<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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 0-18054
SUN SPORTSWEAR, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1132690
(State or other jurisdiction (IRS Employer
of incorporation of Identification No.)
organization)
6520 SOUTH 190TH STREET, KENT, WASHINGTOn 98032
(Address of principal executive offices) (Zip Code)
(206) 251-3565
(Registrant's telephone number
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of August 9, 1996 the Registrant had 5,748,500 shares of common stock
outstanding.
Page 1 of 13
<PAGE> 2
SUN SPORTSWEAR, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements:
Balance Sheets at June 30, 1996 3-4
(unaudited) and December 31, 1995
Statements of Income 5
for the three months ended
June 30, 1996 and 1995 (unaudited) and for
the six months ended June 30, 1996 and 1995
(unaudited)
Statements of Cash Flows 6
for the six months ended June 30,
1996 and 1995 (unaudited)
Notes to Financial Statements 7-8
Item 2. Management's Discussion and Analysis 8-12
of Financial Condition and Results
of Operations
Part II. Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of 12
Security Holders
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
Page 2 of 13
<PAGE> 3
SUN SPORTSWEAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 111,094 $ 2,006,633
Accounts receivable, net of
allowance for doubtful accounts of
$45,904 and $46,317, respectively 16,133,426 13,102,275
Inventories, net (Note 2) 18,766,448 23,631,358
Prepaid expenses and other
current assets 1,054,264 959,872
Deferred income taxes 788,332 788,332
Federal income tax receivable 247,387 1,979,535
----------- -----------
Total current assets 37,100,951 42,468,005
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
(Note 3) 4,384,122 4,831,994
OTHER ASSETS 14,500 15,107
----------- -----------
Total assets $41,499,573 $47,315,106
=========== ===========
</TABLE>
(continued)
See accompanying notes to financial statements
Page 3 of 13
<PAGE> 4
SUN SPORTSWEAR, INC.
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 7,349,470 $13,500,000
Accounts payable 5,300,123 4,985,953
Accrued royalties payable 1,776,377 1,753,745
Accrued wages and taxes payable 557,694 512,078
Accrued interest payable 54,851 51,263
Current portion of long-term debt -0- 245,652
----------- -----------
Total current liabilities 15,038,515 21,048,691
----------- -----------
NONCURRENT LIABILITIES:
Long-term debt,
net of current portion -0- 92,354
Deferred income taxes 155,642 155,642
----------- -----------
Total noncurrent liabilities 155,642 247,996
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par value,
20,000,000 shares authorized;
5,748,500 shares at 6/30/96
and 5,748,500 shares at 12/31/95
issued and outstanding 21,618,339 21,618,339
Retained earnings 4,687,077 4,400,080
----------- -----------
Total shareholders' equity 26,305,416 26,018,419
----------- -----------
COMMITMENTS AND
CONTINGENCIES
Total liabilities and
shareholders' equity $41,499,573 $47,315,106
=========== ===========
</TABLE>
See accompanying notes to financial statements
Page 4 of 13
<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,
-------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Proprietary sales $ 5,703,323 $ 4,397,014 $ 10,325,687 $ 10,429,871
Licensed sales 14,762,315 26,791,188 35,221,953 47,347,630
Sales deductions (431,073) (606,697) (1,079,635) (1,475,434)
------------ ------------ ------------ ------------
Net sales (Note 4): 20,034,565 30,581,505 44,468,005 56,302,067
Cost of goods sold 16,871,903 25,310,087 37,495,432 47,832,585
------------ ------------ ------------ ------------
Gross margin 3,162,662 5,271,418 6,972,573 8,469,482
------------ ------------ ------------ ------------
Operating expenses:
Selling 741,110 899,060 1,516,179 1,886,685
Design and pattern 681,697 614,839 1,343,958 1,258,982
General and
administrative 1,514,732 2,132,007 3,227,429 4,114,003
Provision for doubtful
accounts and
factoring fees 46,513 16,189 78,484 29,853
------------ ------------ ------------ ------------
2,984,052 3,662,095 6,166,050 7,289,523
------------ ------------ ------------ ------------
Operating income 178,610 1,609,323 806,523 1,179,959
------------ ------------ ------------ ------------
Other expense (income):
Interest expense 176,390 360,735 417,381 705,053
Other, net (27,052) (46,702) (44,856) (60,987)
------------ ------------ ------------ ------------
149,338 314,033 372,525 644,066
------------ ------------ ------------ ------------
Income before provision
for income taxes 29,272 1,295,290 433,998 535,893
Provision for
income taxes 9,000 440,000 147,000 182,000
------------ ------------ ------------ ------------
Net income $ 20,272 $ 855,290 $ 286,998 $ 353,893
============ ============ ============ ============
Earnings per share: $ 0.00 $ 0.15 $ 0.05 $ 0.06
============ ============ ============ ============
Weighted average shares 5,748,500 5,748,451 5,748,500 5,747,997
outstanding
</TABLE>
See accompanying notes to financial statements
Page 5 of 13
<PAGE> 6
SUN SPORTSWEAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1996 1995
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 286,998 $ 353,893
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 806,787 738,815
Gain on disposal of equipment (10,196) (5,984)
Increase in accounts receivable (3,031,151) (77,647)
Decrease in inventories 4,864,910 4,614,177
Decrease (increase) in federal
income tax receivable, accrued and deferred 1,732,148 (109,000)
(Decrease) increase in other assets (93,785) 188,365
Increase (decrease) in accounts payable 165,867 (6,178,832)
Increase (decrease) in accrued liabilities 71,836 (60,003)
----------- -----------
Net cash provided by (used in) operating activities 4,793,414 (536,216)
----------- -----------
Cash flows from investing activities:
Capital expenditures (359,827) (812,458)
Proceeds from sale of equipment 11,108 34,015
----------- -----------
Net cash used in investing activities (348,719) (778,443)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in outstanding
checks in excess of funds on deposit 148,303 (1,138,604)
Net (repayments) borrowings
under line of credit agreement (6,150,530) 1,655,000
Principal payments under long-term debt (338,007) (137,517)
Proceeds from issuance of common
stock for employee stock options -0- 4,648
----------- -----------
Net cash (used in) provided by financing activities (6,340,234) 383,527
----------- -----------
Net decrease in cash (1,895,539) (931,132)
Cash at beginning of period 2,006,633 1,217,171
----------- -----------
Cash at end of period $ 111,094 $ 286,039
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 413,792 $ 708,775
Income taxes ($1,585,148) $ 291,000
</TABLE>
See accompanying notes to financial statements
Page 6 of 13
<PAGE> 7
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements at June 30, 1996 for the three and six
months ended June 30, 1996 and June 30, 1995 are unaudited. These unaudited
interim financial statements and related notes have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. However, in
the opinion of management, the accompanying condensed financial statements
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair statement of the results for the interim periods. The results of
operations and cash flows for the six months ended June 30, 1996 and 1995 are
not necessarily indicative of the results of operations and cash flows that may
be expected for the entire year, which are subject to year-end adjustments in
conjunction with the annual audit by the Company's independent public
accountants. The accompanying condensed financial statements and related notes
should be read in conjunction with the financial statements and footnotes
thereto included in Sun Sportswear, Inc.'s (the "Company") 1995 Form 10-K and
Annual Report to Shareholders. See also "Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations Quarterly Net Sales -
Seasonality" on page 11 of this report.
NOTE 2 - INVENTORIES:
Inventories are composed as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Garments in process $ 2,251,396 $ 2,244,781
Unprinted finished garments 16,307,466 19,827,823
Printed finished garments 2,257,446 5,617,347
Supplies 931,689 407,064
Lower of cost or market allowance (2,981,549) (4,465,657)
------------ -------------
$ 18,766,448 $ 23,631,358
============ ============
</TABLE>
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 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Production equipment 5-7 $ 3,791,581 $ 3,658,861
Leasehold improvements 5-10 1,286,329 1,271,542
Design system hardware and software 3-5 954,333 851,056
Information system hardware and software 3-5 1,889,172 2,145,582
Furniture and fixtures 5 1,052,506 1,116,112
Distribution equipment 5-10 1,481,340 1,452,716
Warehouse equipment 5-7 385,201 395,797
Vehicles 5 12,417 12,417
------------ ------------
10,852,879 10,904,083
LESS - Accumulated depreciation (6,468,757) (6,072,089)
------------ ------------
$ 4,384,122 $ 4,831,994
============ ============
</TABLE>
Page 7 of 13
<PAGE> 8
NOTE 4 - MAJOR CUSTOMERS:
The Company operates almost exclusively in one industry, which is the wholesale
distribution of imprinted, dyed and decorated casual apparel. The Company has
three major customers, all of whom are mass merchants. The percentage of gross
sales for each customer and the total percentage of gross sales for the three
customers are as follows:
<TABLE>
<CAPTION>
Percentage of gross sales for Total percentage
the Company's three largest of gross sales for
customers the three customers
<S> <C> <C>
For the six months ended June 30,
1996 12%, 25% and 48% 85%
1995 19%, 27% and 41% 87%
For the year ended December 31, 1995 17%, 24% and 47% 88%
</TABLE>
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
(decrease)/increase
as a percentage
1995 to 1996
------------------- -------------------- ---------------------
Three months Six months ended three six
ended June 30, June 30, months months
------------------- -------------------- ended ended
1996 1995 1996 1995 June 30, June 30,
---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Gross sales
Proprietary sales 28.5% 14.4% 23.2% 18.5% 29.7% (1.0)%
Licensed sales 73.7 87.6 79.2 84.1 (44.9) (25.6)
Sales deductions (2.2) (2.0) (2.4) (2.6) (28.9) (26.8)
----- ----- ----- -----
Net sales 100.0 100.0 100.0 100.0 (34.5) (21.0)
Cost of goods sold 84.2 82.8 84.3 85.0 (33.3) (21.6)
Gross margin 15.8 17.2 15.7 15.0 (40.0) (17.7)
Operating expenses 14.9 12.0 13.9 12.9 (18.5) (15.4)
Interest expense 0.9 1.2 0.9 1.3 (51.1) (40.8)
Other (income)
and expense (0.1) (0.2) (0.1) (0.1) (42.1) (26.4)
Provision (benefit)
for income taxes 0.0 1.4 0.3 0.3 (98.0) (19.2)
----- ----- ----- -----
Net income 0.1% 2.8% 0.7% 0.6% (97.6) (18.9)
===== ===== ===== =====
</TABLE>
SECOND QUARTER OF 1996 AND SECOND QUARTER OF 1995
NET SALES. Net sales for the quarter ended June 30, 1996 decreased 34% to $20.0
million from $30.6 million in the same period of 1995. Gross sales of men's and
boys' products decreased 44% to $4.7 million in the second quarter of 1996 from
$8.4 million in the same period of 1995. Women's and girls' gross sales
decreased by 31% to $15.7 million in the second quarter of 1996 from $22.7
million in the same period of 1995. The Company believes these sales decreases
were the result of the soft retail environment.
Page 8 of 13
<PAGE> 9
The Company expects its third quarter 1996 sales to be below its third quarter
1995 sales as a result of this soft retail environment (see "Quarterly Net
Sales - Seasonality" below).
The Company is working to improve its results by focusing on new
customers, on the private label needs of its mid-tier and mass market customers,
and building its men's and boys' business. To assist in these efforts, the
Company is in the process of upgrading and enlarging its sales staff, has
recently begun a formal program of new customer development and is expanding its
product design capabilities to encompass private label business.
Gross sales of licensed products decreased to $14.8 million in the
second quarter of 1996 versus $26.8 million in the second quarter of 1995. The
Company believes this sales decrease was the result of the soft retail
environment.
The Company, on an ongoing basis, is actively seeking additional
licenses and brands to add to its existing stable of licensed properties. Recent
license acquisitions include Disney Enterprises' 1996 live action movie release,
101 Dalmatians((C) Disney) and a Budweiser(R) license from Anheuser-Busch. There
can be no assurances, however, that any license acquisitions will receive
positive market acceptance by Sun's customers.
The Company is currently negotiating to renew its two top selling
licenses, both of which expire at the end of 1996 (these two licenses accounted
for 26% and 25% of the Company's gross revenues in the first six months of
1996). While the Company hopes to renew these and other licenses, there can be
no assurance that any license held by the Company will be renewed by the
licensor.
Gross sales of proprietary products increased by 30% to $5.7 million in
the 1996 quarter from $4.4 million in the 1995 quarter. The Company believes
this increase was primarily the result of the Company's concerted effort to
increase its private label business with such customers as J.C. Penneys (Arizona
Jeans(R) label) and Sears (Canyon River Blues(R) label).
Gross sales to Sun's largest three customers decreased 41% in the
second quarter of 1996 versus sales in the same period of 1995, primarily as a
result of the soft retail environment. Gross sales to Sun's other customers
increased 12% in the second three months of 1996 versus the same period of 1995,
primarily as a result of the Company's concerted efforts to increase its private
label business.
Sales deductions, consisting of sales returns, discounts and
allowances, decreased to $431,000 in the 1996 quarter from $607,000 in 1995.
This decrease was primarily due to decreases in the amount of product returns.
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 15.8% in
the second quarter of 1996 from 17.2% in the second quarter of 1995. The
decrease primarily resulted from the fact that the reduced overall sales level
in 1996 had a disproportionate effect on gross margin (as a percentage of net
sales) due to the diminished capacity to cover the Company's fixed costs. The
above factor was partially offset by the Company's efforts to re-engineer its
operating processes, begun in 1995, which lowered Sun's manufacturing costs in
the second quarter of 1996, and the fact that customer returns were down in the
1996 quarter versus 1995.
OPERATING EXPENSES. Operating expenses decreased to $3.0 million (or 14.9% of
net sales) in 1996 from $3.7 million (or 12.0% of net sales) in the second
quarter of 1995. The dollar decrease was primarily attributable to decreases in
selling, and general and administrative expenses. The increase as a percentage
of sales was the result of the lower sales volume in 1996, compared to the 1995
quarter.
General and administrative expenses decreased to $1.5 million (or 7.6%
of net sales) in the second quarter of 1996 from $2.1 million (or 7.0% of net
sales) in the same period of 1995. The dollar decrease was primarily the result
of elimination of positions under a restructuring plan implemented by the
Company in the first quarter of 1996 (see "First Quarter 1996 Restructuring"
below). The increase as a percentage of sales was the result of the lower sales
volume in 1996, compared to the 1995 quarter.
Selling expense decreased to $741,000 (or 3.7% of net sales) in the
second quarter of 1996 from $899,000 (or 2.9% of net sales) in the same period
of 1995. The dollar decrease was primarily the result of the elimination of
positions under a restructuring plan implemented by the Company in the first
quarter
Page 9 of 13
<PAGE> 10
of 1996 (see "First Quarter 1996 Restructuring" below). The increase as a
percentage of sales was the result of the lower sales volume in 1996, compared
to the 1995 quarter.
INTEREST EXPENSE. Quarterly interest expense decreased 51% to $176,000 in the
second quarter of 1996 from $361,000 in 1995 primarily as a result of lower
borrowing levels in the 1996 quarter.
NET INCOME. Net income decreased to $20,000 in the second quarter of 1996 from a
net income of $855,000 in the same period of 1995, as a result of the factors
described above.
FIRST QUARTER 1996 RESTRUCTURING. In February 1996, the Company initiated a
restructuring plan, that, among other things, resulted in the combining of Sun's
Women's and Girls' Division and Men's and Boys' Division. The restructuring plan
also resulted in the elimination of approximately 30 indirect positions from the
Company's workforce.
FIRST SIX MONTHS OF 1996 AND FIRST SIX MONTHS OF 1995
NET SALES. Net sales for the six months ended June 30, 1996 decreased 21% to
$44.5 million from $56.3 million in the same period of 1995. Gross sales of
women's and girls' apparel decreased 16% to $32.1 million in 1996 from $38.4
million in 1995. Sales of men's and boys' products decreased 31% to $13.4
million in the first six months of 1996 from $19.4 million in the same period of
1995. The Company believes the primary reason for these decreases was the soft
retail environment.
Gross sales of licensed products decreased by 26% to $35.2 million in
the first half of 1996 from $47.3 million in the first half of 1995. The Company
believes the primary reason for this decrease was the soft retail environment.
Gross sales of proprietary products remained virtually unchanged at
$10.3 million in the first six months of 1996 versus $10.4 million in the first
six months of 1995. The Company believes that sales of proprietary products held
relatively firm primarily as a result of the Company's concerted effort to
increase its private label business.
Gross sales to Sun's largest three customers decreased 24% in the first
six months of 1996 versus the comparable period in 1995, primarily as a result
of the soft retail environment. Gross sales to Sun's other customers remained
virtually unchanged in the first half 1996 versus the first half of 1995,
primarily as a result of the Company's concerted efforts to increase its private
label business.
Sales deductions, consisting of sales returns, discounts and
allowances, decreased to $1.1 million in 1996 from $1.5 million in the first
half of 1995. This decrease was primarily due to decreases in the amount of
product returns in the first half of 1996.
GROSS MARGIN. Gross margin as a percentage of net sales increased to 15.7% in
the first half of 1996 from 15.0% in 1995. This increase was primarily the
result of three factors. First, customer returns were down in the first half of
1996 versus the first half of 1995. Second, 1995 margins were negatively
impacted by efforts to reduce men's inventory, including customer incentives and
substitution of existing, higher value inventory to fill customer orders for
lower value product, while the first six months of 1996 were not impacted by
such actions. Third, the Company's efforts to re-engineer its operating
processes, begun in 1995, lowered Sun's manufacturing costs in the first half of
1996. The above factors were partially offset by the reduced overall sales level
in 1996 which had a negative effect on gross margin (as a percentage of net
sales) due to the diminished capacity to cover the Company's fixed costs.
OPERATING EXPENSES. Operating expenses decreased to $6.2 million (or 13.9% of
net sales) in 1996 from $7.3 million (or 12.9% of net sales) in the first half
of 1995. The dollar decrease was primarily attributable to decreases in selling,
and general and administrative expenses. The increase as a percentage of sales
is a result of the lower sales volume in 1996, compared to 1995.
General and administrative expenses decreased to $3.2 million (or 7.3%
of net sales) in 1996 from $4.1 million (or 7.3% of net sales) in 1995. This
dollar decrease was primarily the result of elimination of positions under a
restructuring plan implemented by the Company in the first quarter of 1996 (see
"First Quarter 1996 Restructuring" above).
Page 10 of 13
<PAGE> 11
Selling expense decreased to $1.5 million (or 3.4% of net sales) in the
first half of 1996 from $1.9 million (or 3.4% of net sales) in the same period
of 1995. The dollar decrease was primarily the result of elimination of
positions under a restructuring plan implemented by the Company in the first
quarter of 1996 (see "First Quarter 1996 Restructuring" above).
INTEREST EXPENSE. Interest expense decreased 41% to $417,000 in the first half
of 1996 from $705,000 in 1995 primarily as a result of lower borrowing levels in
the 1996 half.
NET INCOME. Net income decreased to $287,000 in the first half of 1996 from
$354,000 in the same period of 1995, as a result of the factors described above.
QUARTERLY NET SALES - SEASONALITY
The Company's net sales fluctuate from quarter to quarter. Quarterly
net sales for 1996 and 1995 are set forth below.
<TABLE>
<CAPTION>
1996 1995
----------------------- -------------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
First Quarter $ 24,433 * $ 25,720 27.4%
Second Quarter 20,035 * 30,582 32.5
Third Quarter 16,225 17.3
Fourth Quarter 21,438 22.8
--------- -------- --------- ----
Total $ 44,468 $ 93,965 100.0%
========= ========= =====
* Unknown
</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 credit agreement. In February 1996, the Company
entered into a credit agreement with Heller Financial, Inc. The Heller credit
agreement provides for a line of credit (including commercial letters of credit)
of up to $24 million and expires in February 1998. At June 30, 1996,
approximately $11.7 million was available for borrowing. The borrowing rate for
the revolving portion of the line is the prime rate. All the Company's assets,
including accounts receivable and inventories, are pledged as security for
borrowings under the Heller credit agreement. Under the agreement, the amount
borrowed at any time, together with letters of credit issued on behalf of the
Company, may not exceed 85% of eligible accounts receivable and 60% of eligible
inventory - up to $8.5 million. The Heller credit agreement requires compliance
with certain financial covenants principally relating to working capital,
tangible net worth, ratio of debt to equity, expenditures for fixed assets,
minimum earnings (before taxes, interest and depreciation), restrictions on the
payment of dividends and restrictions on the incurrence of long-term debt. The
Company was in compliance with the Heller debt covenants at June 30, 1996.
Inventory levels decreased by $4.9 million or 21% from December 31,
1995 to June 30, 1996 primarily as a result of the Company's concerted efforts
to operate its business with lower levels of inventory. The Company believes
there was approximately $2.8 million (net of inventory markdown reserves of $3.1
million) of impaired surplus inventory on hand at June 30, 1996, which is
expected to be sold at little or no margin throughout 1996. As a result, the
Company believes its gross margin will be negatively impacted in the last half
of 1996 by 1% to 2% of net sales.
Page 11 of 13
<PAGE> 12
Accounts receivable increased by 23% to $16.1 million at June 30, 1996
from $13.1 million at December 31, 1995 as a result of a temporary problem with
a customer's automated payment system (the problem was rectified shortly after
June 30, 1996).
The Company has an agreement with Heller Financial, Inc., that is
intended to transfer the collection risk to Heller, for Sun's accounts
receivable for essentially all of its customers other than Target and Wal-Mart.
Under the agreement, Heller assumes 100% of the collection risk associated with
the Company's covered receivables and Heller receives a fee equal to .65% of the
gross amount of Kmart receivables and .55% of the gross amount of all other
covered receivables for assuming such collection risk. The agreement was amended
in the third quarter of 1996 to provide that Heller assumes 100% of the
collection risk associated with Kmart.
Notes payable (borrowings under the Company's line of credit) decreased
$6.2 million or 46% from December 31, 1995 to June 30, 1996. The decrease in
notes payable was primarily the result of the reduction in inventory that
occurred during the first half of 1996.
During the first half of 1996, the Company purchased approximately
$360,000 of machinery and equipment for production, warehouse, distribution and
office use. The Company anticipates that total expenditures for machinery and
equipment will be less than $200,000 during the remainder of 1996.
Sun's primary ongoing cash needs are for working capital and capital
expenditures. The Company believes that its cash needs through the remainder of
1996 will be met by borrowings under its Heller credit facility.
INFLATION
From time to time, Sun's suppliers of blank garments and materials
increase their prices. Further, Sun increases its employees' compensation
relative to increases in the cost of living. Sun's mass merchant customers have
historically sold Sun's more basic products at predetermined sales price points,
many of which have not risen during the last few years. Because Sun's customers
generally operate on a fixed markup, their strategy of not increasing their
sales price points has made it difficult for the Company to pass on any cost
increases relative to its more basic products.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No material change.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None
Page 12 of 13
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN SPORTSWEAR, INC.
DATE: August 9, 1996 BY: /s/ William S. Wiley
----------------------------------------
William S. Wiley
Chairman of the Board,
Chief Executive Officer
and President
DATE: August 9, 1996 BY: /s/ Kevin C. James
----------------------------------------
Kevin C. James
Senior Vice President
and Chief Financial Officer
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000856711
<NAME> SUN SPORTSWEAR, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 111,094
<SECURITIES> 0
<RECEIVABLES> 16,179,330
<ALLOWANCES> 45,904
<INVENTORY> 18,766,448
<CURRENT-ASSETS> 37,100,951
<PP&E> 10,852,879
<DEPRECIATION> 6,468,757
<TOTAL-ASSETS> 41,499,573
<CURRENT-LIABILITIES> 15,038,515
<BONDS> 155,642
0
0
<COMMON> 21,618,339
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<TOTAL-LIABILITY-AND-EQUITY> 26,305,416
<SALES> 44,468,005
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<CGS> 37,495,432
<TOTAL-COSTS> 43,661,482
<OTHER-EXPENSES> (44,856)
<LOSS-PROVISION> 78,484
<INTEREST-EXPENSE> 417,381
<INCOME-PRETAX> 433,998
<INCOME-TAX> 147,000
<INCOME-CONTINUING> 286,998
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<NET-INCOME> 286,998
<EPS-PRIMARY> .05
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