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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
[ ] 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
7495 N.W. 48th Street
Miami, Florida 33166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 592-2830
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH ON WHICH REGISTERED
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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
4,351,287 (as of April 25, 1997).
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is approximately $34,754,506 (as of April 25, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
The following discussion contains, in addition to historical information,
forward looking statements with respect to Supreme International Corporation
(the "Company") that involve risks and uncertainties. The Company's actual
results could differ materially. Factors that could cause or contribute to such
difference include, but are not limited to, risks related to fashion trends; the
retail industry; reliance on key customers; contract manufacturing; foreign
sourcing; imports and import restrictions; competition; seasonality; rapid
expansion of business; dependence on key personnel and other factors discussed
in the Company's filing with Securities and Exchange Commission.
ITEM 1. BUSINESS
(a) General Development of Business
INTRODUCTION
The Company designs, imports and markets a broad line of moderately priced
and better men's and boys' sportswear, including sport and dress shirts, golf
sportswear and casual and dress pants. Over two-thirds of the Company's products
are sold under its own brand names, including its Natural Issue/registered
trademark/ and Munsingwear/registered trademark/ brands, as well as other owned
and licensed brand names, with the balance being private label sales. The
Company sells its merchandise to a broad spectrum of retailers, including
national and regional department stores, chain stores, mass merchandisers and
specialty stores throughout the U.S. and Puerto Rico.
The Company was incorporated in 1967 and initially focused its efforts on
importing and distributing guayabera shirts (a loose-fitting, pleated shirt worn
over the belt and favored by Hispanic men), as well as other men's apparel
products targeted at the Hispanic market in Florida and Puerto Rico. Over the
next decade, as the South Florida market for Hispanic oriented menswear
underwent substantial growth, the Company expanded its product line to offer a
variety of men's sport shirts and developed expertise in designing and marketing
additional products. Since then, the Company has further broadened its product
lines and increased its sourcing capabilities and design technology. These
factors, combined with the trend in the 1990's towards more casual dressing in
the workplace, have enabled the Company to market its existing products to the
general marketplace and evolve into a designer, importer and marketer of high
quality, innovatively styled men's sportswear products.
Since completing its initial public offering in May 1993, the Company has
focused on growth both internally and through acquisitions. In May 1996, the
Company acquired substantially all of the assets of Jolem Imports, Inc.
("Jolem") thereby expanding its lines to include the ethnic and Hispanic
segments of the men's and boy's market. In September 1996, the Company acquired
certain assets of Munsingwear, Inc. ("Munsingwear"), a 110 year-old men's
apparel manufacturer for approximately $18.4 million. The assets acquired by the
Company consisted primarily of tradenames and trademarks, including the
Munsingwear/registered trademark/ and Penguin trademarks/trademark/, customer
lists and records, rights under license agreements, advertising materials,
archives and disks, the name "Munsingwear", business records and sourcing
rights. With the addition of these marks, the Company has broadened its men's
sportswear line with emphasis on the golf sportswear category.
BUSINESS STRATEGY
The Company's business strategies as follows:
/bullet/ INCREASE BRAND NAME RECOGNITION. The Company seeks to increase its
presence in the men's shirt category by increasing the brand name recognition of
its brand names, including Natural Issue/registered trademark/ and
Munsingwear/registered trademark/. In order to promote these brands at the
retail level, the Company conducts cooperative advertising in print and
broadcast media in which these products are featured by various retailers in
their advertisements and the cost of the advertisements is shared by the Company
and the retailers. The Company also conducts various in-store marketing
activities with its customers, displaying our products with an emphasis on
related and coordinated clothing in highly visible locations and offering
promotions geared to holidays such as Christmas and Father's Day. During the
fiscal year ending January 31, 1998 ("Fiscal 1998"), the Company plans to
undertake a direct advertising campaign featuring the Natural Issue/registered
trademark/ and Munsingwear/registered trademark/ brand names through the
placement of highly visible billboards, sponsorships and special event
advertising in selected markets. This marketing strategy further emphasizes the
commitment to capitalize on the Natural Issue/registered trademark/ and
Munsingwear/registered trademark/ brand names.
/bullet/ CONTINUE TO DIVERSIFY PRODUCT LINE. The Company has been seeking
to diversify its product lines and expand its customer base. The Company has
developed a fall, winter, and holiday shirt line with a view towards reducing
the seasonality of the Company's existing product lines, which have historically
emphasized spring and summer merchandise. The Company is also expanding its
lines of boyswear and dress shirts while continuing to offer its dress shirts,
boyswear, and ethnic lines to select customers expanding our visibility and
market penetration. Through the acquisition of Jolem, the Company has expanded
the distribution of casual apparel targeted at ethnic and Hispanic segments of
men's and boy's markets. Additionally, the Company's acquisition of
Munsingwear/registered trademark/ has expanded the Company's product line into
the golf sportswear category.
/bullet/ PURSUE SELECT PRIVATE LABEL OPPORTUNITIES. The Company believes
that the trend towards increased consolidation in the retail industry has
created an environment where retailers are turning to a select group of
suppliers for their private label sourcing needs. As a result, the Company
believes retailers will seek vendors who have worldwide sourcing capabilities
and offer customized, creative designs at competitive prices. The Company seeks
to utilize its strengths in these areas to selectively pursue private label
opportunities.
/bullet/ PURSUE ACQUISITION AND LICENSING OPPORTUNITIES. The Company
continues to focus its efforts on expanding its product lines and brand name
recognition through acquisition and licensing opportunities. During the fiscal
year ended January 31, 1997 ("Fiscal 1997") the Company acquired the
Munsingwear/registered trademark/ brand name, and the assets of Jolem. The
Company has granted a license of its Natural Issue/registered trademark/ brand
name for the marketing of a line of men's underwear, loungewear, and hoisery.
The Company has also acquired and granted licensing arrangements of its
Munsingwear/registered trademark/ brand name for marketing of undergarments,
hoisery, activewear, blazers, sweaters, shirts, pants, shorts and loungewear.
The Company continues to evaluate opportunities to acquire other brand names and
businesses which
-2-
distribute complementary apparel products and to grant licenses of its brand
names. However, there can be no assurance that any such acquisitions will be
consummated.
(b) Financial Information about Industry Segments
Not Applicable.
(c) Narrative Description of Business
PRODUCTS AND PRODUCT DESIGN
SHIRTS. The Company offers a broad line of sport shirts which include
cotton and cotton-blend printed and plain knit shirts, silk, cotton and rayon
printed button front sport shirts, linen sport shirts, golf shirts, embroidered
cotton shirts and cotton/poly mix dress shirts. The Company's shirt line also
includes dress shirts, brushed twill shirts, jacquard knits and yarn-dyed
flannels. In addition, the Company is also the leading distributor in the United
States of guayabera shirts. The Company markets shirts under a number of its own
brand names, as well as the private labels of its customers. The Company's
signature brand names are Natural Issue/registered trademark/ and the
Munsingwear/registered trademark/, Grand Slam, Grand Slam Tour/trademark/ and
Penguin Sport/trademark/ brand names acquired in the Munsingwear acquisition.
The Company also uses Feldini/registered trademark/ for its better shirts, and
Corsa/registered trademark/, Gianni Abozzi/registered trademark/,
Premier/trademark/, Monte Carlo/trademark/, Career Club/registered trademark/,
CC Sport/registered trademark/, Cotton Mill/trademark/, Tippos and
Romani/registered trademark/ for its more moderately priced lines. The Company
holds license rights to market men's dress and sport shirts under the Albert
Nipon/registered trademark/ and Adolfo/registered trademark/ brand names. Sales
under the brand names owned and licensed by the Company accounted for a
significant majority of net shirt sales during Fiscal 1997, with the balance
being private label sales. The Company's shirts are produced in a wide range of
men's sizes, including sizes for the big and tall men's market. Sales of shirts
accounted for approximately 90% of net sales during Fiscal 1997.
PANTS. The Company's pants line includes a variety of styles of wool,
wool-blend, linen and poly/rayon dress pants, casual pants in cotton and
poly/cotton and linen/cotton walking shorts. The Company's pants line, which is
offered in a wide range of men's sizes, is marketed under the Feldini/registered
trademark/ and Natural Issue/registered trademark/ brand names. The Company also
holds a license to market dress and casual pants under the Gianfranco
Ruffini/registered trademark/ brand name. Sales of pants accounted for
approximately 5% of net sales during Fiscal 1997.
OTHER PRODUCTS. The Company offers boyswear items including rayon and
cotton sport shirts under the Tones/trademark/ and Natural Issue/registered
trademark/ brand names. The Company is currently expanding its marketing of
boyswear which accounted for approximately 5% of net sales during Fiscal 1997.
PRODUCT DESIGN. Substantially all of the Company's products are designed by
its in-house staff utilizing computer-aided design technology. This technology
enables the Company to produce computer-generated simulated samples that display
how a particular style will look in a given color and fabric. These samples can
be printed on paper or directly onto fabric to present more accurately the
colors and patterns to a potential customer. In addition, the Company can
quickly alter the simulated sample in response to customer comments, such as a
request to change the colors, print layout, collar style and trimming, pocket
details and/or placket treatments. The use of computer-aided design technology
-3-
minimizes the time consuming need for and costs associated with producing actual
sewn samples prior to customer approval and allows the Company to create custom
designed products meeting the specific needs of a customer.
In designing its apparel, the Company seeks to foster consumer appeal by
combining functional, colorful and high quality fabrics with creative designs
and graphics. Styles, color schemes and fabrics are also selected to encourage
consumers to coordinate outfits, thereby encouraging multiple purchases. The
Company's design staff seeks to stay abreast of the latest design trends by
attending trade shows and periodically conducting marketing research in Europe
and the United States.
MARKETING AND SALES
The Company sells its merchandise to a broad spectrum of retailers,
including chain stores, department stores, mass merchandisers and specialty
stores. The Company's largest customers include K-Mart Corporation, J.C. Penney
Company, Inc., Sears, Roebuck & Co., Wal-Mart Stores Inc., and Federated
Department Stores, Inc. The Company's net sales to its five largest customers
aggregated approximately 53%, 54% and 52% of net sales during the fiscal years
ended January 31, 1995 ("Fiscal 1995"), January 31, 1996 ( "Fiscal 1996") and
Fiscal 1997, respectively. Sales to K-Mart Corporation, J.C. Penney Company,
Inc., and Sears, Roebuck & Co. accounted for approximately 15%, 12% and 11%,
respectively, of net sales during Fiscal 1997. Sales to J.C. Penney Company,
Inc., Wal-Mart Stores Inc. and Sears, Roebuck & Co. accounted for approximately
18%, 12% and 10%, respectively, of net sales during Fiscal 1996. Sales to J.C.
Penney Company, Inc., Sears, Roebuck & Co. and K-Mart Corporation accounted for
approximately 19%, 12% and 10% respectively, of net sales during Fiscal 1995. No
other single customer accounted for more than 10% of net sales during such
fiscal years.
The Company markets its apparel products to customers principally through
the direct efforts of an in-house sales staff and independent commission sales
representatives who work exclusively for the Company. These in-house employees
and sales representatives account for approximately 95% of net sales, handling
all major accounts. In addition, the Company uses independent commission sales
representatives, who generally market other product lines as well as those of
the Company. The Company supplements these sales efforts through attendance at
major industry trade shows and through telemarketing efforts directed largely at
specialty retailers. The Company also advertises to retailers through print
advertisements in a variety of trade magazines and newspapers. In order to
promote its men's sportswear at the retail level, the Company conducts
cooperative advertising in print and broadcast media in which the Company's
products are featured by various retailers in their advertisements and the cost
of the advertisements is shared by the Company and the retailers. The Company
also conducts various in-store marketing activities with its customers, such as
placing displays of its product line with an emphasis on related and coordinated
clothing in highly visible locations and offering promotions geared to holidays
such as Christmas and Father's Day. During Fiscal 1998 the Company has committed
to a direct advertising campaign featuring the Natural Issue/registered
trademark/ and Munsingwear/registered trademark/ brand names through the
placement of highly visible billboards, sponsorships, and special events in
selected markets.
-4-
CUSTOMER SERVICE
The Company believes that customer service is a key factor in successfully
marketing its apparel products and seeks to provide customers with a high level
of customer service. The Company coordinates efforts with retailers to develop
products meeting the specific needs of a customer, uses computer-aided design
technology to offer custom designed products and utilizes its sourcing
capabilities to produce and deliver products on a timely basis.
The Company's in-house sales staff is responsible for customer follow-up
and support including monitoring prompt order fulfillment and timely delivery.
The Company utilizes an Electronic Data Interchange ("EDI") system for certain
customers in order to provide them with advance shipping notices, process their
orders and conduct billing operations. In addition, certain customers use the
EDI system to communicate their weekly inventory requirements per store to the
Company by computer. The Company then fills those orders either by shipping
directly to the individual stores or by sending shipments, individually packaged
and bar coded by store, to a customer's centralized distribution center.
SOURCES OF SUPPLY
The Company utilizes independent contract manufacturers to produce
substantially all its apparel products. During Fiscal 1997, in excess of 85% of
the Company's products were sourced from independent foreign suppliers, with the
remainder from domestic manufacturing and "807 operations". The Company
currently uses approximately 120 suppliers primarily from countries in the Far
East and other parts of Asia and approximately 12 suppliers from countries in
Central America. The Company is dependent upon the ability of its contract
manufacturers to secure a sufficient supply of raw materials, adequately finance
the production of goods ordered and maintain sufficient manufacturing and
shipping capacity. The use of contract manufacturers and the resulting lack of
direct control could subject the Company to difficulty in obtaining timely
delivery of products of acceptable quality. Nevertheless, the Company believes
that the use of numerous independent suppliers allows the Company to maximize
production flexibility while avoiding significant capital expenditures and the
costs of maintaining and operating production facilities.
The Company does not have long-term contracts with any of its suppliers.
The Company believes that the loss of any one or more of its suppliers is not
likely to have a long-term material adverse effect on the Company's business,
because either new or existing manufacturers would be available to fulfill the
Company's requirements. However, the failure of any key supplier to perform or
the loss of any key supplier could have a material adverse effect on a
short-term basis on the Company's business and results of operations until such
time as a comparable key supplier is identified.
The Company allocates production among suppliers based upon a number of
criteria, including availability of production capability, quality, pricing and
possession of necessary quota allocations to enable the import of finished goods
into the United States. Substantially all of the Company's products are
manufactured by suppliers who themselves purchase the necessary materials and
produce finished garments in accordance with specifications, designs and
patterns furnished by the Company. Cotton fabric is the principal raw material
used in the Company's apparel. Although the Company believes that its suppliers
will continue to be able to procure a sufficient supply of cotton fabric for its
production needs,
-5-
the price and availability of cotton may fluctuate significantly.
The Company maintains offices in Beijing, Guangzhou, Taipei and Mexico
City. It also operates through independent agents based in Thailand, Hong Kong,
Pakistan, Korea, Turkey, Indonesia and India to source the Company's products in
the Far East and monitor production at contract manufacturing facilities in
order to ensure quality control and timely delivery. Similar functions with
respect to the Company's Central American suppliers are performed by Company
personnel based in its Miami, Florida executive offices. The Company conducts
periodic inspections of samples of each product prior to cutting by contractors,
during the manufacturing process and prior to shipment. Finished goods are
generally shipped to the Company's Miami, Florida facilities for repackaging and
distribution to customers. The Company's return policy permits customers to
return defective products for credit; however, the amount of the Company's
products in the last three fiscal years which were returned as defective was not
material.
In order to assist with timely delivery of finished goods, the Company
functions as its own customs broker, pursuant to which it is able to prepare its
own customs documentation and arrange for any inspections or other clearance
procedures with the United States Customs Service. The Company is also a member
of the United States Customs Automated Interface program, which permits the
Company to clear its goods through United States Customs electronically,
reducing the necessary clearance time to a matter of hours rather than days.
SEASONALITY
The Company's products have historically been geared towards lighter weight
products generally worn during the spring and summer months. While the Company
believes that this seasonality has been reduced with the introduction of fall,
winter, and holiday merchandise, there can be no assurance that these new
product lines will continue to be successful or that they will continue to
reduce the seasonality of the Company's sales.
COMPETITION
The men's sportswear industry is highly competitive. The Company's
competitors include numerous apparel importers, distributors and manufacturers,
many of which have greater financial, manufacturing and distribution resources
than the Company. Although to date the Company has been able to compete
successfully based upon product quality, price and customer service, there can
be no assurance that it will continue to be able to do so.
TRADEMARKS
The Company holds or has applied for U.S. trademarks for its most
significant brand names. The Company believes that its Natural Issue/registered
trademark/ , Munsingwear/registered trademark/, and Penguin Design trademarks
are material to its business. Natural Issue/registered trademark/,
Munsingwear/registered trademark/ and the Penguin Design are registered with the
United States Patent and Trademark Office. The Natural Issue registration
expires in June 2002 and is subject to renewal. The Munsingwear/registered
trademark/ trademark registration expires in May 2009 and is subject to renewal.
The Penguin Design Trademark registration expires during 1999 and is subject to
renewal. 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 condition.
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EMPLOYEES
The Company employed approximately 300 persons as of January 31, 1997. None
of the Company's employees is subject to a collective bargaining agreement, and
the Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse facilities are located in
Miami, Florida.
The Company's executive offices occupy a 19,000 square foot building in
Miami, Florida. The space is leased from George Feldenkreis, the Company's
Chairman of the Board, pursuant to a lease which expires in December 2000. The
Company's current rental for the office facility is $128,000 per annum.
The Company also occupies an approximately 49,000 square foot warehouse
building adjacent to its executive offices with approximately 6,000 square feet
of office space. The warehouse is leased from George Feldenkreis pursuant to a
five-year lease expiring in April 1998, at a current annual rental of $299,000,
which rent increases annually by an amount equal to the lesser of any increase
in the consumer price index or 5%. This lease provides for a five-year renewal
option. The Company leases a second adjacent 32,000 square foot warehouse
building from a partnership of which Mr. Feldenkreis is a general partner. This
warehouse is leased pursuant to a three-year lease expiring in June 1998, at a
current annual rental of approximately $136,000.
The Company also leases an additional 107,000 square foot warehouse from an
unaffiliated third party, pursuant to a lease which expires in July 1997, at an
annual rent of approximately $494,000. This space is located approximately three
miles from the Company's headquarters facilities.
The Company leases a showroom and office space in New York City, maintains
an office in Guangzhou and also leases offices jointly with Carfel, Inc.
("Carfel"), an affiliated automotive parts importer and distributor, in Beijing
and Taipei to monitor Far East production of their respective products.
The Company believes that its arrangements with George Feldenkreis are on
terms at least as favorable as the Company could secure from a non-affiliated
third party.
During Fiscal 1998, the Company intends to consolidate its administrative
offices and warehouse and distribution facilities into a new 238,000 square foot
facility in Miami. The Company is party to an agreement to purchase this
facility which is being built to the Company's specifications. The Company is
seeking to finance the facility with a financial institution in a transaction
where the financial institution will assume the Company's obligation to purchase
the facility and will then enter into a long term lease with the Company for the
facility. The Company anticipates that the lease will have an initial term of
five years and a minimum annual rental of approximately $1,300,000.
-7-
ITEM 3. LEGAL PROCEEDINGS
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 condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock has been listed for trading on The Nasdaq
National Market under the symbol SUPI since May 21, 1993. The following table
sets forth, for the Fiscal quarters indicated, the range of high and low closing
bid prices per share of Common Stock as reported by The Nasdaq National Market.
Such quotations represents inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW
FISCAL 1996
First Quarter.................................... $13.63 $ 9.50
Second Quarter................................... 19.75 11.75
Third Quarter.................................... 22.50 16.00
Fourth Quarter................................... 16.50 12.00
FISCAL 1997
First Quarter.................................... 13.00 12.25
Second Quarter................................... 17.25 15.63
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Third Quarter.................................... 17.00 14.50
Fourth Quarter................................... 16.25 14.25
(b) Holders
As of April 25, 1997, there were approximately 43 holders of record of the
Company's Common Stock. The Company believes the number of beneficial owners of
its Common Stock is in excess of 1100.
(c) Dividends
The Company has not paid any cash dividends since its inception and the
Board of Directors does not contemplate doing so in the near future. Payment of
cash dividends is prohibited under the Revolving Credit Agreement. See Note 7 of
Notes to the Consolidated Financial Statements of the Company included in Item 8
of this Report. Any future decision as to payment of cash dividends will depend
on the earnings and financial position of the Company and such other factors as
the Board of Directors deems relevant.
-9-
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts and number of shares)
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of the
Company and related notes thereto included in Item 8 of this Report and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
FISCAL YEAR ENDED JANUARY 31,
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1993 1994 1995 1996 1997
STATEMENT OF INCOME DATA:
Net sales $ 33,556 $ 50,006 $ 90,564 $121,080 $ 155,706
Gross profit 8,511 12,488 21,377 28,935 33,660
Selling, General and
Administrative Expenses 4,763 7,651 13,967 19,602 22,555
Operating income 3,749 4,837 7,409 9,333 11,105
Interest expenses 938 796 1,219 2,224 1,664
Income before income taxes 2,811 4,041 6,191 7,109 9,441
Net income 1,800 2,540 3,872 4,424 5,844
Net income per share $ 0.77 $ 0.81 $ 1.10 $ 1.13 $ 1.33
Weighted average number of
common shares 2,333,333 3,151,963 3,533,333 3,912,774 4,396,548
JANUARY 31,
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1993 1994 1995 1996 1997
BALANCE SHEET DATA:
Accounts receivable, net $ 5,996 $ 11,462 $ 21,272 $ 18,101 $ 28,807
Inventories 7,045 16,056 30,153 30,353 32,201
Working capital 3,172 16,509 43,067 47,760 23,574
Total assets 14,018 30,030 55,512 53,735 88,158
Borrowings under credit
facilities, including current
portion of long-term debt 9,290 7,073 4,944 0 31,949
Long-term debt, less current
portion 62 96 23,312 6,968 0
Total stockholders' equity 3,660 18,144 22,016 43,833 47,775
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company has experienced significant growth with sales increasing to
$155.7 million for Fiscal 1997 from $90.6 million for Fiscal 1995. A substantial
portion of the increase during the period is attributable to increased volume of
the Company's products sold. Since Fiscal 1995, the Company has significantly
increased sales to its existing customer base, primarily mass merchandisers and
department stores. In addition, the Company has expanded its customer base to
include more mass merchandisers, department stores and foreign customers.
The Company has experienced significant growth in sales of its knit and
woven shirts under the Natural Issue/registered trademark/ and other related
brand names, as well as the private labels of its customers. The Company has
also grown through the acquisitions of Munsingwear and Jolem during Fiscal 1997.
The increased recognition of the Company's products has allowed the Company
to expand its line of sports shirts and introduce additional products such as
pants, shorts and boyswear. In addition, the Company believes that it has
benefitted from the growing trend towards casual dressing in the workplace and
is well positioned to continue to benefit from this trend.
The Company's marketing commitment is intended to further the growing
popularity of its brand names, including the Natural Issue/registered trademark/
and Munsingwear/registered trademark/ brands as well as enhancing licensing
opportunities. The Company has increased expenditures to enhance its sales and
marketing, design capability, product sourcing, distribution and internal
control systems. The Company believes that such expenditures have provided the
personnel and resources needed to manage its growth and plans to continue to
invest appropriately in order to sustain future growth.
The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of income expressed as a percentage of
sales:
FISCAL YEAR ENDED
JANUARY 31,
--------------------------------------
1995 1996 1997
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of Sales................................................. 76.4 76.1 78.4
---- ---- ----
Gross profit.................................................. 23.6 23.9 21.6
Selling, general and administrative expenses.................. 15.4 16.2 14.5
---- ---- ----
Operating income.............................................. 8.2 7.7 7.1
Interest expense.............................................. 1.3 1.8 1.1
--- --- ---
Income before income taxes.................................... 6.9 5.9 6.0
Income tax provision.......................................... 2.6 2.2 2.3
--- --- ---
Net income.................................................... 4.3% 3.7% 3.7%
=== === ===
-11-
RESULTS OF OPERATIONS
FISCAL 1997 AS COMPARED TO FISCAL 1996
Sales for Fiscal 1997 were $155.7 million as compared to $121.1 million for
Fiscal 1996, an increase of $34.6 million or 28.6%. This increase was
principally attributable to the broad-based growth in the Company's product
lines to existing customers, the addition of new customers, and the acquisition
of both Jolem and Munsingwear.
Cost of sales for Fiscal 1997 was $122.0 million or 78.4% of sales as
compared to $92.1 million or 76.1% of sales for Fiscal 1996. This increase in
cost of sales as a percentage of sales principally reflects sales of discounted
inventory.
Selling, general and administrative expenses for Fiscal 1997 were $22.6
million or 14.5% of sales as compared to $19.6 million or 16.2% of sales for
Fiscal 1996. This increase was due to increased levels of business as well as
partial absorption of certain operating expenses as a result of the Jolem and
Munsingwear/registered trademark/ acquisitions. Thereafter, the Company
integrated the purchasing, marketing and design functions of Jolem and
Munsingwear/registered trademark/ into its operations in Miami. Such integration
directly impacted the selling, general and administrative expenses, and
contributed to the reduction of such expenses as a percentage of sales.
Interest expense for Fiscal 1997 was $1.7 million or 1.1% of sales as
compared to $2.2 million or 1.8% of sales for Fiscal 1996. This decrease in
interest expense was due to the repayment of a portion of the amount outstanding
under the Company's $35.0 million revolving credit agreement with a portion of
the proceeds of the Company's public offering in September 1995. However,
interest expense is expected to increase in Fiscal 1998 as a result of the
additional indebtedness incurred by the Company to consummate the Munsingwear
acquisition.
Net income for Fiscal 1997 was $5.8 million or 3.7% of sales as compared to
$4.4 million or 3.7% of sales for Fiscal 1996.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Sales for Fiscal 1996 were $121.1 million as compared to $90.6 million for
Fiscal 1995, an increase of $30.5 million or 33.6%. This increase was
principally attributable to increased volume of the Company's product sold, with
broad-based growth of the Company's product lines to existing customers as well
as the addition of new customers, including a major mass merchandiser. In
particular, the Company experienced rapid growth of sales of knit shirts to mass
merchandisers as well as increased sales of its Natural Issue/registered
trademark/ product line.
Cost of sales for Fiscal 1996 was $92.1 million or 76.1% of sales as
compared to $69.2 million or 76.4% of sales for Fiscal 1995. This slight
decrease in cost of sales as a percentage of sales principally reflects lower
sourcing costs.
Selling, general and administrative expenses for Fiscal 1996 were $19.6
million or 16.2% of sales as compared to $14.0 million or 15.4% of sales for
Fiscal 1995. A significant portion of this increase in selling, general and
administrative expenses resulted from the addition of administrative and
operating personnel needed to support the Company's expanded level
-12-
of operations. As a percentage of sales, selling, general and administrative
expenses increased due to expenditures associated with the expansion of the
business, continued investment in control systems, additional brand name support
and other marketing activities.
Interest expense for Fiscal 1996 was $2.2 million or 1.8% of sales as
compared to $1.2 million or 1.3% of sales for Fiscal 1995. This increase in
interest expense was due to a higher level of borrowings incurred to finance the
working capital needs of the Company associated with the growth of the Company's
operations.
Net income for Fiscal 1996 was $4.4 million or 3.7% of sales as compared to
$3.9 million or 4.3% of sales for Fiscal 1995. This decrease in net income as a
percentage of sales was principally attributable to the above-referenced
factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth in sales and the resulting increase in
inventory and other working capital requirements principally from operating cash
flow and borrowings under the Revolving Credit Agreement. The amount available
for borrowings under the Revolving Credit Agreement is determined pursuant to a
formula based upon the levels of eligible accounts receivable and finished goods
inventory, subject to a maximum of $35.0 million. At January 31, 1997, $25.1
million was outstanding under the Revolving Credit Agreement, and the Company
had approximately $9.9 million available for additional borrowings based on
eligible receivables and inventory. The increase in the outstanding amount due
under the revolving credit agreement is primarily related to the financing of
the Munsingwear acquisition.
The Revolving Credit Agreement bears interest at the bank's prime rate or
LIBOR plus 1.5%. The Company borrows under the Revolving Credit Agreement as the
need arises to meet working capital needs and to fund capital expenditures. The
outstanding balance due under the Revolving Credit Agreement matures in October
1997. As a result, this amount was re-classified as a current liability at
January 31, 1997. The Company intends to renew or replace the Revolving Credit
Agreement prior to its scheduled maturity date.
Net cash provided by operating activities was $1,873,766 for Fiscal 1997
principally as a result of cash provided by net income of $5.8 million and
increases in the amount of accounts payable and accrued expenses by $4.8
million, offset by an increase in accounts receivable and other assets of $9.0
million and $1.9 million, respectively. Accounts receivable are typically high
at the end of the Company's fourth quarter as a result of the increase in sales
during the holiday season. However, the fourth quarter sales of Fiscal 1996 were
adversely affected by shipments to some retailers that were delayed in the last
weeks of January as a result of the harsh weather conditions in the Northeastern
states and in response to the difficult retail environment at the time. Sales
for the quarter ended January 31, 1997 were $41.3 million compared to $25.7
million for the quarter ended January 31, 1996. Therefore, the increase in
accounts receivable at January 31, 1997 from January 31, 1996 reflects the
Company's improved holiday sales during the fourth quarter of Fiscal 1997.
Capital expenditures were $1.1 million for Fiscal 1997. Except with respect
to a planned financing and lease transaction for a new facility, as described in
"Item 2. Properties", the Company presently has no significant commitments to
incur capital expenditures.
The Company also maintains letter of credit facilities totaling $33.0
million, one of which provides the Company with a sublimit of $8.0 million for
advances to refinance letters of credit up to 120 days. The letter of credit
facilities are secured by the consignment of merchandise in transit under each
letter of credit. Indebtedness under these facilities bears interest at variable
rates substantially equal to the lenders' specified base lending rates minus
1.0% per annum. As of January 31, 1997, there was $9.2 million available under
these facilities.
-13-
The Revolving Credit Agreement contains significant financial and operating
covenants, including requirements that the Company maintain minimum net worth
levels and certain financial ratios, prohibitions on the ability of the Company
to incur certain additional indebtedness and restrictions on its ability to make
capital expenditures, to incur or suffer to exist certain liens, to pay
dividends or to take certain other corporate actions. Amounts will only be
available under the Revolving Credit Agreement if such financial maintenance and
other covenants are satisfied and the borrowing base calculation (which is based
upon the amount of eligible accounts receivable and eligible inventory) are
satisfied. The Company is currently in compliance with all covenants under the
Revolving Credit Agreement.
At January 31, 1997, the Company had working capital of $23.6 million. The
Company's current ratio was 1.58 to 1 at January 31, 1997. If the Company's
Revolving Credit Agreement had not been reclassified as a current liability due
to its scheduled maturity in October 1997, the Company's working capital would
have been $48.7 million and its current ratio would have been 4.2 to 1. The
Company's sources of working capital are income generated from operations and
the credit facilities described above.
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
The Company does not believe that inflation has significantly affected its
results of operations.
The Company's purchases from foreign suppliers are made in U.S. dollars.
Accordingly, the Company, to date, has not been materially adversely affected by
foreign currency fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-14-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Supreme International Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Supreme
International Corporation and subsidiaries (the "Company") as of January 31,
1997 and 1996, 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, 1997. 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, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 1997, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Miami, Florida
April 30, 1997
F-1
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash $ 755,798 $ 258,533
Accounts receivable, net 28,807,236 18,101,151
Inventories 32,200,522 30,352,993
Deferred income taxes 668,658 828,313
Other current assets 1,525,695 1,153,785
----------- -----------
Total current assets 63,957,909 50,694,775
PROPERTY AND EQUIPMENT, net 2,138,088 2,078,327
INTANGIBLE ASSETS, net 19,858,692 674,199
OTHER 2,203,601 288,123
----------- -----------
TOTAL $88,158,290 $53,735,424
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,584,924 $ 1,523,560
Accrued expenses 2,063,040 1,189,171
Borrowings under credit facilities 6,812,629 -
Current portion of long-term debt 25,136,801 -
Other current liabilities 785,422 221,666
----------- -----------
Total current liabilities 40,382,816 2,934,397
----------- -----------
LONG-TERM DEBT - 6,967,943
----------- -----------
Total liabilities 40,382,816 9,902,340
----------- -----------
COMMITMENTS (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock - $.01 par value; 10,000,000 shares
authorized; 4,351,287 and 4,533,333 shares issued and
outstanding at January 31, 1997 and 1996, respectively 43,513 45,333
Additional paid-in capital 27,419,452 29,319,261
Retained earnings 20,312,509 14,468,490
----------- -----------
Total stockholders' equity 47,775,474 43,833,084
----------- -----------
TOTAL $88,158,290 $53,735,424
=========== ===========
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, 1997
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
NET SALES $ 155,705,733 $ 121,079,823 $ 90,564,186
COST OF SALES 122,045,614 92,144,575 69,187,357
------------- ------------- ------------
GROSS PROFIT 33,660,119 28,935,248 21,376,829
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 22,554,790 19,602,165 13,967,375
------------- ------------- ------------
OPERATING INCOME 11,105,329 9,333,083 7,409,454
INTEREST EXPENSE 1,664,392 2,223,869 1,219,279
------------- ------------- ------------
INCOME BEFORE INCOME
TAX PROVISION 9,440,937 7,109,214 6,190,175
INCOME TAX PROVISION 3,596,918 2,685,663 2,318,607
------------- ------------- ------------
NET INCOME $ 5,844,019 $ 4,423,551 $ 3,871,568
============= ============= ============
NET INCOME PER SHARE $ 1.33 $ 1.13 $ 1.10
============= ============= ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 4,396,548 3,912,774 3,533,333
============= ============= ============
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, 1997
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
-------------------------------- ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
BALANCE, JANUARY 31, 1994 3,533,333 $ 35,333 $ 11,935,731 $ 6,173,371 $18,144,435
Net income - - - 3,871,568 3,871,568
---------- --------- ------------ ----------- -----------
BALANCE, JANUARY 31, 1995 3,533,333 35,333 11,935,731 10,044,939 22,016,003
Sale of common stock, net 1,000,000 10,000 17,383,530 - 17,393,530
Net income - - - 4,423,551 4,423,551
---------- --------- ------------ ----------- -----------
BALANCE, JANUARY 31, 1996 4,533,333 45,333 29,319,261 14,468,490 43,833,084
Purchase of treasury stock, at cost (187,046) (1,870) (1,948,509) - (1,950,379)
Exercise of stock options 5,000 50 48,700 - 48,750
Net income - - - 5,844,019 5,844,019
---------- --------- ------------ ----------- -----------
BALANCE, JANUARY 31, 1997 4,351,287 $ 43,513 $ 27,419,452 $20,312,509 $47,775,474
========== ========= ============ =========== ===========
See notes to consolidated financial statements.
F-4
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,844,019 $ 4,423,551 $ 3,871,568
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 1,147,091 724,955 474,136
Loss on sale and abandonment of property 257,221
Decrease (increase) in deferred income taxes 159,655 (228,313) (433,993)
Changes in assets and liabilities
(net of effects of acquisitions):
(Increase) decrease in accounts receivable, net (8,951,318) 3,170,857 (9,810,378)
Decrease (increase) in inventories 293,527 (200,269) (14,096,820)
Increase in other current assets (359,942) (269,584) (356,636)
Increase in other assets (1,915,477) (12,604) (178,715)
Increase (decrease) in accounts payable and
accrued expenses 4,835,234 (2,174,659) 942,151
Increase (decrease) in other current liabilities 563,756 (131,184) (426,058)
------------ ------------ ------------
Net cash provided (used) by operating activities 1,873,766 5,302,750 (20,014,745)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,058,061) (1,308,535) (746,524)
Proceeds from sale of property and equipment 164,545 - -
Payments on purchase of intangible assets (137,027) (183,138) (78,092)
Payment for Jolem Imports, Inc. (3,657,435) - -
Payment for Munsignwear, Inc.'s assets (19,768,380) - -
------------ ------------ ------------
Net cash used by investing activities (24,456,358) (1,491,673) (824,616)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under credit facilities 6,812,629 (4,943,575) (2,103,080)
Proceeds from long-term debt 60,288,097 41,357,933 23,312,068
Payments on long-term debt (42,119,240) (57,702,058) (114,639)
Proceeds from the issuance of common stock 17,393,530
Purchase of treasury stock (1,950,379) - -
Proceeds from exercise of stock options 48,750 - -
------------ ------------ ------------
Net cash provided (used) by financing activities 23,079,857 (3,894,170) 21,094,349
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 497,265 (83,093) 254,988
CASH AT BEGINNING OF YEAR 258,533 341,626 86,638
------------ ------------ ------------
CASH AT END OF YEAR $ 755,798 $ 258,533 $ 341,626
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,433,403 $ 2,306,659 $ 1,177,254
============ ============ ===========
Income taxes $ 3,394,466 $ 3,285,250 $ 2,876,198
============ ============ ===========
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, 1997
- -------------------------------------------------------------------------------
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Supreme International Corporation and Subsidiaries (the
"Company") was incorporated in the State of Florida and has been in
business since 1967. The Company designs, imports, and markets
fashion-oriented, moderately priced and better men's sportswear, primarily
sports and dress shirts and casual and dress pants, which are sold
principally to mass merchandisers, department stores, and men's specialty
retailers throughout the United States, Puerto Rico and Canada.
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 consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts in
the consolidated financial 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.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Costs consists of the purchase price, customs
duties, freight and 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. Intangibles are amortized
over their estimated useful lives which range from three to twenty years.
LONG LIVED-ASSETS - The Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF, in fiscal year
1997. The effects of adopting SFAS No. 121 were not material in relation
to the Company's consolidated financial statements.
In accordance with SFAS No. 121, 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
F-6
disposition. If these cash flows are less than the carrying amount of the
asset, an impairment loss is recognized to write down the asset to its
estimated fair value. Assets, if any, for which management has committed
to a plan to dispose of the assets, whether by sale or abandonment, are
reported at the lower of carrying amount or fair value less cost to sell.
Preparation of estimated expected future cash flows is inherently
subjective and is based on management's best estimate of assumptions
concerning future conditions.
REVENUE RECOGNITION - Sales are recognized upon shipment, returns for
defective goods are netted against sales, and an allowance is provided for
such estimated returns. Sales to any one customer exceeding ten percent
amounted to $23,490,000 (15%), $18,350,000 (12%) and $17,670,000 (11%) for
the year ended January 31, 1997; $22,020,000 (18%), $14,250,000 (12%) and
$12,280,000 (10%) for the year ended January 31, 1996; $17,097,000 (19%),
$10,657,000 (12%) and $8,989,000 (10%) for the year ended January 31,
1995. The Company does not believe that these concentration of sales and
credit risk represents a material risk of loss with respect to its
financial position as of January 31, 1997.
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 liability method of computing deferred income
taxes. Under the liability method, deferred taxes are adjusted for tax
rate changes as they occur.
NET INCOME PER SHARE - Earnings per common share and common equivalent
share were computed by dividing net income by the weighted average number
of shares of common stock and common stock equivalents outstanding during
the year. The number of common shares was increased by the number of
shares issuable on the exercise of warrants and stock options when the
market price of the common stock exceeds the exercise price of the
warrants or options. This increase in the number of common shares was
reduced by the number of common shares that are assumed to have been
purchased with the proceeds from the exercise of the warrants or options;
those purchases were assumed to have been made at the average price of
common stock during the year. Earnings per share assuming full dilution
was determined in the same manner as earnings per common share and common
equivalent share except that the period-end stock price was used.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company adopted the
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, in fiscal year 1997
(See Note 11).
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), EARNINGS PER SHARE. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15 and simplifies the accounting standards
used in calculating earnings per share. SFAS No. 128 suggest that earnings
per common share be calculated by a numerator of income available to
common shareholders divided by a denominator of weighted-average shares
outstanding. Earnings per share - assuming dilution is calculated by a
numerator of income available to common shareholders plus effects of
convertible securities divided by a denominator of weighted-average shares
outstanding plus potential common shares. The components of the numerator
and denominator are further detailed in SFAS No. 128. SFAS No. 128 will
apply to the Company for the year ended January 31, 1998. The Company does
not believe the adoption of SFAS No. 128 will have a material effect on
the Company's earnings per share calculation.
F-7
2. 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,GRAND SLAM TOUR, PENGUIN
SPORT, 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
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 7).
JOLEM ACQUISITION - On May 6, 1996, the Company acquired all of 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.
The following unaudited information presents the Company's pro forma
operating data for the years ended January 31, 1997 and 1996 as if the
acquisitions had been consummated at the beginning of each of the years
presented. It includes certain adjustments to the historical consolidated
statements of income of the Company to give effect to the acquisition of
brand names and associated rights, license agreements and other acquired
net assets, the related issuance of additional indebtedness by the Company
and the increased amortization of the intangible assets. The unaudited pro
forma financial data are not necessarily indicative of the results of
operations that would have been achieved had the transactions reflected
therein been consummated prior to the period in which they were completed,
or that might be attained in the future.
PRO FORMA YEAR ENDED
--------------------
JANUARY 31, 1997 JANUARY 31, 1996
Net Sales $183,559,000 $167,237,000
Net income 6,614,000 5,758,000
Net income per share 1.50 1.47
F-8
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at January 31:
1997 1996
Trade accounts $ 29,924,228 $ 18,873,684
Other 803,573 37,273
------------- -------------
Total 30,727,801 18,910,957
Less: Allowance for doubtful accounts (250,000) (242,792)
Allowance for sales returns (1,670,565) (567,014)
------------- -------------
Total $ 28,807,236 $ 18,101,151
============= =============
The activity for the allowance accounts are as follows:
1997 1996 1995
Allowance for doubtful accounts:
Beginning balance $ 242,792 $ 627,108 $ 201,959
Provision 135,854 362,007 708,668
Write-offs, net of recoveries (128,646) (746,323) (283,519)
-------------- -------------- --------------
Ending balance $ 250,000 $ 242,792 $ 627,108
============== ============== ==============
Allowance for sales returns:
Beginning of balance $ 567,014 $ 189,997 $ 48,701
Provision 9,057,342 7,790,650 3,807,131
Actual returns (7,953,791) (7,413,633) (3,665,835)
-------------- -------------- --------------
Ending balance $ 1,670,565 $ 567,014 $ 189,997
============== ============== ==============
The Company carries accounts receivable at the amounts 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
4. INVENTORIES
Inventories consist of the following at January 31:
1997 1996
Finished goods $ 27,445,635 $ 26,673,903
Raw materials and in process 3,629,940 3,040,737
Merchandise in transit 1,124,947 638,353
-------------- --------------
Total $ 32,200,522 $ 30,352,993
============== ==============
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 31:
1997 1996
Furniture, fixtures and equipment $ 3,250,373 $ 2,601,879
Vehicles 321,553 264,079
Leasehold improvements 775,292 621,604
-------------- --------------
4,347,218 3,487,562
Less accumulated depreciation and amortization (2,209,130) (1,409,235)
-------------- --------------
Total $ 2,138,088 $ 2,078,327
============== ==============
6. BORROWINGS UNDER LETTER OF CREDIT FACILITIES
The Company has a letter of credit facility which provides up to $20
million to issue sight letters of credit including a sublimit of $2
million to issue time letters of credit up to 120 days. In addition, the
facility has an $8.0 million sublimit for refinancing of sight letters of
credit up to 120 days. The facility is secured 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' specified base lending rates minus 1.0% per annum. Amounts
outstanding under the $8.0 million sub-limit shall be secured by a
secondary interest in the Company's accounts receivable and inventory.
The Company has two other letter of credit facilities which provide
borrowings up to $13 million to issue sight letters of credit. The
facilities are secured by the consignment of the merchandise in transit
under each letter of credit.
1997 1996 1995
Total letter of credit facilities $ 33,000,000 $ 35,000,000 $ 40,000,000
Borrowings (6,812,629) - (4,943,575)
Outstanding letters of credit (16,978,256) (11,758,074) (22,842,000)
------------- ------------- -------------
Available $ 9,209,115 $ 23,241,926 $ 12,214,425
============= ============= =============
F-10
7. LONG-TERM DEBT
The Company entered into a revolving credit agreement on October 5, 1994
with a commercial bank giving it the right to borrow $35 million or a
portion thereof for its general corporate purposes until October 5, 1997.
The principal amount then outstanding will be due and payable on that
date. 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 payable on borrowings is variable, based upon the Company's
option of selecting a LIBOR plus 1.5% or the bank's prime rate. Interest
of 7.11% was being charged as of January 31, 1997. The agreement contains
certain covenants the most restrictive of which require the Company to
maintain certain financial and net worth ratios. In addition, the
agreement restricts the payment of dividends. The agreement is secured by
the Company's assets. The outstanding balance under this agreement at
January 31, 1996 was $6,967,943 and was classified as long-term debt. At
January 31, 1997, the outstanding balance was $25,136,801 and was
classified as a current liability as it will mature in October 1997.
8. INCOME TAXES
The income tax provision consists of the following for each of the years
ended January 31:
1997 1996 1995
Current income taxes:
Federal $ 2,910,509 $ 2,510,684 $ 2,352,677
State 526,754 403,292 397,409
------------- -------------- --------------
Total 3,437,263 2,913,976 2,750,086
Deferred income taxes:
Federal and state 159,655 (228,313) (431,479)
------------- -------------- --------------
Total $ 3,596,918 $ 2,685,663 $ 2,318,607
============= ============== ==============
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 1996 1995
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 3.3 3.1
Benefit of graduated rate (1.0) (1.0) (1.0)
Other 0.2 0.5 0.4
---- ---- ----
Total 38.1 % 37.8 % 37.5 %
==== ==== ====
F-11
The tax effects of temporary differences that give rise to deferred tax
assets are as follows as of January 31:
1997 1996
Deferred income tax assets:
Inventories $ 589,770 $ 547,881
Accounts receivable 93,750 308,687
Accrued expenses 233,604
Other 44,901 18,125
----------- -----------
Deferred income tax assets 962,025 874,693
----------- -----------
Deferred income tax liabilities:
Intangibles (167,188)
Prepaid expenses (126,179) (46,380)
----------- -----------
Deferred income tax liabilities (293,367) (46,380)
----------- -----------
Net deferred income tax asset $ 668,658 $ 828,313
=========== ===========
A valuation allowance for deferred income tax assets is not deemed
necessary as the assets are expected to be recovered in future years.
9. RELATED PARTY TRANSACTIONS
George Feldenkreis, the Company's Chairman of the Board and Chief
Executive Officer; Oscar Feldenkreis, the Company's President and Chief
Operating Officer; Fanny Hanono, the Company's Secretary-Treasurer; and
Salomon Hanono, a director of the Company, are officers, directors, or
shareholders of Carfel, Inc. ("Carfel"). Up until December 1995, Carfel
and the Company shared certain office space, office equipment, and
administrative employees. The costs for these items were either
specifically attributed, allocated based on square footage, or shared
equally between the Company and Carfel. Each company paid the related
expense according to the methodology described above.
In addition, certain office and warehouse space currently occupied by the
Company is leased from George Feldenkreis. Rent expense, including taxes,
for these leases amounted to $600,000, $506,000, and $445,000 for the
fiscal years ended January 31, 1997, 1996 and 1995, respectively.
In January 1995, 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
Issue/registered trademark/ brand name in the United States, its
territories and possessions and Puerto Rico to market a line of men's
underwear and loungewear. The License Agreement provides for a guaranteed
minimum royalty of $112,500 through May 31, 1997 (with increasing amounts
in succeeding years) and expires on May 31, 1998. The principal
shareholder of Isaco is Isaac Zelcer, who is Oscar Feldenkreis'
father-in-law. Royalty income earned from the License Agreement amounted
to $243,000 and $93,000 for the years ended January 31, 1997 and 1996,
respectively.
F-12
10. PROFIT SHARING PLAN
The Company's profit sharing plan permits employees with one or more years
of service to become participants in the plan. Annual contributions to the
plan are determined by the Board of Directors. For the years ended January
31, 1997, 1996 and 1995, the Company accrued contributions to the plan
amounting to $50,000, $70,000 and $70,000, respectively.
11. STOCK OPTIONS AND WARRANTS
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 300,000 shares of common stock and
100,000 shares of common stock, respectively, are reserved for issuance
upon the exercise of the options. The Stock Option Plans are designed to
serve as an incentive for 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 will 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 will 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 for the first
time in any calendar year is subject to a $100,000 limit.
In conjunction with the Company's initial public offering in May 1993, the
Company granted 120,000 warrants entitling the holders of each warrant to
purchase one share of common stock at an exercise price of $14.03 per
share. The warrants became exercisable on May 21, 1995 and expire on May
20, 1998. No warrants have been exercised as of January 31, 1997.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. The Company's stock options are issued with exercise
prices which equal market price of the Company's common stock on the date
of grant and, consequently, no compensation expense is recognized.
SFAS No. 123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB No. 25 to present pro
forma disclosure of net income and earnings per share as if compensation
cost was measured at the date of grant based on fair value of the award.
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions: a risk-free interest rate of 6.5%; no dividend yield; a
volatility factor of 58%; and a weighted-average expected life of the
options of 5 years.
F-13
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.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's net income and net income per share would have been reduced to
the following pro forma amounts for the years ended January 31, as
follows:
1997 1996
Net income:
As reported $ 5,844,019 $ 4,423,551
Pro forma 5,710,383 4,311,772
Primary earnings per share:
As reported $ 1.33 $ 1.13
Pro forma 1.30 1.10
The above pro forma amounts reflect only the effect of stock options
granted subsequent to February 1, 1995. Accordingly, the pro forma amounts
may not be representative of the future effects on reported net income and
earnings 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.
A summary of the stock option activity is as follows for the years ended
January 31:
1997 1996 1995
-----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE OF SHARES EXERCISE OF SHARES EXERCISE
PRICE PRICE PRICE
-----------------------------------------------------------------------------
Shares under option at
beginning of year............145,500 $11.57 94,000 $11.35 70,500 $11.96
Granted........................60,000 13.31 52,500 12.00 25,000 9.50
Exercised......................(5,000) 9.75
Cancelled......................(5,000) 9.75 (1,000) 11.50 (1,500) 11.50
------- -------- -------
Shares under option
at end of year...............195,500 $12.01 145,500 $11.57 94,000 $11.35
------- -------- -------
Exercisable at end of year....128,625 $12.21 76,625 $12.09 32,600 $11.47
------- -------- -------
Weighted-average fair value of
options granted during the year .. $ 7.46 $ 5.70 $ 5.36
F-14
The following table summarizes information about fixed-price stock options
outstanding at January 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGES OF EXERCISE PRICES AT 1/31/97 LIFE EXERCISE AT 1/31/97 EXERCISE PRICE
PRICE
------------------------------------------------------------------------------------------------------
$ 9.50 - $12.00 118,000 2 years $11.00 84,250 $11.07
12.01 - 13.75 50,000 2 years 12.72 36,250 12.67
13.76 - 16.50 27,500 4 years 15.91 8,125 16.00
------------------------------------------------------------------------------------------------------
$ 9.50 - $16.50 195,500 128,625
12. COMMITMENTS
The Company has licensing agreements, as licensee, for the use of four
separate designer labels. The license agreements expire on December 31,
1997, 1998, 1999, and 2000, respectively. Total royalty payments under
these license agreements amounted to $405,000, $443,000 and $350,000 for
the years ended January 31, 1997, 1996 and 1995, respectively, and were
classified as selling, general and administrative expenses.
The Company has entered into employment agreements with Messrs. George
Feldenkreis and Oscar Feldenkreis. The agreements expire in May 1998 and
are subject to annual renewals unless terminated by written notice at
least 90 days prior to the May anniversary date. The agreements provide
for a combined minimum annual salary of $470,000, subject to annual
cost-of-living increases, and an annual bonus as may be determined by the
compensation committee of the Company's Board of Directors at its
discretion, up to a combined maximum of $750,000. The total performance
bonus for the years ended January 31, 1997, 1996 and 1995 approximated
$500,000, $200,000 and $309,000, respectively.
The Company leases certain office, warehouse, and showroom facilities
under leases that have minimum rental commitments as follows:
Year Ending
January 31, Amount
1998 $ 999,800
1999 261,000
2000 129,000
2001 117,000
-------------
Total $ 1,506,800
=============
F-15
Rent expense for these leases, including the related party rent payments
discussed in Note 9, amounted to $1,078,000, $825,000 and $575,000 for the
fiscal years ended January 31, 1997, 1996 and 1995, respectively.
During Fiscal 1998, the Company intends to consolidate its administrative
offices and warehouse and distribution facilities into a new 238,000
square foot facility in Miami. The Company is party to an agreement to
purchase this facility which is being built to the Company's
specifications. The Company is seeking to finance the facility with a
financial institution in a transaction where the financial institution
will assume the Company's obligation to purchase the facility and will
then enter into a long term lease with the Company for the facility. The
Company anticipates that the lease will have an initial term of five years
and a minimum annual rental of approximately $1,300,000.
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 condition.
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JANUARY 31, 1997 1Q 2Q 3Q 4Q TOTAL
Net sales $ 37,355 $ 31,012 $ 46,021 $ 41,318 $ 155,706
Gross profit 8,192 6,606 9,987 8,875 33,660
Net income 1,615 689 1,974 1,566 5,844
Per share (1) $ 0.37 $ 0.16 $ 0.45 $ 0.36 $ 1.33
FISCAL YEAR ENDED JANUARY 31, 1996
Net sales $ 35,043 $ 25,168 $ 35,216 $ 25,653 $ 121,080
Gross profit 8,656 6,405 8,467 5,407 28,935
Net income 1,595 1,024 1,505 299 4,423
Per share (1) $ 0.45 $ 0.29 $ 0.38 $ 0.07 $ 1.13
FISCAL YEAR ENDED JANUARY 31, 1995
Net sales $ 17,512 $ 17,466 $ 25,881 $ 29,705 $ 90,564
Gross profit 4,360 4,304 5,869 6,844 21,377
Net income 889 690 1,125 1,168 3,872
Per share $ 0.25 $ 0.20 $ 0.32 $ 0.33 $ 1.10
(1) Total does not equal sum of quarters due to effect of the weighted
averaging of shares outstanding.
* * * * * *
F-16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants due to disagreements on
accounting and financial disclosures.
-15-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
George Feldenkreis(1)..................... 62 Chairman of the Board and Chief Executive Officer
Oscar Feldenkreis......................... 37 President, Chief Operating Officer and Director
Richard L. Dunn........................... 47 Vice President, Finance and Chief Financial Officer
Joseph Roisman............................ 51 Executive Vice President
Fanny Hanono.............................. 36 Secretary-Treasurer
Ronald L. Buch............................ 61 Director
Gary Dix(1)............................... 49 Director
Salomon Hanono............................ 47 Director
Richard W. McEwen(2)...................... 76 Director
Leonard Miller(1)(2)...................... 67 Director
- --------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
George Feldenkreis founded the Company in 1967, has been involved in all
aspects of its operations since that time and served as the Company's President
and a Director until February 1993, when he was elected Chairman of the Board
and Chief Executive Officer. Mr. Feldenkreis is also a director, executive
officer and principal shareholder of Carfel, an importer and distributor of
automotive parts which he founded in 1961, serves as Chairman of the Board of
Universal National Bank in Miami, Florida and is Vice President of the Greater
Miami Jewish Federation. Mr. Feldenkreis devotes a majority of his working time
to the affairs of the Company and devotes the balance of his working time to the
affairs of Carfel.
Oscar Feldenkreis was elected Vice President and a Director in 1979 and
joined the Company on a full-time basis in 1980. Mr. Feldenkreis has been
involved in all aspects of the Company's operations since that time and was
elected President and Chief Operating Officer in February 1993. Oscar
Feldenkreis also serves as a director of Carfel, but does not devote any of his
working time to its affairs.
Richard L. Dunn joined the Company in April 1994 as its Vice President,
Finance and Chief Financial Officer. From January 1982 until April 1993, Mr.
Dunn was employed in various financial capacities with Tyco International, Ltd.,
a publicly-held multinational manufacturer of fire protection and flow control
products, including Assistant Corporate
-16-
Controller from 1984 to September 1987 and Treasurer from September 1987 to
April 1993.
Joseph Roisman was appointed Executive Vice President in September 1995.
Previously, Mr. Roisman, who has been employed by the Company since 1988, had
the position of Vice President, Sales. Mr. Roisman was also employed by the
Company from 1970 to 1982 in various sales capacities. From 1982 to 1988, Mr.
Roisman was employed in similar capacities by Euro American Fashion, Inc.
Fanny Hanono was elected Secretary-Treasurer of the Company in September
1990. From September 1988 to August 1990, Mrs. Hanono served as the Company's
Assistant Secretary and Assistant Treasurer. Mrs. Hanono has been employed by
Carfel since 1988 in various administrative positions. Mrs. Hanono devotes
substantially all of working time to the affairs of Carfel. In the latter part
of 1996, Mrs. Hanono was elected Vice President of Carfel.
Ronald L. Buch was appointed to the Company's Board of Directors in
January 1996. Prior to his retirement in 1995, Mr. Buch was employed by K-Mart
Corporation for over 39 years, most recently as Vice President and General
Merchandise Manager.
Gary Dix was elected to the Company's Board of Directors in May 1993.
Since February 1994, Mr. Dix, a certified public accountant, has been a partner
at Mallah Furman & Company, P.A., an accounting firm in Miami, Florida. From
1979 to January 1994, Mr. Dix was a partner of Silver Dix & Hammer, P.A.,
another Miami accounting firm. Mr. Dix also is a member of the Board of
Directors of Universal National Bank in Miami, Florida.
Salomon Hanono was elected to the Company's Board of Directors in February
1993. Mr. Hanono has been employed by Carfel in various sales capacities since
1987 and currently is Export Director, with overall responsibilities for
Carfel's export sales. Mr. Hanono devotes substantially all of his working time
to the affairs of Carfel.
Richard W. McEwen was elected to the Company's Board of Directors in
September 1994. Mr. McEwen serves as a director of Sound Advice, Inc. and
Wometco Enterprises, Inc. Prior to his retirement in 1985, Mr. McEwen was
Chairman of the Board and Chief Executive Officer of Burdines, a division of
Federated Department Stores, Inc.
Leonard Miller was elected to the Company's Board of Directors in May
1993. Mr. Miller has been Vice President and Secretary of Pasadena Homes, Inc.,
a home construction firm in Miami, Florida, since 1959.
George Feldenkreis is the father of Oscar Feldenkreis and Fanny Hanono and
the father-in-law of Salomon Hanono, Fanny Hanono's spouse. There are no other
family relationships among the Company's directors and executive officers.
The Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The Company's directors hold
office until the next annual meeting of shareholders and until their successors
have been duly elected and qualified.
-17-
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and holders of more than ten percent
of the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and The Nasdaq National
Market. Such persons are required to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
oral or written representations from certain reporting persons that no Forms 5
were required for those persons, the Company believes that, with respect to
Fiscal 1997, its executive officers, directors and greater than ten percent
beneficial owners complied with all such filing requirements.
-18-
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following compensation table sets forth, for Fiscal 1995, Fiscal 1996
and Fiscal 1997, the cash and certain other compensation paid by the Company to
the Company's Chief Executive Officer ("CEO") and such other executive officers
whose annual salary and bonus exceeded $100,000 during Fiscal 1997 (together
with the CEO, collectively, the "Named Executive Officers"):
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
SECURITIES UNDERLYING ALL OTHER
FISCAL SALARY BONUS OPTION/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- --------------------------- ------- -------- ---------- --------------------- ------------
George Feldenkreis 1997 120,000 50,000 ---- 500
Chairman and CEO 1996 120,000 -- ---- 1,970
1995 100,000 -- ---- 3,000
Oscar Feldenkreis 1997 350,000 450,000 ---- 500
President and Chief Operating 1996 350,000 200,000 ---- 2,634
Officer 1995 200,000 309,000 ---- 12,000
Richard L. Dunn 1997 145,000 10,000 ---- 500
Vice President, Finance and 1996 132,692 10,000 ---- 2,269
Chief Financial Officer 1995 100,968 1,000 25,000(2) ----
Joseph Roisman 1997 140,000 10,000 ---- 500
Executive Vice President 1996 116,000 10,000 ---- 2,179
1995 101,462 18,000 ---- 5,500
(1) The dollar amount represents Company contributions for the Named
Executive Officer to the Company's 401(K) Plan.
(2) Represents options to purchase Common Stock granted to the Named
Executive Officer under the Company's 1993 Stock Option Plan (the
"1993 Plan").
-19-
EMPLOYMENT AGREEMENTS
The Company is party to an employment agreement with Oscar Feldenkreis,
the Company's President and Chief Operating Officer, which expires in May 1998,
and is subject to annual renewal. 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 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 1998, and is subject to annual renewal. The employment
agreement, provides for an annual salary of $120,000, 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. Effective
February 1, 1997, Mr. Feldenkreis' salary was increased to $125,000 per annum.
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.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant stock options during Fiscal 1997 to any of the
Named Executive Officers.
-20-
STOCK OPTIONS HELD AT END OF FISCAL 1997
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, 1997. No options to purchase stock were exercised by any of the
Named Executive Officers in Fiscal 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END
--------------------------------- --------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
- ---- -----------------------------------------------------------
Oscar Feldenkreis 30,000 0 $ 48,000 $ 0
Richard L. Dunn 18,750 6,250 89,063 29,688
Joseph Roisman 7,500 0 20,625 0
- ------------------------
(1) Based on the Nasdaq National Market closing bid price for the Company's
Common Stock on January 31, 1997 in the amount of $14.25 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None
COMPENSATION OF DIRECTORS
During Fiscal 1997, non-employee directors, with the exception of
Salomon Hanono, were compensated at the rate of $1,500 per quarter and $500 for
meetings of the Board of Directors or any committee thereof attended during a
quarter, up to a maximum of $8,000 per annum. Directors are reimbursed for
travel and lodging expenses in connection with their attendance at meetings. Mr.
Hanono receives no cash compensation for his services as a director. Directors
are also entitled to receive options under the Company's 1993 Plan and
Directors' Stock Option Plan (the "Directors' Plan"). No such options were
granted during Fiscal 1997 or prior to Fiscal 1996. As of January 31, 1997, the
following options were outstanding under the Directors' Plan:
NUMBER OF EXERCISE EXPIRATION
NAME OF OPTIONEE SHARES PRICE DATE
- ---------------- --------- -------- -----------
Gary Dix 7,500 $ 12.00 June 2, 2000
Richard W. McEwen 5,000 $ 12.00 June 2, 2000
Leonard Miller 7,500 $ 12.00 June 2, 2000
Salomon Hanono 7,500 $ 12.00 June 2, 2000
-21-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 25, 1997, by (i)
each of the shareholders of the Company who is known by the Company to own more
than 5% of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer and (iv) all directors and executive
officers of the Company as a group.
NAME AND ADDRESS OF NUMBER % OF CLASS
BENEFICIAL OWNER(1)(2) OF SHARES OUTSTANDING
- ---------------------- --------- -----------
George Feldenkreis(3)................................ 1,075,169 24.7%
Oscar Feldenkreis(4)................................. 853,192 19.5
Fanny Hanono(5)...................................... 284,972 6.5
Salomon Hanono(5)(6)................................. 292,472 6.7
Carfel, Inc(7)....................................... 241,017 5.5
Richard L. Dunn(8)................................... 25,000 *
Joseph Roisman(9).................................... 8,500 *
Ronald Buch.......................................... 500 *
Gary Dix(10)......................................... 11,000 *
Richard W. McEwen(11)................................ 6,500 *
Leonard Miller(12)................................... 32,500 *
Kennedy Capital Management, Inc. (13)
10829 Olive Boulevard
St. Louis, Missouri 63141........................... 231,578 5.3
FMR Corporation (14)
82 Devonshire Street
Boston, Massachusetts 02109....................... 220,000 5.1
The Kaufmann Funds, Inc. (15)
140 East 45th Street, 43rd Floor
New York, New York 10017...................... 300,000 6.9
All directors and executive
officers as a group
(ten persons)(16)............................... 2,154,803 48.6%
- ------------------------
* Less than 1%.
(1) Except as otherwise indicated, the address of each beneficial owner is
c/o the Company 7495 N.W. 48th Street, Miami, Florida 33166.
(2) Except as otherwise indicated, the Company believes that all beneficial
owners named in the table have sole voting and investment power with
respect to all shares
-22-
of Common Stock beneficially owned by them.
(3) Represents (a) 759,152 shares of Common Stock held by George Feldenkreis,
(b) 241,017 shares of Common Stock held by Carfel, of which company Mr.
Feldenkreis is a director, executive officer and principal shareholder
and (c) 75,000 shares of Common Stock held by a charitable foundation of
which George Feldenkreis, Oscar Feldenkreis and Fanny Hanono are each
directors and officers (the "Foundation").
(4) Represents (a) 748,192 shares of Common Stock held by a limited
partnership of which Oscar Feldenkreis is the sole shareholder of the
general partner and the sole limited partner, (b) 30,000 shares of Common
Stock issuable upon the exercise of stock options held by Oscar
Feldenkreis and (c) 75,000 shares held by the Foundation.
(5) Represents (a) 209,972 shares of Common Stock held by a limited
partnership of which Fanny Hanono is the sole shareholder of the general
partner and the sole limited partner and (b) 75,000 shares held by the
Foundation. Fanny Hanono and Salomon Hanono are husband and wife.
(6) Also includes 7,500 shares of Common Stock issuable upon the exercise of
stock options held by Mr. Hanono.
(7) The shares of Common Stock held by Carfel are pledged to a bank to secure
Carfel's credit facility.
(8) Represents 25,000 shares of Common Stock issuable upon the exercise of
stock options held by Mr. Dunn.
(9) Represents (a) 1,000 shares of Common Stock held by Mr. Roisman and (b)
7,500 shares of Common Stock issuable upon the exercise of stock options
held by Mr. Roisman.
(10) Represents (a) 2,000 shares of Common Stock held by Mr. Dix, (b) 1,000
shares of Common Stock held in trust for his children, (c) 500 shares
held in an individual retirement account and (d) 7,500 shares of Common
Stock issuable upon the exercise of stock options held by Mr. Dix.
(11) Represents (a) 1,500 shares of Common Stock held by Mr. McEwen and (b)
5,000 shares of Common Stock issuable upon the exercise of stock options
held by Mr. McEwen.
(12) Represents (a) 25,000 shares of Common Stock held by Mr. Miller and (b)
7,500 shares of Common Stock issuable upon the exercise of stock options
held by Mr. Miller.
(13) Based solely on information contained in an amendment to Schedule 13G
dated
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February 10, 1997 filed with the Securities and Exchange Commission.
(14) Based solely on information contained in schedule 13G dated February 14,
1997 filed with the Securities and Exchange Commission. The shares are
owned by Fidelity Capital Appreciation Fund, a wholly owned subsidiary
of FMR Corporation.
(15) Based solely on information contained in Schedule 13G dated December 31,
1996 filed with the Securities and Exchange Commission.
(16) Includes the shares of Common Stock and options to purchase shares of
Common Stock described in Notes (3) through (6) and (8) through (12).
-24-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's executive offices occupy a 19,000 square foot building in
Miami, Florida. The space is leased from George Feldenkreis, the Company's
Chairman of the Board, pursuant to a lease which expires in December 2000. The
Company's current rental for the office facility is $128,000 per annum.
The Company also occupies an approximately 49,000 square foot warehouse
building adjacent to its executive offices with approximately 6,000 square feet
of office space. The warehouse is leased from George Feldenkreis pursuant to a
five-year lease expiring in April 1998, at a current annual rental of $299,000.
The rent increases annually by an amount equal to the lesser of any increase in
the consumer price index or 5%. This lease provides for a five-year renewal
option. The Company leases a second adjacent 32,000 square foot warehouse
building from a partnership of which Mr. Feldenkreis is a general partner. This
warehouse is leased pursuant to a three-year lease expiring in June 1998, at a
current annual rental of approximately $136,000.
In January 1995, 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 Issue/registered
trademark/ brand name in the United States, its territories and possessions and
Puerto Rico to market a line of mens' underwear and loungewear. The License
Agreement provides for a guaranteed minimum royalty of $112,500 through May 31,
1997 (with increasing amounts in succeeding years) and expires on May 31, 1998.
Royalty income earned from the License Agreement amounted to approximately
$243,000 for Fiscal 1997. The principal shareholder of Isaco is Isaac Zelcer,
who is Oscar Feldenkreis' father-in-law.
The Company believes that its arrangements with George Feldenkreis and the
License Agreement are on terms at least as favorable as the Company could secure
from a non-affiliated third party.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Consolidated 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, 1997 and 1996 F-2
Consolidated Statements of Income
for each of the three years in the period
ended January 31, 1997 F-3
Consolidated Statements of Changes in
Stockholders' Equity for each of the three
years in the period ended January 31, 1997 F-4
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1997 F-5
Notes to Consolidated Financial Statements F-6
(2) Consolidated Financial Statement Schedules
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 has been included in the Consolidated
Financial Statements and therefore such schedules
have been omitted.
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(3) Exhibits
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
3.1 Registrant's Amended and Restated
Articles of Incorporation(1)
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 office
facilities(1)
10.7 Business Lease dated May 1, 1993,
between George Feldenkreis and the
Registrant relating to warehouse
facilities(1)
10.9 1993 Stock Option Plan(1)(2)
10.10 Directors Stock Option Plan(1)(2)
10.15 Loan and Security Agreement dated as
of October 5, 1994 between the
Registrant and NationsBank of
Georgia, N.A.(3)
10.16 First Amendment to Loan and Security
Agreement dated as of August 19,
1995, between the Registrant and
NationsBank of Georgia, 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)
22.1 Subsidiaries of Registrant(3)
23.2 Consent of Deloitte & Touche LLP(6)
27.1 Financial Data Schedule (SEC use
only) (6)
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___________________
(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 filed 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.
(b) Reports on Form 8-K
None
(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.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has caused the report or amendment thereto to be
signed on its behalf by the undersigned, thereunto duly authorized.
SUPREME INTERNATIONAL CORPORATION
By: /S/ GEORGE FELDENKREIS
-----------------------------------
George Feldenkreis, Chairman of the
Board and Chief Executive Officer
Dated: April 30, 1997
____________________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURES TITLE DATE
/S/ GEORGE FELDENKREIS Chairman of the Board and April 30, 1997
- ----------------------------------------- Chief Executive Officer
George Feldenkreis (principal executive officer)
/S/ OSCAR FELDENKREIS President, Chief Operating Officer April 30, 1997
- ----------------------------------------- and Director
Oscar Feldenkreis
/S/ RICHARD L. DUNN Vice President, Finance and April 30, 1997
- ----------------------------------------- Chief Financial Officer
Richard L. Dunn (principal financial and
accounting officer)
/S/ RONALD BUCH Director April 30, 1997
- -----------------------------------------
Ronald Buch
/S/ GARY DIX Director April 30, 1997
- -----------------------------------------
Gary Dix
/S/ SALOMON HANONO Director April 30, 1997
- -----------------------------------------
Salomon Hanono
/S/ RICHARD MCEWEN Director April 30, 1997
- -----------------------------------------
Richard McEwen
/S/ LEONARD MILLER Director April 30, 1997
- -----------------------------------------
Leonard Miller
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SUPREME INTERNATIONAL CORPORATION
INDEX TO EXHIBITS
FILED WITH ANNUAL REPORT ON FORM 10-K
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (SEC use only)
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