<PAGE> 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, 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 organization) Identification No.)
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 7, 1995 the Registrant had 5,748,500 shares of common stock
outstanding.
<PAGE> 2
SUN SPORTSWEAR, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Balance Sheets at June 30, 1995 3 - 4
(Unaudited) and December 31, 1994
Statements of Income for the three 5
months ended June 30, 1995 and
1994 (Unaudited) and for the six
months ended June 30,
1995 and 1994 (Unaudited)
Statements of Cash Flows 6
for the six months ended June 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 14
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
</TABLE>
2
<PAGE> 3
SUN SPORTSWEAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 286,039 $ 1,217,171
Accounts receivable, net of
allowance for doubtful
accounts of $46,524 and
$46,524, respectively 24,502,481 24,424,834
Inventories (Note 2) 25,541,441 30,155,618
Prepaid expenses and
other current assets 401,389 596,919
Deferred income taxes 760,710 760,710
----------- -----------
Total current assets 51,492,060 57,155,252
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net:
(Note 3) 5,262,532 5,216,920
OTHER ASSETS: 19,107 11,943
----------- -----------
Total assets $56,773,699 $62,384,115
=========== ===========
</TABLE>
(continued)
See accompanying notes to financial statements
3
<PAGE> 4
SUN SPORTSWEAR, INC.
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $17,642,000 $15,987,000
Accounts payable 5,720,708 13,038,144
Accrued royalties payable 1,770,727 1,720,536
Accrued wages and taxes payable 675,179 781,651
Accrued interest payable 50,090 53,813
Current portion of long term debt 385,017 376,636
Federal income tax payable 57,059 166,059
----------- -----------
Total current liabilities 26,300,780 32,123,839
----------- -----------
NONCURRENT LIABILITIES:
Long term debt, net of current portion 192,107 338,005
Deferred income taxes 172,046 172,046
----------- -----------
Total noncurrent liabilities 364,153 510,051
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par value
20,000,000 shares authorized;
5,748,500 shares at 6/30/95
and 5,747,125 shares at 12/31/94
issued and outstanding 21,618,339 21,613,691
Retained earnings 8,490,427 8,136,534
------------ -----------
Total shareholders equity 30,108,766 29,750,225
------------ -----------
COMMITMENTS AND CONTINGENCIES:
Total liabilities and shareholders' equity $ 56,773,699 $62,384,115
============ ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
SUN SPORTSWEAR, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------------- --------------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Proprietary sales $ 4,397,014 $ 8,235,612 $10,429,871 $17,865,612
Licensed sales 26,791,188 20,539,678 47,347,630 38,841,660
Sales deductions (606,697) (1,400,650) (1,475,434) (2,108,431)
----------- ----------- ----------- -----------
Net sales (Note 4) 30,581,505 27,374,640 56,302,067 54,598,841
Cost of goods sold 25,310,087 22,778,232 47,832,585 45,172,368
----------- ----------- ----------- -----------
Gross margin 5,271,418 4,596,408 8,469,482 9,426,473
----------- ----------- ----------- -----------
Operating expenses:
Selling 899,060 930,633 1,886,685 2,004,169
Design and pattern 614,839 690,270 1,258,982 1,305,437
General and
administrative 2,132,007 1,732,172 4,114,003 3,331,973
Provision for
doubtful accounts
and factoring fees 16,189 20,423 29,853 35,957
----------- ----------- ----------- -----------
3,662,095 3,373,498 7,289,523 6,677,536
----------- ----------- ----------- -----------
Operating income 1,609,323 1,222,910 1,179,959 2,748,937
----------- ----------- ----------- -----------
Other (income) expense:
Interest expense 360,735 130,566 705,053 231,025
Other, net (46,702) (61,331) (60,987) (102,532)
----------- ----------- ----------- -----------
314,033 69,235 644,066 128,493
----------- ----------- ----------- -----------
Income before provision
for income taxes 1,295,290 1,153,675 535,893 2,620,444
Provision for income taxes 440,000 377,579 182,000 875,579
----------- ----------- ----------- -----------
Net income $ 855,290 $ 776,096 $ 353,893 $ 1,744,865
=========== =========== =========== ===========
Earnings per share $0.15 $ 0.14 $ 0.06 $ 0.31
===== ====== ====== ======
Weighted average shares
outstanding 5,748,451 5,713,929 5,747,997 5,701,410
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
SUN SPORTSWEAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended June 30,
-------------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 353,893 $ 1,744,865
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 738,815 591,907
(Gain) on disposal of fixed assets (5,984) (17,082)
(Increase) in receivables (77,647) (7,352,339)
Decrease (increase) in inventories 4,614,177 (4,775,270)
(Decrease) increase in deferred income taxes and
accrued federal income taxes (109,000) 174,579
Decrease (increase) in other assets 114,366 (84,831)
(Decrease) increase in accounts payable (6,178,832) 7,436,556
(Decrease) increase in accrued liabilities (13,996) 558,733
----------- -----------
Net cash used in operating activities (536,216) (1,722,882)
----------- -----------
Cash flows from investing activities:
Capital expenditures (812,458) (1,600,306)
Proceeds from sale of equipment 34,015 70,956
----------- -----------
Net cash used in investing activities (778,443) (1,529,350)
----------- -----------
Cash flows from financing activities:
(Decrease) increase in outstanding
checks in excess of funds on deposit (1,138,604) 292,942
Net borrowings under line of credit 1,655,000 5,187,000
Principal payments under long-term debt (137,517) (2,327,544)
Proceeds from issuance of common
stock for employee stock options 4,648 302,290
----------- -----------
Net cash provided by financing activities 383,527 3,454,688
----------- -----------
Net increase (decrease) in cash (931,132) 202,456
Cash at beginning of period 1,217,171 649,088
----------- -----------
Cash at end of period $ 286,039 $ 851,544
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $708,775 $263,490
Income taxes $291,000 $701,000
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 7
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements at June 30, 1995 and for the three and
six months ended June 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 six months ended June 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 June 30, 1995 financial
statements.
NOTE 2 - INVENTORIES:
Inventories are comprised as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Garments in process $ 824,354 $ 2,205,577
Unprinted finished garments 22,792,963 24,218,586
Printed finished garments 4,101,221 5,965,455
Supplies 254,886 521,000
Lower of Cost or Market Allowance (2,431,983) (2,755,000)
----------- -----------
$25,541,441 $30,155,618
=========== ===========
</TABLE>
7
<PAGE> 8
NOTE 3 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are summarized by major classifications as
follows:
<TABLE>
<CAPTION>
Estimated June 30, December 31,
useful lives 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Production equipment 5-7 $ 3,563,861 $ 3,500,342
Leasehold improvements 5-10 1,218,504 1,157,422
Computer hardware and software 3-5 2,896,676 1,507,205
Furniture and fixtures 5 1,132,454 1,111,640
Distribution equipment 5-10 1,384,698 1,395,543
Warehouse equipment 5-7 382,297 338,507
Vehicles 5 27,317 27,317
----------- -----------
10,605,807 9,037,976
Construction in progress -0- 922,373
LESS - Accumulated depreciation (5,343,275) (4,743,429)
----------- -----------
$ 5,262,532 $ 5,216,920
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Total percentage
Percentage of gross of gross sales for
sales for each customer the three customers
------------------------ -------------------
<S> <C> <C>
For the six months ended June 30,
1995 19%, 27% and 41% 87%
1994 21%, 35% and 32% 88%
For the year ended December 31, 1994 19%, 29% and 40% 88%
</TABLE>
8
<PAGE> 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:
<TABLE>
<CAPTION>
Dollar increase/(decrease)
as a percentage
1994 to 1995
------------
Three months Six months three six
ended June 30, ended June 30, months months
---------------- ------------------- ended ended
1995 1994 1995 1994 June 30, June 30,
---- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross sales
Proprietary sales 14.4% 30.1% 18.5% 32.7% (46.6)% (41.6)%
Licensed sales 87.6 75.0 84.1 71.1 30.4 21.9
Sales deductions (2.0) (5.1) (2.6) (3.8) (56.7) (30.0)
------ ------ ------ ------
Net sales 100.0 100.0 100.0 100.0 11.7 3.1
Cost of goods sold 82.8 83.2 85.0 82.7 11.1 5.9
Gross margin 17.2 16.8 15.0 17.2 14.7 (10.2)
Operating expenses 12.0 12.3 12.9 12.2 8.6 9.2
Interest expense 1.2 0.5 1.3 0.4 176.3 205.2
Other (income) expense (0.2) (0.2) (0.1) (0.2) (23.9) (40.5)
Provision for income taxes 1.4 1.4 0.3 1.6 16.5 (79.2)
---- ---- ---- ----
Net income 2.8% 2.8% 0.6% 3.2% 10.2 (79.7)
===== ==== ==== ====
</TABLE>
SECOND QUARTER OF 1995, SECOND QUARTER OF 1994, AND FUTURE OUTLOOK
NET SALES. Net sales for the quarter ended June 30, 1995 increased 11.7% to
$30.6 million from $27.4 million in the same period of 1994. The primary
reason for this increase was the increase in gross sales of women's and girls'
apparel by 25% to $22.7 million in 1995 from $18.2 million in 1994. The
Company believes this increase is due to the strong design and merchandising
abilities of this division, coupled with a strong license portfolio, which
resulted in strong sell-through at retail.
Sales of men's and boys' products decreased 20% to $8.4 million in the
second quarter of 1995 from $10.4 million in the same period of 1994. The
company believes this decrease is primarily the result of the Major League
Baseball strike and a difficult retail sales environment. The Company expects
third quarter 1995 sales for this division to be below those of 1994.
Gross sales of licensed products increased by 30% to $26.8 million in
the second quarter of 1995 from $20.5 million in the second quarter of 1994.
The increase in licensed sales was primarily attributable to the growth in
sales of Pocahontas((C) Disney), 101 Dalmatians((C) Disney) and Warner
Brothers' Batman Forever((TM) and (C) DC Comics) licensed products. Sun
acquired a license to sell Pocahontas((C) Disney) products in the beginning of
the second quarter of 1995 and those products accounted for $6.8 million of
9
<PAGE> 10
gross sales in the second quarter of 1995. Looney Tunes((C) Warner Bros.) and
joint Looney Tunes((C) Warner Bros.) licensed product sales decreased to $13.6
million in the second quarter of 1995 from $15.5 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 Peanuts characters((C)
United Features Syndicate). There can be no assurances, however, that any
license acquisitions will receive positive market acceptance by Sun's
customers.
Gross sales of proprietary products decreased by 47% to $4.4 million
in the second quarter of 1995 from $8.2 million in the second quarter of 1994.
The Company believes this decrease was primarily the result of increased
competition from garments bearing licensed characters and trademarks.
Gross sales to Sun's largest three customers increased 8.6% in the
second quarter of 1995 versus the comparable period in 1994. Gross sales to
Sun's other customers increased 7.4% in 1995 versus 1994. These increases are
primarily the result of the factors discussed above.
Sales deductions, consisting of sales returns, discounts and
allowances, decreased to $607,000 in 1995 from $1.4 million in the second
quarter of 1994. This decrease was primarily due to decreases in the amount of
product returns in the second quarter of 1995.
GROSS MARGIN. Gross margin as a percentage of net sales increased to 17.2% in
the second quarter of 1995 from 16.8% in 1994 (see "Note 1 to Financial
Statements" above). This increase was primarily the result of manufacturing
efficiencies achieved in 1995 as a result of the company's ongoing
re-engineering efforts (see "Re-engineering Efforts" below); higher levels of
licensed product sales - licensed products generally command higher margins
than proprietary products - in the 1995 quarter; and improved international
sourcing of women's basic tee shirts sold in the 1995 quarter.
These favorable margin trends in the second quarter of 1995 were
partially offset by increases in sales of children's products - which typically
carry lower margins than adult products - in the 1995 quarter versus the 1994
quarter; and by efforts to reduce men's inventory in the 1995 quarter,
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 lowered in the
third quarter of 1995 by 1.0% to 2.0% of net sales.
OPERATING EXPENSES. Operating expenses increased to $3.7 million (or 12.0% of
net sales) in 1995 from $3.4 million (or 12.3% of net sales) in the second
quarter of 1994 (see "Note 1 to Financial Statements" above). This dollar
increase was primarily attributable to an increase in general and
administrative expense.
General and administrative expenses increased to $2.1 million (or 7.0%
of net sales), in 1995 from $1.7 million, or (6.3% of net sales), in the second
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); $260,000 in consulting
costs associated with the Company's ongoing re-engineering efforts to reduce
its sourcing, printing and distribution costs (see "Re- engineering Efforts"
below); and a one-time charge of $75,000 associated with settlement of a
wrongful discharge lawsuit brought by a former employee (see "Legal
Proceedings" below).
10
<PAGE> 11
INTEREST EXPENSE. Interest expense increased 176% to $361,000 in the second
quarter of 1995 from $131,000 in 1994 primarily as a result of higher borrowing
levels and higher interest rates in the 1995 quarter.
NET INCOME. Net income increased to $855,000 in the second quarter of 1995
from $776,000 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 $390,000 in consulting expense in the first half of 1995, and
believes it will incur $250,000 in such expenses during the remainder of 1995
for these consultants. Mr. Robert Pene, a current director of the Company, is
a principal in one of the consulting firms the Company has hired.
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 $1,400,000). Presently, the new system is over 70% 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) has indicated to the Company it will not renew
Sun's joint license for Looney Tunes ((C) Warner Bros.) characters combined
with National Football League(R) team trademarks (this license expired March
31, 1995). The National Football League indicated to the Company that the NFL
will not be renewing 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 SIX MONTHS OF 1995 AND FIRST SIX MONTHS OF 1994
NET SALES. Net sales for the six months ended June 30, 1995 increased 3% to
$56.3 million from $54.6 million in the same period of 1994. The primary
reason for this increase was the increase in gross sales of women's and girls'
apparel by 31% to $38.2 million in 1995 from $29.2 million in 1994. The
Company believes this increase is due to the strong design and merchandising
abilities of this division, coupled with a strong license portfolio, which
resulted in strong sell-through at retail.
Sales of men's and boys' products decreased 29% to $19.3 million in
the first six months of 1995 from $27.2 million in the same period of 1994.
The company believes this decrease is primarily the result of the Major League
Baseball strike and a difficult retail sales environment.
Gross sales of licensed products increased by 22% to $47.3 million in
the first half of 1995 from $38.8 million in the first half of 1994. The
increase in licensed sales was primarily attributable to the growth in sales of
Pocahontas((C) Disney), 101 Dalmatians((C) Disney) and Warner Brothers Batman
Forever((TM) and (C) DC Comics) licensed products.
Gross sales of proprietary products decreased by 42% to $10.4 million
in the first six months of 1995 from $17.9 million in the first six months of
1994. The Company believes this decrease was primarily the result of increased
competition from garments bearing licensed characters and trademarks.
11
<PAGE> 12
Gross sales to Sun's largest three customers increased 2.0% in the
first six months of 1995 versus the comparable period in 1994. Gross sales to
Sun's other customers increased 1.1% in 1995 versus 1994. These increases were
primarily the result of the factors discussed above.
Sales deductions, consisting of sales returns, discounts and
allowances, decreased to $1.5 million in 1995 from $2.1 million in the half of
1994. This decrease was primarily due to decreases in the amount of product
returns in the second quarter of 1995.
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 15.0 %
in the first half of 1995 from 17.3% in 1994 (see "Note 1 to Financial
Statements" above). This decrease was primarily the result of low margins
(12.4% of net sales) in the first quarter of 1995. Margins were low in the
first quarter of 1995 (versus the same quarter in 1994) as a result of higher
levels of close-out sales in the first quarter of 1995 versus the 1994 quarter;
higher levels of sales deductions in the first quarter of 1995 versus the 1994
quarter; costs associated with applying license-specific labels to garments
bearing The Walt Disney Company's licensed designs in the first quarter of
1995; and an increase in sales of children's products - which typically carry
lower margins than adult products - in the first quarter of 1995 versus the
1994 quarter.
OPERATING EXPENSES. Operating expenses increased to $7.3 million (or 12.9% of
net sales) in 1995 from $6.7 million (or 12.2% of net sales) in the first half
of 1994 (see "Note 1 to Financial Statements" above). This increase was
primarily attributable to an increase in general and administrative expense.
General and administrative expenses increased to $4.1 million (or 7.3% of net
sales), in 1995 from $3.3 million (or 6.1% 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 $390,000 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 205% to $705,000 in the first
half of 1995 from $231,000 in 1994 primarily as a result of higher borrowing
levels and higher interest rates in the 1995 half.
NET INCOME. Net income decreased to $354,000 in the first half of 1995 from
$1,745,000 in the same period of 1994, as a result of the factors described
above.
12
<PAGE> 13
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.
<TABLE>
<CAPTION>
Net Sales
(Dollar amounts in thousands)
1995 1994
---------------------------- ----------------------------
Percent of Percent of
Amount Annual Sales Amount Annual Sales
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
First Quarter $25,721 * $ 27,224 24.0%
Second Quarter 30,581 * 27,375 24.2
Third Quarter 26,634 23.6
Fourth Quarter 31,980 28.2
------- -------- -----
Total $56,302 $113,213 100.0%
======= ======== =====
</TABLE>
* 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 and 35% of inventory (up to $8.4
million, except that nothing may be borrowed against inventory for any 90
consecutive days each calendar year). 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 June 30, 1995, approximately $6.3 million was available for
borrowing under the renewed credit agreement. The Company is in compliance
with its debt covenants.
Inventory levels decreased by $4.6 million or 15.3% from December 31,
1994 to June 30, 1995. This decrease was primarily the result of a concerted
effort by the Company to reduce its inventory through restrictions on
purchasing additional blank garments and the provision of customer incentives.
Accounts receivable remained essentially unchanged at $24.5 million at
June 30, 1995 versus $24.4 million at December 31, 1994.
13
<PAGE> 14
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 the three
largest customers (which three customers accounted for 88% of Sun's total sales
in the second quarter 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)
increased $1.7 million or 10.4% and accounts payable decreased $7.3 million or
56% from December 31, 1994 to June 30, 1995. The net decrease in notes payable
and accounts payable was primarily the result of lower levels of garment
purchases in the second quarter of 1995 than in the fourth quarter of 1995.
During the first six months of 1995, the Company purchased
approximately $812,000 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 $500,000 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 internally
generated funds and borrowings under the modified credit facility should
support the Company's cash needs through 1995.
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
As previously disclosed in the Company's Form 10-K for the period
ending December 31, 1994, the Company was defendant in a wrongful discharge
lawsuit brought by a former employee. In June 1995 the Company settled this
lawsuit with a one-time payment of $75,000 (which payment was expensed in the
second quarter of 1995).
As previously disclosed in the Company's Form 10-K for the period
ending December 31, 1994, a lawsuit is pending in the Supreme Court of the
State of New York, County of Oneida, the basis of which is a Complaint filed on
February 14, 1994 against Sun Sportswear, Inc.; E.R.O. Industries, Inc.; Toys
'R Us, Inc.; Grace International Apparel, Inc.; and Bradlees Department Store;
by plaintiff Dustin Allen Pack. In July of 1995, Bradlees Department Stores
filed for Chapter 11 protection. The effect of Bradlees Chapter 11 filing, if
any, on this lawsuit has not been determined.
The only other legal proceedings to which the Company is a party
involve routine matters that are incidental to its business and the Company
does not believe that the resolution of these matters will have a material
effect on the results of operations or financial condition of the Company.
14
<PAGE> 15
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
On August 7, 1995 L. Kaye Counts resigned from the Company's Board of
Directors.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
10.2.1 Sun Sportswear, Inc. 1989 Director Stock Option Plan, as
Amended by the Board of Directors April 19, 1994, and
Approved at the Annual Meeting of Shareholders on May 20, 1994 17-25
10.23 Employment Agreement between Registrant and
Sandra L Teufel, Senior Vice President - Women's and Girls' Division 26-30
10.24 Consulting Services Agreement between Registrant
and Wiley, Pene and Company 31-36
</TABLE>
15
<PAGE> 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: August 10, 1995 BY: /s/ Larry C. Mounger
---------------------------- ----------------------------
Larry C. Mounger
Chairman of the Board,
Chief Executive Officer
and President
DATE: August 10, 1995 BY: /s/ Kevin C. James
---------------------------- ----------------------------
Kevin C. James
Senior Vice President
and Chief Financial Officer
16
<PAGE> 1
EXHIBIT 10.2.1
SUN SPORTSWEAR, INC.
1989 DIRECTOR STOCK OPTION PLAN
1. Purpose. The purpose of the 1989 Director Stock Option Plan
(the "Plan") of Sun Sportswear, Inc., a Washington corporation (the "Company")
is to compensate non-employee members of the Company's Board of Directors and
to provided a means for those directors to acquire shares of Company Common
Stock.
2. Definitions. The following terms used in this Plan have the
meanings set forth below:
"Administrator" has the meaning given in Section 3.
"Annual Grant Date" means, for each calendar year, the date on
which the shareholders of the Company have their regular annual meeting.
"Board" means the Board of Directors of the Company.
"Common Stock" means the common stock no par value of the
Company.
"Eligible Director" means any person who is a member of the
Board and who is not and was not at any time within one year prior to his or
her election to the Board a full or part-time employee of the Company or of any
subsidiary of the Company; provided, however, that David A. Sabey is not and
cannot be an Eligible Director.
"Grant Date" means the Initial Grant Date or the Annual Grant
Date, as appropriate.
"Initial Grant Date" means, with respect to each Eligible
Director, the date such Eligible Director is first elected as a member of the
Board, except that the Initial Grant Date for Eligible Directors first elected
to the Board prior to the initial public offering of Common Stock shall be the
date upon which options are first granted under the Company's 1989 Employee
Stock Option Plan.
"Option" means an option to purchase Shares granted under this
Plan.
"Option Agreement" means the written agreement described in
Section 6.
"Shares" means shares of Common Stock.
3. Administration. This Plan shall be administered by the Board
or by a committee composed of disinterested persons
17
<PAGE> 2
appointed by the Board, or by a disinterested person appointed by the Board (in
each case, the "Administrator"), unless the Administrator determines that
compliance with the foregoing provision is not necessary to comply with the
provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended,
and any successor rule adopted by the Securities and Exchange Commission.
"Disinterested Person" for these purposes shall have the meaning set forth in
Rule 16b-3. All decisions, interpretations and other actions of the
Administrator shall be final and binding on all persons. The Administrator may
delegate nondiscretionary administrative duties to such employees of the
Company or a subsidiary as it deems proper. No member of the Administrator
shall be liable for any decision, act, or omission on such member's own part
respecting this Plan, or any options granted or shares sold under this Plan,
except for those acts or omissions resulting from such member's own willful
misconduct.
4. Shares Subject to Plan.
(a) Aggregate Number. Subject to the other provisions of
this Plan, the total number of shares with respect to which Options may be
granted under this Plan is 60,000 shares of Common Stock. Shares delivered
upon exercise of Options may be previously unissued shares, outstanding shares,
or repurchased shares. All such delivered shares, however, whatever their
source and whether or not repurchased by the Company in accordance with the
terms of the Plan, shall be counted against the 60,000-share limitation.
Shares covered by Options that expire or terminate shall again become available
for the grant of Options and shall not be counted against the 60,000-share
limitation. The total number of shares with respect to which Options may be
granted under the Plan is subject to adjustment as provided in the Plan.
(b) Rights as Shareholder. An Eligible Director shall
have no rights as a shareholder with respect to Shares acquired by exercise of
an Option until the issuance (as evidenced by the appropriate entry on the
books of the Company or a duly authorized transfer agent) of a stock
certificate evidencing the Shares. Subject to Sections (e) and (f) of this
Plan, no adjustment shall be made for dividends or other events for which the
record date is prior to the date the certificate is issued.
5. Nondiscretionary Grants.
(a) Initial Grant. On the Initial Grant Date, each
Eligible Director, other than David J. Taylor, shall receive the grant of an
Option to purchase 5,000 Shares, and David J. Taylor shall receive the grant of
an Option to purchase 10,000 Shares.
(b) Regular Annual Grants. On each Annual Grant Date,
immediately after the annual election of directors, each Eligible Director then
in office shall receive the grant of an Option to
18
<PAGE> 3
purchase 1,000 Shares, provided that no Eligible Director shall receive under
this Plan Options to purchase an aggregate of more than 20,000 Shares.
(c) Adjustment. The number of shares for which Options
are granted in accordance with this Section 5 and the number of Shares subject
to any Option shall be subject to adjustment in accordance with Section 6(e).
(d) Limitation on Other Grants. The Administrator shall
have no discretion to grant Options under this Plan to any other person or in
any other amount other than as set forth in Section 6(a) or (b) of this Plan.
6. Terms of Option Agreements. Upon the grant of each Option,
the Company and the Eligible Director shall enter into an Option Agreement
which shall specify the Grant Date and the exercise price, and shall include or
incorporate by reference the substance of all of the following provisions and
such other provisions consistent with this Plan as the Board may determine:
(a) Term. The term of each Option shall be five years
from its Grant Date, subject to earlier termination in accordance with Sections
6(f) or 6(g) of this Plan.
(b) Exercise Schedule. An Option shall be exercisable on
its entirety on the first anniversary of the applicable Grant Date. An Option
may exercised only in increments of 100 Shares or larger.
(c) Purchase Price. The purchase price of the Shares
subject to each Option shall be the fair market value of the stock covered by
the Option as of the Grant Date.
(d) Transferability. No Option shall be transferable
otherwise than by will or the laws of descent and distribution. An Option
shall be exercisable during the Eligible Director's lifetime only by the
Eligible Director.
(e) Changes in Capital Structure. The existence of
outstanding Options shall not affect the Company's right to effect adjustments,
recapitalizations, reorganizations, or other changes in its or any other
entity's capital structure or business, any merger or consolidation, any
issuance of bonds, debenture, preferred or prior preference stock ahead of or
affecting Common Stock, the dissolution or liquidation of the Company's or any
other entity's assets or business, or any other corporate act, whether similar
to the events described above or otherwise. Subject to Section 6(f) of this
Plan, if the Common Stock is increased or decreased in number or changed into
or exchanged for a different number or kind of securities of the Company or any
other entity by reason of a stock split, reverse stock split, stock dividend,
recapitalization, merger,
19
<PAGE> 4
consolidation, acquisition, separation, reorganization, liquidation, or other
event, appropriate adjustments shall be made in (i) the number and class of
shares of stock subject to this Plan and each Option outstanding under this
Plan, and (ii) the exercise price of each outstanding Option; provided,
however, that the Company shall not be required to issue fractional shares as a
result of any such adjustments. Each such adjustment shall be subject to
approval by the Administrator in its sole discretion.
(f) Acquisitions and Other Transactions. In connection
with the dissolution or liquidation of the Company or a partial liquidation
involving more than 50 % of the assets of the Company, a merger or
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than 50% of the shares of the
Company outstanding prior to the merger or reorganization are converted into
cash or into another security, a sale of more than 50% of the Company's assets,
or a similar event which the Administrator determines would materially alter
the structure of the Company or its ownership, the Administrator, upon 10
business days prior written notice to the Eligible Director, may do one or more
of the following:
(i) shorten the period during which an Option is exercisable
(provided it remains exercisable, to the extent otherwise exercisable, for at
least 10 business days after the date the notice is given) and provide that
Options not exercised prior to the effective date of the dissolution,
liquidation, reorganization, merger, sale, or other event shall terminate upon
the effective date of such event;
(ii) accelerate any vesting schedule to which an Option is
subject;
(iii) arrange to have the surviving corporation grant
reasonably equivalent replacement options with adjustments in the number and
kind of securities and option prices; or
(iv) cancel Options upon payment to the Eligible Director in
cash, with respect to each Option to the extent then exercisable, of an amount
which, in the absolute discretion of the Administrator, is determined to be
equivalent to any excess of the fair market value (at the effective time of the
dissolution, liquidation, reorganization, merger, sale, or other event) of the
consideration that the optionee would have received if the option had been
exercised before the effective time over the exercise price of the option.
The actions described in the Section may be taken without regard to any
resulting tax consequences to the Eligible Director.
(g) Termination of Directorship; Death; Disability. If for
any reason other than death or permanent and total
20
<PAGE> 5
disability, an Eligible Director ceases to be a member of the Board, Options
held at the date of termination (to the extent then exercisable) may be
exercised in whole or in part at any time within three months after the date of
such termination, or such other period as is specified in the Option Agreement
but not thereafter. Notwithstanding anything in the preceding sentence, if
immediately before the Termination Date the Eligible Director is subject to
Section 16(b) of the Exchange Act with respect to the Company's equity
securities, then with respect to Options held by the Eligible Director, the
period following the termination date during which an Option held by the
optionee may be exercised shall be seven months. If an Eligible Director dies
or becomes permanently and totally disabled (within the meaning of Section
422(e) (3) of the Code) while he or she is a member of the Board (or, in the
event of death, within the period that the Option remains exercisable after the
Eligible Director ceases to be a member of the Board), Options then held (to
the extent exercisable on the date of death or permanent and total disability)
may be exercised in whole or in part by the Eligible Director, by the Eligible
Director's personal representative, or by the person to whom the Option is
transferred by will or the laws of descent and distribution, at anytime within
one year after the date of death or permanent and total disability of the
Eligible Director or if lesser, the period specified in the Option Agreement.
Notwithstanding any provision of this Section 6(g), Options shall in no case be
exercisable after the expiration date of the Option as provided in Section 5(a)
of this Plan.
(h) Modification, Extension and Renewal of Options. Within
the limitations of this Plan, the Administrator may modify, extend or renew
outstanding Options or may accept the cancellation thereof (to the extent not
previously exercised) for the granting of new Options in substitution therefor.
Notwithstanding the foregoing, no Options granted pursuant to subsections 6(a)
or 6(b) may be modified and no modification shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under an Option.
The failure by the Company, the Eligible Director, or both, to execute an
Option Agreement shall not invalidate the grant of the Option; no Option shall
be exercisable, however, until the written Option Agreement is executed by the
Company and the Eligible Director.
7. Payment and Taxes upon Exercise of Options.
(a) Payment. Except as provided below, payment in full, in
cash or by check, shall be made for all stock purchased at the time the written
notice of exercise of an option is given to the Company. Proceeds of any
payment shall constitute general funds of the Company. At the option of an
Eligible Director, the Eligible Director may make payment through delivery by
the Eligible Director of Common Stock already owned by the Eligible
21
<PAGE> 6
Director for all or part of the option price. Any shares so delivered shall be
valued at their fair market value as of the date of exercise of the Option, as
determined under this Plan; provided, however, that if an Eligible Director has
exercised any portion of any Option granted by the Company by delivery of
Common Stock, the Eligible Director may not, within six months following such
exercise, exercise any Option granted by this Plan by delivery of Common Stock.
(b) Payment of Withholding and Employment Taxes. At the
time of exercise of an Option, the Eligible Director shall remit to the Company
in cash all applicable Federal, State, and Local withholding and employment
taxes, including without limitation, FICA withholding tax, which, in the
Administrator's judgment, may be payable in connection with the exercise or
disposition.
(c) Election Regarding Tax Withholding. If and to the extent
authorized by the Administrator, an Eligible Director may make an election, by
means of a form of election to be prescribed by the Administrator, to have
shares of Common Stock which are acquired upon exercise of the Option withheld
by the Company, or to tender to the Company other shares of Common Stock or
other securities of the Company owned by the Eligible Director (if such shares
have been held by the Eligible Director for at least six months), to pay all or
a portion of the Federal, State, and Local withholding taxes, including FICA
withholding tax, arising in connection with the exercise of such Option. Any
securities so withheld or tendered will be valued by the Company as of the date
of determination of the amount of tax to be withheld as a result of exercise of
such option (the "Tax Date"). All such elections are subject to the following
restrictions:
(i) the election shall be irrevocable;
(ii) the election must be made on or prior to the
Tax Date; and
(iii) the election is subject at all times to the
disapproval of the Administrator.
In addition, if the Eligible Directors of the Company are subject to Section 16
of the Exchange Act (such persons referred to as "Section 16 Persons"), any
such election by an Eligible Director who is a Section 16 Person shall be
subject to the following additional limitations:
(iv) the election may not be made within six months
of the grant date of the Option the exercise of which resulted in the tax
withholding obligation (except that this limitation shall not apply in the
event of death or disability of such person occurring prior to the expiration
of the six-month period); and
22
<PAGE> 7
(v) such election must be made either (A) at least
six months prior to the Tax Date, or (B) in any ten business-day period
beginning on the third business day following the date of release by the
Company for publication of quarterly or annual summary statements of sales or
earnings of the Company.
When the Tax Date of a Section 16 Person is deferred until six months after the
exercise of an Option and the person makes the share withholding election
described in this paragraph, then the full number of Shares for which the
Option is being exercised shall be issued to the person upon exercise of the
Option, but the person shall be unconditionally obligated to tender back and
deliver to the Company the proper number of shares of Common Stock on the Tax
Date. The Administrator may adopt procedures which would allow an Eligible
Director, as part of the election described in this paragraph, to pay
withholding taxes in excess of the statutory minimum, as long as the amount
paid does not exceed the Eligible Director's estimated total Federal, State,
and Local tax obligations associated with the transaction, including FICA taxes
to the extent applicable.
8. Use of Proceeds. Proceeds from the sale of Shares pursuant to this
Plan shall be used by the Company for general corporate purposes.
9. Determination of Value. For purposes of the Plan, the value of
Shares or other securities of the Company shall be determined as follows:
(a) If the security is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers Automated
Quotation System, its fair market value shall be the closing sales price for
the Security or the closing bid if no sales were reported, as quoted on such
system or exchange (or the largest such exchange) for the date the value is to
be determined (or if there are no sales for such date, then for the last
preceding business day on which there were sales), as reported in the Wall
Street Journal or similar publication.
(b) If the security is regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair market value
shall be the mean between the high bid and low asked prices for the security on
the date the value is to be determined (or if there are no quoted prices for
that date, then for the last preceding business day on which there were quoted
prices).
(c) In the absence of an established market for the security
the fair market value shall be determined in good faith by the Administrator,
with reference to the Company's net worth, prospective earning power,
dividend-paying capacity and other relevant factors, including the goodwill of
the Company, the economic outlook in the Company's industry, the Company's
23
<PAGE> 8
position in the industry and its management, and the values of stock of other
corporations in the same or a similar line of business.
10. Legal Requirements. No option shall be granted or exercised if
the Company or its counsel determines that such grant or exercise would not be
in compliance with Federal or State securities laws. The Company shall be
under no obligation, however, to determine compliance with such laws.
11. Amendment or Termination of Plan. The Board of Directors may
amend, alter, suspend, or discontinue this Plan at any time, except that the
provisions of this Plan relating to (i) the persons eligible to receive
Options; (ii) the timing of grants of Options; (iii) the amounts of securities
to be granted to individual recipients of Options; or (iv) the requirement of
administration by a disinterested person or persons, shall not be amended more
than once every six months, other than to comport with changes in the Internal
Revenue Code or the rules thereunder, unless the Administrator determines that
compliance with the foregoing provision is not necessary to comply with Rule
16b-3. Notwithstanding any provision of this Plan or any Option Agreement,
this Plan shall automatically terminate,and any Options outstanding under this
Plan shall automatically terminate, if the Company does not complete the
initial public offering of its Shares by December 31, 1989. Without the consent
of the holder of the Option, no amendment may affect outstanding Options except
to conform this Plan and Options granted under this Plan to Federal tax or
other laws relating to Options. No amendment shall require shareholder
approval unless
(a) the amendment would:
(i) increase the total number of shares reserved for
issuance under this Plan or issuable to any individual under this Plan;
(ii) extend the term of this Plan;
(iii) change the class of persons eligible to
receive Options under this Plan;
(iv) change the timing of the grants of Options
under this Plan, or
(b) the Board concludes that shareholder approval is
otherwise advisable in order to comply with the provisions of Rule 16b-3 or
otherwise, unless the Board determines that compliance with the foregoing
provisions is not necessary to comply with Rule 16b-3. The Administrator may
also, at any time without shareholder approval, amend the terms of any Option
outstanding under the Plan, provided that the Eligible Director consents to
such amendment.
24
<PAGE> 9
12. Shareholder Approval and Term. This Plan shall be subject to
approval by the holders of a majority of the outstanding voting stock of the
Company within 12 months after its adoption by the Board. Options may be
granted, but not exercised, before the shareholders approve this Plan.
However, if the shareholders fail to approve the Plan within the required time
period, any Options granted under this Plan shall be cancelled. This Plan
shall terminate ten years after adoption by the Board unless terminated earlier
by the Board. The Board may terminate this Plan at any time without
shareholder approval. No Options shall be granted after termination of this
Plan, but termination shall not affect rights and obligations under then
outstanding Options.
* * * * * * * * * * * *
Plan adopted by the Board of Directors on: October 2, 1989
Plan amended by the Board of Directors on: April 19, 1994
Plan approved by the Sole Shareholder on: October 2, 1989
Plan amended at the Annual Meeting of Shareholders: May 20, 1994
25
<PAGE> 1
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement"), dated as of May 24, 1995 by and between SUN
SPORTSWEAR, INC., a Washington corporation ("Employer"), and SANDRA L. TEUFEL,
a resident of Mercer Island, Washington ("Employee").
AGREEMENTS
In consideration of the mutual promises and covenants set forth below, Employer
and Employee agree as follows:
1. Employment. Employer hereby employs Employee and Employee hereby
accepts employment with Employer in the Puget Sound area of Washington
State upon the terms and conditions set forth herein.
2. Term. The term of this Agreement shall begin on the date above
written and shall end on December 31, 1995, unless earlier terminated
pursuant to Paragraph 7 hereof.
3. Compensation. For all services rendered by Employee hereunder,
Employer agrees to pay and grant Employee and Employee agrees to
accept the following:
3.1 An annual base salary of two hundred thousand dollars
($200,000), payable at the times and in the manner set by Employer's
standard payroll policy;
3.2 An annual bonus as set forth on Exhibit A attached hereto and
by this reference incorporated herein; and
3.3 Stock Options in the amount of 54,500 shares, to be granted
under the Employer's 1989 Employee Stock Option Plan, the exercise
price of which shall be the fair market value as defined in such Plan
on the date of the Employer's annual meeting, May 25, 1995, and which
shares shall vest according to the following vesting schedule:
a. One third shall vest on December 30, 1995,
b. One third shall vest on December 30, 1996,
c. One third shall vest on December 30, 1997,
provided, however, that the two thirds described in subparagraphs 3.3
(b and c) above shall vest and be exercisable by Employee only if she
is in the employ of Employer at such vesting dates in her current or a
higher management capacity.
4. Duties of Employee. Employee is employed as Senior Vice President,
Women's and Girls' Division of Employer with such duties,
responsibilities and authority as are consistent with such position.
Employee shall report to the Chief Executive Officer and perform such
additional duties as are assigned to her by such Officer and/or by the
Board of Directors of Employer and which are within the scope of
duties and responsibilities normally performed by a corporate officer
in such position.
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<PAGE> 2
4.1 During the term of this Agreement, Employee shall devote her
full time, attention and efforts to the conduct of the business of
Employer and the performance of her duties hereunder. Employee shall
not engage in any other business activity, whether pursued for gain,
profit, or otherwise; provided that Employee shall not be prevented
from investing her personal assets in entities in a manner that will
not require her services to help conduct the affairs of such entities.
4.2 The parties have discussed the mutual importance to Employee
and Employer of development and succession planning in Employee's
Division. The parties therefore agree that Employee shall use her
best efforts to train, develop and strengthen her staff.
5. Benefits. Employee shall be entitled to all rights and benefits for
which she is eligible under Employer's 401(k), health, life and
disability insurance plans to the extent Employer maintains any or all
such plans, provided that nothing herein shall obligate Employer to
establish or maintain any such plans.
6. Vacation. Employee shall be entitled to a total of four (4) weeks
vacation each year. Employee also has two (2) weeks of accrued
vacation that are carried over from 1994.
7. Termination and Extension. This Agreement may be terminated prior to
December 31, 1995 upon mutual agreement in writing and signed by both
parties. It is the intent of both parties, however, that an extension
of this Agreement continuing beyond December 31, 1995, be mutually
agreed to in a writing signed by both parties prior to such date.
Such extended agreement may contain such additional and amended terms
and conditions as are mutually agreed to by both parties.
8. Nondisclosure of Confidential Information.
8.1 Employee will not, during or after the term of this Agreement,
directly or indirectly, except in the ordinary course of fulfilling
Employee's duties and responsibilities hereunder, use, disseminate, or
disclose to any person, firm, corporation or other business entity for
any purpose whatsoever, information disclosed to Employee or known by
Employee as a consequence of or through her employment hereunder,
which is not generally known in the industry in which Employer is or
may become engaged, about Employer's business or activities, including
without limitation, information about Employer's products, services,
procedures, pricing, research, development, inventions, manufacturing,
purchasing, accounting, engineering, marketing, merchandising or
selling.
8.2 Upon termination of this Agreement, Employee shall immediately
return to Employer all documents, records, files, notebooks, computer
disks, and similar repositories containing the information described
in Section 8.1 above, including copies thereof, then in Employee's
possession or under her control whether prepared by her or by others.
8.3 Employee agrees to keep the terms of this Agreement
confidential and not discuss any terms with any employee of Employer
other than its Chief Executive Officer, and any other person other
than the Chairman of the Compensation Committee of Employer, unless
disclosure is otherwise required by law.
27
<PAGE> 3
9. Noncompetition. Upon expiration of the term of this Agreement or
upon a failure to extend this Agreement beyond its termination date,
Employee agrees that, for a period of eight (8) months after such
expiration or termination, she shall not:
9.1 Engage within the United States, as an officer, director,
shareholder, owner, investor, partner, joint venturer, manager,
employee, independent contractor, agent, consultant, advisor or sales
representative, in any type of business whose primary focus is screen
printed apparel, or who is seeking to enter or penetrate the screen
printed apparel business during that time;
9.2 Call upon any person who is an employee of Employer for the
purpose or with the intent of enticing or recruiting such employee
away from or out of the employ of Employer; or
9.3 Call upon any person or entity which is at that time, or which
has been within eight (8) months prior to that time, a customer of
Employer for the purpose of soliciting such customer or selling to
such customer any type of screen printed apparel.
10. Saving Provision. Employer and Employee agree that the nondisclosure
and noncompetition provisions set forth above, including, without
limitation, the scope, duration and geographic extent of such
restrictions, are fair and reasonably necessary for the protection of
Employer's legitimate business interests. In the event a court of
competent jurisdiction should decline to enforce any of such
provisions, they shall be deemed to be modified to restrict Employee
to the maximum extent which the court shall find enforceable.
11. Injunctive Relief. Employee acknowledges that the breach or
threatened breach of any of the nondisclosure or noncompetition
provisions or other agreements contained in this Agreement would give
rise to irreparable injury to Employer, which injury would be
inadequately compensable in money damages. Employer may, therefore,
seek and obtain a restraining order or injunction prohibiting the
breach or any threatened breach of any provision, requirement or
covenant of this Agreement, in addition to and not in limitation of
any other legal remedies which may be available.
12. Miscellaneous.
12.1 All rights of Employer and Employee pursuant to this Agreement
shall survive termination of employment hereunder.
12.2 Any notice required to be given under this Agreement shall be
sufficient if in writing and delivered personally or sent by
registered or certified mail to Employee at her last known address and
to Employer at its principal office.
12.3 This Agreement contains the entire agreement between Employer
and Employee relating to the subject matter hereof and no modification
of this Agreement shall be valid unless made in writing and signed by
both parties.
28
<PAGE> 4
12.4 No waiver by Employer of any default or breach by Employee of
any term, condition or covenant of this Agreement shall be deemed to
be a waiver of any subsequent default or breach of the same or any
other term, condition or covenant contained herein.
12.5 The rights and obligation of Employee hereunder are personal
and may not be assigned to any other person. This Agreement will bind
and benefit any successor of Employer, whether by merger, sale of
assets, reorganization or other form of acquisition, disposition or
business reorganization. In the event of Employee's death, any
benefits due or to become due under this Agreement, including
compensation, shall become a part of Employee's estate and shall be
distributed to her personal representative.
12.6 If Employer or Employee brings an action or other proceeding
against the other to enforce any of the terms or conditions of this
Agreement, the prevailing party in any such action or proceeding shall
be paid reasonable attorneys' fees and costs by the other party.
12.7 This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
EXECUTED as of the day and year first above written.
EMPLOYER: EMPLOYEE:
--------- ---------
By: /S/ Larry C. Mounger, Jr. By: /S/ Sandra L. Teufel
---------------------------- -------------------------
Larry C. Mounger, Jr. Sandra L. Teufel
Chief Executive Officer
Sun Sportswear, Inc.
By: /S/ Paul R. Rollins, Jr.
----------------------------
Paul R. Rollins, Jr., Chairman
Compensation Committee
29
<PAGE> 5
EXHIBIT A
The following sets forth the terms of the Incentive Compensation Plan referred
to in Paragraph 3.2 defining Employee's annual bonus, it being agreed by
Employer and Employee that Employee's annual bonus for 1995 shall be determined
in two components, the first criteria set forth in I below being a condition
precedent to the right to receive any bonus under the second criteria set forth
in II below.
I. Divisional Contribution Margin Criteria.
Employee shall receive as an annual bonus for 1995 for meeting the "Divisional
Contribution Margin Criteria" bonus component, the amount of $125,000, which
bonus amount shall be increased by 5% of the amount by which "Divisional
Contribution Margin" exceeds $10.596 million, for an additional bonus of up to
$75,000 (it being agreed that the maximum Employee can earn under this Criteria
I is $200,000), provided the following condition is met:
(i) Women's and Girls' Division shall have a fiscal year 1995 "Divisional
Contribution Margin" (calculated in accordance with the standard method used by
Employer in preparing its books and records, as exemplified by the attached
"Sun Sportswear, Inc., Income Statement, Women's Division, Fiscal 1995 April
27, 1995"), of $10.596 million or greater.
II. Sun Sportswear, Inc. Profitability Criteria.
If Sun Sportswear, Inc. has net income in excess of $2.6 million, and if
Employee has met all the conditions set forth in Criteria I above and has
earned the maximum allowable thereunder of $200,000, Employee shall receive an
additional bonus amount for 1995 equal to 5% of any amount in excess of $2.6
million net income as reported on Sun Sportswear, Inc.'s audited Income
Statement, provided, however, that the amount of such bonus shall not exceed
$60,000, regardless of the amount of Employer's net income. No bonus component
will be paid out under this criteria if Sun Sportswear, Inc.'s net income does
not equal or exceed $2.6 million and unless and until Employee has achieved the
$200,000 maximum bonus level described in Criteria I above.
III. Notwithstanding the foregoing, Employee shall earn a minimum of
$243,384 combined base salary and bonus, regardless of the amount of her
"Divisional Contribution Margin" and the amount of the Employer's Net Income,
both described above, provided Employee is in the employ of Employer on
December 31, 1995.
30
<PAGE> 1
EXHIBIT 10.24
CONSULTING SERVICES AGREEMENT
DATED AS OF FEBRUARY 17, 1995
Parties: WILEY, PENE & C0MPANY ("WPC")
Five Centerpointe, Suite 100
Lake Oswego, Oregon 97035
SUN SPORTSWEAR, INC. ("Client")
6520 South 190th Street
Kent, WA. 98032
RECITALS
WHEREAS, Client desires assistance in organizing and streamlining its
operations and thereby improving the profitability of its operations and
desires assistance in implementing strategies designed to position Client for
long term growth in the marketplace, and Client believes that WPC is capable of
assisting Client in achieving such goals, and Client therefore desires to
engage WPC to provide consulting services to Client and WPC desires to provide
such services to Client to help Client achieve such goals,
THE PARTIES THEREFORE AGREE AS FOLLOWS:
1. Services. WPC shall provide the consulting services of Robert A. Pene and
William S. Wiley to significantly assist Client 's efforts to achieve the
following goals and objectives, consistent with the 1995 Strategic Business
Plan (as presented to the Board of Directors of Client at its April 28,1995
meeting) ("1995 Strategic Business Plan"), attached hereto and by this
reference incorporated herein:
1.1 Significant ending inventory reduction and achievement of overall
inventory control improvement.
1.2 Creation of efficiencies in the expense structure of Client's
operations, with particular emphasis on reducing general and
administration expenses to a level not greater than the amount
appearing in the 1995 Strategic Business Plan.
1.3 Significant enhancement of production efficiencies.
1.4 Stabilization and significant improvement of results in Men's and
Boys' Division.
1.5 Development of long term strategic direction of Client.
31
<PAGE> 2
2. Fees and Expenses.
2.1 Client shall pay WPC for its services on an hourly basis at its
standard hourly rate of $150, through April 30, 1995. From May 1, 1995 through
July 31, 1995, Client shall pay WPC a flat fee of $25,000 per month, together
with an incentive payment in the amount of an additional $25,000 per month for
each month the net income of the Client (as defined in accordance with Client's
normal procedures used to report net income on its audited financial
statements) meets the net income threshold set forth on the 1995 Strategic Plan
for that month. To the extent net income exceeds such threshold, Client shall
pay WPC an additional ten percent (10%) of any excess above such threshold
amount.
2.2 Client shall reimburse WPC for its reasonable "reimbursable
expenses," which may include costs of travel within Client's normal travel
guidelines in effect for its employees, printing and reproduction,
long-distance communications, services of third parties consulted or engaged by
WPC in accordance with the limitations set forth in this paragraph and
paragraph 5 of this Consulting Agreement, and all other payments to third
parties reasonably made by WPC in performing its services hereunder. Client
shall not be obligated to reimburse WPC for any payments made to third parties
for personal services unless WPC has first obtained written consent to engage
the services of such third parties of (a) the CEO of Client if the costs for
such services are between $1 and $5,000 or (b) the Audit Committee of Client's
Board of Directors in the event the costs for such services exceed $5,000.
2.3 Within five (5) days of execution of this Consulting Agreement,
WPC shall issue an invoice Client for all services rendered through April 30,
1995 on the hourly basis described in paragraph 2.1. Thereafter, WPC shall
issue an invoice on a bi-monthly basis for all services performed during the
preceding period and for reimbursable expenses incurred and not previously
billed. Such invoices are due and payable within ten (10) days of receipt.
WPC may suspend its performance (in which case its right to fees for future
services shall also be suspended as of that date) if its invoices are not paid
when due, or if Client is the subject of a bankruptcy case and the bankruptcy
court has not approved the engagement of WPC in accordance with this Consulting
Agreement.
2.4 WPC has assured Client, and Client is relying on such assurance,
that the project contemplated by this Consulting Agreement for Client is the
principal and most significant project currently being undertaken by WPC and
will remain WPC's principal and most significant project for the duration of
this Consulting Agreement. Client is further relying on the fact that the
personal services of Robert A. Pene and William S. Wiley, specifically, are the
services that will be provided to Client by WPC under this Consulting
Agreement.
32
<PAGE> 3
3. Term.
3.1 The term of this Consulting Agreement shall be from its date
described above until July 31, 1995, unless earlier terminated
pursuant to this paragraph or paragraph 2.3. This Consulting
Agreement may be terminated by either party upon not less than five
(5) days written notice to the other party.
3.2 If this Consulting Agreement is terminated by WPC prior to the
end of a month, WPC shall be entitled to a pro rata share of its
monthly base $25,000 consulting fee, but shall not be entitled to any
portion of that month's incentive or profit sharing payments. If this
Consulting Agreement is terminated by Client prior to the end of a
month, WPC shall be entitled to a pro rata share of that month's base
$25,000 consulting fee as well as a pro rata amount of that month's
incentive and profit sharing payments to which WPC would otherwise
have been entitled as determined by the financial results of that
month for month end.
3.3 Both parties contemplate that this Consulting Agreement, with
such other or different terms and conditions as are mutually agreed
upon, be continued after July 31, 1995, with the scope of services and
fees revised as the parties deem appropriate at the time. It is
further contemplated that such a revised Consulting Agreement will be
discussed and entered into, if both parties reach agreement to its
terms, during the month of July, 1995.
4. Information and Cooperation. Client shall promptly provide WPC with all
the information, access to all Client facilities and personnel, and such other
assistance as WPC reasonably requests. WPC may rely upon documents, opinions
and other information given to it by officers, employees and other consultants
of Client (including but not limited to consultants engaged under paragraph 5),
provided that WPC reasonably believes that the person providing the information
is reliable. WPC will treat all information as confidential and proprietary
and shall not disclose it to outside third parties without express permission
of the CEO of Client.
5. Other Services. WPC may consult with or engage attorneys, accountants,
appraisers and other third parties to provide services with respect to the
affairs of the Client to the extent that WPC reasonably deems is necessary to
accomplish the goals set forth in this Consulting Agreement, subject to prior
written approval of Client, provided that WPC shall obtain prior written
approval of the CEO of Client for any services that will cost between $1 and
$5,000, and shall obtain prior written approval of the Audit Committee for any
such services that will cost in excess of $5,000.
6. Independent Contractor Status. WPC is an independent contractor and
neither it nor any of its officers, employees or other agents shall be or
become employees of Client, except by a written amendment to this Agreement.
Accordingly, WPC shall provide its own workers' compensation coverage and other
employee benefits and insurance as it
33
<PAGE> 4
deems appropriate for its operations. WPC shall have no authority to bind
Client to third parties in any manner except as otherwise expressly stated
herein, and WPC shall not hold itself out as an employee or agent of Client.
This Consulting Agreement is made solely for the benefit of the parties hereto,
and no third party shall acquire any claim against WPC or Client as a result of
this Consulting Agreement.
7. Confidential Information. The parties acknowledge that WPC will be in
receipt of confidential and proprietary information of Client as a result of
services it is providing pursuant to this Consulting Agreement. WPC shall
maintain the confidentiality of such information, and shall not disclose any
such information to any third party or use any such confidential information
except to the extent necessary to achieve the goals of this Consulting
Agreement. WPC shall use its best efforts to ensure that its employees and any
third party to whom WPC discloses such confidential information shall not
disclose or make unauthorized use thereof.
8. Reports, Recommendations and Records.
8.1 WPC shall maintain reasonably detailed records concerning its
services and reimbursable expenses and shall permit Client to inspect
the same at reasonable times, and provide Client with copies thereof
at Client's request, to verify WPC's invoices.
8.2 WPC shall prepare a monthly written report to the CEO and Board
of Directors of Client setting forth specific actions taken during the
prior month to achieve the goals and objectives set forth in Paragraph
1. Such report shall include detailed analyses of such activities,
the effects of such activities, specific action plans for the next
thirty days and the goals such action plans are intended to address,
and a discussion of other areas of concern that were not addressed
during the prior thirty days. The first such report shall be due June
1, 1995.
8.3 Reports, recommendations, business plans and all other written
materials prepared or furnished by WPC under this Consulting
Agreement shall become the sole property of Client, to be used in
whatever way Client wishes so long as such use does not create
liability on the part of WPC. Notwithstanding the foregoing, Client
shall seek prior consent from WPC, who shall respond to such request
from Client without delay, and whose consent shall not be unreasonably
withheld, to use any or all business plans and monthly written reports
(referred to in Paragraph 8.2) in connection with any offering of
securities of Client (whether in a private placement or public
offering) or in connection with obtaining interest bearing debt from a
creditor. In connection with any such use, it is acknowledged that
any consent by WPC may be accompanied by appropriate disclaimers in
form determined by WPC so as to preclude WPC from incurring any
liability as an underwriter of any such issuance. WPC may maintain a
copy of such materials, provided that it shall treat all such
materials as confidential and proprietary and
34
<PAGE> 5
may not disclose any such materials to any third party without express
written consent of the Board of Directors of Client.
8.4 WPC expressly understands and agrees that monthly reports and
business plans prepared by it pursuant to this Consulting Agreement
may be used by Client in connection with Client's borrowing
activities, discussions concerning strategic partnerships with third
parties and Client or the Strategic Planning Committee of Client's
Board of Directors, and any other uses Client deems appropriate.
9. Limitation of Liability and Indemnity.
9.1 WPC and its officers, employees and other agents shall in no
event be liable to Client or any third parties for any loss of profits
or other consequential damages suffered by them, or any of them, as a
result of the acts of omissions of WPC in connection with this
Consulting Agreement.
9.2 Client shall indemnify, defend and hold harmless WPC and all of
its officers, employees and other agents against all claims, losses
and expenses arising out of services performed under this Consulting
Agreement, other than claims, losses and expenses resulting from,
arising out of or attributable in whole or in part to actions by WPC
or any of its officers, employees or agents that constitute (a)
negligence, whether gross or otherwise; (b) misconduct or a knowing
violation of law; (c) a transaction from which the party seeking
indemnity received an improper benefit; or (d) conduct that the party
seeking indemnity did not in good faith believe was in the best
interests of Client.
10. Arbitration. All claims and any other disputes among the parties arising
out of or relating to this Consulting Agreement shall be decided by arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA") then in effect, unless the parties otherwise agree at the
time. Any demand for arbitration must be made and filed with the AAA (or
commenced in accordance with an alternative agreed procedure) before the time
that institution of legal proceedings based on such claim or dispute would be
barred by the applicable statute of limitations. Any award rendered by the
arbitrator or arbitrators shall be final and may be enforced in accordance with
Washington law.
11. General Provisions.
11.1 This Consulting Agreement shall be governed by the Laws of the
State of Washington.
11.2 This Consulting Agreement shall be binding upon the parties and
their respective heirs, representatives, successors and assigns, but
no party may assign any benefit or delegate any duty hereunder, either
voluntarily or by operation of law without the prior written consent
of the other party.
35
<PAGE> 6
11.3 Any notice hereunder shall be effective upon delivery in person
or by facsimile transmission, or, if sent by mail, three days
following mailing by registered or certified mail with proper address
and postage prepaid.
11.4 Venue for any arbitration or litigation to enforce this
Consulting Agreement shall be in King County, Washington, and the
prevailing party shall be entitled to recover its reasonable
attorneys' fees and costs incurred in arbitration, at trial, and on
appeal, or in any insolvency or bankruptcy proceeding or appeal
thereof. The amount of such fees and expenses shall be fixed by the
arbitrator or court, as the case may be.
11.5 This Consulting Agreement constitutes the entire agreement
between the parties with respect to the subject matter and may be
modified only in writing signed by authorized representatives of both
parties. Failure to enforce any provision of this Consulting
Agreement in one instance shall not constitute a waiver of the right
to enforce the provision in a subsequent instance or waiver of the
provision itself.
11.6 Each individual signing this Consulting Agreement for a party
individually warrants that he/she is authorized to do so and that this
Consulting Agreement is binding upon the party for whom the individual
signs.
11.7 No party shall be responsible for any delay or failure to
perform caused by adverse weather, casualty or other cause reasonably
beyond its control.
WILEY, PENE & COMPANY ("WPC")
An Oregon Corporation
By: /s/ Robert A. Pene Date:
------------------------------- -------------------
Robert A. Pene, Principal
SUN SPORTSWEAR, INC. ("Client")
A Washington Corporation
By: s/ Larry Mounger Date: May 17, 1995
------------------------------ -------------------
Larry Mounger, President
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 286,039
<SECURITIES> 0
<RECEIVABLES> 24,549,005
<ALLOWANCES> 46,524
<INVENTORY> 25,541,441
<CURRENT-ASSETS> 51,492,060
<PP&E> 10,605,807
<DEPRECIATION> 5,343,275
<TOTAL-ASSETS> 56,773,699
<CURRENT-LIABILITIES> 26,300,780
<BONDS> 364,153
<COMMON> 21,618,339
0
0
<OTHER-SE> 8,490,427
<TOTAL-LIABILITY-AND-EQUITY> 56,773,699
<SALES> 56,302,067
<TOTAL-REVENUES> 56,302,067
<CGS> 47,832,585
<TOTAL-COSTS> 55,122,108
<OTHER-EXPENSES> (60,985)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 705,053
<INCOME-PRETAX> 535,893
<INCOME-TAX> 182,000
<INCOME-CONTINUING> 353,893
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 353,893
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
