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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, 1998
[ ] 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
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(Exact name of Registrant as specified in its charter)
FLORIDA 59-1162998
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3000 N.W. 107TH AVENUE
MIAMI, FLORIDA 33172
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(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 CLASS ON WHICH REGISTERED
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
6,884,022 (as of April 20, 1998).
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is approximately $58,057,863 (as of April 20, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
SUPREME INTERNATIONAL CORPORATION (THE "COMPANY") CAUTIONS READERS THAT
CERTAIN IMPORTANT FACTORS MAY AFFECT THE COMPANY'S ACTUAL RESULTS AND COULD
CAUSE SUCH RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS
WHICH MAY BE DEEMED TO HAVE BEEN MADE IN THIS REPORT OR WHICH ARE OTHERWISE MADE
BY OR ON BEHALF OF THE COMPANY. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN
THIS REPORT THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTEND",
"COULD", "WOULD", "ESTIMATE", OR "CONTINUE" OR THE NEGATIVE OTHER VARIATIONS
THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. FACTORS WHICH MAY AFFECT THE COMPANY'S RESULTS 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 HEREIN AND IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION").
All financial information herein has been adjusted to give effect to a
3-for-2 stock split declared in July 1997.
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. A significant majority 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., Puerto Rico and Canada.
BUSINESS STRATEGY
The Company's business strategies are 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 its 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 ended January 31, 1998 ("Fiscal 1998"), the Company started
direct consumer advertising in select markets featuring the Natural
Issue/Registered trademark/ and Munsingwear/Registered trademark/
brand names through the placement of highly visible billboards,
sponsorships and special event advertising.
/bullet/ CONTINUE TO DIVERSIFY PRODUCT LINE. The Company has been
diversifying its product lines and expanding 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. During the year ended January 31, 1997 ("Fiscal 1997"),
the Company expanded into golfwear through its acquisition of the
Munsingwear/Registered trademark/ brand name. The Company has also
expanded its ethnic lines and its boyswear lines and has introduced
a higher-end sweater line under the Crossings/Registered trademark/
brand name, which it acquired in Fiscal 1998.
/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 Fiscal 1998, the Company acquired the
Crossings/Registered trademark/ brand name. The Company has granted
licenses of its Natural Issue/Registered trademark/ brand name for
the marketing of a line of men's underwear, neckwear, and hosiery
and a line of women's apparel. The Company is also party to
licensing arrangements of its Munsingwear/Registered trademark/
brand name for the marketing of men's undergarments, hosiery,
activewear, outerwear, thermals, swimwear, robes, sleepwear, pants,
shorts, loungewear, hats and caps. The Company continues to evaluate
opportunities to acquire or license other brand names and businesses
which distribute complementary apparel products and to grant
licenses of its brand names.
(b) Financial Information about Industry Segments
Not Applicable.
(c) Narrative Description of Business
-2-
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/TM/ and Penguin
Sport/TM/ brand names. The Company also uses Feldini/Registered trademark/ for
its better shirts, and Corsa/Registered trademark/, Gianni Abozzi/Registered
trademark/, Premier/TM/, Monte Carlo/TM/, Career Club/Registered trademark/, CC
Sport/Registered trademark/, Cotton Mill/TM/, Tipos and Romani/Registered
trademark/ for its more moderately priced lines. The Company holds license
rights to market men's dress and sport shirts under Adolfo/Registered trademark/
and other brand names. Sales under the brand names owned and licensed by the
Company accounted for a significant majority of net shirt sales during Fiscal
1998, 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 83% of net sales
during Fiscal 1998.
PANTS. The Company's pants lines include 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 lines, which
are offered in a wide range of men's sizes, are marketed under the
Feldini/Registered trademark/, Natural Issue/Registered trademark/ and other
brand names. Sales of pants accounted for approximately 11% of net sales during
Fiscal 1998.
OTHER PRODUCTS. The Company offers boyswear items including rayon and
cotton sport shirts under the Tones/TM/ and Natural Issue/Registered trademark/
brand names and recently introduced a line of sweaters under the
Crossings/Registered trademark/ brand name for Fall 1998. Sales of other
products accounted for approximately 6% of net sales during Fiscal 1998.
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 more accurately
present 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 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.
-3-
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 market 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 Target Stores, Sears, Roebuck &
Co., Wal-Mart Stores Inc., Federated Department Stores, Inc., and K-Mart
Corporation. The Company's net sales to its five largest customers aggregated
approximately 43%, 52% and 54% of net sales during Fiscal 1998, Fiscal 1997, and
during the fiscal year ended January 31, 1996 ("Fiscal 1996"), respectively.
Sales to Target Stores and Sears, Roebuck & Co. each accounted for approximately
11% of net sales during Fiscal 1998. 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. 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 90% 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 started direct consumer advertising in select markets featuring
the Natural Issue/Registered Trademark/ and Munsingwear/Registered Trademark/
brand names through the placement of highly visible billboards, sponsorships,
and special event advertising.
-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 advance shipping notices, process 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 1998, in excess of 90% 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 149 suppliers primarily from countries in the Far
East and other parts of Asia and approximately 16 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
-5-
Company's products are manufactured by suppliers who 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, 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. The amount of the Company's products which
were returned as defective was not material in the last three fiscal years.
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.
-6-
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 business, financial condition, results of operations or
cash flows.
EMPLOYEES
The Company employed approximately 335 persons as of January 31, 1998.
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
During the latter half of Fiscal 1998, the Company consolidated its
administrative offices and substantially all of its warehouse and distribution
facilities into a new 238,000 square foot leased facility in Miami which was
built to the Company's specifications. The Company originally entered into an
agreement to purchase this facility. In September 1997, the Company entered into
an agreement with a financial institution whereby the financial institution
assumed the Company's obligation to purchase the facility and, in turn, leased
the facility to the Company. The lease has an initial term of five years and a
minimum annual rental of approximately $1,000,000 and a minimum contingent
rental payment of $12,325,000 if the Company does not renew the lease after the
five-year term. In March 1998, for purposes of potential future expansion, the
Company purchased certain land adjacent to its facility from a non-affiliated
third party for $1,030,000.
During Fiscal 1998, the Company also leased the following facilities:
The Company leased a 19,000 square foot building in Miami, Florida
which housed the Company's executive offices. 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 will continue to pay rent on this facility
until the expiration of the lease or the lease of the facility to another party.
-7-
The Company also leased an approximately 54,000 square foot
warehouse/office building adjacent to its former executive offices from George
Feldenkreis pursuant to a lease which expired in April 1998. Fiscal 1998 rental
for this facility was approximately $308,000. The Company leases a second 32,000
square foot warehouse building from a partnership of which Mr. Feldenkreis is a
general partner. This warehouse is leased pursuant to a lease expiring in June
1998, at a current annual rental of approximately $136,000. A portion of this
facility is still being used by the Company and a portion is subleased to
Carfel, Inc. ("Carfel"), an affiliated automotive parts importer and
distributor. The Company will vacate this facility upon expiration of the lease.
The Company also leased an additional 107,000 square foot warehouse
from an unaffiliated third party, pursuant to a lease which expired during
Fiscal 1998. Fiscal 1998 rental for this facility was approximately $275,000.
The Company leases a showroom and office space in New York City,
maintains an office in Guangzhou and also leases offices jointly with Carfel in
Beijing and Taipei to monitor Far East production of their respective products.
The Company believes that its arrangements with George Feldenkreis and
Carfel are on terms at least as favorable as the Company could secure from a
non-affiliated third party.
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 business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
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
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FISCAL 1997
First Quarter.................................... $ 8.67 $ 8.17
Second Quarter................................... 11.50 10.42
Third Quarter.................................... 11.33 9.67
Fourth Quarter................................... 10.83 9.50
FISCAL 1998
First Quarter.................................... $ 11.00 $ 8.83
Second Quarter................................... 12.00 10.17
Third Quarter.................................... 15.38 11.25
Fourth Quarter................................... 13.13 10.38
(b) Holders
As of April 20, 1998, there were approximately 53 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. Certain amounts in prior fiscal years have been reclassified to
conform to the 1998 presentation.
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- --------- --------
STATEMENT OF INCOME DATA:
Net sales $50,006 $90,564 $121,838 $157,373 $190,689
Gross profit 12,488 21,377 29,694 35,327 44,698
Selling, General and
Administrative Expenses 7,651 13,967 20,361 24,222 31,854
Operating income 4,837 7,409 9,333 11,105 12,844
Interest expenses 796 1,219 2,224 1,664 2,782
Income before income taxes 4,041 6,191 7,109 9,441 10,063
Net income 2,540 3,872 4,424 5,844 7,178
Net income per share:
Basic $ .54 $ .73 $ .76 $ .89 $ 1.10
Diluted $ .54 $ .73 $ .75 $ .89 $ 1.08
Weighted average number of shares
outstanding:
Basic 4,727,945 5,300,000 5,800,000 6,534,446 6,540,604
Diluted 4,727,945 5,300,000 5,874,470 6,595,147 6,665,635
JANUARY 31,
---------------
1994 1995 1996 1997 1998
------ ------- -------- --------- --------
BALANCE SHEET DATA:
Accounts receivable, net $11,462 $21,272 $18,101 $28,807 $35,503
Inventories 16,056 30,153 30,353 32,201 35,799
Working capital 16,509 43,067 47,760 23,574 65,884
Total assets 30,030 55,512 53,735 88,158 101,367
Borrowings under credit
facilities, including current
portion of long-term debt 7,073 4,944 0 31,949 3,000
Long-term debt, less current
portion 96 23,312 6,968 0 36,658
Total stockholders' equity 18,144 22,016 43,833 47,775 55,155
-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 $190.7 million for Fiscal 1998 from $157.4 million for Fiscal 1997. During
the year, the Company increased sales of its branded product lines, as well as
licensed branded products. At the same time revenue from sales of private label
products decreased. The Company also significantly increased sales to its
existing customer base, primarily mass merchandisers and department stores. In
addition, the Company expanded its customer base to include more mass
merchandisers, department stores and foreign customers.
A substantial portion of the 21.2% increase in net sales during Fiscal
1998 was achieved in the Company owned branded product lines which increased by
34.1%. The sale of licensed branded products also increased significantly. A
reduction in the sale to retailers of private label goods offset, to a small
extent, the aforementioned increases.
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 golf sportswear, pants, shorts, sweaters 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/, Grand Slam/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,
----------------------------
1996 1997 1998
------ ------ -------
Net sales....................................... 100.0% 100.0% 100.0%
Cost of Sales................................... 75.6 77.6 76.6
------ ------ -------
Gross profit.................................... 24.4 22.4 23.4
Selling, general and administrative expenses.... 16.7 15.3 16.7
------ ------ -------
Operating income................................ 7.7 7.1 6.7
Interest expense................................ 1.8 1.1 1.4
-------- -------- -------
Income before income taxes...................... 5.9 6.0 5.3
Income tax provision............................ 2.2 2.3 1.5
-------- -------- -------
Net income...................................... 3.7% 3.7% 3.8%
======== ======= =======
-11-
RESULTS OF OPERATIONS
FISCAL 1998 AS COMPARED TO FISCAL 1997
Sales for Fiscal 1998 were $190.7 million as compared to $157.4
million for Fiscal 1997, an increase of $33.3 million or 21.2%. This increase
was principally attributable to an increase in the Company's branded product
lines, including Munsingwear/Registered trademark/ and Grand Slam/Registered
trademark/, as well as in its licensed branded products. This increase was
partially offset by a decrease in revenue from sales of private label products.
Cost of sales for Fiscal 1998 was $146.0 million or 76.6% of sales as
compared to $122.0 million or 77.6% of sales for Fiscal 1997. This decrease in
cost of sales as a percentage of sales reflects a shift to more sales of brand
name products which typically generate higher gross profit than private label
products.
Selling, general and administrative expenses for Fiscal 1998 were
$31.9 million or 16.7% of sales as compared to $24.2 million or 15.3% of sales
for Fiscal 1997. This increase was due to increased levels of business and
increased advertising costs relating to the start of consumer advertising.
Interest expense for Fiscal 1998 was $2.8 million or 1.4% of sales as
compared to $1.7 million or 1.1% of sales for Fiscal 1997. This increase in
interest expense was a result of the additional indebtedness incurred by the
Company in connection with the acquisition of the Munsingwear and Jolem brands,
as well as to support increased levels of operations.
During Fiscal 1998, the Company reduced the provision for income taxes
by $503,000 to adjust certain income tax reserves.
Net income for Fiscal 1998 was $7.2 million or 3.8% of sales as
compared to $5.8 million or 3.7% of sales for Fiscal 1997.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Sales for Fiscal 1997 were $157.4 million as compared to $121.8
million for Fiscal 1996, an increase of $35.6 million or 29.2%. 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 77.6% of sales as
compared to $92.1 million or 75.6% 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
$24.2 million or 15.3% of sales as compared to $20.4 million or 16.7% 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
-12-
repayment of a portion of the amount outstanding under the Company's revolving
credit agreement with a portion of the proceeds of the Company's public offering
in September 1995.
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.
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 a revolving credit agreement with a
Bank. The Company's existing revolving credit expired in October 1997. From
October 1997 to March 1998, the Company operated under interim credit
arrangements with its lenders. At January 31, 1998, $36.7 million was
outstanding under the interim credit arrangements. In March 1998, the Company
replaced the credit arrangements with an expanded revolving credit agreement
(the "Revolving Credit Agreement") with a group of banks, including its existing
lender. 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 $55.0 million.
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
March 2001.
The Company also maintains three letter of credit facilities totaling
$60.0 million. 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, 1998, there
was $30.3 million available under these facilities.
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.
Net cash used in operating activities was $3.1 million for Fiscal 1998
principally as a result of an increase in inventories of $3.6 million resulting
from introduction of the Company's Munsingwear/Registered trademark/ and Jolem
lines.
-13-
Capital expenditures were $3.8 million for Fiscal 1998 primarily
relating to the Company's new distribution facility. The Company presently has
no significant commitments to incur capital expenditures except with respect to
the purchase of land as described in Item 2.
At January 31, 1998, the Company had working capital of $65.9 million.
The Company's current ratio was 7.9 to 1 at January 31, 1998. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 requires that all components of comprehensive
income be reported on one of the following: (1) the statement of income; (2) the
statement of changes in stockholders' equity; or (3) a separate statement of
comprehensive income. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by stockholders
(changes in paid-in capital) and distributions to stockholders (dividends). SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. The
Company will adopt this standard in Fiscal 1999. The Company does not believe
that the adoption of this statement will have a significant impact on its
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
SFAS No. 131 also requires entity-wide disclosure about products and services an
entity provides, the foreign countries in which it holds assets and reports
revenues, and its major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt this standard in
fiscal year ending January 31, 1999.
YEAR 2000 MATTERS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Consequently,
in the year 2000, such systems may be unable to accurately process certain
date-based information. The Company can potentially be affected by this issue
through the internal computer applications on which it relies. The Company is in
the process of reviewing all significant third-party applications which it
utilizes and obtaining documentation from the manufacturers which certify Year
2000 compliance. The Company is also developing a test plan for internal
applications to validate the
-14-
results of its initial review. Should the Company find any items which are not
Year 2000 compliant in the course of its testing, the Company will take the
necessary actions to correct the matter. The Company expects that its testing
procedures and any required Year 2000 compliance activities will be completed by
December 31, 1998. The Company does not anticipate that Year 2000 compliance
activities will have a material effect on the Company's business, financial
condition or results of operations. However, there can be no assurance that the
Company's systems are Year 2000 compliant until the successful completion of its
testing procedures. Additionally, there can be no assurance that the systems of
other companies on which the Company relies will be Year 2000 compliant which
could result in a material adverse effect on the Company's business, financial
condition or results of operations.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements that involve a number of risks
and uncertainties, including the risks described elsewhere in this report and
detailed from time to time in the Company's filings with the Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-15-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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)................. 63 Chairman of the Board and Chief
Executive Officer
Oscar Feldenkreis..................... 38 President, Chief Operating
Officer and Director
Joseph Roisman........................ 52 Executive Vice President
Fanny Hanono.......................... 37 Secretary-Treasurer
Ronald L. Buch........................ 62 Director
Gary Dix(1)........................... 50 Director
Salomon Hanono........................ 48 Director
Richard W. McEwen(2).................. 77 Director
Leonard Miller(1)(2).................. 68 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.
-16-
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.
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
-17-
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 from whom no
Forms 5 were required, the Company believes that, with respect to Fiscal 1998,
its executive officers, directors and greater than ten percent beneficial owners
complied with all such filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following compensation table sets forth, for Fiscal 1996, Fiscal
1997 and Fiscal 1998, 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 $100,000 during Fiscal
1998 (together with the CEO, collectively, the "Named Executive Officers"):
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------- -------------------
SECURITIES
UNDERLYING ALL OTHER
FISCAL SALARY BONUS OPTION/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)
- --------------------------- ---- ------- ------- ------- --------
George Feldenkreis 1998 125,000 100,000 -- 4,750
Chairman and CEO 1997 120,000 50,000 -- 500
1996 120,000 -- -- 1,970
Oscar Feldenkreis 1998 350,000 460,000 -- 4,750
President and Chief 1997 350,000 450,000 -- 500
Operating Officer 1996 350,000 200,000 -- 2,634
Richard L. Dunn 1998 155,000 9,000 -- 2,500
Vice President, Finance and 1997 145,000 10,000 -- 500
Chief Financial Officer(2) 1996 132,692 10,000 -- 2,269
Joseph Roisman 1998 147,000 21,000 -- 4,750
Executive Vice President 1997 140,000 10,000 -- 500
1996 116,000 10,000 -- 2,179
- -------------------
(1) The dollar amount represents Company contributions for the Named
Executive Officer of the Company's 401(K) plan.
(2) Mr. Dunn resigned as an executive officer of the Company in April 1998.
-18-
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 currently provides
for an annual salary of $350,000, subject to annual cost-of-living increases,
and an annual bonus as may be determined by the Compensation Committee in its
discretion, up to a maximum of $500,000. The employment agreement requires Mr.
Feldenkreis to devote his full-time to the affairs of the Company. Upon
termination of the employment agreement by reason of the employee's death or
disability, Mr. Feldenkreis or his estate will receive a lump sum payment equal
to one year's salary plus a bonus as may be determined by the Compensation
Committee in its discretion. The employment agreement also prohibits Mr.
Feldenkreis from directly or indirectly competing with the Company for one year
after termination of his employment for any reason except the Company's
termination of Mr. Feldenkreis without Cause.
The Company is also party to an employment agreement with George
Feldenkreis, the Company's Chairman of the Board and Chief Executive Officer,
expiring in May 1998, and is subject to annual renewal. The employment agreement
currently provides for an annual salary of $125,000, subject to annual
cost-of-living increases, and an annual bonus as may be determined by the
Compensation Committee in its discretion, up to a maximum of $250,000. Pursuant
to his employment agreement, Mr. Feldenkreis devotes a majority of his working
time to the affairs of the Company. George Feldenkreis' employment agreement
contains termination and non-competition provisions similar to those set forth
in Oscar Feldenkreis' agreement.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant stock options during Fiscal 1998 to any of the
Named Executive Officers.
STOCK OPTIONS HELD AT END OF FISCAL 1998
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, 1998. No options to purchase stock were exercised by any of the
Named Executive Officers in Fiscal 1998.
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 45,000 0 $467,100 $ 0
Richard L. Dunn 37,500 0 389,250 0
Joseph Roisman 11,250 0 116,775 0
- -------------------
(1) Based on the Nasdaq National Market last sales price for the Company's
Common Stock on January 30, 1998 in the amount of $10.38 per share.
-19-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
COMPENSATION OF DIRECTORS
During Fiscal 1998, 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 Stock Option Plan
and Directors' Stock Option Plan (the "Directors' Plan"). No such options were
granted during Fiscal 1998. As of January 31, 1998, the following options were
outstanding under the Directors' Plan:
NUMBER OF EXERCISE EXPIRATION
NAME OF OPTIONEE SHARES PRICE DATE
- ----------------- --------- -------- ------------
Gary Dix 11,250 $8.00 June 2, 2000
Richard W. McEwen 7,500 $8.00 June 2, 2000
Leonard Miller 11,250 $8.00 June 2, 2000
Salomon Hanono 11,250 $8.00 June 2, 2000
-20-
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 20, 1998, 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)................. 1,588,653 23.1
Oscar Feldenkreis(4).................. 1,254,688 18.1
Fanny Hanono(5)....................... 400,358 5.8
Salomon Hanono(5)(6).................. 411,608 6.0
Carfel, Inc(7)........................ 361,525 5.3
Richard L. Dunn(8).................... 37,500 *
Joseph Roisman(9)..................... 12,750 *
Ronald Buch........................... 750 *
Gary Dix(10).......................... 16,800 *
Richard W. McEwen(11)................. 9,750 *
Leonard Miller(12).................... 50,250 *
FMR Corporation
82 Devonshire Street
Boston, Massachusetts 02109(13).... 653,400 9.5
The Kaufmann Funds, Inc.
140 East 45th Street, 43rd Floor
New York, New York 10017(14)....... 450,000 6.5
All directors and executive
officers as a group
(ten persons)(15).................. 3,211,949 45.8
- ---------------------------
* Less than 1%.
(1) Except as otherwise indicated, the address of each beneficial owner is
c/o the Company 3000 N.W. 107th Avenue, Miami, Florida 33172.
(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 of Common Stock beneficially owned by them.
(3) Represents (a) 1,141,728 shares of Common Stock held by George
Feldenkreis, (b) 361,525 shares of Common Stock held by Carfel, of which
company Mr. Feldenkreis is a director, executive officer and principal
shareholder and (c) 85,400 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").
-21-
(4) Represents (a) 1,122,288 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) 2,000 shares of Common
Stock held by Mr. Feldenkreis directly, (c) 45,000 shares of Common
Stock issuable upon the exercise of stock options held by Oscar
Feldenkreis and (d) 85,400 shares held by the Foundation.
(5) Represents (a) 314,958 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) 85,400 shares held by the
Foundation. Fanny Hanono and Salomon Hanono are husband and wife.
(6) Also includes 11,250 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 37,500 shares of Common Stock issuable upon the exercise of
stock options held by Mr. Dunn. Mr. Dunn resigned as an executive
officer of Supreme in April 1998.
(9) Represents (a) 1,500 shares of Common Stock held by Mr. Roisman and (b)
11,250 shares of Common Stock issuable upon the exercise of stock
options held by Mr. Roisman.
(10) Represents (a) 3,000 shares of Common Stock held by Mr. Dix, (b) 1,800
shares of Common Stock held in trust for his children, (c) 750 shares
held in an individual retirement account and (d) 11,250 shares of Common
Stock issuable upon the exercise of stock options held by Mr. Dix.
(11) Represents (a) 2,250 shares of Common Stock held by Mr. McEwen and (b)
7,500 shares of Common Stock issuable upon the exercise of stock options
held by Mr. McEwen.
(12) Represents (a) 39,000 shares of Common Stock held by Mr. Miller and (b)
11,250 shares of Common Stock issuable upon the exercise of stock
options held by Mr. Miller.
(13) Based solely on information contained in amendment to Schedule 13G dated
December 30, 1997 filed with the Commission. 330,000 of these shares of
Common Stock are owned by Fidelity Capital Appreciation Fund, a
wholly-owned subsidiary of FMR Corporation.
(14) Based solely on information contained in Schedule 13G dated December 31,
1996 filed with the Commission.
(15) Includes the shares of Common Stock and options to purchase shares of
Common Stock described in Notes (3) through (6) and (8) through (12).
-22-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Item 2. Properties" with respect to certain facilities leased by
the Company from George Feldenkreis and his affiliates.
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 provided 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
$287,000 for Fiscal 1998. The principal shareholder of Isaco is Isaac Zelcer,
who is Oscar Feldenkreis' father-in-law. The Company believes that the License
Agreement is on terms at least as favorable as the Company could secure from a
non-affiliated third party.
-23-
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, 1998 and 1997 F-2
Consolidated Statements of Income
for each of the three years in the period
ended January 31, 1998 F-3
Consolidated Statements of Changes in
Stockholders' Equity for each of the three
years in the period ended January 31, 1998 F-4
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1998 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.
(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)
-24-
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 Nations Bank 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)
10.24 Lease Agreement [Land] dated as of August 28,
1997 between SUP Joint Venture, as Lessor and
Registrant, as Lessee (6)
10.25 Lease Agreement [Building] dated as of August 28,
1997, between SUP Joint Venture, as Lessor and
Registrant, as Lessee (6)
10.26 Amended and Restated Loan and Security Agreement
dated as of March 31, 1998 (6)
22.1 Subsidiaries of Registrant (3)
23.2 Consent of Deloitte & Touche LLP (6)
27.1 Financial Data Schedule (SEC use only) (6)
- ---------------
(1) Previously filed as an Exhibit of the same number to Registrant's
Registration Statement on Form S-1 (File No. 33-60750) and incorporated
herein by reference.
-25-
(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.
-26-
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, 1998
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, 1998
- ------------------------- Chief Executive Officer
George Feldenkreis (principal executive, financial
and accounting officer)
/s/ OSCAR FELDENKREIS President, Chief Operating April 30, 1998
- ------------------------- Officer and Director
Oscar Feldenkreis
/s/ RONALD BUCH Director April 30, 1998
- -------------------------
Ronald Buch
/s/ GARY DIX Director April 30, 1998
- -------------------------
Gary Dix
/s/ SALOMON HANONO Director April 30, 1998
- -------------------------
Salomon Hanono
/s/ RICHARD MCEWEN Director April 30, 1998
- -------------------------
Richard McEwen
/s/ LEONARD MILLER Director April 30, 1998
- -------------------------
Leonard Miller
-27-
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,
1998 and 1997, 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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
April 10, 1998
F-1
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1998 AND 1997
1998 1997
ASSETS
CURRENT ASSETS:
Cash $ 1,010,256 $ 755,798
Accounts receivable, Net 35,502,607 28,807,236
Inventories 35,799,388 32,200,522
Deferred income taxes 872,000 668,658
Other current assets 2,253,328 1,525,695
------------ ------------
Total current assets 75,437,579 63,957,909
PROPERTY AND EQUIPMENT, Net 4,899,656 2,138,088
INTANGIBLE ASSETS, Net 19,716,064 19,858,692
OTHER 1,313,747 2,203,601
------------ ------------
TOTAL $101,367,046 $ 88,158,290
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,048,325 $ 5,584,924
Accrued expenses 1,692,225 2,063,040
Borrowings under credit facilities 3,000,000 6,812,629
Current portion of long-term debt - 25,136,801
Other current liabilities 813,477 785,422
-------------- -------------
Total current liabilities 9,554,027 40,382,816
------------- ------------
LONG-TERM DEBT 36,658,174 -
------------ ------------
Total liabilities 46,212,201 40,382,816
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock - $.01 par value; 15,000,000 shares
authorized; 6,555,681 and 6,529,431 shares issued and
outstanding as of January 31, 1998 and 1997, respectively 65,556 65,295
Additional paid-in capital 27,598,618 27,397,670
Retained earnings 27,490,671 20,312,509
----------- -----------
Total stockholders' equity 55,154,845 47,775,474
----------- -----------
TOTAL $ 101,367,046 $ 88,158,290
============ ===========
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, 1998
1998 1997 1996
NET SALES $190,689,212 $157,372,796 $121,838,493
COST OF SALES 145,991,132 122,045,614 92,144,575
------------ ------------ ------------
GROSS PROFIT 44,698,080 35,327,182 29,693,918
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 31,853,565 24,221,853 20,360,835
----------- ------------ ------------
OPERATING INCOME 12,844,515 11,105,329 9,333,083
INTEREST EXPENSE 2,781,509 1,664,392 2,223,869
------------ ----------- ------------
INCOME BEFORE INCOME TAXES 10,063,006 9,440,937 7,109,214
PROVISION FOR INCOME TAXES 2,884,844 3,596,918 2,685,663
------------ ------------ -----------
NET INCOME $ 7,178,162 $ 5,844,019 $ 4,423,551
============ =========== ===========
NET INCOME PER SHARE:
Basic $ 1.10 $ .89 $ .76
============ =========== ===========
Diluted $ 1.08 $ .89 $ .75
============ =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic $ 6,540,604 $ 6,534,446 $ 5,800,000
============ =========== ===========
Diluted $ 6,665,635 $ 6,595,147 $ 5,874,470
============ =========== ===========
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, 1998
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
BALANCE, JANUARY 31, 1995 5,300,000 $ 53,000 $11,918,064 $10,044,939 $22,016,003
Sale of common stock, net 1,500,000 15,000 17,378,530 - 17,393,530
Net income - - - 4,423,551 4,423,551
--------- ---------- ----------- ---------- -----------
BALANCE, JANUARY 31, 1996 6,800,000 68,000 29,296,594 14,468,490 43,833,084
Purchase of treasury stock,
at cost (278,069) (2,780) (1,947,599) - (1,950,379)
Exercise of stock options 7,500 75 48,675 - 48,750
Net income - - - 5,844,019 5,844,019
--------- ---------- ----------- ---------- -----------
BALANCE, JANUARY 31, 1997 6,529,431 65,295 27,397,670 20,312,509 47,775,474
Exercise of stock options 26,250 261 200,948 - 201,209
Net income - - - 7,178,162 7,178,162
--------- ---------- ----------- ---------- -----------
BALANCE, JANUARY 31, 1998 6,555,681 $ 65,556 $ 27,598,618 $27,490,671 $55,154,845
========= ========== ============ =========== ===========
See Notes to consolidated financial statements.
F-4
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1998
1998 1997 1996
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 7,178,162 $ 5,844,019 $ 4,423,551
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,748,006 1,147,091 724,955
Loss on sale and abandonment of property 187,692 257,221 --
(Increase) decrease in deferred taxes (203,342) 159,655 (228,313)
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (6,695,371) (8,951,318) 3,170,857
Inventories (3,598,866) 293,527 (200,269)
Other current assets (727,633) (359,942) (269,584)
Other assets 889,854 (1,915,477) (12,604)
Accounts payable and accrued expenses (1,907,414) 4,835,234 (2,174,659)
Other current liabilities 28,055 563,756 (131,184)
------------ ------------ ------------
Net cash (used in) provided by operating activities (3,100,857) 1,873,766 5,302,750
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,828,142) (1,058,061) (1,308,535)
Proceeds from sale of property and equipment 32,102 164,545 --
Payment on purchase of intangible assets (758,598) (137,027) (183,138)
Payment for Jolem Imports, Inc. -- (3,657,435) --
Payment for Munsingwear, Inc.'s assets -- (19,768,380) --
------------ ------------ ------------
Net cash used in investing activities (4,554,638) (24,456,358) (1,491,673)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under credit
facilities (3,812,629) 6,812,629 (4,943,575)
Proceeds from long-term debt 48,653,294 60,288,097 41,357,933
Payments on long-term debt (37,131,921) (42,119,240) (57,702,058)
Proceeds from the issuance of common stock -- -- 17,393,530
Purchase of treasury stock -- (1,950,379) --
Proceeds from exercise of stock options 201,209 48,750 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 7,909,953 23,079,857 (3,894,170)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 254,458 497,265 (83,093)
CASH AT BEGINNING OF YEAR 755,798 258,533 341,626
------------ ------------ ------------
CASH AT END OF YEAR $ 1,010,256 $ 755,798 $ 258,533
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,820,016 $ 1,433,403 $ 2,306,659
============ ============ ============
Income taxes $ 3,174,807 $ 3,394,466 $ 3,285,250
============ ============ ============
F-5
See Notes to consolidated financial statements.
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1998
1. GENERAL
Supreme International Corporation and subsidiaries (the "Company") was
incorporated in the State of Florida and has been in business since 1967.
The Company 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting
policies:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Supreme International Corporation and its wholly-owned
subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts in the consolidated
financial statements and the accompanying notes. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their
short-term nature. The carrying amount of debt and credit facilities
approximate fair value due to their stated interest rate approximating a
market rate. These estimated fair value amounts have been determined using
available market information or other appropriate valuation methodologies.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Costs consists of the purchase price, customs,
duties, freight, insurance, and commissions to buying agents.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line and accelerated methods
over the estimated useful lives of the assets. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of
the lease term or estimated useful lives of the improvements. The useful
lives range from five to ten years.
INTANGIBLE ASSETS - Intangible assets primarily represent costs capitalized
in connection with the acquisition, registration and maintenance of brand
names and license rights. Intangibles are amortized over their estimated
useful lives which range from three to twenty years. As of January 31, 1998
and 1997 accumulated amortization related to intangible assets amounted to
$1,608,588 and $707,362, respectively.
F-6
LONG LIVED-ASSETS - Management reviews long-lived assets, including
identifiable intangible assets, for possible impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If there is an indication of impairment, management prepares
an estimate of future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition. If these cash flows are less than the carrying amount of the
asset, an impairment loss is recognized to reduce the asset to its
estimated fair value. Preparation of estimated expected future cash flows
is inherently subjective and is based on management's best estimate of
assumptions concerning future conditions. At January 31, 1998, there were
no impaired assets.
REVENUE RECOGNITION - Sales are recognized upon shipment, returns for
defective goods are netted against sales, and an allowance is provided for
estimated returns. Sales to any one customer exceeding ten percent amounted
to $21,648,468 (11%) and $20,630,689 (11%) for the year ended January 31,
1998; $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. The Company does not
believe that these concentration of sales and credit risk represent a
material risk of loss with respect to its financial position as of January
31, 1998.
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 - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), EARNINGS PER SHARE, which changes the method of calculating earnings
per share. SFAS No. 128 requires the presentation of "basic" net income per
share and "diluted" net income per share on the face of the income
statement. Basic net income per share is computed by dividing net income by
the weighted average shares of outstanding common stock. The calculation of
diluted net income per share is similar to basic earnings per share except
that the denominator includes dilutive potential common stock. The dilutive
potential common stock included in the Company's computation of diluted net
income per share includes the effects of the stock options and warrants
described in Note 11, as determined using the treasury stock method. SFAS
No. 128 was effective for financial statements for periods ending after
December 15, 1997. The Company adopted SFAS No. 128 in the fourth quarter
of fiscal 1998 and restated its net income per share for prior periods
presented to give effect to SFAS No. 128.
STOCK SPLIT - On July 21, 1997, the Company's Board of Directors declared a
3 for 2 stock split in the form of a stock dividend. The accompanying
financial statements reflect the stock split as if it had occurred as of
the earliest period being presented.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company has chosen to account
for stock-based compensation to employees and non-employee members of the
Board using the intrinsic value method prescribed by Accounting Principles
Board Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,"
and related interpretations. As required by Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company has presented certain pro forma and other
disclosures related to stock-based compensation plans.
RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation.
F-7
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires
that all components of comprehensive income be reported on one of the
following: (1) the statement of income; (2) the statement of changes in
stockholders' equity, or (3) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to
stockholders' equity, except those due to investments by stockholders
(changes in paid-in capital) and distributions to stockholders (dividends).
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. The Company will adopt this standard in fiscal year ending January
31, 1999. The Company does not believe that the adoption of this statement
will have a significant impact on its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 changes the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected
segment information in their quarterly reports issued to shareholders. SFAS
No. 131 also requires entity-wide disclosure about products and services an
entity provides, the foreign countries in which it holds assets and reports
revenues, and its major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The Company will adopt this
standard in fiscal year ending January 31, 1999.
3. ACQUISITIONS
MUNSINGWEAR ACQUISITION - On September 6, 1996, the Company acquired
certain assets of Munsingwear, Inc. ("Munsingwear"), a manufacturer of
men's casual apparel, for approximately $18,400,000. The assets acquired
consisted of brand names including GRAND SLAM /Registered trademark/, GRAND
SLAM TOUR /Registered trademark/, PENGUIN SPORT /Registered trademark/, and
other intangible assets. The purchase price amounted to approximately
$19,800,000, which included $1,400,000 of transaction costs, and was
primarily allocated to working capital and intangible assets as follows:
inventories $300,000; accounts receivable $300,000; and brand 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 8).
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.
F-8
PRO FORMA YEAR ENDED
JANUARY 31, 1997 JANUARY 31, 1996
Net sales $185,226,000 $167,996,000
Net income 6,614,000 5,578,000
Net income per share:
Basic 1.01 .96
Diluted 1.00 .95
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of January 31:
1998 1997
Trade accounts $37,499,297 $29,924,228
Royalties and other receivables 2,217,338 803,573
----------- -----------
Total 39,716,635 30,727,801
Less: Allowance for doubtful accounts 609,874 250,000
Allowance for sales returns and other chargebacks 3,604,154 1,670,565
----------- -----------
Total $35,502,607 $28,807,236
=========== ===========
The activity for the allowance accounts are as follows:
1998 1997 1996
Allowance for doubtful accounts:
Beginning balance $ 250,000 $ 242,792 $ 627,108
Provision 799,129 135,854 362,007
Write-offs, net of recoveries (439,255) (128,646) (746,323)
---------- ----------- ----------
Ending balance $ 609,874 $ 250,000 $ 242,792
=========== =========== ==========
Beginning balance $ 1,670,565 $ 567,014 $ 189,997
Provision 13,047,822 9,057,342 7,790,650
Actual returns and other chargebacks (11,114,233) (7,953,791) (7,413,633)
----------- ------------ ----------
Ending balance $ 3,604,154 $ 1,670,565 $ 567,014
=========== =========== ==========
The Company carries accounts receivable at the amount it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best
estimates. Recoveries are recognized in the period they are received. The
ultimate amount of accounts receivable that become uncollectible could
differ from those estimated.
F-9
5. INVENTORIES
Inventories consist of the following as of January 31:
1998 1997
Finished goods $ 31,972,723 $ 27,445,635
Raw materials and in process 1,204,841 3,629,940
Merchandise in transit 2,621,824 1,124,947
------------- -------------
Total $ 35,799,388 $ 32,200,522
============ ============
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of January 31:
1998 1997
Furniture, fixtures and equipment $ 5,723,557 $ 3,250,373
Vehicles 309,955 321,553
Leasehold improvements 1,617,288 775,292
-------------- --------------
7,650,800 4,347,218
Less: accumulated depreciation and amortization (2,751,144) (2,209,130)
-------------- ----------
Total $ 4,899,656 $ 2,138,088
============= =============
7. BORROWINGS UNDER LETTER OF CREDIT FACILITIES
The Company has a $45 million facility which provides up to $35 million to
issue sight letters of credit including a sub-limit of $2 million to issue
time letters of credit up to 120 days. In addition, the facility has a $10
million sub-limit for refinancing of sight letters of credit for a period
of up to 120 days. The facility is 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' prime rate minus 1.0% per annum (7.5 % as of January 31, 1998).
Amounts outstanding under the $10 million sub-limit are secured by a
secondary interest in the Company's accounts receivable and inventories.
The Company has two additional letter of credit facilities which provide
for borrowings of up to $15 million to issue sight letters of credit. The
facilities are secured by the consignment of the merchandise in transit
under each letter of credit.
1998 1997
Total letter of credit facilities $60,000,000 $33,000,000
Borrowings (3,000,000) (6,812,629)
Outstanding letters of credit (26,673,016) (16,978,246)
----------- -----------
Available $30,326,984 $ 9,209,115
=========== ===========
F-10
8. LONG-TERM DEBT
The Company entered into a revolving credit agreement in March 1998 with a
commercial bank giving it the right to borrow $55 million or a portion
thereof for its general corporate purposes. This revolving credit agreement
expires in April 2001 and replaced the previous revolving credit agreement
which expired in October 1997. Borrowings are limited under the terms of a
borrowing base calculation which generally restricts the outstanding
balance to 85% of eligible receivables plus 50% of eligible inventories, as
defined. Interest on borrowings is variable, based upon the Company's
option of selecting a LIBOR plus 1.5% or the bank's prime rate. Interest of
7.4% was being charged as of January 31, 1998. 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 agreements are secured by the
Company's assets. The outstanding balance under these revolving credit
agreements as of January 31, 1998 and 1997 amounted to $36,658,174 and
$25,136,801, respectively.
9. INCOME TAXES
The income tax provision consists of the following for each of the years
ended January 31:
1998 1997 1996
Current income taxes:
Federal $ 2,780,815 $ 2,910,509 $ 2,510,684
State 307,371 526,754 403,292
------------- ------------- -------------
Total 3,088,186 3,437,263 2,913,976
Deferred income taxes:
Federal and state (203,342) 159,655 (228,313)
------------- ------------- -------------
Total $ 2,884,844 $ 3,596,918 $ 2,685,663
============= ============= =============
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:
1998 1997 1996
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 2.1 3.9 3.3
Benefit of graduated rate (1.0) (1.0) (1.0)
Reversal of certain income tax
reserves (5.0) - -
Other (2.4) 0.2 0.5
---- ---- ----
Total 28.7% 38.1% 37.8%
==== ==== ====
F-11
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows as of January 31:
1998 1997
Deferred income tax assets:
Inventories $ 642,944 $ 589,770
Accounts receivable 227,468 93,750
Accrued expenses 183,750 233,604
Other 39,001 44,901
------------ ------------
Deferred income tax assets 1,093,163 962,025
------------ ------------
Deferred income tax liabilities:
Intangibles (99,694) (167,188)
Other (121,469) (126,179)
------------- -------------
Deferred income tax assets (221,163) (293,367)
------------- -------------
Net deferred income tax asset $ 872,000 $ 668,658
============ ===========
A valuation allowance for deferred income tax assets is not deemed
necessary as the assets are expected to be recovered.
10. RELATED PARTY TRANSACTIONS
The Company leases certain office and warehouse space owned by the
Company's Chairman of the Board of Directors and Chief Executive Officer
under a non-cancelable operating lease arrangement. Rent expense, including
taxes, for these leases amounted to $625,000, $600,000 and $506,000 for the
years ended January 31, 1998, 1997 and 1996, respectively.
The Company entered into a license agreement (the "License Agreement") with
Isaco International, Inc. ("Isaco"), pursuant to which Isaco was granted an
exclusive license to use the Natural Issue/Registered trademark/ brand name
in the United States and Puerto Rico to market a line of men's underwear
and loungewear. The License Agreement provides for a guaranteed minimum
royalty payment to the Company of $137,500 and expires on May 31, 1998. The
principal shareholder of Isaco is the father-in-law of the Company's
President and Chief Operating Officer. Royalty income earned from the
License Agreement amounted to $287,000, $243,000 and $93,000 for the years
ended January 31, 1998, 1997 and 1996, respectively.
11. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS - The Company adopted a 1993 Stock Option Plan (the "1993
Plan") and a Directors Stock Option Plan (the "Directors Plan")
(collectively, the "Stock Option Plans"), under which 450,000 shares of
common stock and 150,000 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 attracting and retaining qualified
and competent employees, directors, consultants, and independent
contractors of the Company. The 1993 Plan provides for the granting of both
incentive stock options and nonstatutory stock options. Incentive stock
options may only be granted to employees.
F-12
Only non-employee directors are eligible to receive options under the
Directors Plan. All matters relating to the Directors Plan are administered
by a committee of the Board of Directors consisting of two or more employee
directors, including selection of participants, allotment of shares,
determination of price and other conditions of purchase, except that the
per share exercise price of options granted under the Directors Plan may
not be less than the fair market value of the common stock on the date of
grant.
Options can be granted under the 1993 Plan on such terms and at such prices
as determined by the Board of Directors, or a committee thereof, except
that the per share exercise price of incentive stock options granted under
the 1993 Plan may not be less than the fair market value of the common
stock on the date of grant, and in the case of an incentive stock option
granted to a 10% shareholder, the per share exercise price will not be less
than 110% of such fair market value. The aggregate fair market value of the
shares covered by incentive stock options granted under the 1993 Plan that
become exercisable by a grantee for the first time in any calendar year is
subject to a $100,000 limit.
A summary of the stock option activity for options issued under the 1993
Plan and the Directors Plan is as follows for the years ended January 31:
1998 1997 1996
--------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
-------------------------- ---------------------------- -------------------------
Shares under option at
beginning of year .............. 293,250 $ 8.01 218,250 $ 7.71 141,000 $ 7.57
Granted ....................... 24,000 6.56 90,000 8.87 78,750 8.00
Exercised ..................... (26,250) 7.73 (7,500) 6.50 -- --
Cancelled ..................... -- -- (7,500) 6.50 (1,500) 7.70
-------- -------- ------- -------- ------- --------
Shares under option
at end of year ................ 291,000 $ 7.92 293,250 $ 8.01 218,250 $ 7.71
-------- -------- ------- -------- ------- --------
Exercisable at end of year .... 221,750 $ 7.90 192,938 $ 8.14 114,938 $ 8.06
======== ======== ======= ======== ======= ========
Weighted-average fair value of
options granted during the year $ 5.99 $ 4.97 $ 3.80
======== ======== ========
The following table summarizes information about fixed-price stock options
outstanding as of January 31, 1998:
OPTIONS OUTSTANDING OPTION EXCERCISABLE
------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT 1/31/98 LIFE EXERCISE AT 1/31/98 EXERCISE
-------------------------------------------------------------------------------------------
$ 6.00 - $ 8.00 180,875 2 years $ 7.20 143,000 $ 7.24
8.01 - 10.00 68,875 1 years 8.49 56,250 8.47
10.01 - 11.00 41,250 4 years 10.61 22,500 10.64
--------------------------------------------------------------------------------------------
$ 6.00 - $11.00 291,000 221,750
F-13
As described in Note 2, the Company accounts for stock-based compensation
using the provisions of APB No. 25 and related interpretations. No
compensation expense has been recognized in the years ended January 31,
1998, 1997 and 1996 as the exercise prices for stock options granted are
equal to their fair market value at the time of grant. Had compensation
cost for options granted been determined in accordance with the fair value
provisions of SFAS 123, the Company's net income and net income per share
would have been as follows for the years ended January 31:
1998 1997 1996
Net income:
As reported $7,178,162 $5,844,019 $4,423,551
========== ========== ==========
Pro forma $7,026,242 $5,710,383 $4,311,772
========== ========== ==========
Net income per share:
As reported:
Basic $ 1.10 $ .89 $ .76
======= ====== ======
Diluted $ 1.08 $ .89 $ .75
======= ====== ======
Pro forma:
Basic $ 1.07 $ .87 $ .74
======= ====== ======
Diluted $ 1.05 $ .87 $ .73
======= ====== ======
The fair value of options issued was estimated at the date of grant using
the 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 45.9%; and a weighted-average expected life of the
options of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
The pro forma amounts may not be representative of the future effects on
reported net income and net income per share that will result from the
future granting of stock options, since the pro forma compensation expense
is allocated over the periods in which options become exercisable and new
option awards are granted each year.
WARRANTS - In conjunction with the Company's initial public offering in May
1993, the Company granted 180,000 warrants entitling the holders of each
warrant to purchase one share of common stock at an exercise price of $9.35
per share. The warrants became exercisable on May 21, 1995 and expire on
May 20, 1998. No warrants have been exercised as of January 31, 1998.
F-14
12. COMMITMENTS AND CONTINGENCIES
The Company has licensing agreements, as licensee, for the use of certain
branded and designer labels. The license agreements expire on varying dates
through December 31, 2000. Total royalty payments under these license
agreements amounted to $330,000, $405,000 and $443,000 for the years ended
January 31, 1998, 1997 and 1996, respectively, and were classified as
selling, general and administrative expenses.
The Company is party to an employment agreement with Oscar Feldenkreis, the
Company's President and Chief Operating Officer, which expires in May 1998,
and is subject to annual renewal. The employment agreement currently
provides for an annual salary of $350,000, subject to annual cost-of-living
increases, and an annual bonus as may be determined by the Compensation
Committee in its discretion, up to a maximum of $500,000. The employment
agreement requires Mr. Feldenkreis to devote his full-time to the affairs
of the Company. Upon termination of the employment agreement by reason of
the employee's death or disability, Mr. Feldenkreis or his estate will
receive a lump sum payment equal to one year's salary plus a bonus as may
be determined by the Compensation Committee in its discretion. The
employment agreement also prohibits Mr. Feldenkreis from directly or
indirectly competing with the Company for one year after termination of his
employment for any reason except the Company's termination of Mr.
Feldenkreis without cause.
The Company is also party to an employment agreement with George
Feldenkreis, the Company's Chairman of the Board and Chief Executive
Officer, expiring in May 1998, and is subject to annual renewal. The
employment agreement currently provides for an annual salary of $125,000,
subject to annual cost-of-living increases, and an annual bonus as may be
determined by the Compensation Committee in its discretion, up to a maximum
of $250,000. Pursuant to his employment agreement, Mr. Feldenkreis devotes
a majority of his working time to the affairs of the Company. George
Feldenkreis' employment agreement contains termination and non-competition
provisions similar to those set forth in Oscar Feldenkreis' agreement.
The Company has consolidated its administrative offices and warehouses and
distribution facilities into a new 238,000 square foot facility in Miami.
The lease has a term of five years, minimum annual rental of approximately
$1,000,000 and requires a minimum contingent rental payment at the
termination of the lease of $12,325,000. The minimum contingent rental
payment is not required if, at the Company's option, the lease is renewed
after the five year term.
Minimum aggregate annual commitments for all of the Company's noncancelable
operating lease commitments, including the related party leases described
in Note 10 and the minimum contingent rental payment described above, are
as follows.
YEAR ENDING
JANUARY 31,
1999 $ 1,490,500
2000 1,335,000
2001 1,323,300
2002 1,206,200
2003 13,154,500
2004 and thereafter 372,100
-------------
Total $ 18,881,600
=============
F-15
Rent expense for these leases, including the related party rent payments
discussed in Note 10, amounted to $1,460,000, $1,078,000, and $825,000 for
the fiscal years ended January 31, 1998, 1997 and 1996, respectively.
On March 4, 1998, the Company purchased certain land adjacent to the
building it occupies. The purchase price of $1,030,000 was financed with
borrowings from the revolving credit agreement (see Note 8).
The Company guarantees up to $600,000 of letters of credit of an
unaffiliated entity.
The Company is subject to claims and suits against it, as well as the
initiator of claims and suits against others, in the ordinary course of its
business, including claims arising from the use of its trademarks. The
Company does not believe that the resolution of any pending claims will
have a material adverse affect on its financial position, results of
operations or cash flows.
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED JANUARY 31, 1998 1Q 2Q 3Q 4Q TOTAL
Net sales $ 48,841 $42,037 $ 54,550 $45,261 $190,689
Gross profit 11,840 9,487 11,590 11,781 44,698
Net income 2,149 826 2,411 1,792 7,178
Net income per share:
Basic $ 0.33 $ 0.13 $ 0.37 $ 0.27 $ 1.10
Diluted $ 0.33 $ 0.12 $ 0.36 $ 0.27 $ 1.08
FISCAL YEAR ENDED JANUARY 31, 1997 1Q 2Q 3Q 4Q TOTAL
Net sales $ 37,807 $31,159 $ 46,746 $41,661 $157,373
Gross profit 8,644 6,754 10,711 9,218 35,327
Net income 1,615 689 1,974 1,566 5,844
Net income per share:
Basic (1) $ 0.25 $ 0.11 $ 0.30 $ 0.24 $ 0.89
Diluted $ 0.25 $ 0.10 $ 0.30 $ 0.24 $ 0.89
FISCAL YEAR ENDED JANUARY 31, 1996 1Q 2Q 3Q 4Q TOTAL
Net sales $ 35,090 $25,358 $ 35,506 $25,884 $121,838
Gross profit 8,703 6,595 8,757 5,639 29,694
Net income 1,595 1,024 1,505 300 4,424
Net income per share:
Basic (1) $ 0.29 $ 0.18 $ 0.27 $ 0.04 $ 0.76
Diluted (1) $ 0.28 $ 0.18 $ 0.26 $ 0.04 $ 0.75
- -------------------
(1) Total does not equal sum of quarters due to effect of the weighted
averaging of shares outstanding.
* * * * * *
F-16
SUPREME INTERNATIONAL CORPORATION
INDEX TO EXHIBITS
FILED WITH ANNUAL REPORT ON FORM 10-K
EXHIBIT DESCRIPTION OF EXHIBIT
10.24 Lease Agreement [Land] dated as of August 28, 1997 between SUP Joint
Venture, as Lessor and Registrant, as Lessee
10.25 Lease Agreement [Building] dated as of August 28, 1997, between SUP
Joint Venture, as Lessor and Registrant, as Lessee
10.26 Amended and Restated Loan and Security Agreement dated as of March 31,
1998
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (SEC use only)