreme, the Company's North Carolina manufacturing
facility will be devoted entirely to the production of premium product, which
management believes will contribute to more cost effective operations. Continued
promotional pricing with department stores also contributed to the reduction in
gross profit margin from 21.5% in the first six months of 1995 to 19.3% for the
same period this year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased over the prior year in
both the second quarter and first six months as a result of volume-related
expenses such as sales commissions and warehouse and distribution expense.
However, as a percent of net sales, expenses decreased during the quarter from
22.2% last year to 21.2% in 1996. In addition, depreciation and lease expense on
information systems improvements contributed to a $184,000 increase in the
Company's second quarter expenses, while costs related to the Company's study on
maximizing shareholder value and a warehouse operations improvement project
contributed to another $216,000 increase in general administration expenses. In
the first six months of 1996, selling, general and administrative expenses
dropped from 23.4% in 1995 to 22.9% this year.
RESTRUCTURING COSTS of $400,000 in the second quarter of 1995 relate primarily
to severance costs associated with staffing reductions that occurred in the last
half of that year.
INTEREST EXPENSE increased over the comparable period a year ago due to a higher
effective interest rate as a result of the late 1995 renegotiation of the bank
line of credit.
At the beginning of fiscal 1996, the Company had $35,300,000 in net operating
loss carryforwards for federal income tax purposes. As a result, a $1,534,000 of
the PROVISION FOR INCOME TAXES was recognized as a reduction in the deferred tax
asset during the first six months of 1996.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources:
The financial condition of the Company is reflected in the following:
(000's omitted)
---------------
July 6, January 6,
1996 1996
---- ----
Working capital. . . . . . . . . . . . . $ 8,857 $ 3,926
Current ratio. . . . . . . . . . . . . . 1.8:1 1.2:1
Stockholders' equity . . . . . . . . . . $16,220 $12,984
As reported in the Condensed Consolidated Statements of Cash Flows, operating
activities during the first six months of 1996 provided cash of $3,628,000,
primarily the result of a $6,282,000 decrease in inventories due to more
effective inventory management as well as liquidation of inventories related to
the pending sale to Supreme. Capital spending of $598,000 was comprised
primarily of spending on the Company's information systems upgrade, investment
in the Company's first modular sewing units which is expected to improve
efficiency and throughput, and upgrades to air conditioning systems in the
Company's North Carolina manufacturing and distribution facilities. In June the
Company transferred its trademarks and pending trademark applications in China
and other Far East countries to ITOCHU for $5,000,000, and in May a $1,000,000
deposit was received for the pending sale to Supreme. As a result of the reduced
inventories, proceeds from the sale of trademarks to ITOCHU and the deposit
related to the sale to Supreme, the Company paid down its line of credit
borrowings by $9,164,000 in the first six months of 1996.
Liquidity:
On May 22, 1996 the Company entered into an agreement to sell all of its rights
to its trademarks and certain associated assets relating to the retail and
professional golf businesses to Supreme International Corporation pursuant to a
purchase and sale agreement dated as of that date. If the agreement is approved
by the stockholders of the Company, the purchased assets will be transferred to
Supreme in exchange for approximately $18,000,000 in cash ($1,000,000 of which
was paid in May of 1996). The closing is expected to occur in early September.
On June 28, 1996 the Company transferred its trademarks and pending trademark
applications in China and other Far East countries to ITOCHU for $5,000,000
cash. As a result of the sale to ITOCHU and the liquidation of inventories
related to the retail and professional golf businesses that are to be sold to
Supreme, the Company has experienced a dramatic decrease in its line of credit
borrowings during the second quarter of 1996, from $12,883,000 at April 6, 1996
to $1,726,000 on July 6, 1996. After the Supreme transaction, management expects
to have sufficient cash available to finance working capital needs and capital
expenditures of the premium business, which will be the Company's only remaining
business. As a result of the above transactions, the Company's borrowing
requirements are expected to be considerably lower than historic levels, and
management has begun discussions with asset-based lenders regarding a new credit
facility.
Looking Forward:
As previously reported, in late 1995, the Company retained the services of an
investment banking firm to explore a range of opportunities to maximize
stockholder value. During the second quarter of 1996, the Company announced two
events that were the direct result of this study: the transfer of its trademarks
and pending trademark applications in China and other Far East countries to
ITOCHU for $5,000,000; and a purchase and sale agreement with Supreme
International Corporation to sell all of its rights to its trademarks and
certain associated assets relating to the retail and professional golf
businesses for approximately $18,000,000 in cash, subject to stockholder
approval which will be requested at a meeting expected in early September.
Cautionary Statement:
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer which
are not historical or current facts are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The following important factors, among others, in some cases
have affected and in the future could affect the Company's actual results and
could cause the Company's actual financial performance to differ materially from
that expressed in any forward-looking statement: (i) continued implementation of
the North America Free Trade Agreement (NAFTA) is expected to put competitive
cost pressure on apparel wholesalers with domestic production facilities such as
the Company; (ii) the inability to carry out marketing and sales plans would
have a materially adverse impact on the Company's projections; and (iii) failure
to receive stockholder approval of the asset sale to Supreme would require
management to seek other alternatives to operations and sources of capital. The
foregoing list should not be construed as exhaustive and the Company disclaims
any obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
MUNSINGWEAR, INC.
PART II: OTHER INFORMATION
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
* * * * *
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.
MUNSINGWEAR, INC.
(Registrant)
Date: AUGUST 7, 1996 /s/LOWELL M. FISHER
Lowell M. Fisher
President & CEO
/s/JAMES S. BURY
James S. Bury
Vice President, Controller
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-04-1997
<PERIOD-END> JUL-06-1996
<CASH> 68
<SECURITIES> 0
<RECEIVABLES> 10,259
<ALLOWANCES> 615
<INVENTORY> 8,359
<CURRENT-ASSETS> 19,563
<PP&E> 5,106
<DEPRECIATION> 1,978
<TOTAL-ASSETS> 27,257
<CURRENT-LIABILITIES> 10,706
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0
0
<COMMON> 21
<OTHER-SE> 16,199
<TOTAL-LIABILITY-AND-EQUITY> 27,257
<SALES> 18,021
<TOTAL-REVENUES> 19,146
<CGS> 14,301
<TOTAL-COSTS> 14,610
<OTHER-EXPENSES> 3,815
<LOSS-PROVISION> 49
<INTEREST-EXPENSE> 358
<INCOME-PRETAX> 4,766
<INCOME-TAX> 1,691
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<NET-INCOME> 3,075
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