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