-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JJLOe8P7QjlrDX70MxFO+XHTogmJti5lVWCA/iVYBZBjqz5h9BEMLy5ufDnYcTHP Pba4Bqsyl6iWkEvYs6Rlig== 0000950170-99-000568.txt : 19990412 0000950170-99-000568.hdr.sgml : 19990412 ACCESSION NUMBER: 0000950170-99-000568 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPREME INTERNATIONAL CORP CENTRAL INDEX KEY: 0000900349 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 591162998 STATE OF INCORPORATION: FL FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-21764 FILM NUMBER: 99591015 BUSINESS ADDRESS: STREET 1: 3000 NW 107TH AVENUE CITY: MIAMI STATE: FL ZIP: 33172 BUSINESS PHONE: 3055922830 10-K/A 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A Amendment No. 1 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ . COMMISSION FILE NUMBER 0-21764 SUPREME INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FLORIDA 59-1162998 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 3000 N.W. 107TH AVENUE, MIAMI, FLORIDA 33172 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (305) 592-2830 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS: COMMON STOCK, PAR VALUE $.01 PER SHARE 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 Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. Indicate by check mark whether the Registrant has filed all documents and reports to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] The number of shares outstanding of the Registrant's Common Stock is 6,723,874 (as of March 12, 1999). The aggregate market value of the voting stock held by non-affiliate of the Registrant's approximately $44,693,206 (as of March 12, 1999). DOCUMENTS INCORPORATED BY REFERENCE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA SUMMARY PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION The "Pro Forma Financial Information" set forth below gives effect to (i) the Perry Ellis International acquisition and (ii) a Rule 144A offering of $100.0 million in aggregate principal amount of senior subordinated notes due 2006. The "Supplemental Financial Information" set forth below, in addition to giving effect to the transactions included in the Pro Forma Financial Information, gives effect to (i) the John Henry/Manhattan acquisition and the related concurrent sale of the existing dress shirt inventory to Phillips-Van Heusen and (ii) additional indebtedness incurred under the Senior Credit Facility to finance the John Henry/Manhattan acquisition. The income statement and operating information give effect to such transactions as if they had occurred on February 1, 1998 and the balance sheet information gives effect to such transactions as if they had occurred on January 31, 1999. The information presented below has been derived from our audited consolidated financial statements, the audited financial statements of Perry Ellis International, Inc. and certain financial information received from Salant Corporation with respect to the John Henry/Manhattan acquisition. This information does not purport to represent what our operating results or financial condition would actually have been had the Perry Ellis International acquisition and/or the John Henry/Manhattan acquisition and related transactions with Phillips-Van Heusen actually occurred as of the dates indicated above or to project our financial condition for any future period. The information presented below should be read in conjunction with our consolidated financial statements and notes thereto, the financial statements and notes thereto of Perry Ellis International, Inc., the Unaudited Pro Forma Combined Financial Information and notes thereto included in Item 8 of this report and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." PRO FORMA FISCAL YEAR ENDED JANUARY 31, 1999 PRO FORMA FINANCIAL INFORMATION ---------------------- (DOLLARS IN MILLIONS) STATEMENT OF INCOME DATA: Total revenues ........................................ $ 240.6 Depreciation and amortization ......................... 5.9 Operating income ...................................... 23.1 Interest expense ...................................... 14.4 BALANCE SHEET DATA (AT YEAR END): Working capital ....................................... $ 66.5 Total assets .......................................... 183.4 Total debt ............................................ 106.5 Total stockholders' equity ............................ 64.9 OTHER FINANCIAL DATA AND RATIOS: Pro Forma EBITDA (a) .................................. $ 29.0 Capital expenditures .................................. 4.0 Ratio of Pro Forma EBITDA to interest expense ......... 2.0x Ratio of total debt to Pro Forma EBITDA ............... 3.7x SUPPLEMENTAL FINANCIAL INFORMATION The Pro Forma Financial Information set forth above does not give effect to the John Henry/Manhattan acquisition because audited financial information for the assets being acquired will not be available from Salant Corporation prior to the filing of this report. However, we have been provided with certain unaudited financial information for the eleven months ended November 30, 1998 that has been derived from Salant's internal financial records. Based on this information, EBITDA related to the John Henry and Manhattan brands for the 11 months ended November 30, 1998 was $3.8 million ("Estimated EBITDA") (see note (b) below). The sum of the 2 $29.0 million Pro Forma EBITDA (with respect to the Perry Ellis International acquisition) set forth above plus Estimated EBITDA is $32.8 million ("Adjusted EBITDA"). The information used to calculate the Estimated EBITDA and, correspondingly, the Adjusted EBITDA may not be reliable because Estimated EBITDA (i) has been obtained from the unaudited financial records of Salant Corporation, (ii) reflects only eleven months of operations and (iii) does not include the impact of any additional costs or expenses that may be recorded by Salant Corporation in December, as a result of normal year-end adjustments or otherwise, that relate to the 11 months ended November 30, 1998. Additionally, the Estimated EBITDA and, correspondingly, the Adjusted EBITDA do not take into consideration any expenses of assuming the lease for the dress shirt manufacturing facility located in Mexico, operating that facility or disposing of that facility. Although no agreement has been reached, we intend to either sublease the facility or not renew the lease. The following financial information supplements the Pro Forma Financial Information set forth above to give effect to the John Henry/Manhattan acquisition and related Phillips-Van Heusen transactions by adjusting (i) Pro Forma EBITDA by Estimated EBITDA and (ii) Total Debt and interest expense by the additional debt of $27.0 million and related interest expense of $2.1 million incurred to finance the John Henry/Manhattan acquisition (after giving effect to the Phillips-Van Heusen acquisition of the existing dress shirt inventory) (dollars in millions): Pro Forma EBITDA ..................................... $ 29.0 Estimated EBITDA(b) .................................. 3.8 -------- Adjusted EBITDA(a) ................................. $ 32.8 ======== Interest expense ..................................... $ 16.5 Total Debt ........................................... $ 133.5 Ratio of Adjusted EBITDA to interest expense ......... 2.0x Ratio of Total Debt to Adjusted EBITDA ............... 4.1x - ---------------- (a) EBITDA represents net income before taking into consideration interest expense, income tax expense, depreciation expense, and amortization expense. EBITDA is not a measurement of financial performance under generally accepted accounting principles and does not represent cash flow from operations. Accordingly, do not regard this figure as an alternative to net income (loss) or as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity. We believe that EBITDA is widely used by analysts, investors and other interested parties in our industry but it is not necessarily comparable with similarly titled measures for other companies. See "Statements of Cash Flows" in our consolidated financial statements and in the financial statements of Perry Ellis International, Inc. contained in Item 8 of this report. (b) Estimated EBITDA represents the sum of (i) royalty income related to the John Henry and Manhattan brands less the related direct expenses (which exclude any allocation of corporate expense), in each case for the 11 months ended November 30, 1998 as determined from the financial information provided by Salant Corporation referred to above and (ii) the minimum yearly royalty required to be paid to us by Phillips-Van Heusen pursuant to its license of the John Henry and Manhattan brands. 3 SUMMARY HISTORICAL FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) The following table presents selected historical financial and operating data derived from the audited consolidated financial statements of Supreme and the audited financial statements of Perry Ellis International, Inc. The historical financial data should be read in conjunction with our consolidated financial statements and the notes and the financial statements of Perry Ellis International, Inc. and the notes thereto appearing elsewhere herein and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL YEAR ENDED JANUARY 31, --------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------- ------------- ------------- ------------- ------------- SUPREME HISTORICAL STATEMENT OF INCOME DATA: Net sales .................................. $ 90,564 $ 121,839 $ 157,373 $ 190,689 $ 221,347 Net royalty income ......................... -- 759 1,654 4,032 3,057 ---------- ---------- ---------- ---------- ---------- Total revenue .............................. 90,564 122,598 159,027 194,721 224,404 Cost of sales .............................. 69,187 92,145 122,046 145,991 166,198 ---------- ---------- ---------- ---------- ---------- Gross profit ............................... 21,377 30,453 36,981 48,730 58,206 Selling, general and administrative expenses .................................. 13,493 20,395 24,729 34,137 39,478 Depreciation and amortization .............. 474 725 1,147 1,748 2,161 ---------- ---------- ---------- ---------- ---------- Operating income ........................... 7,410 9,333 11,105 12,845 16,567 Interest expense ........................... 1,219 2,224 1,664 2,782 3,494 ---------- ---------- ---------- ---------- ---------- Income before income taxes ................. 6,191 7,109 9,441 10,063 13,073 Income taxes ............................... 2,319 2,685 3,597 2,885 4,491 ---------- ---------- ---------- ---------- ---------- Net income ................................. $ 3,872 $ 4,424 $ 5,844 $ 7,178 $ 8,582 ========== ========== ========== ========== ========== Net income per share Basic ..................................... $ 0.73 $ 0.76 $ 0.89 $ 1.10 $ 1.29 Diluted ................................... $ 0.73 $ 0.75 $ 0.89 $ 1.08 $ 1.27 Weighted average number of shares outstanding Basic ..................................... 5,300,000 5,800,000 6,534,446 6,540,604 6,674,103 Diluted ................................... 5,300,000 5,874,470 6,595,147 6,665,635 6,769,810 OTHER FINANCIAL DATA AND RATIOS: EBITDA (a) ................................. $ 7,884 $ 10,058 $ 12,252 $ 14,593 $ 18,728 Capital expenditures ....................... 747 1,309 1,058 3,828 4,005 Ratio of earnings to fixed charges (b) ..... 5.3x 3.8x 5.7x 4.1x 4.2x BALANCE SHEET DATA (AT YEAR END): Working capital ............................ $ 43,067 $ 47,760 $ 23,575 $ 66,166 $ 71,300 Total assets ............................... 55,512 53,735 88,158 101,650 108,958 Total debt (c) ............................. 28,256 6,968 31,949 39,658 33,511 Total stockholders' equity ................. 22,016 43,833 47,775 55,155 64,946
(CONTINUED ON FOLLOWING PAGE) 4
FISCAL YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- PERRY ELLIS INTERNATIONAL, INC. HISTORICAL STATEMENT OF INCOME DATA: Net royalty income ................................... $10,917 $15,660 $16,177 Selling, general and administrative expenses ......... 8,606 7,109 8,398 Depreciation and amortization ........................ 212 226 228 ------- ------- ------- Operating income ..................................... 2,099 8,325 7,551 Interest income ...................................... 144 136 32 ------- ------- ------- Income before income taxes ........................... 2,243 8,461 7,583 Income taxes ......................................... 218 852 760 ------- ------- ------- Net income ........................................... $ 2,025 $ 7,609 $ 6,823 ======= ======= ======= OTHER FINANCIAL DATA AND RATIOS: EBITDA (a) ........................................... $ 2,455 $ 8,688 $ 7,811 Capital expenditures ................................. 47 87 21 BALANCE SHEET DATA (AT YEAR END): Working capital ...................................... $ 1,995 $ (27) $ 2,665 Total assets ......................................... 4,803 3,112 4,563 Total debt ........................................... -- -- -- Total stockholders' equity ........................... 3,439 1,369 3,839
- ---------------- (a) EBITDA represents net income before taking into consideration interest expense, income tax expense, depreciation expense, and amortization expense. EBITDA is not a measurement of financial performance under generally accepted accounting principles and does not represent cash flow from operations. Accordingly, do not regard this figure as an alternative to net income or as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity. We believe that EBITDA is widely used by analysts, investors and other interested parties in our industry but is not necessarily comparable with similarily titled measures for other companies. See "Statements of Cash Flows" in our consolidated financial statements and in the financial statements of Perry Ellis International, Inc. contained in Item 8 of this report. (b) For purpose of computing this ratio, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest expense, amortization of deferred debt issuance costs and the portion of rental expense of the Lease deemed representative of the interest factor. (c) Total debt includes balances outstanding under credit facilities, long-term debt and current portion of long-term debt. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading designer and marketer of a broad line of high quality men's sportswear, including sport and dress shirts, golf sportswear, sweaters, urban wear and casual and dress pants which we sell to all levels of retail distribution. We have built a broad portfolio of brands through selective acquisitions and the establishment of our own brands over our 32-year operating history. We are currently one of the top five branded suppliers to department stores in the knit and woven shirt product categories. We currently use over 70 independent suppliers, mostly located in the Far East, other parts of Asia, Mexico, and Central America. We own or license from third parties the brand names under which most of our products are sold. These brand names include Crossings and Natural Issue for casual sportswear, John Henry for dress casual wear, Andrew Fezza for dress sportswear, Ping and Munsingwear for golf sportswear and PNB Nation for urban wear. We market our brands to a wide range of demographic segments, targeted at consumers in specific age, income and ethnic groups. Currently, our products are predominantly produced for the men's segment of the apparel industry, in which fashion trends tend to be less volatile than in other segments. The percentage of our revenues from branded products increased to 81.4% in fiscal 1999 from 71.5% in fiscal 1997. We also license our proprietary brands to third parties for the manufacture and marketing of various products which we do not sell, including underwear, activewear and loungewear. In addition to generating additional sources of revenue for us, these licensing arrangements raise overall awareness of our brands. RECENT DEVELOPMENTS In order to expand our licensing operations, we recently signed a definitive agreement to acquire Perry Ellis International, Inc. which owns and licenses the prestigious and well-known Perry Ellis brand name. We have also signed a definitive agreement to purchase the trademarks for John Henry, the leading brand for men's dress casualwear at Sears Roebuck, for Manhattan, the best selling dress shirt brand at Wal-Mart and Kmart Corporation and for Lady Manhattan. PERRY ELLIS INTERNATIONAL ACQUISITION. In January 1999, we agreed to buy Perry Ellis International, Inc. for approximately $74.6 million in cash, net of purchase price adjustments. Perry Ellis International, Inc. is a privately held company which owns and licenses the Perry Ellis brand name, currently one of the top selling brands in department stores in the United States. Perry Ellis International, Inc. is currently the licensor under 34 license agreements, primarily for various men's wear, boys' wear and fragrances. During the years ended December 31, 1998, Perry Ellis International, Inc. had revenues of $16.2 million and EBITDA of $7.8 million. Under our management of the brand, we expect to benefit from certain operating efficiencies and to enhance the licensing royalties the Perry Ellis brand generates. Net income from royalties at Perry Ellis International, Inc. grew 48.2% from fiscal year end December 31, 1996 to December 31, 1998 while operating expenses grew at a rate of 55.6% primarily as a result of increased advertising. JOHN HENRY/MANHATTAN ACQUISITION. In December 1998, we entered into an agreement to buy certain assets of the John Henry and Manhattan dress shirt business from Salant Corporation which is currently in Chapter 11 bankruptcy proceedings. On February 24, 1999, the bankruptcy court approved the purchase for $27.0 million, plus the value of the existing dress shirt inventory (which was subsequently valued at approximately $17.2 million). The acquisition was completed on March 29, 1999. The assets purchased consist of the John Henry, Manhattan and Lady Manhattan trademarks, tradenames, license agreements, certain manufacturing equipment and the existing dress shirt inventory. On March 29, 1999, Phillips-Van Heusen Corporation purchased the existing dress shirt 6 inventory at our acquisition cost and licensed from us the John Henry and Manhattan brands for men's dress shirts. In connection with the John Henry/Manhattan acquisition, we assumed a lease for a shirt manufacturing facility in Mexico which expires in July 1999. Although no agreement has been reached, we intend to either sublease the Mexican facility to one of our suppliers for use in the production of our products or not renew the lease. The acquisition price, net of the $1.0 million deposit we have paid and the proceeds from sale of the existing dress shirt inventory, was approximately $26.0 million and was financed with borrowings under our Senior Credit Facility. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected items in our consolidated statements of income expressed as a percentage of total revenues:
FISCAL YEAR ENDED JANUARY 31, ------------------------------------ 1997 1998 1999 ---------- ---------- ---------- Net sales ............................................ 99.0% 97.9% 98.6% Royalty income ....................................... 1.0 2.1 1.4 ----- ----- ----- Total revenues ....................................... 100.0 100.0 100.0 Cost of sales ........................................ 76.7 75.0 74.1 ----- ----- ----- Gross profit ......................................... 23.3 25.0 25.9 Selling, general and administrative expenses ......... 16.3 18.4 18.5 ----- ----- ----- Operating income ..................................... 7.0 6.6 7.4 Interest expense ..................................... 1.0 1.4 1.6 ----- ----- ----- Income before income taxes ........................... 6.0 5.2 5.8 Income tax provision ................................. 2.3 1.5 2.0 ----- ----- ----- Net income ........................................... 3.7% 3.7% 3.8% ===== ===== =====
FISCAL 1999 AS COMPARED TO FISCAL 1998 TOTAL REVENUES. Total revenues consist of net sales and royalty income. Total revenue grew $29.7 million or 15.3% to $224.4 million in fiscal 1999 from $194.7 million in fiscal 1998 as a result of internal growth. NET SALES. Net sales increased $30.6 million or 16.1% to $221.3 million in fiscal 1999 from $190.7 million in fiscal 1998 as branded products grew to represent nearly 81.4% of net sales in fiscal 1999 compared to 75.4% of net sales in fiscal 1998. Within branded products, the increase in net sales was primarily the result of the sales growth in the Munsingwear brand where net sales increased by $23.6 million to approximately $66.0 million in fiscal 1999. In addition, net sales of the Natural Issue brand increased by approximately, $10.2 million to $76.2 million for fiscal 1999. In the portfolio of other branded products, the John Henry brand also experienced an increase in net sales. We first introduced the Andrew Fezza, PNB Nation and Ping brands during fiscal 1999. They also contributed to the increase in net sales. The increases in net sales in fiscal 1999 were slightly offset by declines in net sales of our other branded and private label products. ROYALTY INCOME. We had royalty income of $3.1 million for fiscal 1999 compared to $4.0 million for fiscal 1998. The decline of $0.9 million was primarily due to our relationship with one customer, which shifted from primarily a licensee basis to primarily a sales basis. Net sales to this customer increased by $7.0 million to $11.5 million in fiscal 1999. 7 COST OF SALES. Cost of sales for fiscal 1999 was $166.2 million or 74.1% of total revenue as compared to $146.0 million or 75.0% of total revenue for fiscal 1998. The decrease in the cost of sales as a percentage of total revenues is a result of our increased sales in branded products, which typically generate higher gross profit margin than private label products. Gross profit was $58.2 million or 25.9% of total revenue for fiscal 1999 as compared to $48.7 million or 25.0% of total revenue in fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, including depreciation and amortization, for fiscal 1999 were $41.6 million or 18.5% of total revenue as compared to $35.9 million or 18.4% of total revenue for fiscal 1998. The increase is primarily attributable to costs associated with recent license acquisitions and the $0.7 million in costs associated with the increase in temporary personnel hired in connection with our new inventory management system. The costs associated with the recent license acquisitions are primarily related to payroll, advertising, and samples. We will continue to incur expenses related to start up costs of acquired licenses, including the completion and integration of the Perry Ellis International acquisition and the John Henry/Manhattan acquisition. We believe that we will achieve greater efficiencies in our new corporate and warehouse facility during the coming fiscal year, somewhat offsetting these increases. INTEREST EXPENSE. Interest expense for fiscal 1999 was $3.5 million as compared to $2.8 million for fiscal 1998. The increase was the result of additional indebtedness incurred to support the increase in working capital requirements during the fiscal year particularly in the third quarter. INCOME TAXES. During fiscal 1999, our effective tax rate was 34.4% compared to 28.7% in fiscal 1998, which resulted in an increase in the income tax provision by $1.6 million to $4.5 million. The prior year tax rate was lower than normal as we adjusted our provision for overpayments in fiscal 1997. NET INCOME. Net income for fiscal 1999 increased $1.4 million or 19.4% to $8.6 million or 3.8% of total revenue from $7.2 million or 3.7% of total revenue for fiscal 1998. FISCAL 1998 AS COMPARED TO FISCAL 1997 TOTAL REVENUES. Total revenues grew 22.5% or $35.7 million to $194.7 million in fiscal 1998 from $159.0 million in fiscal 1997 primarily as a result of the growth from our acquisition of the Munsingwear brand and the related license income. NET SALES. Net sales for fiscal 1998 increased 21.2% or $33.3 million to $190.7 million from $157.4 million for fiscal 1997. The increase in net sales was primarily attributable to the Munsingwear and Grand Slam brands which increased approximately $33.0 million as well as an increase in the Crossings brand. We acquired the Munsingwear brand during the final quarter of fiscal 1997. This increase was partially offset by a decrease in revenue from sales of the Natural Issue brand and private label products. ROYALTY INCOME. We had royalty income of $4.0 million for fiscal 1998 compared to $1.7 million for fiscal 1997. The increase of $2.3 million was primarily due to the increase in royalties from the licensing of the Munsingwear brand. COST OF SALES. Cost of sales for fiscal 1998 was $146.0 million or 75.0% of total revenue as compared to $122.0 million or 76.7% of total revenue for fiscal 1997. The decrease in the cost of sales as a percentage of total revenue reflects a continued shift to more sales of branded products which typically generate higher gross profit margin than private label products. Gross profit was $48.7 million or 25.0% of total revenues for fiscal 1998 as compared to $37.0 million or 23.3% of total revenues in fiscal 1997. SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and administrative expenses, including depreciation and amortization, for fiscal 1998 were $35.9 million or 18.4% of total revenue as 8 compared to $25.9 million or 16.3% of sales for fiscal 1997. This increase was due to increased levels of staffing required to service the Munsingwear brand and increased advertising costs relating to the start of consumer advertising as a result of brand imaging. INTEREST EXPENSE. Interest expense for fiscal 1998 was $2.8 million compared to $1.7 million for fiscal 1997. This increase in interest expense was the result of the additional indebtedness incurred by us in connection with the acquisition of the Munsingwear and Jolem labels, as well as to support increased levels of working capital requirements proportionate with the increased levels of revenue. INCOME TAXES. During fiscal 1998, our effective tax rate was 28.7% compared to 38.1% in fiscal 1997. This decrease was the result of our adjustment of our income tax provision because of tax overpayments for the prior two fiscal years. NET INCOME. Net income for fiscal 1998 was $7.2 million or 3.7% of total revenues as compared to $5.8 million or 3.7% of total revenues for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES We rely primarily upon cash flow from operations and borrowings under our Senior Credit Facility to finance operations and expansion. Cash provided by operating activities was $14.3 million in fiscal 1999, compared to a usage of cash of $3.1 million in fiscal 1998 and cash provided by operating activities of $1.9 million in 1997. The $17.4 million increase in fiscal 1999 cash flow from operations as compared to fiscal 1998 is due primarily to decreases in inventory and accounts receivable levels from year-to-year in the amount of $6.4 million and $3.2 million, respectively, as well as increases in accounts payable and accrued expenses of $5.3 million. Net cash used in investing activities was $10.2 million in fiscal 1999, of which $5.0 million was for the deposit on the pending Perry Ellis International acquisition and $1.0 million was related to the pending John Henry/Manhattan acquisition. Net cash used in investing activities for fiscal 1998 totaled $4.6 million, of which $3.8 million related principally to the new distribution and office facility. Net cash used in financing activities for fiscal 1999 totaled $4.9 million which was primarily due to a reduction of $6.1 million from borrowings on the Letter of Credit Facilities and the Senior Credit Facility. Net cash provided by financing activities for fiscal 1998 totaled $7.9 million, which was primarily due to an increase in borrowings under the Senior Credit Facilities. Working capital (current assets minus current liabilities) was $71.3 million at the end of fiscal 1999 as compared to $66.2 million at the end of fiscal 1998. The $5.1 million increase in working capital primarily resulted from an increase in accounts receivable and other current assets due to the sales growth and deposits made for pending acquisitions. The current ratio (current assets divided by current liabilities) was 8.2:1 and 7.9:1 at the end of fiscal 1999 and fiscal 1998, respectively. We have a $100.0 million ($90.0 million after applying the net proceeds of the Rule 144A offering described below) credit facility with a group of banks consisting of a revolving credit facility of up to an aggregate principal amount of $75.0 million and a term loan in the aggregate amount of $25.0 million ($10.0 million of the term loan portion is required to be repaid with the net proceeds of the Rule 144A offering) (the "Senior Credit Facility"). Borrowings pursuant to the revolving credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to 85.0% of eligible receivables plus 90.0% of eligible factored accounts receivable plus 60.0% of eligible inventories minus all outstanding letters of credit issued pursuant to the Senior Credit Facility that are not fully secured by cash collateral. The maximum amount of borrowing under the Senior Credit Facility attributable to (i) eligible factored accounts receivable is $20.0 million and (ii) eligible inventory is $30.0 million. Interest on revolving borrowings is variable based, at our option, upon either LIBOR plus 2.50% or the agent bank's prime rate plus 0.50%. Interest on the term loan is 25 basis points higher than on the revolving credit facility. The Senior Credit Facility contains certain covenants, the most restrictive of which requires us to maintain certain financial ratios and minimum net worth. In addition, the Senior Credit Facility restricts the payment of dividends. The Senior Credit Facility is secured by all of our assets and is guaranteed by our subsidiaries. The outstanding balance under the Company's previous senior credit facility was $33.5 million on January 31, 1999. The Senior Credit Facility expires in October 2002. 9 Borrowings under the Senior Credit Facility were used to finance the John Henry/Manhattan acquisition and amounted to approximately $27.0 million. We intend to finance the approximately $74.6 million acquisition of Perry Ellis International, Inc., with the net proceeds from a Rule 144A offering of $100.0 million in aggregate principal amount of senior subordinated notes due 2006. The remaining net proceeds from the Rule 144A offering will be used to reduce borrowings under the Senior Credit Facility, including reducing the $25.0 million term loan to $15.0 million. We also maintain three letter of credit facilities which total $60.0 million. Each letter of credit is collateralized by the consignment of merchandise in transit under that letter of credit. Indebtedness under these letters of credit bears interest at variable rates approximately equal to the lenders' specified base lending rates minus 1.0% per annum. As of January 31, 1999, there was $36.6 million available under these facilities. One of the facilities expires in July 1999 and the other two facilities, aggregating $15.0 million, have perpetual terms. Capital expenditures, principally associated with the new office and warehouse facility, were $4.0 million, $3.8 million and $1.1 million for fiscal 1999, 1998 and 1997 respectively. Capital expenditures, including the integration costs for the pending Perry Ellis International and John Henry/Manhattan acquisitions, for fiscal 2000 and 2001 are expected to be approximately $4.0 million and $4.5 million, respectively. Our products have historically been geared toward lighter-weight products generally worn during the spring and summer months, which typically caused a disproportionately higher amount of revenues to be realized during the first quarter of each fiscal year. The introduction of fall, winter and holiday merchandise has also positively affected the third quarter. Our business is currently more affected by the variations in retail buying patterns than the seasons of the year. Management believes that the combination of the borrowing availability under the amended Senior Credit Facility, the completion of this offering, funds anticipated from changes in working capital and funds anticipated to be generated from operating activities will be sufficient to meet our operating and capital needs in the foreseeable future. EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS We do not believe that inflation has significantly affected our results of operations. We purchase from foreign suppliers in U.S. dollars. Accordingly, the Company, to date, has not been materially adversely affected by foreign currency fluctuations. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statements of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides guidance for capitalizing and expensing the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Management has not determined the effect, if any, of adopting SOP 98-1. In April 1998, the American Institute of Certified Public Accountants issued Statements of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 985"). SOP 98-5 establishes accounting standards for the reporting of certain costs associated with the start-up of operations, lines of business, etc. SOP 98-5 requires that costs of start-up activities, including organizational costs, be expenses as incurred and that in the year of adoption, start-up costs recorded should be expensed. 10 SOP 98-5 is effective for fiscal years beginning subsequent to December 15, 1998. Management has not determined the effect, if any, of adopting SOP 98-5. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING Activities. Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for fiscal year beginning after June 15, 1999. Management has not determined the effect, if any, of adopting SFAS No. 133. YEAR 2000 READINESS DISCLOSURE BACKGROUND. The Year 2000 issue refers to the inability of certain data-sensitive computer chips, software and systems to recognize a two-digit date field as belonging to the 21st century. Many computer software programs, as well as certain hardware and equipment containing date-sensitive data, were structured to utilize a two-digit date field. Accordingly, these programs may not be able to properly recognize dates in the year 2000 and later, which could result in a significant system and equipment failures. This is a significant issue for most if not all companies, with far reaching implications, some of which cannot be anticipated or predicted with any degree of certainty. We recognize that we must take action to ensure that our operations will not be adversely impacted by Year 2000 software failures. We have undertaken a study of our functional application systems to determine their compliance with year 2000 issues and, to the extent of noncompliance, the required remediation. As a result of such study, we believe the majority of our systems are year 2000 compliant. Our current distribution software was modified by expanding the date to be century compliant, and all entry forms were modified using a windowing algorithm. The financial systems Account Receivables, Accounts Payables and General Ledger were replaced with Oracle Financial release 11.01, under Oracle 8.0.5 database. This is year 2000 compliant, and enhances our business analysis capabilities. Our EDI application is software purchased from NGC, a company in Miami Lakes, Florida. While we do not own the source code to this software, NGC provided written certification of year 2000 compliance. Furthermore, we passed the EDI year 2000 compliance test from NRF (National Retail Federation). Results of the test can be found at http://www.nrf.com. We are ready to change to the new EDI 4010 documents whenever our customers are ready. Some of our larger customers are already doing 4010 transactions with us. Our EDI software is also ready to convert any non-compliant year 2000 EDI documents to an internal year 2000 compliant transaction. All of our PBXs or telephone systems are year 2000 compliant and were certified and tested by Lucent Technologies. The security system equipment Year 2000 compliant certification could be found under http://www.napcosecurity.com/nsg nsg2000.html. The monitoring company Security One has provided us a Year 2000 certification of any Date Based System. We completed the required remediation noted above, including testing, by December 31, 1998. However, there are also less significant hardware options which will be remediated during 1999. To date, the expense to outsiders incurred by us in order to become year 2000 compliant, including computer software costs, have been $0.2 million and the current additional estimated cost to outsiders to complete such remediation is expected to be $0.2 million. Such costs, other than software, have been and will continue to be expensed as incurred. An assessment of the readiness of year 2000 compliance of third party entities with which we have relationships, such as our banking institutions, customers, payroll processors and others is ongoing. We have inquired, or are in the process of inquiring, of the significant aforementioned third party entities as to their readiness with respect to year 2000 compliance and to date has received indications that many of them are either compliant or in the process of remediation. We will continue 11 to monitor these third party entities to determine the impact on our business and the actions we must take, if any, in the event of non-compliance by any of these third parties. Our initial assessment of compliance by third party is that there is not a material business risk to us posed by any such noncompliance and, as such, we have not yet developed any related contingency plan. FORWARD-LOOKING STATEMENTS Except for the historical information contained herein, this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements that involve a number of risks and uncertainties, including the risks described elsewhere in this report and detailed from time to time in the Company's filings with the Commission. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages F-1 through F-33 appearing at the end of this report. 12 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following compensation table sets forth for fiscal 1999, fiscal 1998 and fiscal 1997, the cash and certain other compensation paid to the Chief Executive Officer ("CEO") and such other executive officers whose annual salary and bonus exceeded $100,000 during fiscal 1999 (together with the CEO, collectively, the "Named Executive Officers"):
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS -------------------------- ---------------------------------------------- SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) OPTION/SAR'S (#) COMPENSATION ($)(1) - ----------------------------- ------------- ------------ ----------- ----------------------- -------------------- George Feldenkreis 1999 270,833 55,000 150,000 9,615 Chairman and CEO 1998 125,000 100,000 -- 4,750 1997 120,000 50,000 -- 500 Oscar Feldenkreis 1999 373,000 470,000 55,000 19,542 President and Chief 1998 350,000 460,000 -- 4,750 Operating Officer 1997 350,000 450,000 -- 500 Joseph Roisman 1999 152,000 15,000 3,000 1,109 Executive Vice President 1998 147,000 21,000 -- 4,750 1997 140,000 10,000 -- 500
- ---------------- (1) The dollar amount represents Company contributions for the Named Executive Officer under the Company's 401(K) plan and Company payments for leased vehicles. EMPLOYMENT AGREEMENTS Supreme has an employment agreement with Oscar Feldenkreis, the President and Chief Operating Officer, which was renewed in May 1998 for a two-year period. In connection with the renewal of the employment agreement, Mr. Feldenkreis was granted ten-year options under the 1993 Plan to purchase a total of 55,000 shares of Common Stock at an exercise price of $15.75 per share. The employment agreement provides for an annual salary of $350,000, subject to annual cost-of-living increases, and an annual bonus as may be determined by the Compensation Committee in its discretion, up to a maximum of $500,000. The employment agreement also prohibits Mr. Feldenkreis from directly or indirectly competing with us for one year after termination of his employment for any reason except our termination of Mr. Feldenkreis without cause. Upon termination of the employment agreement by reason of his death or disability, Mr. Feldenkreis or his estate will receive a lump sum payment equal to one year's salary plus a bonus as may be determined by the Compensation Committee in its discretion. Supreme also has an employment agreement with George Feldenkreis, the Chairman of the Board and CEO, which was renewed in May 1998 for a two-year period. In connection with the renewal of the employment agreement, Mr. Feldenkreis was granted options under the 1993 Plan to purchase a total of 150,000 shares of Common Stock at an exercise price of $15.75 per share. The employment agreement provides for an annual salary of $375,000, subject to annual cost-of-living increases, and an annual bonus as may be determined by the Compensation Committee in its discretion, up to a maximum of $250,000. George Feldenkreis' employment agreement contains termination and non-competition provisions similar to those set forth in Oscar Feldenkreis' agreement. 13 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning individual grants of options made during fiscal 1999 to any of the Named Executive Officers.
OPTIONS GRANTED IN LAST FISCAL YEAR -------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE % OF TOTAL APPRECIATION FOR NUMBER OF SHARES OPTIONS GRANTED EXERCISE OR OPTION TERM ($)(1) UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------- NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE 5% 10% - ------------------------- -------------------- ----------------- ------------ ----------- ----------- ---------- George Feldenkreis ...... 150,000 38.8 15.75 5/07/08 1,485,764 3,765,217 Oscar Feldenkreis ....... 55,000 14.2 15.75 5/07/08 544,780 1,380,579 Joseph Roisman .......... 3,000 0.8 10.00 5/04/03 8,288 18,315
- ---------------- (1) Based upon the exercise price, which was equal to the fair market on the date of grant, and annual appreciation at the rate stated on such price through the expiration date of the options. Amounts represented hypothetical gains that could be achieved for the options if exercised at the end of the term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the Securities and Exchange Commission (the "Commission") and do not represent the Company's estimate or projection of the future stock price. Actual gains, if any, are contingent upon the continued employment of the Named Executive Officer through the expiration date, as well as being dependent upon the general performance of the Common Stock. The potential realizable values have not taken into account amounts required to be paid for federal income taxes. STOCK OPTIONS HELD AT END OF FISCAL 1999 The following table indicates the total number and value of exercisable and unexercisable stock options held by each of the Named Executive Officers as of January 31, 1999. No options to purchase stock were exercised by any of the Named Executive Officers in fiscal 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($) ------------------------------- --------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE - ---------------------------- ------------- --------------- ---------------- -------------- George Feldenkreis ......... 150,000 0 37,500 0 Oscar Feldenkreis .......... 100,000 0 354,400 0 Joseph Roisman ............. 12,000 2,250 98,213 13,500
- ---------------- (1) Based on the Nasdaq National Market last sales price for the Company's Common Stock on January 29, 1999 in the amount of $16.00 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report (1) Financial Statements. (1) Financial Statements. The following consolidated financial statements of Supreme International Corporation and subsidiaries are included in Part II, Item 8: PAGE ----- Independent Auditors' Report ........................................ F-1 Consolidated Balance Sheets as of January 31, 1998 and 1999 ......... F-2 Consolidated Statements of Income For Each of the Three Years in the Period Ended January 31, 1999 .... F-3 Consolidated Statements of Changes in Stockholders' Equity For Each of the Three Years in the Period Ended January 31, 1999 .... F-4 Consolidated Statements of Cash Flow For Each of the Three Years in the Period Ended January 31, 1999 .... F-5 Notes to Consolidated Financial Statements .......................... F-6 The following financial statements of Perry Ellis International, Inc. are included in Part II, Item 8: PAGE ----- Independent Auditors' Report ........................................ F-21 Balance Sheet as of December 31, 1997 and 1998 ...................... F-22 Statement of Operations for the years ended December 31, 1996, 1997 and 1998 ................................... F-23 Undistributed Income for the years ended December 31, 1996, 1997 and 1998 ................................... F-24 Statement of Cash Flows for the years ended December 31, 1996, 1997 and 1998 ................................... F-25 Notes to Financial Statements ....................................... F-26 The following Unaudited Pro Forma Combined Financial Information of Supreme International Corporation and Perry Ellis International, Inc. are included in Part II, Item 8: PAGE ----- Introduction ........................................................ F-29 Balance Sheet as of January 31, 1999 ................................ F-30 Income Statement for the year ended January 31, 1999 ................ F-31 Notes to Unaudited Pro Forma Combined Financial Information ......... F-32 (2) Consolidated Financial Statement Schedule All schedules for which provision is made in applicable regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or the required information have been included in the Consolidated Financial Statements and therefore such schedules have been omitted. 15 (3) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT - -------- --------------------------------------------------------------------------------------------- 3.1 Registrant's Second Amended and Restated Articles of Incorporation(6) 3.2 Registrant's Amended and Restated Bylaws(1) 4.1 Form of Common Stock Certificate(1) 10.3 Form of Indemnification Agreement between the Registrant and each of the Registrant's Directors and Officers(1) 10.6 Business Lease dated October 4, 1990, between George Feldenkreis and the Registrant relating to warehouse facilities(1) 10.7 Business Lease dated May 1, 1990, between George Feldenkreis and the Registrant relating to warehouse facilities(1) 10.9 1993 Stock Option Plan (1)(2) 10.10 Directors Stock Option(1)(2) 10.15 Loan and Security Agreement dated as of October 5, 1994, between the Registrant and NationsBank 10.16 First Amendment to Loan and Security Agreement dated as of August 19, 1995, between the Registrant and NationsBank of George N.A.(4) 10.17 Amendment to Business Lease between George Feldenkreis and the Registrant relating to office facilities(4) 10.18 Revocable Credit Facility Agreement dated May 26, 1995 between the Registrant and Hamilton Bank, N.A.(4) 10.19 Revolving Line of Credit Agreement dated June 23, 1995 between the Registrant and Ocean Bank(4) 10.20 Profit Sharing Plan(2)(4) 10.21 Amended and Restated Employment Agreement between the Registrant and George Feldenkreis(2)(4) 10.22 Amended and Restated Employment Agreement between the Registrant and Oscar Feldenkreis(2)(4) 10.23 Business Lease dated December 26, 1995 between George Feldenkreis and the Registrant relating to office facilities(5) 10.24 Lease Agreement [Land] dated as of August 28, 1997 between SUP Joint Venture, as Lessor and Registrant, as Lessee(7) 10.25 Lease Agreement [Building] dated as of August 28, 1997 between SUP Joint Venture, as Lessor and Registrant, as Lessee(7) 10.26 Amended and Restated Loan and Security Agreement dated as of March 31, 1998(7) 10.27 Amendment to Amended and Restated Loan and Security Agreement dated as of August 1, 1998(6) 22.1 Subsidiaries of Registrant(3) 23.2 Consent of Deloitte & Touche LLP(6) 27.1 Financial Data Schedule (SEC use only)(6)
- ---------------- (1) Previously filed as an Exhibit of the same number to Registrant's Registration Statement on Form S -1 (File No. 33-60750) and incorporated herein by reference. (2) Management Contract or Compensation Plan. (3) Previously filed as an Exhibit of the same number to Registrant's Annual Report on Form 10-K for the year ended January 31, 1995 and incorporated herein by reference. (4) Previously files as an Exhibit of the same number to Registrant's Registration Statement on Form S-1 (File No. 33-96304) and incorporated herein by reference. (5) Previously filed as an Exhibit of the same number to Registrant's Annual Report on Form 10-K for the year ended January 31, 1996 and incorporated herein by reference. (6) Filed herewith. (7) Previously filed as an exhibit of the same number to Registrant's Annual Report on Form 10-K for the year ended January 31, 1997 and incorporated herein by reference. 16 (b) Reports on Form 8-K On January 15, 1999 Supreme filed a current report on Form 8-K to disclose that it had entered into a definitive agreement with respect to the John Henry/Manhattan acquisition. (c) Item 601 Exhibits The exhibits required by Item 601 of Regulation S-K are set forth in (a)(3) above. (d) Financial Statement Schedules The financial statement schedules required by Regulation S-K are set forth in (a)(2) above. 17 SIGNATURES Pursuant to the requirement of Section 12 of the Securities Exchange Act of 1934, the Registrant has caused this report or amendment to thereto to be signed on its behalf by the undersigned, thereunto duly authorized. SUPREME INTERNATIONAL CORPORATION By: /s/ GEORGE FELDENKREIS By: /s/ GEORGE FELDENKREIS ------------------------------------- George Feldenkreis Chairman of the Board and Chief Executive Officer Dated: April 6, 1999 18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Supreme International Corporation and subsidiaries: We have audited the consolidated balance sheets of Supreme International Corporation and subsidiaries (the "Company") as of January 31, 1998 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended January 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Miami, Florida March 12, 1999 F-1 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 1998 AND 1999
1998 1999 --------------- --------------- ASSETS Current Assets: Cash ............................................................. $ 1,010,256 $ 173,493 Accounts receivable, net ......................................... 35,502,607 38,969,845 Inventories ...................................................... 35,799,388 32,965,655 Deferred income taxes ............................................ 1,154,905 1,091,482 Deposits for acquisitions ........................................ -- 6,000,000 Other current assets ............................................. 2,253,328 2,040,200 ------------ ------------ Total current assets ........................................... 75,720,484 81,240,675 Property and equipment, net ....................................... 4,899,656 7,851,592 Intangible assets, net ............................................ 19,716,064 18,842,797 Other ............................................................. 1,313,747 1,022,467 ------------ ------------ TOTAL .......................................................... $101,649,951 $108,957,531 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ................................................. $ 4,048,325 $ 4,595,688 Accrued expenses ................................................. 2,062,912 4,931,525 Borrowings under letter of credit facilities ..................... 3,000,000 -- Other current liabilities ........................................ 442,790 413,505 ------------ ------------ Total current liabilities ...................................... 9,554,027 9,940,718 Deferred income tax ............................................... 282,905 559,728 Long term debt--senior credit agreement ........................... 36,658,174 33,511,157 ------------ ------------ Total liabilities .............................................. 46,495,106 44,011,603 ------------ ------------ Commitments and Contingencies: (Note 16) Stockholders' Equity: Preferred stock--$.01 par value; 1,000,000 shares authorized; no shares issued or outstanding ................................. -- -- Class A Common Stock--$.01 par value; 30,000,000 shares authorized; no shares issued or outstanding ................................. -- -- Common stock--$.01 par value; 30,000,000 shares authorized; 6,555,681 and 6,712,374 shares issued and outstanding as of January 31, 1998 and 1999, respectively ................... 65,556 67,123 Additional paid-in-capital ........................................ 27,598,618 28,806,455 Retained earnings ................................................. 27,490,671 36,072,350 ------------ ------------ Total stockholders' equity ..................................... 55,154,845 64,945,928 ------------ ------------ TOTAL .......................................................... $101,649,951 $108,957,531 ============ ============
See Notes to consolidated financial statements. F-2 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
1997 1998 1999 ----------------- ----------------- ----------------- Revenues Net Sales ........................................... $ 157,372,796 $ 190,689,212 $ 221,347,295 Royalty Income ...................................... 1,654,262 4,031,878 3,057,357 ------------- ------------- ------------- Total Revenues ..................................... 159,027,058 194,721,090 224,404,652 Cost of Sales ........................................ 122,045,614 145,991,132 166,198,450 ------------- ------------- ------------- Gross Profit ......................................... 36,981,444 48,729,958 58,206,202 Selling, General and Administrative Expenses ......... 25,876,115 35,885,443 41,639,672 ------------- ------------- ------------- Operating Income ..................................... 11,105,329 12,844,515 16,566,530 Interest Expense ..................................... 1,664,392 2,781,509 3,493,985 ------------- ------------- ------------- Income Before Income Tax Provision ................... 9,440,937 10,063,006 13,072,545 Income Tax Provision ................................. 3,596,918 2,884,844 4,490,866 ------------- ------------- ------------- Net Income ........................................... $ 5,844,019 $ 7,178,162 $ 8,581,679 ============= ============= ============= Net Income Per Share Basic ............................................... $ 0.89 $ 1.10 $ 1.29 ============= ============= ============= Diluted ............................................. $ 0.89 $ 1.08 $ 1.27 ============= ============= ============= Weighted Average Number of Shares Outstanding Basic ............................................... 6,534,446 6,540,604 6,674,103 ============= ============= ============= Diluted ............................................. 6,595,147 6,665,635 6,769,810 ============= ============= =============
See Notes to consolidated financial statements. F-3 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
COMMON STOCK ADDITIONAL -------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------- ---------- -------------- -------------- -------------- BALANCE, JANUARY 31, 1996 ................... 6,800,000 $ 68,000 $ 29,296,594 $14,468,490 $ 43,833,084 Purchase of treasury stock, at cost ......... (278,069) (2,780) (1,947,599) -- (1,950,379) Exercise of stock options ................... 7,500 75 48,675 -- 48,750 Net Income .................................. -- -- -- 5,844,019 5,844,019 --------- -------- ------------ ----------- ------------ BALANCE, JANUARY 31, 1997 ................... 6,529,431 65,295 27,397,670 20,312,509 47,775,474 Exercise of stock options ................... 26,250 261 200,948 -- 201,209 Net Income .................................. -- -- -- 7,178,162 7,178,162 --------- -------- ------------ ----------- ------------ BALANCE, JANUARY 31, 1998 ................... 6,555,681 65,556 27,598,618 27,490,671 55,154,845 Exercise of stock options ................... 78,525 785 457,367 -- 458,152 Exercise of warrants ........................ 78,168 782 (782) -- -- Net Income .................................. -- -- -- 8,581,679 8,581,679 Tax benefit for exercise of non-qualified stock options ............... -- -- 751,252 -- 751,252 --------- -------- ------------ ----------- ------------ BALANCE, JANUARY 31, 1999 ................... 6,712,374 $ 67,123 $ 28,806,455 $36,072,350 $ 64,945,928 ========= ======== ============ =========== ============
See Notes to consolidated financial statements. F-4 SUPREME INTERNATIONAL CORPORATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
1997 1998 1999 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...................................................... $ 5,844,019 $ 7,178,162 $ 8,581,679 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization .................................. 1,147,091 1,748,006 2,161,398 Loss on sale and abandonment of property ....................... 257,221 187,692 -- Decrease (increase) in deferred taxes .......................... 159,655 (203,342) 340,246 Changes in operating assets and liabilities: (net of effects of acquisition) Accounts receivable, net ...................................... (8,951,318) (6,695,371) (3,467,238) Inventories ................................................... 293,527 (3,598,866) 2,833,733 Other current assets .......................................... (359,942) (727,633) 213,128 Other assets .................................................. (1,915,477) 889,854 291,280 Accounts payable and accrued expenses ......................... 4,835,234 (1,907,414) 3,415,976 Other current liabilities ..................................... 563,756 28,055 (29,285) ------------- ------------ ------------- Net cash provided by (used in) operating activities ..................................... 1,873,766 (3,100,857) 14,340,917 ------------- ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .............................. (1,058,061) (3,828,142) (4,004,588) Proceeds from sale of property and equipment .................... 164,545 32,102 -- Payment on purchase of intangible assets ........................ (137,027) (758,598) (235,479) Deposit for John Henry/Manhattan acquisition .................... -- -- (1,000,000) Deposit for Perry Ellis International acquisition ............... -- -- (5,000,000) Payment for Jolem acquisition ................................... (3,657,435) -- -- Payment for Munsingwear acquisition ............................. (19,768,380) -- -- ------------- ------------ ------------- Net cash used in investing activities ........................ (24,456,358) (4,554,638) (10,240,067) ------------- ------------ ------------- CASH FLOW FROM FINANCING ACTIVITIES: Net increase (decrease) in borrowings under letter of credit facilities ............................................. 6,812,629 (3,812,629) (3,000,000) Net proceeds from (repayments of) long-term debt ................ 18,168,857 11,521,373 (3,147,017) Purchase of treasury stock ...................................... (1,950,379) -- -- Tax benefit for exercise of non-qualified stock options ......... -- -- 751,252 Proceeds from exercise of stock options ......................... 48,750 201,209 458,152 ------------- ------------ ------------- Net cash provided by (used in) financing activities .......... 23,079,857 7,909,953 (4,937,613) ------------- ------------ ------------- NET INCREASE (DECREASE) IN CASH ................................. 497,265 254,458 (836,763) CASH AT BEGINNING OF YEAR ....................................... 258,533 755,798 1,010,256 ------------- ------------ ------------- CASH AT END OF YEAR ............................................. $ 755,798 $ 1,010,256 $ 173,493 ============= ============ ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest ....................................................... $ 1,433,403 $ 2,820,016 $ 3,293,877 ============= ============ ============= Income taxes ................................................... $ 3,394,466 $ 3,174,807 $ 1,762,479 ============= ============ =============
See Notes to consolidated financial statements. F-5 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 1. GENERAL Supreme International Corporation and subsidiaries (the "Company") was incorporated in the State of Florida and has been in business since 1967. The Company is a leading designer and marketer of a broad line of high quality men's sportswear, including sport and dress shirts, golf sportswear, sweaters, urban wear, casual and dress pants and shorts to all levels of retail distribution. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the Company's significant accounting policies: PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Supreme International Corporation and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of accounts receivable and accounts payable approximates fair value due to their short-term nature. The carrying amount of debt and credit facilities approximate fair value due to their stated interest rate approximating a market rate. These estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies. INVENTORIES--Inventories are stated at the lower of cost (first-in, first-out basis) or market. Costs consist of the purchase price, customs, duties, freight, insurance, and commissions to buying agents. PROPERTY AND EQUIPMENT--Property and equipment are stated at cost. Depreciation is computed using the straight-line and accelerated methods over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or estimated useful lives of the improvements. The useful lives range from five to ten years. INTANGIBLE ASSETS--Intangible assets primarily represent costs capitalized in connection with the acquisition, registration and maintenance of brand names and license rights. The amortization periods for the intangible assets range from fifteen to twenty years, with a weighted average of nineteen and a half years. LONG LIVED-ASSETS--Management reviews long-lived assets, including identifiable intangible assets, for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to reduce the asset to its estimated fair value. Preparation of estimated expected future cash flows is inherently subjective and is based on management's best F-6 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) estimate of assumptions concerning future conditions. At January 31, 1999, management believes there was no impairement to long-lived assets. REVENUE RECOGNITION--Sales are recognized upon shipment, returns for defective goods are netted against sales, and an allowance is provided for estimated returns and other chargebacks. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. INCOME TAXES--Deferred income taxes result primarily from timing differences in the recognition of expenses for tax and financial reporting purposes and are accounted for in accordance with Financial Accounting Standards Board Statement No. 109 ("SFAS No. 109"), Accounting for Income Taxes, which requires the asset and liability method of computing deferred income taxes. Under the asset and liability method, deferred taxes are adjusted for tax rate changes as they occur. NET INCOME PER SHARE--Basic net income per share is computed by dividing net income by the weighted average shares of outstanding common stock. The calculation of diluted net income per share is similar to basic earnings per share except that the denominator includes dilutive potential common stock. The dilutive potential common stock included in the Company's computation of diluted net income per share includes the effects of the stock options and warrants described in Note 14, as determined using the treasury stock method. The weighted average number of shares for stock options included in the dilutive weighted average shares outstanding were 60,701, 125,031 and 95,707 in 1997, 1998 and 1999, respectively. STOCK SPLIT--On July 21, 1997, the Company's Board of Directors declared a 3 for 2 stock split in the form of a stock dividend. The accompanying financial statements reflect the stock split as if it had occurred as of the earliest period being presented. ACCOUNTING FOR STOCK-BASED COMPENSATION--The Company has chosen to account for stock-based compensation to employees and non-employee members of the Board using the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As required by Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock-Based Compensation, the Company has presented certain pro forma and other disclosures related to stock-based compensation plans. RECLASSIFICATIONS--Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. NEW ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires that all components of comprehensive income be reported on one of the following: (1) the statement of income; (2) the statement of changes in stockholders' equity, or (3) a separate statement of comprehensive income. Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by stockholders (changes in paid-in capital) and distributions to stockholders (dividends). SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 F-7 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) for the fiscal year ended January 31, 1999. The components of comprehensive income which are excluded from net income are not significant, individually or in the aggregate, and therefore no separate statement of comprehensive income has been presented. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 changes the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. SFAS No. 131 also requires entity-wide disclosure about products and services an entity provides, the foreign countries in which it holds assets and reports revenues and its major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 131 for the fiscal year ended January 31, 1999 (see Note 15). In March 1998, the American Institute of Certified Public Accountants issued Statements of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides guidance for capitalizing and expensing the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Management has not determined the effect, if any, of adopting SOP 98-1. In April 1998, the American Institute of Certified Public Accountants issued Statements of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"). SOP 98-5 establishes accounting standards for the reporting of certain costs associated with the start-up of operations, lines of business, etc. SOP 98-5 requires that costs of start-up activities, including organizational costs, be expensed as incurred and that in the year of adoption, start-up costs recorded should be expensed. SOP 98-5 is effective for fiscal years beginning subsequent to December 15, 1998. Management has not determined the effect, if any, of adopting SOP 98-5. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING Activities ("SFAS No. 133"). Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for fiscal year beginning after June 15, 1999. Management has not determined the effect, if any, of adopting SFAS No. 133. 3. ACQUISITIONS MUNSINGWEAR ACQUISITION--On September 6, 1996, the Company acquired certain assets of Munsingwear, Inc. ("Munsingwear"), a manufacturer of men's casual apparel, for approximately $18,400,000. The assets acquired consisted of brand names including GRAND SLAM/registered trademark/, GRAND SLAM TOUR/registered trademark/, PENGUIN SPORT/registered trademark/, and other intangible assets. The purchase price amounted to approximately $19,800,000, which included $1,400,000 of transaction costs, and was primarily allocated to working capital and intangible assets as follows: inventories $300,000; accounts receivable $300,000; and brand F-8 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 3. ACQUISITIONS--(CONTINUED) names $19,200,000. The acquisition was accounted for under the purchase method of accounting and was financed with borrowings from the revolving credit agreement (see Note 10). JOLEM ACQUISITION--On May 6, 1996, the Company acquired all the assets of Jolem Imports, Inc. ("Jolem"), a Miami based manufacturer of men's and boy's casual apparel. The purchase price amounted to approximately $3,700,000 and was primarily allocated to working capital and intangible assets as follows: inventories $1,800,000; accounts receivable $1,500,000; and brand names $400,000. The acquisition was accounted for under the purchase method of accounting. 4. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following as of January 31:
1998 1999 --------------- --------------- Trade accounts ................................................ $ 37,499,297 $ 43,219,125 Royalties and other receivables ............................... 2,217,338 1,479,149 ------------ ------------ Total ......................................................... 39,716,635 44,698,274 Less: Allowance for doubtful accounts ......................... (609,874) (609,874) Allowance for sales returns and other chargebacks .......... (3,604,154) (5,118,555) ------------ ------------ Total ......................................................... $ 35,502,607 $ 38,969,845 ============ ============
The activity for the allowance accounts are as follows:
1997 1998 1999 --------------- ---------------- ---------------- Allowance for doubtful accounts: Beginning balance ............................ $ 242,792 $ 250,000 $ 609,874 Provision .................................... 135,854 799,129 167,659 Write-offs, net of recoveries ................ (128,646) (439,255) (167,659) ------------ ------------- ------------- Ending balance ............................... $ 250,000 $ 609,874 $ 609,874 ============ ============= ============= Allowance for sales returns and other chargebacks: Beginning balance ............................ $ 567,014 $ 1,670,565 $ 3,604,154 Provision .................................... 9,057,342 13,047,822 11,984,955 Actual returns and other chargebacks ......... (7,953,791) (11,114,233) (10,470,554) ------------ ------------- ------------- Ending balance ............................... $ 1,670,565 $ 3,604,154 $ 5,118,555 ============ ============= =============
The Company carries accounts receivable at the amount it deems to be collectible. Accordingly, the Company provides allowances for accounts receivable it deems to be uncollectible based on management's best estimates. Recoveries are recognized in the period they are received. The ultimate amount of accounts receivable that become uncollectible could differ from those estimated. F-9 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 5. INVENTORIES Inventories consisted of the following as of January 31: 1998 1999 --------------- -------------- Finished goods ........................ $ 31,972,723 $ 30,730,131 Raw materials and in process .......... 1,204,841 255,085 Merchandise in transit ................ 2,621,824 1,980,439 ------------ ------------ Total ................................. $ 35,799,388 $ 32,965,655 ============ ============ 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of January 31: 1998 1999 --------------- --------------- Land .................................. $ -- $ 1,125,000 Furniture, fixture and equipment ...... 5,723,557 7,205,651 Vehicles .............................. 309,955 371,364 Leasehold improvements ................ 1,617,288 2,299,704 ------------ ------------ 7,650,800 11,001,719 Less: accumulated depreciation ........ (2,751,144) (3,150,127) ------------ ------------ Total ................................. $ 4,899,656 $ 7,851,592 ============ ============ Depreciation expense relating to property and equipment amounted to approximately $800,000, $847,000, and $1,052,000 for the fiscal years ended January 31, 1997, 1998 and 1999, respectively. 7. INTANGIBLE ASSETS Intangible assets consisted of the following as of January 31: 1998 1999 -------------- -------------- Trademarks & Licenses ............. $ 21,306,788 $ 21,544,562 Goodwill .......................... 17,864 16,165 ------------ ------------ 21,324,652 21,560,727 Accumulated Amortization .......... (1,608,588) (2,717,930) ------------ ------------ Balance, net ...................... $ 19,716,064 $ 18,842,797 ============ ============ Amortization expense relating to the intangible assets amounted to approximately $347,000, $901,000 and $1,109,000, for the fiscal years ended January 31, 1997, 1998 and 1999, respectively. F-10 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 8. ACCRUED EXPENSES Accrued expenses consisted of the following as of January 31: 1998 1999 ------------- ------------- Income taxes ...................... $ 370,687 $2,107,457 Salaries and commissions .......... 662,865 1,549,758 Buying commissions ................ 597,280 818,188 Other ............................. 432,080 456,122 ---------- ---------- Total ............................. $2,062,912 $4,931,525 ========== ========== 9. BORROWINGS UNDER LETTER OF CREDIT FACILITIES The Company has a $45 million facility which provides up to $35 million to issue sight letters of credit including a sub-limit of $2 million to issue time letters of credit up to 120 days. In addition, the facility has a $10 million sub-limit for refinancing of sight letters of credit for a period of up to 120 days. The facility is collateralized by the consignment of merchandise in transit under each letter of credit. Indebtedness under this facility bears interest at variable rates substantially equal to the lenders' prime rate minus 1.0% per annum (6.75% as of January 31, 1999). Amounts outstanding under the $10 million sub-limit are collateralized by a secondary interest in the Company's accounts receivable and inventories. The Company has two additional letters of credit facilities which provide for borrowings of up to $15 million to issue sight letters of credit. The facilities are collateralized by the consignment of the merchandise in transit under each letter of credit. Borrowings available under letter of credit facilities consisted of the following as of January 31: 1998 1999 --------------- --------------- Total letter of credit facilities ...... $ 60,000,000 $ 60,000,000 Borrowings ............................. (3,000,000) -- Outstanding letters of credit .......... (26,673,016) (23,420,765) ------------- ------------- Available .............................. $ 30,326,984 $ 36,579,235 ============= ============= 10. LONG-TERM DEBT--SENIOR CREDIT FACILITY The Company amended its revolving credit facility (the "Senior Credit Facility") on August 1, 1998 with a group of banks giving it the right to borrow $60 million or a portion thereof for its general corporate purposes. The Senior Credit Facility expires in April 2001 . Borrowings are limited under the terms of a borrowing base calculation which generally restricts the outstanding balance to 85% of eligible receivables plus 50% of eligible inventories, as defined. Interest on borrowings is variable, based upon the Company's option of selecting a LIBOR plus 1.25% or the bank's prime rate. The weighted average interest rate was 6.69% as of January 31, 1999. The Senior Credit Facility contains certain covenants, the most restrictive of which require the Company to maintain certain financial and net worth ratios. In addition, the Senior Credit Facility restricts the payment of dividends. The Senior Credit Facility is secured by the Company's assets. The outstanding balance under the Senior Credit Facility as of January 31, 1998 and 1999 amounted to $36,658,174 and $33,511,157, respectively. F-11 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 10. LONG-TERM DEBT--SENIOR CREDIT FACILITY--(CONTINUED) The Company amended the Senior Credit Facility in March, 1999. As amended, the Senior Credit Facility will provide a revolving credit facility up to an aggregate amount of $75 million and a term loan of $25 million. The amended agreement expires in October 2002. 11. INCOME TAXES The income tax provision consisted of the following for each of the years ended January 31: 1997 1998 1999 ------------- ------------- ------------- Current income taxes: Federal ................... $2,910,509 $2,780,815 $3,057,838 State ..................... 526,754 307,371 1,002,692 Foreign ................... -- -- 90,090 ---------- ---------- ---------- Total ...................... $3,437,263 $3,088,186 $4,150,620 Deferred income taxes: Federal and state ......... 159,655 (203,342) 340,246 ---------- ---------- ---------- Total ...................... $3,596,918 $2,884,844 $4,490,866 ========== ========== ========== The following table reconciles the statutory federal income tax rate to the Company's effective income tax rate for each of the years ended January 31:
1997 1998 1999 ------------- ------------- ------------- Statutory federal income tax rate ............................... 35.0 % 35.0 % 35.0 % Increase (decrease) resulting from State income taxes, net of federal income tax benefit .......... 3.9 2.1 2.9 Benefit of graduated rate ...................................... (1.0) (1.0) (1.0) Reversal of certain income tax reserves ........................ -- (5.0) -- Other ........................................................... 0.2 (2.4) (2.5) ----- ----- ----- Total ........................................................... 38.1 % 28.7 % 34.4 % ===== ===== =====
F-12 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 11. INCOME TAXES--(CONTINUED) The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows as of January 31: 1998 1999 ------------ ------------ Deferred income tax assets: Inventories ............................. $ 642,944 $ 795,442 Accounts receivable ..................... 227,468 220,165 Accrued expenses ........................ 183,750 -- Other ................................... 100,743 75,875 --------- --------- Deferred income tax assets .............. 1,154,905 1,091,482 --------- --------- Deferred income tax liabilities: Fixed assets ............................ (61,742) (318,580) Intangible .............................. (99,694) (241,148) Other ................................... (121,469) -- --------- --------- Deferred income tax liabilities ......... (282,905) (559,728) --------- --------- Net deferred income tax asset ........... $ 872,000 $ 531,754 ========= ========= A valuation allowance for deferred income tax assets is not deemed necessary as the assets are expected to be recovered. 12. RETIREMENT PLAN The Company adopted a 401(K) Profit Sharing Plan (the "Plan") in which eligible employees may participate. Employees are eligible to participate in the Plan upon the attainment of age 21, and completion of one year of service. Participants may elect to contribute up to 15% of their annual compensation, not to exceed amounts prescribed by statutory guidelines. The Company is required to contribute an amount equal to 50% of each participant's eligible contribution up to 4% of the participant's annual compensation. The Company may elect to contribute additional amounts at its discretion. The Company's contributions to the plan were approximately $34,000, $74,000, and $115,000 for the fiscal years ended January 31, 1997, 1998 and 1999 respectively. 13. RELATED PARTY TRANSACTIONS The Company leases certain office and warehouse space owned by the Company's Chairman of the Board of Directors and Chief Executive Officer under non-cancelable operating lease arrangements. Rent expense, including taxes, for these leases amounted to approximately $600,000, $625,000 and $546,000 for the fiscal years ended January 31, 1997, 1998 and 1999, respectively. The Company entered into a license agreement (the "License Agreement") with Isaco International, Inc. ("Isaco"), pursuant to which Isaco was granted an exclusive license to use the Natural Issues brand name in the United States and Puerto Rico to market a line of men's underwear and loungewear. The License Agreement provides for a guaranteed minimum royalty payment to the Company of $137,500 and expires on May 31, 1999. The principal shareholder of Isaco is the father-in-law of the Company's President and Chief Operating Officer. Royalty income earned from the License F-13 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 13. RELATED PARTY TRANSACTIONS--(CONTINUED) Agreement amounted to approximately $243,000, $296,000 and $298,000 for the fiscal years ended January 31, 1997, 1998 and 1999, respectively. In January 1998, the Company entered into two additional three-year license agreements with Isaco for use of the Natural Issue brand in the United States and its territories and possessions to market lines of hosiery and neckwear. The license agreement for neckwear provides for a guaranteed minimum annual royalty of $15,000 and the license agreement for hosiery provides for a guaranteed minimum annual royalty of $25,000 during the first year, increasing by $5,000 in each subsequent year. 14. STOCK OPTIONS AND WARRANTS STOCK OPTIONS--The Company adopted a 1993 Stock Option Plan (the "1993 Plan") and a Directors Stock Option Plan (the "Directors Plan") (collectively, the "Stock Option Plans"), under which shares of common stock are reserved for issuance upon the exercise of the options. The number of shares issuable under the Directors Plan is 150,000. The 1993 Plan was amended during fiscal 1999 to increase the number of shares issuable from 450,000 shares to 900,000 shares. The Stock Option Plans are designed to serve as an incentive for attracting and retaining qualified and competent employees, directors, consultants, and independent contractors of the Company. The 1993 Plan provides for the granting of both incentive stock options and nonstatutory stock options. Incentive stock options may only be granted to employees. Only non-employee directors are eligible to receive options under the Directors Plan. All matters relating to the Directors Plan are administered by a committee of the Board of Directors consisting of two or more employee directors, including selection of participants, allotment of shares, determination of price and other conditions of purchase, except that the per share exercise price of options granted under the Directors Plan may not be less than the fair market value of the common stock on the date of grant. Options can be granted under the 1993 Plan on such terms and at such prices as determined by the Board of Directors, or a committee thereof, except that the per share exercise price of incentive stock options granted under the 1993 Plan may not be less than the fair market value of the common stock on the date of grant, and in the case of an incentive stock option granted to a 10% shareholder, the per share exercise price will not be less than 110% of such fair market value. The aggregate fair market value of the shares covered by incentive stock options granted under the 1993 Plan that become exercisable by a grantee in any calendar year is subject to a $100,000 limit. On December 9, 1998, in order to provide an appropriate incentive to certain members of management whose stock option exercise prices were higher than the market price on that date, the Company allowed certain options to be repriced. This repricing was at the consent of the option holders, and all other terms of the options, including grant dates and exercise dates, remain intact and in accordance with the 1993 Plan. F-14 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 14. STOCK OPTIONS AND WARRANTS--(CONTINUED) A summary of the status of the option plans as of and for the changes during each of the three years in the period ended January 31, 1999 is presented below:
OPTION PRICE PER SHARE OPTIONS EXERCISABLE --------------------------------- ----------------------------- NUMBER NUMBER WEIGHTED AVERAGE OF SHARES LOW HIGH WEIGHTED OF SHARES EXERCISE PRICE ------------- ---------- ----------- ---------- ----------- ----------------- Outstanding January 31, 1996 218,250 $ 6.33 $ 10.75 $ 7.71 114,938 $ 8.06 Granted 1997 ................ 90,000 $ 6.67 $ 10.75 $ 8.87 Exercised 1997 .............. (7,500) $ 6.50 $ 6.50 $ 6.50 Cancelled 1997 .............. (7,500) $ 6.50 $ 6.50 $ 6.50 ------- Outstanding January 31, 1997 293,250 $ 6.33 $ 10.75 $ 8.01 192,938 $ 8.14 Granted 1998 ................ 24,000 $ 9.17 $ 10.17 $ 9.84 Exercised 1998 .............. (26,250) $ 6.67 $ 10.75 $ 7.73 Cancelled 1998 .............. -- ------- Outstanding January 31, 1998 291,000 $ 6.33 $ 10.75 $ 7.92 221,750 $ 7.90 Granted 1999 ................ 387,000 $ 9.75 $ 15.75 $ 13.18 Exercised 1999 .............. (103,125) $ 6.33 $ 10.67 $ 7.36 Cancelled 1999 .............. (8,875) $ 10.67 $ 15.25 $ 10.96 -------- Outstanding January 31, 1999 566,000 $ 6.67 $ 15.75 $ 11.95 410,375 $ 12.66 ========
The following table summarizes the information about options outstanding at January 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------- ------------------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------------- ------------- ------------------ ---------------- ------------- --------------- $ 6.50 - $ 9.75 152,750 3.0 $ 8.20 135,625 $ 8.19 $ 10.00 - $15.00 175,250 4.7 $ 10.07 42,750 $ 10.12 $ 15.25 - $15.75 238,000 9.1 $ 15.73 232,000 $ 15.75
F-15 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 14. STOCK OPTIONS AND WARRANTS--(CONTINUED) As described in Note 2, the Company accounts for stock-based compensation using the provisions of APB No. 25 and related interpretations. No compensation expense has been recognized in the years ended January 31, 1997, 1998 and 1999 as the exercise prices for stock options granted are equal to their fair market value at the time of grant. Had compensation cost for options granted been determined in accordance with the fair value provisions of SFAS 123, the Company's net income and net income per share would have been as follows for the years ended January 31: 1997 1998 1999 --------------- ---------------- --------------- Net income: As reported ......... $ 5,844,019 $ 7,178,162 $ 8,581,679 =========== ============ ============ Pro forma ........... $ 5,710,383 $ 7,026,242 $ 8,145,789 =========== ============ ============ Net income per share: As reported Basic .............. $ 0.89 $ 1.10 $ 1.29 =========== ============ ============ Diluted ............ $ 0.89 $ 1.08 $ 1.27 =========== ============ ============ Pro forma: Basic ............... $ 0.87 $ 1.07 $ 1.22 =========== ============ ============ Diluted ............. $ 0.87 $ 1.05 $ 1.20 =========== ============ ============ The fair value for these options was estimated at the grant date using the Black-Scholes Option Pricing Model with the following weighted-average assumptions for 1997, 1998 and 1999: 1997 1998 1999 --------- --------- --------- Risk free interest rate ................ 6.5% 6.5% 6.5% Dividend yield ......................... 0.0% 0.0% 0.0% Volatility factors ..................... 58.0% 45.9% 67.3% Weighted average life (years) .......... 5.0 5.0 5.0 Using the Black-Scholes Option Pricing Model, the estimated weighted-average fair value per option granted in 1997, 1998 and 1999 were $4.97, $5.99 and $9.22, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The pro forma amounts may not be representative of the future effects on reported net income and net income per share that will result from the future granting of stock options, since the pro forma compensation expense is allocated over the periods in which options become exercisable and new option awards are granted each year. F-16 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 14. STOCK OPTIONS AND WARRANTS--(CONTINUED) WARRANTS--In conjunction with the Company's initial public offering in May 1993, the Company granted 180,000 warrants entitling the holders of each warrant to purchase one share of common stock at an exercise price of $9.35 per share. The warrants became exercisable on May 21, 1995. All warrants were exercised during fiscal 1999. 15. SEGMENT INFORMATION The Company is engaged principally in one line of business, that being a leading designer and marketer of a broad line of high quality men's sportswear, including sport and dress shirts, golf sportswear, sweaters, urban wear, casual and dress pants and shorts to all levels of retail distribution. We own or license the brands under which most of our products are sold. The percentage of our revenues from branded products amounted to 75% in fiscal 1998 and 81% in fiscal 1999. Sales to any one customer exceeding ten percent amounted to 15%, 12% and 12% for the year ended January 31, 1997; 12% and 13% for the year ended January 31, 1998; and 15%, 10% and 10% for the year ended January 31, 1999. The Company does not believe that these concentrations of sales and credit risk represent a material risk of loss with respect to its financial position as of January 31, 1999. 16. COMMITMENTS AND CONTINGENCIES The Company has licensing agreements, as licensee, for the use of certain branded and designer labels. The license agreements expire on varying dates through December 31, 2000. Total royalty payments under these license agreements amounted to approximately $405,000, $330,000 and $573,000 for the years ended January 31, 1997, 1998 and 1999, respectively, and were classified as selling, general and administrative expenses. The Company is party to an employment agreement with Oscar Feldenkreis, the Company's President and Chief Operating Officer, which expires in May 2000, and is subject to annual renewal. The employment agreement currently provides for an annual salary of $350,000, subject to annual cost-of-living increases, and an annual bonus as may be determined by the Compensation Committee in its discretion, up to a maximum of $500,000. The employment agreement requires Mr. Feldenkreis to devote his full-time to the affairs of the Company. Upon termination of the employment agreement by reason of the employee's death or disability, Mr. Feldenkreis or his estate will receive a lump sum payment equal to one year's salary plus a bonus as may be determined by the Compensation Committee in its discretion. The employment agreement also prohibits Mr. Feldenkreis from directly or indirectly competing with the Company for one year after termination of his employment for any reason except the Company's termination of Mr. Feldenkreis without cause. The Company is also party to an employment agreement with George Feldenkreis, the Company's Chairman of the Board and Chief Executive Officer, expiring in May 2000, and is subject to annual renewal. The employment agreement currently provides for an annual salary of $375,000, subject to annual cost-of-living increases, and an annual bonus as may be determined by the Compensation Committee in its discretion, up to a maximum of $250,000. Pursuant to his employment agreement, Mr. Feldenkreis devotes a majority of his working time to the affairs of the Company. George Feldenkreis' employment agreement contains termination and non-competition provisions similar to those set forth in Oscar Feldenkreis' agreement. F-17 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 16. COMMITMENTS AND CONTINGENCIES--(CONTINUED) The Company consolidated its administrative offices and warehouses and distribution facilities into a 238,000 square foot facility in Miami. The lease has a term of five years, minimum annual rental of approximately $1,000,000 and requires a minimum contingent rental payment at the termination of the lease of $12,325,000. The minimum contingent rental payment is not required if, at the Company's option, the lease is renewed after the five year term. Minimum aggregate annual commitments for all of the Company's noncancelable operating lease commitments, including the related party leases described in Note 13 and the minimum contingent rental payment described above, are as follows. YEAR ENDING JANUARY 31, - ------------------------- 2000 ................. $ 1,461,800 2001 ................. 1,335,600 2002 ................. 1,206,200 2003 ................. 13,154,500 2004 ................. 372,100 ------------ Total ............... $ 17,530,200 ============ Rent expense for these leases, including the related party rent payments discussed in Note 13, amounted to $1,078,000, $1,460,000, and $1,946,000 for the fiscal years ended January 31, 1997, 1998 and 1999, respectively. The Company guarantees up to $600,000 of letters of credit of an unaffiliated entity. Upon consummation of the John Henry/Manhattan acquisition described in Note 17, the Company will pay Icahn Associates Corp. or its affiliates ("IAC") a financial advisory fee of $1.0 million. In addition, IAC has been granted the right to acquire 1,320,000 shares of the Company's common stock at $12 per share. This right is exercisable on or before April 13, 1999. Simultaneously with the exercise of the right, IAC will be required to enter into a two-year standstill agreement and will receive certain registration rights with respect to the shares. The Company is subject to claims and suits against it, as well as the initiator of claims and suits against others, in the ordinary course of its business, including claims arising from the use of its trademarks. The Company does not believe that the resolution of any pending claims will have a material adverse affect on its financial position, results of operations or cash flows. F-18 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 17. SUBSEQUENT EVENTS PERRY ELLIS INTERNATIONAL, INC. In January 1999, the Company agreed to buy Perry Ellis International, Inc. for approximately $75.0 million in cash. Perry Ellis International, Inc. is a privately-held company, which owns and licenses the Perry Ellis brand, currently one of the top selling brands in specialty chains and department stores in the United States. Perry Ellis International, Inc. is currently the licensor under approximately 34 license agreements, primarily for various categories of men's wear, boys' wear and fragrances. During the year ended December 31, 1998, Perry Ellis International, Inc. had revenues of $16.2 million. The Company anticipates completing the Perry Ellis International acquisition in early April, 1999. SENIOR SUBORDINATED NOTES. Concurrently with the Company's acquisition of Perry Ellis International, Inc., the Company intends to issue $100,000,000 in senior subordinated notes due 2006. JOHN HENRY/MANHATTAN. In December 1998, the Company entered into an agreement to buy certain assets of the John Henry and Manhattan dress shirt business from Salant Corporation, which is currently in a Chapter 11 bankruptcy proceeding. On February 24, 1999, the bankruptcy court approved the purchase for approximately $44.2 million in cash. The assets consist of the John Henry, Manhattan and Lady Manhattan trademarks and trade names, license agreements, the existing dress shirt inventory with a value of approximately $17.2 million and certain manufacturing equipment. The Company will also assume a lease for the dress shirt manufacturing facility located in Mexico and other ordinary course of business liabilities. The Company has entered into an agreement with Phillips-Van Heusen Corporation to license the John Henry and Manhattan brands. The agreement also provides that Phillips-Van Heusen will buy the existing dress shirt inventory from the Company at the Company's cost concurrent with the closing of the John Henry/Manhattan acquisition. F-19 SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999 18. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
1Q 2Q 3Q 4Q TOTAL ------------ ------------ ------------ ------------ ------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) FISCAL YEAR ENDED JANUARY 31, 1999 Net Sales ........................ $ 60,085 $ 49,709 $ 65,012 $ 46,541 $ 221,347 Royalty income ................... 1,022 981 492 562 3,057 -------- -------- -------- -------- --------- Total revenues ................... 61,107 50,690 65,504 47,103 224,404 Gross Profit ..................... 15,648 13,166 16,085 13,307 58,206 Net Income ....................... 2,637 1,053 2,812 2,080 8,582 Net income per share: Basic ........................... $ 0.40 $ 0.16 $ 0.42 $ 0.31 $ 1.29 Diluted ......................... $ 0.39 $ 0.15 $ 0.42 $ 0.31 $ 1.27 FISCAL YEAR ENDED JANUARY 31, 1998 Net Sales ........................ $ 48,841 $ 42,037 $ 54,550 $ 45,261 $ 190,689 Royalty income ................... 1,123 1,051 887 971 4,032 -------- -------- -------- -------- --------- Total revenues ................... 49,964 43,088 55,437 46,232 194,721 Gross Profit ..................... 12,963 10,538 12,477 12,752 48,730 Net Income ....................... 2,149 826 2,411 1,792 7,178 Net income per share: Basic ........................... $ 0.33 $ 0.13 $ 0.37 $ 0.27 $ 1.10 Diluted ......................... $ 0.33 $ 0.12 $ 0.36 $ 0.27 $ 1.08 FISCAL YEAR ENDED JANUARY 31, 1997 Net Sales ........................ $ 37,807 $ 31,159 $ 46,746 $ 41,661 $ 157,373 Royalty income ................... 28 70 405 1,151 1,654 -------- -------- -------- -------- --------- Total revenues ................... 37,835 31,229 47,151 42,812 159,027 Gross Profit ..................... 8,672 6,824 11,116 10,369 36,981 Net Income ....................... 1,615 689 1,974 1,566 5,844 Net income per share: Basic (1) ....................... $ 0.25 $ 0.11 $ 0.30 $ 0.24 $ 0.89 Diluted ......................... $ 0.25 $ 0.10 $ 0.30 $ 0.24 $ 0.89
- ---------------- (1) Total does not equal sum of quarters due to effect of the weighted averaging of shares outstanding. F-20 INDEPENDENT AUDITORS' REPORT Perry Ellis International, Inc.: We have audited the accompanying balance sheet of Perry Ellis International, Inc. as of December 31, 1997 and December 31, 1998, and the related statement of operations, undistributed income and cash flows for the three years ended December 31, 1996, December 31, 1997 and December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based upon our audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Perry Ellis International, Inc. as of December 31, 1997 and December 31, 1998, and the results of its operations and cash flows for the three years ended December 31, 1996, December 31, 1997, and December 31, 1998, in conformity with generally accepted accounting principles. /s/ Saul L. Klaw & Co., P.C. Certified Public Accountants Dated: March 12, 1999 F-21 PERRY ELLIS INTERNATIONAL, INC. BALANCE SHEET
DECEMBER 31, ----------------------------- 1997 1998 ------------- ------------- ASSETS Current Assets Cash Balances ..................................................... $ 527,161 $1,776,722 Due from Licensees ................................................ 389,281 944,885 Prepaid Expenses .................................................. 758,171 543,383 Prepaid Franchise Taxes ........................................... -0- 75,232 Unexpired Insurance ............................................... 41,317 43,200 Employee Loan Receivable .......................................... -0- 6,183 ---------- ---------- Total Current Assets ............................................... 1,715,930 3,389,605 Fixed Assets ....................................................... 1,995,817 2,016,958 Less: Accumulated Depreciation ..................................... (647,380) (875,444) Security Deposits .................................................. 47,688 32,334 ---------- ---------- Total Assets ....................................................... $3,112,055 $4,563,453 ========== ========== LIABILITIES Current Liabilities Accounts Payable, Expenses ........................................ $ 542,170 $ 163,443 Accrued Payroll ................................................... 500,425 452,884 Employment Termination Payable, Current ........................... 90,000 108,296 Franchise Taxes Payable ........................................... 610,058 -0- ---------- ---------- Total Current Liabilities .......................................... 1,742,653 724,623 ---------- ---------- CAPITAL Capital Stock--no par value; 200 shares authorized; 50 shares issued and outstanding .................................................. 1,000 1,000 Undistributed Income ............................................... 1,368,402 3,837,830 ---------- ---------- Total Capital ...................................................... 1,369,402 3,838,830 ---------- ---------- Total Liabilities and Capital ...................................... $3,112,055 $4,563,453 ========== ==========
(See Notes to Financial Statements) F-22 PERRY ELLIS INTERNATIONAL, INC. STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1996 1997 1998 -------------- -------------- -------------- Royalty Revenues ................ $12,191,490 $15,739,291 $16,210,696 Less Agent's Commission ......... 1,273,879 78,750 33,750 ----------- ----------- ----------- Net Royalty Revenues ............ 10,917,611 15,660,541 16,176,946 Operating Expenses .............. 5,544,425 7,334,551 8,625,713 Non-recurring Items ............. 3,273,529 -0- -0- ----------- ----------- ----------- Operating Income ................ 2,099,657 8,325,990 7,551,233 Interest Income ................. 143,765 135,537 32,061 ----------- ----------- ----------- Income Before Taxes ............. 2,243,422 8,461,527 7,583,294 State and Local Taxes ........... 218,631 852,072 760,346 ----------- ----------- ----------- Net Income for the Year ......... $ 2,024,791 $ 7,609,455 $ 6,822,948 =========== =========== ===========
(See Notes to Financial Statements) F-23 PERRY ELLIS INTERNATIONAL, INC. UNDISTRIBUTED INCOME
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1997 1998 ------------- ------------- ------------- Balance at Beginning ......................... $2,826,046 $3,437,637 $1,368,402 Net Income for the Year ...................... 2,024,791 7,609,455 6,822,948 ---------- ---------- ---------- Total ........................................ 4,850,837 11,047,092 8,191,350 ---------- ---------- ---------- Less Distributions to Stockholder during year: Dividend Paid ........................... 1,390,000 9,625,000 4,325,000 Foreign Tax Credits ..................... 23,200 53,690 28,520 ---------- ---------- ---------- Total ........................................ 1,413,200 9,678,690 4,353,520 ---------- ---------- ---------- Balance at End ............................... $3,437,637 $1,368,402 $3,837,830 ========== ========== ==========
(See Notes to Financial Statements) F-24 PERRY ELLIS INTERNATIONAL, INC. STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1996 1997 1998 --------------- --------------- --------------- Cash Flow from Operating Activities: Net Income .............................................. $ 2,024,791 $ 7,609,455 $ 6,822,948 Depreciation ............................................ 212,000 225,783 228,064 Loss on Investment in Limited Partnership ............... 154,187 -0- -0- Changes in Operating Assets and Liabilities: Due from Licensees ..................................... 167,120 (362,559) (555,604) Prepaid Expenses ....................................... (265,840) (396,439) 212,905 Other Current Assets ................................... -0- -0- (6,183) Accounts Payable ....................................... 486,503 (140,906) (378,727) Accrued Payroll ........................................ (24,814) 325,192 (47,541) Corporate Taxes Payable ................................ (350,947) 610,058 (685,290) Employment Termination ................................. (75,000) (126,000) 18,296 Commissions Payable .................................... 200,000 (200,000) -0- Non-Current Assets ..................................... (851) (846) 15,354 Non-Current Liabilities ................................ (216,000) (90,000) -0- ------------ ------------ ------------ Net Cash Provided by Operating Activities ................ 2,311,149 7,453,738 5,624,222 ------------ ------------ ------------ Cash Flow from Investing Activities: (Credit) for Disposal of Service Agreement .............. (1,000,001) 1,000,001 -0- (Additions) to Fixed Assets ............................. (47,461) (87,160) (21,141) ------------ ------------ ------------ Net Cash (Used) Provided by Investing Activities ......... (1,047,462) 912,841 (21,141) ------------ ------------ ------------ Cash Flow from Financing Activities: Distribution to Stockholders ............................ (1,413,200) (9,678,690) (4,353,520) ------------ ------------ ------------ Net (Decrease) Increase in Cash Flows .................... (149,513) (1,312,111) 1,249,561 Cash at Beginning of Year ................................ 1,988,785 1,839,272 527,161 ------------ ------------ ------------ Cash at End of Year ...................................... $ 1,839,272 $ 527,161 $ 1,776,722 ============ ============ ============ Supplemental Disclosure of Cash Flow Information: Taxes Paid ............................................. $ 627,773 $ 192,652 $ 1,446,000 ============ ============ ============
(See Notes to Financial Statements) F-25 PERRY ELLIS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 1. DESCRIPTION OF BUSINESS The Company was incorporated on September 12, 1978 and operates as a licensor. Its income consists primarily of royalties received from licensees under licensing agreements. Revenues to a major customer accounted for approximately 36% in 1997 and 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS The Company's financial instruments include cash, receivables and payables, for which carrying amounts approximate fair value due to the short-term nature of the instruments. FIXED ASSETS Fixed Assets consist of fixtures, equipment and improvements and are stated at cost. Depreciation is computed using the straight-line basis over the estimated useful life of the assets. The useful lives range from five to ten years. Maintenance and Repairs are expensed as incurred. Expenditures for major renewals are capitalized. Upon the sale, replacement or retirement of assets, the cost and accumulated depreciation or amortization thereon are removed from the accounts. INCOME TAXES The Company has qualified as a small business ("S") corporation under the Internal Revenue Code. The federal income tax effect of income and losses is passed through to the stockholders. Consequently, there is no provision for federal income taxes in the financial statements. However, the Company is subject to state and local income taxes in certain taxing districts in which it does business. F-26 PERRY ELLIS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 3. CASH BALANCES Cash balances consist of the following: 1997 1998 ----------- ----------- Cash in Checking and Savings Accounts ........... $519,972 $1,559,711 Cash in Pierpont Money Market Accounts .......... 7,189 217,011 -------- ---------- Total ........................................... $527,161 $1,776,722 ======== ========== 4. DUE FROM LICENSEES The balance due from licensees in the amount of $944,885 represents charges of advertising and other expenses advanced for the account of the individual licensees of the Company. 5. PREPAID EXPENSES The prepaid expense balance consists of the following: 1997 1998 ----------- ---------- Deposit for Advertising Campaign ............... $197,785 $ 75,718 Deposit Paid for Photoshoots ................... 424,441 444,365 Deposit for Outdoor Systems Billboard .......... -0- 20,486 Deposit for Trade Shows ........................ 116,592 -0- Other Expenses ................................. 19,353 2,814 -------- -------- Total .......................................... $758,171 $543,383 ======== ======== 6. PROPERTY AND EQUIPMENT Property and equipment balances consist of the following:
1997 1998 ------------- ------------- Furniture, fixtures and equipment ........................ $ 420,329 $ 437,763 Leasehold improvements ................................... 1,575,488 1,579,195 ---------- ---------- 1,995,817 2,016,958 Less: accumulated depreciation and amortization .......... (647,380) (875,444) ---------- ---------- Total .................................................... $1,348,437 $1,141,514 ========== ==========
7. ACCRUED PAYROLL Accrued Payroll consists of incentive bonuses earned by executives during the calendar year and payable in the following year. 8. PENSION PLAN The Company has a Money Purchase and Profit Sharing Plan in effect. All employees are eligible to participate in both plans upon the completion of one year of service and reaching the age of 21. The Company is required to contribute 10% of the compensation of all participants to the Money Purchase Pension Plan on an annual basis. There is no contribution requirement for the Proft Sharing Plan. Employees are not required to contribute to either plan. The contributions for the calendar year 1997 aggregated $127,066 and for 1998, $66,265. F-27 PERRY ELLIS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 9. RENTS The Company leases its executive and design offices. As at December 31, 1998, total minimum rentals are approximately as follows: 1999 ............... $215,000 2000 ............... 230,000 2001 ............... 246,000 Thereafter ......... 478,000 Rent expense for this lease amounted to approximately $196,000, $197,000 and $219,000 for the years ended December 31, 1996, 1997 and 1998, respectively. 10. SUBSEQUENT EVENT In January 1999, the Company's sole shareholder agreed to sell 100% of the Company's outstanding common stock to Supreme International Corporation for approximately $75 million in cash. The sale is expected to close in April 1999. F-28 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION INTRODUCTION The following sets forth the Unaudited Pro Forma Combined Financial Information of Supreme as of and for the fiscal year ended January 31, 1999, giving effect to the Perry Ellis acquisition under the "purchase" method of accounting, and the Rule 144A offering of an aggregate principal amount of $100.0 million in senior subordinated notes due 2006. Supreme's Unaudited Pro Forma Combined Income Statement Information presents the acquisition of Perry Ellis International, Inc. and the Rule 144A offering as if they had been consummated on February 1, 1998. The Unaudited Pro Forma Combined Balance Sheet Information of Supreme presents the Perry Ellis International acquisition and the Rule 144A offering as if they had been consummated on January 31, 1999. The Unaudited Pro Forma Combined Financial Information of the combined companies are presented for illustrative purposes only, and therefore do not purport to present the financial position or results of operations of Supreme had the Perry Ellis International acquisition and the Rule 144A offering occurred on the dates indicated, nor are they necessarily indicative of the results of operations which may be expected to occur in the future. The historical financial information for Supreme and Perry Ellis International, Inc. has been derived from the audited financial statements of Supreme and Perry Ellis International, Inc., respectively, included in Item 8. The pro forma adjustments relating to the acquisition and integration of Perry Ellis International, Inc. represent Supreme's preliminary determinations of these adjustments and are based upon available information and certain assumptions Supreme considers reasonable under the circumstances. Final amounts could differ from those set forth herein. The Unaudited Pro Forma Combined Financial Information does not give effect to the pending John Henry/Manhattan acquisition and the related Phillips-Van Heusen transactions. See "Item 6. Selected Financial Data--Summary Pro Forma and Supplemental Financial Information." F-29 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION BALANCE SHEET BALANCE SHEET JANUARY 31, 1999
HISTORICAL(1) PRO FORMA --------------------------- ---------------------------------- SUPREME PERRY ELLIS ADJUSTMENTS(2) COMBINED ----------- ------------- -------------------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current Assets: Cash ............................................. $ 174 $ 1,777 $ (1,777)(a) $ 174 Accounts receivable, net ......................... 38,970 945 -- 39,915 Inventories ...................................... 32,966 -- -- 32,966 Deferred income taxes ............................ 1,091 -- -- 1,091 Deposits for acquisitions ........................ 6,000 -- (5,000)(b) 1,000 Other current assets ............................. 2,040 667 (75)(c) 2,632 -------- -------- -------- -------- Total Current Assets .......................... 81,241 3,389 (6,852) 77,778 Property and equipment, net ....................... 7,852 1,142 (900)(d) 8,094 Intangible assets, net ............................ 18,843 -- 74,104 (e) 92,947 Other assets ...................................... 1,022 32 3,479 (f) 4,533 -------- -------- -------- -------- Total Assets .................................. $108,958 $ 4,563 $ 69,831 $183,352 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ................................. $ 4,596 $ 163 -- $ 4,759 Accrued expenses ................................. 4,931 561 -- 5,492 Other current liabilities ........................ 414 -- $ 640 (g) 1,054 -------- -------- -------- --------- Total Current Liabilities ..................... 9,941 724 640 11,305 Deferred income taxes ............................. 560 -- -- 560 Senior Credit Facility ............................ 33,511 -- (25,822)(h) 7,689 Notes offered in the Rule 144A offering ........... -- -- 98,852 (i) 98,852 -------- -------- -------- -------- Total Liabilities ............................. 44,012 724 73,670 118,406 Stockholders' equity .............................. 64,946 3,839 (3,839)(j) 64,946 -------- -------- -------- -------- Total Liabilities and Stockholders' Equity..... $108,958 $ 4,563 $ 69,831 $183,352 ======== ======== ======== ========
See Notes to Unaudited Pro Forma Combined Financial Information. F-30 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION INCOME STATEMENT YEAR ENDED JANUARY 31, 1999
HISTORICAL(1) PRO FORMA ----------------------------- ----------------------------------- SUPREME PERRY ELLIS ADJUSTMENTS(3) COMBINED ------------- ------------- ------------------- ------------- (DOLLARS IN THOUSANDS) Net sales ............................................. $ 221,347 $ -- $ -- $ 221,347 Royalty income ........................................ 3,057 16,177 -- 19,234 --------- -------- -------- --------- Total revenues ........................................ 224,404 16,177 -- 240,581 Cost of sales ......................................... 166,198 -- -- 166,198 --------- -------- -------- --------- Gross profit .......................................... 58,206 16,177 -- 74,383 Selling, general, and administrative expenses ......... 41,639 8,594 1,059 (a) 51,292 --------- -------- -------- --------- Operating income ...................................... 16,567 7,583 (1,059) 23,091 Interest expense ...................................... 3,494 -- 10,896 (b) 14,390 --------- -------- -------- --------- Income before provision for income taxes .............. 13,073 7,583 (11,955) 8,701 Provision for income taxes ............................ 4,491 760 (1,504)(c) 3,747 --------- -------- -------- --------- Net income ............................................ $ 8,582 $ 6,823 $(10,451) $ 4,954 ========= ======== ======== ========= Other Operating Data: Ratio of earnings to fixed charges(4) ................ 4.3x -- -- 1.6x Depreciation and amortization ........................ $ 2,161 $ 228 $ 3,525 $ 5,914 EBITDA(5) ............................................ $ 18,728 $ 7,811 $ 2,466 $ 29,005
See Notes to Unaudited Pro Forma Combined Financial Information. F-31 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) (1) The year ended January 31, 1999 is Supreme's historical financial reporting period. For the pro forma year ended January 31, 1999 Perry Ellis International, Inc. financial information has been included as of and for the twelve months ended December 31, 1998 because they have historically reported on a calendar year end. Supreme believes the effect of the difference in these reporting periods is not significant and is not reflected in the Unaudited Pro Forma Combined Financial Information. (2) The purchase price is $75,000, adjusted for working capital less other agreed upon adjustments. Based upon the Perry Ellis International, Inc. December 31, 1998 balance sheet, the purchase price is calculated as follows: PURCHASE PRICE DETERMINATION: Gross purchase price .......................... $ 75,000 Net adjustments to purchase price ............. (449) -------- Net purchase price ......................... $ 74,551 ======== PURCHASE PRICE ALLOCATION: Current assets ................................ $ 1,537 Property, plant and equipment ................. 242 Other assets .................................. 32 Trademarks .................................... 74,104 Accounts payable and accrued expenses ......... (1,364) -------- Net purchase price ......................... $ 74,551 ======== For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet, the Perry Ellis assets acquired and liabilities assumed have been recorded at their estimated fair values. A final determination of the required purchase accounting adjustments and of the fair value of the assets and liabilities of Perry Ellis International, Inc. acquired or assumed has not yet been made. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma financial information reflect the Company's best estimate based upon currently available information.
AS OF JANUARY 31, 1999 ----------------- (a) Cash balances of Perry Ellis International, Inc. which are not being acquired ............................................................. $ (1,777) (b) Deposit applied to Perry Ellis International acquisition ............. (5,000) (c) Other current assets of Perry Ellis International, Inc. which are not being acquired ....................................................... (75) (d) Property, plant and equipment have been adjusted to their estimated fair value ........................................................... (900) (e) Trademarks acquired .................................................. 74,104 (f) Deferred financing costs related to the notes offered in the Rule 144A offering ................................................... 3,479 (g) Liabilities assumed, including severance and acquisition costs payable ........................................................ 640 (h) Pay down of Senior Credit Facility ................................... (25,822) (i) Issuance of notes offered in the Rule 144A offering .................. 98,852 (j) Elimination of Perry Ellis International, Inc.'s stockholders' equity (3,839)
F-32 (3) The pro forma income statement data for the year ended January 31, 1999 present the effects of the Perry Ellis International acquisition and the Rule 144A offering, in each case as if they occurred as of the beginning of such period, including: (a) Adjustments to selling, general and administrative expenses: Decrease in depreciation expense to reflect the fair value and useful lives of the acquired property, plant and equipment ................................. $ (180) Amortization expense of trademarks (straight line--20 years) .................. 3,705 Elimination of consulting fees, licensing fees, severance costs, occupancy costs and employment costs that will not be incurred by the Company ........... (2,466) -------- Total adjustment to selling, general and administrative expenses ................ 1,059 -------- (b) The pro forma adjustments to interest expense arising from the Perry Ellis International acquisition and the offering of the notes in the Rule 144A offering are presented below: Reduction of interest expense related to the: Lower balance outstanding under the credit facility (at 7.60%) ................ (1,962) Additional interest cost related to: The notes offered in the Rule 144A offering ................................... 12,250 Amortization of deferred financing costs and discount.......................... 608 -------- Total adjustment to interest expense ............................................ 10,896 -------- (c) Adjustment to the provision for income taxes at an effective rate of 34.4% ...... (1,504) -------- Total adjustment to income statement ............................................ $10,451) ========
In addition to the above, the company believes additional cost savings will be realized through the combination of the two companies. (4) For purpose of computing this ratio, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest expense, amortization of deferred debt issuance costs and the portion of rental expense of the Lease deemed representative of the interest factor. (5) EBITDA represents net income before taking into consideration interest expense, income tax expense, depreciation expense, and amortization expense. EBITDA is not a measurement of financial performance under generally accepted accounting principles and does not represent cash flow from operations. Accordingly, do not regard this figure as an alternative to net income or as an indicator of our operating performance or as an alternative to cash flows as a measure of liquidity. We believe that EBITDA is widely used by analysts, investors and other interested parties in our industry but is not necessarily comparable with similarily titled measures for other companies. See "Statements of Cash Flow" in our consolidated financial statements and in the financial statements of Perry Ellis International, Inc. contained elsewhere in this Item 8. F-33 EXHIBIT INDEX ------------- EXHIBIT DESCRIPTION - ------- ----------- 23.2 Consent of Deloitte & Touche 27.1 Financial Data Schedule EX-23.2 2 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-69613 of Supreme International Corporation on Form S-8 of our report dated March 12, 1999 appearing in the Annual Report on Form 10-K/A of Supreme International Corporation for the year ended January 31, 1999. DELOITTE & TOUCHE LLP Miami, Florida April 5, 1999 EX-27.1 3
5 3-MOS JAN-31-1999 FEB-01-1998 JAN-31-1999 173,493 0 38,969,845 0 32,965,655 81,240,675 11,001,719 3,150,127 108,957,531 9,940,718 0 0 0 67,123 64,878,805 108,957,531 221,347,295 224,404,652 166,198,450 166,198,450 41,639,672 0 3,493,985 13,072,545 4,490,866 8,581,679 0 0 0 8,581,679 1.29 1.27
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