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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-K
(MARK ONE)FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARYFor the fiscal year ended January 31, 19992002
OR
[ ][_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________ .
COMMISSION FILE NUMBERFor the transition period from ___________ to ____________.
Commission file number 0-21764
SUPREME INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDAPerry Ellis International, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Florida 59-1162998
(STATE OR OTHER JURISDICTION OF------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)Employer
Incorporation or Organization) Identification Number)
3000 N.W. 107TH AVENUE, MIAMI, FLORIDA107th Avenue, Miami, Florida 33172
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)-------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(305) 592-2830
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
COMMON STOCK, PAR VALUE--------------
(Registrant's telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 PER SHAREper share
(Title of class)
Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x][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 the 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 [ ][X]
The number of shares outstanding of the Registrant'sregistrant's Common Stock is 6,723,8746,286,740
(as of March 12, 1999)April 15, 2002).
The aggregate market value of the voting stock held by non-affiliatenon-affiliates of the
Registrant'sregistrant is approximately $44,693,206$33,172,976 (as of March 12, 1999)April 15, 2002).
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
Portions of the Company's Proxy Statement for the 2002 Annual Meeting - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------Part III
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "SUPREME,Unless the context otherwise requires, all references to "Perry Ellis," THE
"COMPANY,the
"Company," "WE,"we," "US" OR "OUR" INCLUDE SUPREME INTERNATIONAL CORPORATION AND
ITS SUBSIDIARIES. REFERENCES IN THIS REPORT TO ANNUAL FINANCIAL DATA FOR
SUPREME REFER TO FISCAL YEARS ENDING JANUARY"us" or "our" include Perry Ellis International, Inc. and its
subsidiaries. References in this report to annual financial data for Perry Ellis
refer to fiscal years ending January 31. ----------------This Form 10-K contains trademarks held
by us and those of third parties.
_______________
FORWARD-LOOKING STATEMENTS
We caution readers that this report includes forward-looking statements.
We haveand the portions of the proxy statement
incorporated by reference into this report include "forward-looking statements"
as that term is used in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based these forward-looking statements on our current expectations rather than
historical facts and projections about future events.they are indicated by words or phrases such as
"anticipate," "estimate," "expect," "project," "believe," "intend," "envision,"
and similar words or phrases. These forward-looking statements are subject
toinvolve known and
unknown risks, uncertainties and assumptions about us,other factors that may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Some of the factors that would affect our financial performance, cause
actual results to differ from our estimates, or underlie such forward-looking
statements, are set forth in various places in this report and the portion of
the proxy statement incorporated by reference, including among other
things:
/bullet/under the heading Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report. These factors include:
. general economic conditions;
. the effectiveness of our anticipatedplanned advertising, marketing and
promotional campaigns;
. our ability to carry out growth strategies;
/bullet/. our expected internal growth;
/bullet/ consummation of our pending acquisitions and ability to obtain
additional financing;
/bullet/contain costs;
. our ability to integrate acquired businesses, trademarks, tradenames
and licenses;
/bullet/licenses into our existing organization and operations;
. our future capital needs and the expected efficiencies fromability to obtain financing;
. our new office and warehouse
facility;
/bullet/ability to predict consumer preferences;
. our ability to compete;
. the termination or non-renewal of any material license agreements to
which we are a party;
. anticipated trends and conditions in our industry, including future
consolidation;
/bullet/ our future capital needs;
/bullet/ our ability. changes in fashion trends and customer acceptance of both new designs
and newly introduced products;
. the level of consumer spending for apparel and other merchandise;
. competition among department and specialty stores;
. possible disruption in commercial activities due to compete;
/bullet/ the continued economic health of our markets;terrorist activity
and /bullet/armed conflict; and
. other factors set forth in this report and in our other filings with the
Securities and Exchange Commission (the "Commission").
You are cautioned not to place reliance on these forward-looking
statements, which are valid only as of the date they were made. We undertake no
obligation to update or revise any forward-looking statements whether as a result ofto reflect new
information futureor the occurrence of unanticipated events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.2
PART I
ITEMItem 1. BUSINESS
OVERVIEWBusiness
Overview
We are a leading licensor, designer and marketer of a broad line of high
quality men's sportswear, including sport and dress shirts, golf sportswear,
sweaters urban wear,and casual and dress pants and shorts, which we sell to all levels of
retail distribution. We license our trademark portfolio domestically and
internationally for apparel and other products that we do not sell, including
dress sportswear, outerwear, fragrances and accessories. Beginning in mid
fiscal 2003 we plan to design, license and market women's swimwear under the
Jantzen(R) and Tommy Hilfiger(R) brands, which we acquired in March 2002. We
have built a broad portfolio of brands through selective acquisitions and the
establishment of our own brands over our 32-year35-year operating history. Our
distribution channels include regional, national and international, department stores,mass
merchants, chain stores, mass merchandisersdepartment stores and specialty stores throughout the
United States, Puerto Rico and Canada. We are one of the
top 5 branded suppliers to department stores in the knit and woven shirt
product categories. Our largest customers include Dayton HudsonWal-Mart
Stores, Inc., J.C. Penney Company, Inc., Target Corp., Federated Department Stores, Inc.,Mervyn's, Kohl's
Corporation and Sears Roebuck & Co., Kohl's Corporation,
Wal-Mart Stores, Inc. and J.C. Penney Company, Inc. We currently use over 70approximately 100
independent suppliers, to source our products, located mostly in the Far East, other parts of Asia, Mexico, and Central
America.
2
America, to source our products.
Through consolidationacquisition of brands and internal growth, we have experienced
significant overall growth in recent years. Our total revenues have increasedFrom fiscal 1997 to $224.4 million for fiscal 1999 from $90.6 million for fiscal 1995,
representing2002, we
experienced a compound annual growth rate of 25.5%. During that same period,
our EBITDA (as defined herein; see "Item 6. Selected Financial Data--Summary
Historical Financial Information") grew12.0% in revenues. In order to
$18.7 million from $7.9 million,
representingcontinue to grow, we plan to selectively evaluate a compound annual growth ratenumber of 24.0%. On a pro forma basis
assuming that our pending acquisition
of Perry Ellis International, Inc. was
completed on February 1, 1998, our EBITDA for fiscal 1999, would have been
$29.0 million. For the estimated effect of the John Henry/Manhattan
acquisition, see "Item 6. Selected Financial Data--Summary Pro Forma and
Supplemental Financial Information."candidates each year.
We own or license from third parties the brandsbrand names under which most of our products are
sold. These brandsbrand names include Crossings/registered trademark/Crossings(R), Cubavera(R), Havana Shirt Co.(R)
and Natural Issue/registered trademark/Issue(R) for casual sportswear, John Henry/registered trademark/Henry(R) and Manhattan(R) for
dress casual wear, Perry Ellis(R), Mondo di Marco(R) and Andrew Fezza/registered
trademark/Fezza(R) for
dress sportswear, PingPerry Ellis America(R) for jeans wear, PING(R) and
MunsingwearMunsingwear(R) for golf sportswear and PNB NationPro Player(R) and Nautica(R) for
urban wear.activewear. We are positioned to enter the women's market for swimwear and
sportswear with the March 2002 acquisition of the Jantzen brands. Through our
"family of brands" marketing strategy, we seek to develop and enhance a distinct
brand name for each product category within each distribution channel. We also
produce goods sold under the private label program of our various retail
customers. We market our brands to a wide range of
demographic segments, targeting consumers
in specific age, income and ethnic groups. Currently, our products are
predominantly produced for the men's segment of the apparel industry, in which
fashion trends tend to be less volatile than in other segments. The percentage
of our revenuesnet sales from branded products increaseddecreased to 81.4%63.0% in fiscal 19992002 from
71.5%66.0% in fiscal 1997.2001.
We also license our proprietary brands to third parties for the manufacture
and marketing of various products, some of which we do not sell, including underwear, activeweardress
sportswear, outerwear, fragrances and loungewear.accessories. In addition to generating
additional
sources of revenue for us, these licensing arrangements raise the overall
awareness of our brands.
In order to expand our licensing operations, we
recently signed a definitive agreement to acquire Perry Ellis International,
Inc. which owns and licenses the prestigious and well-known Perry Ellis brand
name. Perry Ellis International, Inc. had licensing revenues of $16.2 million
for the year ended December 31, 1998. We have also signed a definitive
agreement to purchase the trademarks for John Henry, a leading brand of men's
dress casualwear sold at Sears Roebuck, for Manhattan, a popular dress shirt
brand sold at Wal-Mart and Kmart Corporation and Lady Manhattan. See "The
Pending Acquisitions."
We believe that our competitive strengths position us well to capitalize on
several trends that have affected the apparel industrysector in recent years. These
trends include the consolidation of the department and chain store sectors into
a smaller number of stronger retailers, which represent some of our most
important customers; the increased reliance of retailers on reliable suppliers
with design expertise and advanced systems and technology; and the continued
importance of a brandstrong brands as a source of product differentiation.
COMPETITIVE STRENGTHS3
Jantzen Acquisition
On March 22, 2002, we completed the acquisition from subsidiaries of VF
Corporation of certain assets of the Jantzen swimwear business for approximately
$24.0 million, excluding fees related to the transaction. The Jantzen brands
have a history of over 90 years and its products are sold in upscale department
stores, mid-tier department stores, chain stores, mass merchants and specialty
shops. The acquisition was financed with a portion of the proceeds from a $57.0
million private offering of 9 1/2% senior secured notes due 2009, which we
closed simultaneously with the acquisition.
The Jantzen assets we acquired consist primarily of the Jantzen trademarks
and tradenames, license agreements, certain equipment, other items of personal
property, showroom leases and inventory relating to the 2003 season, which
commences on July 1, 2002. As part of this acquisition, we acquired the
licenses for the Tommy Hilfiger brand for women's swimwear. We also acquired
the license for the Nike(R) brand for women's swimwear and swimwear accessories.
However, the assignment of this license is subject to the written consent of the
licensor. We are still in the process of negotiating Nike's consent to the
assignment of its license. In the meantime, we are working closely with Jantzen
and the licensor to ensure that all of the rights and obligations under the
existing Nike license are preserved and fulfilled until such written consent is
obtained.
In connection with the Jantzen acquisition, we entered into a lease
agreement with VF Corporation to occupy Jantzen's Portland, Oregon office
facility for an initial six-month period. In addition, we entered into a lease
agreement to occupy a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period. We also have a right of first refusal
until May 2002 to purchase the Seneca distribution center facility.
We believe this acquisition opens up a new market for the Company and we
plan to build on Jantzen's reputation for high-quality swimwear. It will expand
our licensing revenues, add to our strong portfolio of brands, and allow us to
broaden our product line into new product categories, such as women's swimwear
and sportswear.
Notes Offering
On March 22, 2002, we completed a private offering of $57.0 million 9 1/2%
senior secured notes due 2009. The proceeds of the private offering were used
to fund the Jantzen acquisition, to reduce the amount of outstanding debt under
our senior credit facility and as additional working capital.
The senior secured notes are secured by a first priority security interest
granted in our existing portfolio of trademarks and licenses, including the
trademarks and licenses acquired in the Jantzen acquisition; all license
agreements with respect to these trademarks; and all income, royalties and other
payments with respect to such licenses. The senior secured notes are senior
secured obligations of Perry Ellis and rank pari passu in right of payment with
all of our existing and future senior indebtedness. The senior secured notes
are effectively senior to all unsecured indebtedness of the Company to the
extent of the value of the assets securing the notes.
Competitive Strengths
We believe that we have the following competitive advantages in our
industry:
PORTFOLIO OF STRONG BRANDS.4
Portfolio of Family of Brands. We currently own fourand distribute nine major brands
(Munsingwear,(Perry Ellis, Munsingwear, Crossings, Natural Issue, John Henry, Manhattan,
Mondo di Marco, Grand Slam and Grand Slam)Jantzen) with a total of over 4041 sub-brands (such
as Penguin Sport(R) and Career Club)Club(R)). We also design, source and market threefour
other major brands (PNB Nation, Andrew(Andrew Fezza, PING, Nautica and Ping)Tommy Hilfiger), which we
license under existing agreements with various expiration dates and renewal
options. We also license the Perry Ellis, John Henry, Manhattan, Natural Issue,
Pro Player, Mondo di Marco, Munsingwear and Jantzen brands to licensees for
products that we do not sell directly to retailers. These brands enjoy national
recognition in their respective sectors of the apparel industrymarket and we believe have a
loyal consumer and retailer following. Brand recognition is critical in the
apparel industry, where strong brand names help define consumer preferences and
drive department store floor space allocation.
We believe that each of the Perry Ellis International and John Henry/Manhattan
acquisitions will further enhance our established portfolio of recognizable
brands.
STRONG RETAILER RELATIONSHIPS.Strong Retailer Relationships. We believe our established relationships
with retailers at all distribution levels give us the opportunity to maximize
the selling space dedicated to our products, 3
monitor our brand presentation and
merchandising selection, and introduce new brands and products. We have long-standinglong-
standing relationships with our largest customers, includingwhich include J.C. Penney and
Sears Roebuck (more than 2022 years), Federated Department Stores (12(15 years), Wal-Mart (10Wal-
Mart (13 years), Kohl's (6(9 years) and Dayton Hudson (5Target (8 years). We believe that we have
maintained these long relationships as a result of our quality brand name products
and our dedication to customer service. Management, in conjunction with our
30 salespeople,staff of sales people and commissioned agents, meets with our major customers
frequently to review product offerings, establish and monitor sales plans, and
design joint advertising and promotional campaigns. We believe our reliable
delivery times, consistent product quality and quick response to designfashion trends
and inventory demands allow us to meet our retailers' current requirements. In
addition, our global sourcing network, design expertise, advanced systems and
technology, and new warehousing facility enhance our ability to meet the changing
and increasing needs of our retailers.
STRONG LICENSING CAPABILITIES AND RELATIONSHIPS.Strong Licensing Capabilities and Relationships. By actively licensing the
brands we own, we have gained significant experience in identifying potential
licensing opportunities and have established relationships with many active
licensees. Our acquisition of the Perry Ellis brand during fiscal 2000
positioned us in more retail outlets with more exposure nationally and
internationally. We believe that over the past three years we have successfully
integrated new brands into our business. We believe that our broad portfolio of
brands appeals to licensees because it gives them the opportunity to sell their
products ininto many different retail distribution channels. For example, a
manufacturer of men's accessories might license the CrossingsNatural Issue brand to sell
to national department stores andor license the Munsingwear brand to target mass
merchandisers. Further, by aligning our strengths with those of our licensees,
we have been able to enhance our sourcing capabilities, and plan our marketing
campaigns on an aggregate basis to maximize return on investment. We believe
that our licensing expertise, which is supported by a dedicated staff, will
allow us to continue marketing our brands to apparel producers effectively. WORLD-WIDE LOW-COST SOURCING CAPABILITIES.We
will be bringing our experience and expertise to our Jantzen brands and expect
to position them among the key players in the swimwear and sportswear market.
World-Wide Low-Cost Sourcing Capabilities. Our global network of suppliers
enables us to purchase apparel products at competitive cost without sacrificing
quality, while at the same time reacting quickly to our retailers' needs and
maximizing production flexibility. We developed this expertise through more
than 3235 years of experience in purchasing our products from suppliers around the
world. No individual supplier in fiscal 19992002 accounted for more than 6.9%10.0% of
our total sourcing needs. We do not have long-term arrangements with any of our
suppliers, thereby affording us greater flexibility in making purchasing
decisions with our vendor base. We currently maintain a staff of experienced
sourcing professionals, principally located in the United States, Korea, China,
and Taiwan. The Company made the decision during this past year to close its
office in Mexico and expand its Asian operations with the opening of a new
office in Shanghai, China. This decision was based on the growth of our Far
East sourcing and the better management of the Mexican and Latin American
sourcing through the Miami office. With the global network of ten sourcing and
quality assurance offices, whichwe closely monitor our suppliers to maintain strict
quality standards and identify new sourcing opportunities. By sourcing our
products, we manage our inventories more effectively, and do not incur the costs
of maintaining and operating production facilities.
DESIGN EXPERTISE AND ADVANCED TECHNOLOGY.5
Design Expertise and Advanced Technology. Our in-house staff consists of
five16 senior designers, who have an average of 18 years of experience, and are
supported by a staff of 1420 other design professionals. Together, they design
substantially all of our products utilizing computer-aided design technology.
The use of this technology minimizes the time-consuming and costly production of
actual sewn samples prior to customer approval. It also allows us to create
custom-designed products meeting the specific needs of our customers and
facilitates a quick response to changing fashion trends. Our computer-aided
design system was recently upgraded to allow us to enhance our design technology
produces approximately 800and instantaneously share our designs per monthwith our suppliers globally, and our library
currently contains approximately 52,000 designs.
CAPACITY FOR GROWTH.react
quicker to new product.
Capacity for Growth. We will be able to leverageare leveraging our recent investments in
infrastructure and our skilled personnel to accommodate future internal growth
and selected acquisitions. Our recent move to a new approximately 238,000240,000 sq. ft. office and warehouse facility in
Miami, with approximately 170,000 sq. ft. of warehouse space, has positioned us
to increase capacity with no significant additional
capital expenditure. This facilityto handle current and future growth. We believe these
facilities, two third-party warehouse facilities in California, our 15,000 sq. ft. of office spacetwo
showrooms in New York and other facilities we use are sufficient to accommodate
current operations and additional personnel. However,With the Jantzen acquisition we
expect
thatentered into a lease agreement for one-year period with a 60-day option to
acquire a portion of Jantzen's Seneca, South Carolina distribution center
facility. We also own three acres of land adjacent to our staffing levels will rise at a lower rate thanfacilities in Miami,
Florida, which affords us the opportunity to expand our revenue growth.
PROVEN ABILITY TO INTEGRATE ACQUISITIONS.primary warehousing and
office space when needed.
Proven Ability to Integrate Acquisitions. Since 1993, we have selectively
acquired and integrated fourseven major brands, which currently have over 40 sub-brands. Wesub-
brands. In assessing acquisition candidates, we selectively target brands that
we believe are underperformingunder-performing and can be revitalized using our competitive
strengths. To date our most significant brand purchase waspurchases have been our
acquisitions of the Munsingwear brand in 1996.fiscal 1997, the Perry Ellis, John
Henry and Manhattan brands in fiscal 2000, and the Jantzen brands in fiscal
2003. As part of an extensive integration process we:
/bullet/ repositioned the brand based on our "family of brands"
strategy;
4
/bullet/. improved the responsiveness to market trends by applying our
design and sourcing expertise;
and
/bullet/. communicated the new positioning of the brandbrands through a widevarious wide-
ranging marketing program.
As a result, Munsingwear annual revenues increased by 55.7%programs;
. continued licensing operations immediately upon acquisition
without interruption;
. solidified the management team to approximately
$66.0 milliondesign and market licensing
brands;
. repositioned the brands based on our "family of brands" strategy;
. renegotiated existing contracts and developed new licensing
agreements in fiscal 1999 from approximately $42.4 million in fiscal 1998,new segments and markets; and
. implemented the first full yearsourcing and distribution of our ownership.products previously
licensed.
We believe that we can successfully integrate additional brands into the Supremeour family
of brands, and revitalize
them. For example, we intend to license the Perry Ellis brand for additional
product categories such as women's wear and expand into geographic areas where
the Perry Ellis brand has been historically underrepresented such as Europe and
Asia.
EXPERIENCED MANAGEMENT TEAM.revitalizing them consistent with our competitive strengths.
Experienced Management Team. Our senior management team averages nearly 20
years of experience in the apparel industry. Our management team also has
significant experience in developing and revitalizing brand names, licensing
brands; has an established reputation with retailers, the trade and the
financial community,community; and possesses a diverse skill base, which incorporates
brand marketing, sourcing and management information systems.
BUSINESS STRATEGY6
Business Strategy
Our "family of brands" marketing approach is designed to develop a distinct
brand for each product category within each distribution channel. For example,
we sell our golf sportswear under the Munsingwear brand to mass merchants, under
the Grand Slam brand to department stores and under the PingPING brand to higher-end
retailers, golf shops and resorts. By differentiating our brands in this manner,
we can better satisfy the needs of each type of retailer by offering brands
tailored to its specific distribution channel. In addition, we believe that this
strategy helps insulate us from changing retail patterns, allows us to maintain
the integrity of each distribution channel and helps prevent brand erosion.
Our objective is to develop and enhance our brands by:
/bullet/. carefully maintaining distinct distribution channels for each
of our brands;
/bullet/brand;
. consistently designing, sourcing and marketing high quality
products;
/bullet/. reinforcing the image of our brands and continuously promoting
them; and
/bullet/. updating our styles to keep them current.
Controlling strong brands allows us to increase our retail base, license
these brands to third parties, develop sub-brands and grow internationally.
To achieve our objective, we have adopted a strategy based on the following
elements:
INCREASE BRAND NAME RECOGNITION.Increase Brand Name Recognition. We intend to enhance recognition of our
brand names by promoting our brands at both the retailer and consumer levels. WeAs part
of this effort, we conduct cooperative advertising in print and broadcast media
in which various retailers feature our products in their advertisements. We have also
begunengage in direct consumer advertising in select markets by placingsecuring highly
visible billboards and events, sponsorships, special event advertisements and magazine
advertisementsadvertising in periodicals such
as Men's Health, Maxim and Gentleman's Quarterly.Quarterly in association with specific
regional or national events. We will continue the Jantzen's emphasis in print
advertisements in influential fashion magazines such as In Style, Glamour and
Cosmopolitan and intend to sponsor selected athletes and celebrities in the
future. We believe these campaigns will serve to further enhance and broaden our
customer base. Licensing our brands to third parties also serves to enhanceimprove
brand recognition by providing increased consumer exposure. We have a strong
presence at trade shows, such as "MAGIC" in Las Vegas, Market Week in New York
and golf shows and events throughout the country. We also recently established Webcontinue to maintain
web sites for each of our major brands to position us to take advantage of opportunities
created by the Internet.
INCREASE DISTRIBUTION.Increase Distribution. We intend to increasehave increased the distribution of our existing
products by expanding the number of regional national and internationalnational retailers that carry
our brands and 5
increasinggained greater penetration in the number of stores in which each
of these retailers sells our products. This increased exposure should broadenhas broadened our
established reputation at the retail and consumer levels. We selectively pursue
new channels of distribution for our products, focusing on maintaining the
integrity of our products and reinforcing our image at existing retail stores,
as well as introducing our products to geographic areas and consumer sectors
that are presently less familiar with our products.
CONTINUE TO DIVERSIFY PRODUCT LINE.Continue to Diversify Product Line. We intendcontinue to broaden the range of our
product lines, capitalizing on the name recognition, popularity and discrete
target customer segmentation of each major brand. For example, we introduced a
sweater line under the Crossings brand and expanded it to include several of
our other brands. We have also expanded into urban wear with the licensing of
the PNB Nation brand,
dress sportswear with the licensing of the Andrew Fezza brand and high-end golf
sportswear with the licensing of the PingPING brand. EXPAND LICENSING ACTIVITIES.We also entered into the jeans
wear market with the reintroduction of the Perry Ellis America brand in
department stores and expanded the Natural Issue brand in the mid-tier
department stores and chain stores. This year, we added a new brand to the
corporate wear (Advertising Specialty Industry)
7
market with the licensing of the Nautica brand for knits, woven casual shirts,
fleece tops, outerwear and headwear. For fiscal 2003 with the acquisition of
Jantzen we have entered into a new market for the Company with women's swimwear
and sportswear.
Adapt to Changing Marketplace. The apparel business continues to present
new challenges in changing styles, customer demands and consumer tastes, getting
goods to market, and reacting to the technologies employed by the retailers and
imposed on suppliers. By continuing to strive for improvements in our design
department we continue to develop new designs suited to the various lifestyles
we cater to. Our continuing commitment to sourcing and logistics enables us to
meet the time pressures of gearing up for the new sales seasons, and reacting
quickly to customer demands. Some examples of our ability to meet the challenges
in our business follow:
. In January 2001, we started distribution into the corporate wear
market, which is geared towards selling merchandise to large
corporations as uniforms and for promotional activities. We
diversified our internal sales structure to better service these
customers and their sales channels. We have continued to grow the
corporate wear business by licensing the Nautica brand and
integrating it into our distribution flow.
. In response to increased private label programs being promoted by
some of our retail customers, we increased our branded supply
with private label goods. While these goods generally have lower
initial profit margins, they represent a steady source of supply
for the retailer and generate meaningful revenues for us.
. The Jantzen acquisition in March 2002 provides us with our first
entry into the women's swimwear and sportswear market. This step
gives us the opportunity to apply our design, marketing and
global sourcing capabilities in the women's wear market. With our
competitive strengths in the industry we expect to generate
considerable top line growth for the Jantzen brands over the
coming years.
Expand Licensing Activities. Since acquiring the Munsingwear brand in
1996,fiscal 1997, we have significantly expanded the licensing of our brands to third
parties for various product categories. Similar to the Munsingwear acquisition, we believe the
pendingThe acquisitions of the Perry Ellis,
John Henry, Manhattan, Pro Player and John Henry/
ManhattanMondo di Marco brands have provided us,
and will continue to provide us, with significant licensing opportunities. The
acquisition of the Jantzen brands is expected to significantly enhance these
opportunities. We intend to
useare using these nationally-recognizednationally recognized brands to expand our
licensing activities, particularly with respect to additional product categories such as
women's wear and activewear, and to enter into historically underserved
geographic areas which we believe have been historically
underrepresented by these brands,for our Company, such as Latin America, Europe and Asia. We
plan to workare continually working with our licensees to strengthen their design, finished
products and marketing efforts andcampaigns, thereby increaseincreasing our revenues. THE PENDING ACQUISITIONS
PERRY ELLIS INTERNATIONAL, INC. In January 1999, we agreed to buy Perry
Ellis International, Inc. for approximately $74.6 million in cash, net of
purchase price adjustments. Perry Ellis International, Inc. is a privately held
company, which ownsWe also
continually review our possible entry into new markets and licensesprovide potential
licensees with strong brands, design expertise and innovative marketing
strategies.
Pursue Strategic Acquisitions. The apparel industry has followed the
Perry Ellis brand, currently oneconsolidation trend of the top selling brands in department stores in the United States. Perry Ellis
International, Inc. is currently the licensor under 34 license agreements,
primarily for various categories of men's wear, boy's wearretail industry as large retailers have continued to
give preferences to more dependable and fragrances. The
purchase of the Perry Ellis brand gives us a widely recognized brand in the
marketflexible vendors. We are frequently
presented with and will be our premier brand.
Perry Ellis, who was an internationally-known designer, positioned his
brand to be associated with quality, valueevaluate new acquisition opportunities and innovative designs and to appeal
to high-income, status conscious, 25-50 year-old men. His successors have
maintained the brand's premier image into the 1990's as annual retail sales by
the brand's 34 licensees in various product categories exceeded $900 million in
1998. Perry Ellis International, Inc. is currently one of the largest selling
brands in department stores such as Dillards, Federated Department Stores, Saks
Fifth Avenue and May's Department Stores at retail price points ranging from
$39.99 to $99.99 for dress shirts.
We intend to capitalize oncontinue
our strategy of making selective acquisitions to add new product lines and
expand our portfolio of brands. Since 1993, we have acquired, or obtained
licenses for, several brands, including Munsingwear, Perry Ellis' image as a premier brand by
seeking licensing opportunities in the product categories in which we currently
do not have a large presence, such as women's wear and men's accessories, and
into geographic areas historically underrepresented by this brand, such as
Europe and Asia. Currently, Perry Ellis, branded products are principally sold
in the men's wear, boy's wear and fragrance product categories, and are sold
mostly in the United States. We plan to apply the elements of our brand
strategy to the Perry Ellis brand in order to strengthen it. We believe that
our significant experience in identifying strong licensees and our current
relationship with experienced licensees will enable us to capitalize on the
various licensing opportunities for the Perry Ellis brand. We will also work
with Perry Ellis International, Inc.'s current licensees to further enhance the
brand's image and generate greater licensing revenue.
Although the Perry Ellis brand has international recognition, we perceive
the brand to be underperforming in international markets such as Europe and
Asia. We believe that our brand and licensing experience will enable us to
capitalize on these international opportunities. This acquisition is expected
to close in early April 1999 and is intended to be financed from the net
proceeds of a Rule 144A offering of $100.0 million in aggregate principal
amount of senior subordinated notes due 2009.
6
JOHN HENRY/MANHATTAN. In December 1998, we entered into an agreement to
buy certain assets of the John Henry and Manhattan dress shirt business from
Salant Corporation, which is currently in a Chapter 11 bankruptcy proceeding.
On February 24, 1999, the bankruptcy court approved the purchase for $27.0
million plus the value of the existing dress shirt inventory (which is
currently estimated to be approximately $17.2 million). The assets to be
purchased consist of the John Henry,
Manhattan, Crossings, PING, Andrew Fezza, Mondo di Marco, Pro Player, Nautica,
Jantzen and Lady Manhattan trademarksTommy Hilfiger. The March 2002 acquisition of the Jantzen brands
presents the Company with an opportunity to apply its design, sourcing,
marketing and trade names, license agreements, certain manufacturing equipment and the
existing dress shirt inventory. Phillips-Van Heusen Corporation has agreed,
subject to certain conditions including regulatory approval, to buy the
existing dress shirt inventory at our acquisition cost concurrently with the
John Henry/Manhattan acquisition and to license from us the John Henry and
Manhattan brands for men's dress shirts. In connection with the acquisition, we
will assume a lease for a shirt manufacturing facility located in Mexico which
expires in July 1999. Although no agreement has been reached, we intend to
sublease the Mexican facility to one of our suppliers for use in the production
of our products or not renew the lease.
The John Henry/Manhattan acquisition is subjectdistribution expertise to a number of conditions,
including regulatory approval, amendment of our revolving credit facility with
a group of banks (the "Senior Credit Facility"), amendment of a synthetic lease
(the "Lease") entered into to finance our new office and warehouse facility
and, if consummated, is expected to close in late March or early April 1999.
The acquisition price, net of the $1.0 million deposit we have paid and the
proceeds from sale of the existing dress shirt inventory, will be approximately
$26.0 million and is intended to be financed with borrowings under our Senior
Credit Facility,market, which we expect to amend prior to consummation of the
acquisition.
The licenses to Phillips-Van Heusen have an initial term of three years
and Phillips-Van Heusenbelieve has
options to renew the licensessignificant upside potential for four additional
terms of three years each. The minimum royalty for the first three years would
be approximately $1.5 million and approximately $1.5 million for the John Henry
and Manhattan licenses, respectively, and would increase by varying percentages
in the 12 subsequent years. Phillips-Van Heusen is required to contribute $1.0
million to an overall $3.0 million advertising/marketing campaign for the first
18 months of the license term.
Upon consummation of the John Henry/Manhattan acquisition, we will pay
Icahn Associates Corp., an affiliate of Carl Icahn, or its affiliates ("IAC") a
financial advisory fee consisting of $1.0 million in cash and a right to
purchase 1,320,000 shares of our common stock at $12.00 per share.
Simultaneously with the exercise of the right, IAC will be required to enter
into a two-year standstill agreement and will receive certain registration
rights with respect to the shares.
We are currently a licensee for the John Henry brand name and are thus
very familiar with the brand and its potential. The John Henry brand is highly
recognizable, appealing to 25 to 55 year-old middle-income men and is a leading
brand of men's dress casualwear at Sears Roebuck, one of our existing
customers. The John Henry brand is one which consumers associate with quality
and value.
The Manhattan brand has a history in excess of 50 years. The brand appeals
to 25 to 65 year-old low-income men and is a popular dress shirt at Wal-Mart
and Kmart Corporation. It also has a strong presence in Asia and in other mass
merchandisers such as Meijer's. The brand has been positioned to be associated
with value at a moderate price.
BRANDSus.
8
Brands
The key components of our brand strategy are to: (a) to provide consistent
high quality products, (b) to distribute theour brands in distinct channels of
distribution, and (c) to reinforce and capitalize on theeach brand's image through new
product development and image advertising. This strategy has enabled us to
increase our customer base, license our brands to third parties and develop sub-brands.
In fiscal 1999, over 81.4%sub-
brands.
Nearly 63.0% of our total revenues resulted from sales ofproducts are sold under brands we own or license.license from
third parties. We currently own fournine nationally recognized brands which are thewhose
products we source and sell to retailers and other channels. These brands
include Natural Issue, Munsingwear, 7
Grand Slam, John Henry, Manhattan, Perry
Ellis, Perry Ellis America, Crossings and Crossings brands.Jantzen. There have been over 40 sub-brands41 sub-
brands developed from these fournine major brands. We also have licenses to distribute other
nationally recognized brands including the Ping,PING,
Andrew Fezza, Nautica and PNB Nation
brands.Tommy Hilfiger brands under license arrangements.
We license Perry Ellis, our premier brand, as well as John Henry,
Manhattan, Natural Issue, Pro Player, Mondo di Marco, Career Club, Crossings,
Munsingwear and Jantzen for product categories that we do not sell directly to
the retailers. Our depth of brand selection enables us to target consumers
across a wide range of ages, incomes and ethnic groups.
NATURAL ISSUE.lifestyles.
Perry Ellis. We acquired the Perry Ellis brand, which is associated with
elegance, quality, value, comfort and innovative designs in fiscal 2000. The
Perry Ellis brand is designed to appeal primarily to high-income, status-
conscious, professional 25-50 year-old men. We primarily license the Perry Ellis
brand to third parties for a wide variety of products.
Munsingwear. We purchased the Munsingwear brands along with its associated
sub-brands in fiscal 1997 to appeal to the middle-income 30-70 year-old men who
prefer classic casual sportswear and to sports enthusiasts. Munsingwear and its
sub-brands have over 100 years of history. Munsingwear apparel items include
golf shirts, vests, jackets and casual pants. The Munsingwear brand is
primarily sold in mid-tier department stores such as Mervyn's at retail price
points for shirts ranging from $17.99 to $24.99 and for casual pants from $19.99
to $24.99.
Some of the successful sub-brands of the Munsingwear brand include the
Munsingwear Lifestyle sub-brands for casual sportswear and the Munsingwear Golf
and Slammer sub-brands for golf sportswear. These sub-brands are sold primarily
to regional mass merchants such as Meijer Inc. at retail price points ranging
from $12.99 to $19.99.
Grand Slam and Penguin Sport. We purchased the Grand Slam and Penguin
Sport brands as part of the Munsingwear acquisition in fiscal 1997. Grand Slam,
with its signature penguin icon logo appeals to the middle-income 30-60 year-old
men who prefer a classic casual activewear. The Grand Slam brand is primarily
sold in mid-tier department stores, at retail price points for shirts ranging
from $24.99 to $34.99 and for pants from $29.99 to $39.99.
The Penguin Sport brand offers a functional sportswear design aimed at the
golf market. It is sold primarily in the mid-tier department stores such as
Kohl's and Mervyn's, as well as specialty and sporting goods stores at retail
price points ranging from $33.99 to $35.99. Grand Slam and Penguin Sport
products include golf shirts, vests, jackets, pants and shorts.
Natural Issue. We developed the Natural Issue brand in 1988 to appeal to
middle-income men who are 25-55 years old. The brand is now a well-established
brand which we have positioned to be associated with value and quality.year-old men. Natural IssueIssue's products include shirts,
sweaters and pants. It is designed to suit the needs of the consumer with a
broad cross-cultural appeal. We are expanding our pants and shorts and areproduct to include the
Natural Issue Executive Khaki pant line. Natural Issue is primarily sold in chainthe
mid-tier department stores, such as Sears Roebuck, Kohl's, J.C. Penney and Mervyn's, at retail
price points for shirts ranging from $22.99$26.99 to $30.99.
MUNSINGWEAR AND GRAND SLAM. We purchased the Munsingwear$34.99 and Grand Slam
brands along with their associated sub-brandsfor pants from $39.99
to $44.99.
John Henry. This brand, which we originally licensed and then acquired in
1996fiscal 2000, is designed to appeal to middle income 30-7025-45 year-old men who are sports enthusiasts. These well-known brands
are identified by their signature penguin logo and have over 100 years of
history. We have positioned these brands to be associated with fashion atmen. Our
product offerings form a moderate price. Munsingwear and Grand Slam products include golf shirts, pants
and shorts."dress casual collection." The MunsingwearJohn
9
Henry brand is primarily sold in sporting goodsat the mid-tier department stores such as The Sports AuthoritySears
Roebuck (both in the United States and FootLockerCanada) and Mervyn's at retail price
points ranging from $25.99 to $34.99.
Manhattan. We acquired the Manhattan brand in fiscal 2000. For over 100
years, the Manhattan label has been associated with men's dress shirts. We have
diversified the Manhattan brand in the United States to include a wider range of
sportswear and classic dress-casual apparel. We currently offer an exclusive
collection at K-Mart consisting of pants, shirts and sweaters, in a variety of
styles and patterns geared towards a casual lifestyle. The brand is designed to
appeal to 25-65 year-old men. The Manhattan brand is sold at retail price points
for shirts and sweaters ranging from $12.99 to $26.99.$22.99 and for pants from $19.99
to $24.99.
Cubavera and Havana Shirt Co. In fiscal 2000 and 2002, we introduced the
Cubavera and the Havana Shirt Co. brands, respectively. This line of clothing
is designed to appeal to the growing tropical and Latin influences on consumers'
style and tastes. Cubavera is currently sold in major department stores such as
Federated Department Stores and May Department Stores, as well as specialty
shops, at retail price points ranging from $29.99 to $39.99. The Grand Slam brandHavana Shirt
Co. is primarilycurrently sold in department stores
such as Dayton Hudson, Federated Department Stores and May's Department Stores at retail price points ranging from
$24.99 to $39.99.
Some of the successful sub-brands of the Munsingwear brand include the
Munsingwear Lifestyle/registered trademark/ sub-brand for casual sportswear and
the Munsingwear Golf/registered trademark/ and Slammer/registered trademark/
sub-brands for golf sportswear. These sub-brands are sold primarily to regional
mass merchandisers such as Meijer and Uptons at retail price points ranging
from $18.99 to $24.99.
We also offer golf sportswear under the Grand Slam Tour sub-brand, which
is sold primarily in golf shops and top-tier stores, and the Penguin
Sport/registered trademark/ sub-brand, which is sold primarily to the chain
stores. The retail price points of the Grand Slam Tour and Penguin Sport
sub-brands are $24.99 to $39.99 and $23.99 to $24.95, respectively.
CROSSINGS.$34.99.
Crossings. We purchased the well-known Crossings sweater brand in 1997 in
orderfiscal 1998 and
positioned it to increase our product offerings to include sweaters appealingappeal to middle-income 25-5535-55 year-old men. This brand was well
known in the 1980's as the premier sweater brand. We have positioned the brand
to be associated with value and quality and havefurther expanded it to include
shirts.shirts and pants. The Crossings brand is primarily sold to upscale department
stores such as Federated Department Stores, May'sMay Department Stores and Saks, Fifth AvenueInc.
at retail price points for shirts ranging from $19.99 to $29.99 and for pants
from $19.99 to $29.99.
Perry Ellis America. We introduced the Perry Ellis America brand for jeans
wear during fiscal 2001. The Perry Ellis America brand is designed to appeal
primarily to 18-30 year-old men, and is sold at retail price points for shirts
ranging from $19.99 to $39.99 and for pants from $37.99 to $44.99.
Pro Player. We acquired the Pro Player brand in fiscal 2001. This brand
is well recognized in the sports apparel market and appeals to 18-45 year-old
men. We license and sell this brand to third parties for a wide variety of
products and is sold at retail price points ranging from $22.99$16.99 to $30.99 for sweaters.$22.99.
Jantzen. We acquired the Jantzen brands in March 2002. With this
acquisition we will be entering the women's swimwear and sportswear market. The
Jantzen brands have a history of over 90 years and appeal to middle-income 30-55
year-old women. The products will be sold in upscale department stores, mid-tier
department stores, chain stores and specialty shops at retail price points
ranging from $49.99 to $89.99.
PING. We obtained ahave an apparel master license for the prestigious PingPING golf brand, in 1998which is
designed to appeal to high-income 25-50 year-old men who are status-conscious.
The license which covers the world other than Japan, hashad an initial term expiring in December 2001 with the possibility of renewal depending on satisfactory
performance of our obligations under the licensing agreement.2003 and has been renewed
for another year until December 2004. The brand is a well-known and prestigious
golf brand, which we positioned to be associated with the highest standard of
quality in the golf business. Currently, we sellOur products under this brand include golf shirts,
sweaters, pants, outerwearshorts and hats under this brand.outerwear. The PING brand is sold primarily in the golf
shops and top-tier specialty stores at retail price points ranging from $50.00$43.99
to $105.00.
ANDREW FEZZA.$99.99.
Andrew Fezza. We obtained a license for the Andrew Fezza brand, in 1998 to
appeal to high-income 25-50 year-old men who enjoy shopping for designer
clothes. Theunder a license that
covers the United States, its territories and possessions and has an initial
term expiring in June 2003. We have an option to renew this license for an
additional 5five years depending on satisfactory performance of our obligations
under the licensing agreement.but have not yet determined whether we will exercise such
option. Andrew Fezza is a recognized living American designer who is actively
involved with the design and marketing of the brand. We have positioned the
brand to be associated with a classic European style at a moderate price. Andrew
Fezza's products include shirts and pants. The Andrew Fezza brand is primarily sold to
department stores such as May'sMay Department Stores,
8
Federated Department Stores and
Saks, Fifth AvenueInc. at retail price points for shirts ranging from $21.99 to $29.99 and
for pants from $19.99 to $34.99.
10
Tommy Hilfiger. We acquired a license for the Tommy Hilfiger brand for
women's swimwear as part of the acquisition of the Jantzen brands in March 2002.
The products will be sold in upscale department stores, chain stores and
specialty shops at retail price points ranging from $25.99$49.99 to $34.99 for shirts and $29.99 to $49.99 for pants.
PNB NATION.$99.99.
Mondo di Marco. We obtained a license foracquired the urban-oriented PNB NationMondo di Marco brand in 1998fiscal 2001. This
brand is positioned to appeal to 15-3018-40 year-old men whose clothes are very important to
their identities and who enjoy the urban culture, music and night life.men. The license covers the United States and has an initial term of at least two years,
and we have an option to purchase the brand. PNB Nation's products include
shirts, pants and outerwear. TheMondo di Marco brand
is licensed to a third party and is sold primarily sold in urbanup-scale department stores and
sporting goods stores such as The Buckle, Pacific Sunwear and Dr. Jays
at retail price points ranging from $14.99$29.99 to $34.99 for shirts and $39.99 to
$79.00 for pants.
PRIVATE LABEL.$69.99.
Other Markets
Private Label. In addition to our sales of branded products, we sell
products to retailers for marketing as private label own-storeor own store lines. In
fiscal 1999,2002, we sold private label products to Target, Wal-Mart, KmartJ.C. Penney,
Goody's, K-Mart, Mervyn's, Meijer and Meijer.Sears Roebuck. Private label sales
generally yield lower profit margins than sales of comparable branded products. Consequently, our strategy is to increaseproducts,
but they often achieve higher sales of branded
products.volumes. Private label sales accounted for
approximately 18.6%36.6%, 24.6%34.0% and 28.5%21.0% of net sales during fiscal 1999, 19982002, 2001 and
1997.
PRODUCTS AND PRODUCT DESIGN2000, respectively.
Corporate wear. We entered into the corporate wear business at the end of
fiscal 2001. We recognized the change in the current business environment and
have begun to provide a variety of corporations with high quality designer
products. We currently offer the PING, Nautica and Perry Ellis brands in this
market. We sell primarily to corporate wear distributors at price point ranging
from $39.99 to $109.99.
Products and Product Design
We offer a broad line of high quality men's sportswear, including sportwoven and
dressknit sport shirts, golf sportswear, activewear, sweaters, urban wear andjackets, vests, casual
and dress pants and shorts. Substantially all of our products are designed by our
in-house staff utilizing our advanced computer-aided design technology. This
technology enables us to produce computer-generated simulated samples that
display how a particular style will look in a given color and fabric.fabric before it
is actually produced. These samples can be printed on paper or directly onto
fabric to more accurately present the colors and patterns to a potential retailer.customer.
In addition, we can quickly alter the simulated sample in response to retailerthe
customer's comments, such as a
request to change the colors,of color, print layout, collar style and
trimming, pocket details and/or placket treatments. The use of computer-aided
design technology minimizes the time-consuming and costly need to produce actual
sewn samples prior to retailer approval and allows us to create custom-designed
products meeting the specific needs of a retailer.customers.
In designing our apparel products, we seek to fosterpromote 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 and form collections, thereby encouraging
multiple purchases. Our design staff seeks todesigners stay continuously abreast of the latest
design trends, fabrics, colors, styles and consumer preferences by attending
trade shows and periodically conducting market research in Europe and the United
States. In addition, we actively monitor the retail sales of our products to
determine changes in consumer trends.
In accordance with standard industry practices for licensed products, we
have the right to approve the concepts and designs of all products produced and
distributed by our licensees.
Our products include:
SHIRTS.Shirts. We offer a broad line of sport shirts, which include cotton and
cotton-blend printed, yarn-dyed and plainsolid knit shirts, cotton woven shirts,
silk, cotton and rayon printed button front sport shirts, linen sport shirts,
golf shirts, and embroidered cottonknits and woven shirts. Our shirt line also
includes dress shirts, brushed twill shirts, jacquard knits and yarn-dyed flannels. In
addition, we are aalso the leading distributor in the United States of guayaberaGuayabera
shirts. We market shirts under a number of our own brands as well as the
private labels of our retailers. Sales under our brands and those licensed by us account for a
significant majority of shirt sales. Our shirts are produced in a wide range of
men's sizes, including sizes for the big and tall men's market. Sales of
11
shirts accounted for approximately 82%74%, 83%74% and 87%78% of our net sales during
fiscal 1999,
19982002, 2001 and 1997,2000, respectively.
PANTS.Pants. Our pants lines of pants 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. We offer our pants in a wide range of men's sizes
and generallysizes.
We market themour pants as complementssingle items or as a collection to complement our shirt
lines. Sales of pants accounted for approximately 11%20%, 11%20% and 7%16% of our net
sales during fiscal 1999,
19982002, 2001 and 1997,2000, respectively.
OTHER PRODUCTS.Swimwear and Sportswear. With the acquisition of the Jantzen brands in
March 2002, we are entering into the women's swimwear and sportswear market in
fiscal 2003.
Other Products. We began to offer sweaters, when we purchased the Crossings
brand in 1997vests, jackets and recently introduced sweaterspullovers under our
other brands.existing brands as well as private label. The majority of the other products we
sell is
9
are sweaters, which accounted for approximately 4%6%, 6% and 5% of net sales
during fiscal 1999.
We also began to2002, 2001 and 2000, respectively. With the acquisition of
Jantzen, we will offer a line of urban sportswear, tee-shirtsswimwear accessories beginning in fiscal 2003.
Marketing and outerwear
when we licensed the PNB Nation brand. Sales of other products (including
sweaters) accounted for approximately 7%, 6% and 6% of net sales during fiscal
1999, 1998 and 1997, respectively.
MARKETING AND DISTRIBUTIONDistribution
We market our apparel products to retailerscustomers principally through the direct
efforts of an in-house sales staff, and independent commissioned sales
representatives who work exclusively for us. These in-house employeesus, and
commissioned sales representatives accounted for approximately 84% of net sales
for fiscal 1999. To supplement our sales efforts, we also use other non-exclusive independent
commissioned sales representatives, who generally market other product lines as
well as ours, and weours. We also attend major industry trade shows in the fashion, golf and
tele-market our products to specialty retailers.corporate sales areas.
We also advertise to retailerscustomers through print advertisements in a variety of
consumer and trade magazines and newspapers.newspapers, and through outdoor advertising
such as billboards strategically placed to be viewed by consumers. In order to
promote our men's sportswear at the consumerretail level, we share the cost of conductingconduct cooperative
advertising in print and broadcast media, in which various retailers featurefeatures our products in theirour
customers' advertisements. The cost of this cooperative advertising is shared
with our customers. We also conduct various in-store marketing activities with
our retailers,customers, such as placingretail events and promotions and share in the cost of
these events. These events and promotions are in great part orchestrated to
coincide with high volume shopping times such as holidays (Christmas,
Thanksgiving and Father's Day). In addition to event promotion, we place
perennial displays and signs of our product line with an emphasis on related and
coordinated clothingproducts in highly visible locations and offering promotions geared
to holidays such as Christmas and Father's Day. In fiscal 1997, weretail establishments.
We started direct consumer advertising in selectselected markets featuring the
Perry Ellis, Natural Issue, John Henry, Grand Slam and Munsingwear brandsbrand names
through the placement of highly visible billboards, sponsorships and special
event advertising. We will integrate the Jantzen brands in our advertising
campaigns. We also established
Webmaintain informational web sites featuring our brands and
create and implement editorial and public relations strategies designed to
heighten the visibility of our brands. All these activities are coordinated
around each brand in an integrated marketing approach.
12
The following table sets forth the principal brand names for our product
categories at different levels of retail distribution.distribution:
PRODUCT CATEGORY
-----------------------------------------
RETAIL CASUAL
DISTRIBUTION LEVEL SPORTSWEAR
- ----------------------- -----------------------------------------
High End Specialty --
Retailer,---------------------------------------------------------------------------------------------------------------------------------
Brand Portfolio Dress Jeans Sports
Channel of Casual Casual Wear Golf Shops,
Resorts
National Department Crossings
Stores Perry Ellis America(1)
Chain Stores Natural Issue
Alexander Martin/registered trademark/
Regional Stores Munsingwear
Lifestyle/registered trademark/
Mass Merchandisers Munsingwear
Classics/registered trademark/
Urban Stores --
Sporting Goods --
Stores
PRODUCT CATEGORY
----------------------------------------------------------------------------------------------------
RETAIL GOLF DRESS URBAN
DISTRIBUTION LEVEL SPORTSWEAR SPORTSWEAR SPORTSWEARApparel
Distribution
- ---------------------- ----------------------------- ------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------
High End Specialty
Upscale Department Mondo di Marco Jantzen(3)
Store PING Collection Tommy Hilfiger (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Perry Ellis(1)Ellis America
Crossings Andrew Fezza Jantzen(3)
Department Store Cubavera Perry Ellis(1) --
Retailer, Golf Shops, Ping
ResortsEllis (1) Perry Ellis America Grand Slam Tour
National Department Grand Slam Andrew Fezza PNB Nation
Stores Perry Ellis(1)
Chain StoresTommy Hilfiger (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Natural Issue Penguin Sport John Henry(2) Tipo's/registered trademark/
RegionalPro Player
Mid-Tier Stores Munsingwear John Henry Natural Issue Munsingwear Jantzen(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Mass Merchants Store Brands Manhattan Store Brands
- ---------------------------------------------------------------------------------------------------------------------------------
Green Grass(2) PING Collection
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate Gear/registered trademark/ --
Golf/registered trademark/ Career Club/registered trademark/
Slammer/registered trademark/
Mass Merchandisers Munsingwear Golf etcetera/registered trademark/ New Step/registered trademark/
Classics/registered trademark/ Manhattan(2) Monte Fino/registered trademark/
UrbanNautica Perry Ellis (1) PING Collection
- ---------------------------------------------------------------------------------------------------------------------------------
Jantzen(3)
Specialty Stores -- -- PNB Nation
Sporting Goods Munsingwear -- PNB Nation
StoresHavana Shirt Co. Tommy Hilfiger (3)
- ---------------------------------------------------------------------------------------------------------------------------------
- ----------------
(1) We willare primarily be a licensor for the Perry Ellis brand in the dress
sportswear category upon consummation ofcategory.
(2) This includes high-end and specialty golf shops and resorts.
(3) We acquired the Perry Ellis International
acquisition.
(2) We are currentlyJantzen brands and a licensee oflicense for the John HenryTommy Hilfiger
brand but, subject to
consummation of the John Henry/Manhattan acquisition, will become a
licensor of the John Henry and Manhattan brands in the dress shirt product
category.
10
We believe that the pending Perry Ellis International and John
Henry/Manhattan acquisitions will provide us with additional nationally
recognized brands which we can similarly leverage into additional sub-brands,
geographic areas and distribution channels.March 2002.
We believe that customer service is a key factor in successfully marketing
our apparel products and seek to provide retailersour customers with a high level of customer
service. We coordinate efforts with retailerscustomers to develop products meeting their
specific needs using our design expertise and computer-aided design technology to offer custom-designed products. We also usetechnology.
Utilizing our well-developed sourcing capabilities, we strive to produce and
deliver products to our customers on a timely basis.
Our in-house sales staff is responsible for retailercustomer follow-up and support,
including monitoring prompt order fulfillment and timely delivery. We utilize
an Electronic Data Interchange ("EDI") system for certain retailerscustomers in order to
provide advance shippingadvance-shipping notices, process orders and conduct billing operations.
In addition, certain retailerscustomers use the EDI system to communicate their weekly
inventory requirements per store to us electronically. We then fill thosethese
orders either by shipping directly to the individual stores or by sending
shipments, individually packaged and bar-codedbar coded by store, to a retailer's centralized
customer distribution center.
SOURCES OF SUPPLY13
Sources of Supply
We currently use independent contract foreign manufacturers, all of whom are
overseas, to produce all of our products. We have 48approximately 100 suppliers
fromin countries in the Far East, and other parts of Asia, and 24 suppliers in Mexico and fromin other countries
in Central America. We believe that the use of numerous independent suppliers
allows us to maximize production flexibility while avoiding significant capital
expenditures and the costs of maintaining and operating production facilities.
Upon completion of
the John Henry/Manhattan acquisition, we will assume the lease for a shirt
manufacturing facility in Mexico that expires in July 1999. We intend to sell or
sublease the Mexican facility to one of our suppliers for use in the production
of our products.
We maintain offices in Beijing, Shanghai and Guangzhou, China; Seoul, South
Korea; and Taipei, and Mexico City.Taiwan. We also operate through independent agents based in
Thailand, Hong Kong,
Pakistan, Korea, Turkey, Indonesia, India,Philippines, United Arab Emirates and Sri Lankaother
countries to source our products in Asia and to monitor production at contract
manufacturing facilities in order to ensure quality control and timely delivery.
Similar functions with respect to
our Central American suppliers are performed by ourOur personnel based in our Miami, Florida executive offices.office, perform similar functions with
respect to our suppliers in Mexico and Central America. We conduct periodic inspections
of samples of each product prior to cutting by contractors, during the
manufacturing process and prior to shipment. We also have full-time quality
assurance inspectors in the Dominican Republic, Honduras, El Salvador and
Guatemala and in each of our overseas offices. Finished goods are generally
shipped to our Miami, Florida facilitiesfacility for repackaging and distribution to
customers. Our return policy
permits customersIn fiscal 2003, we will also begin shipments to return any defective productsJantzen's Seneca,
South Carolina facility for credit. These returns
were not material in any of the last three fiscal years.repackaging and distribution to customers.
In order to assist with timely delivery of finished goods, we function as
our own customs broker enabling us tobroker. We prepare our own customs documentation and arrange for
any inspections or other clearance procedures with the United States Customs
Service. We are also a member of the United States Customs Automated Interface
program, whichprogram. This membership permits us to clear our goods through United States
Customs electronically and generally reducingreduces the necessary clearance time to a
matter of hours rather than days.
LICENSING OPERATIONSLicensing Operations
For the past fourseven years, we have been actively licensing the brands we
ownown. The licensing of our brands to third parties for various product
categories. Licensingcategories is one of our strategies. The licensing of our brands enhances their
image by increasing theirwidening the range and distribution and visibilityof these products without requiring
us to make a significant capital investmentinvestments or incur significant operating
expenses. As a result of this strategy, we have gained significant experience
in identifying potential licensing opportunities and have established strong
relationships with many active licensees.
11
We are currently the licensor under approximately 24of 126 license agreements (including 13
acquired in the Jantzen acquisition), for various products including sportswear,
outerwear, underwear, activewear, women's sportswear, fragrances, loungewear and
loungewear.with the acquisition of Jantzen, women's swimwear. Sales of licensed products by
our licensees were approximately $78.7$490.0 million, $73.9$577.8 million and $67.7$485.0
million in fiscal 1999, 19982002, 2001 and 1997,2000, respectively. We received royalties from
these sales and sign-up fees from new licenses of approximately $3.1$26.7 million, $4.0$25.8 million and $1.7$22.8 million in
fiscal 1999, 19982002, 2001 and 1997,2000, respectively. Upon completion of each ofExcluding accelerated payments by two
licensees for early contract terminations during fiscal 2002, royalties
decreased last year due to the Perry Ellis Internationalgeneral economic conditions and John
Henry/Manhattan acquisitions, we will acquire significant additional licensing
operations of nationally recognized brand names. Ascertain licensees
experiencing a result of these
acquisitions and the overall growth of our licensing operations, we plan to
hire an experienced senior executive to oversee and manage these operations.decrease in their sales volume.
To maintain a brand's image, we closely monitor our licensees and pre-approveapprove
all products licensed.licensed products. In evaluating a potentialprospective licensee, we consider the
candidate's experience, financial stability, manufacturing performance and
marketing ability of the proposed licensee.ability. We also evaluate the marketability and compatibility of the
proposed products and their compatibility with products currently being
marketed under that brand.our other products. We regularly monitor product design,
development, merchandising and marketing of licensees, and we schedule meetings
throughout the year with licensees to ensure quality, uniformity and consistency
with our overall
marketing, merchandisingproducts. We also give our licensees a view of our products and design strategies. Allfashion
collections and our expectations of where our products should be positioned in
the market place. In addition to approving in advance all of our licensees'
products, we also approve their advertising, promotional and packaging
materials must be approved in advance by
us.materials.
14
As part of our licensing strategy, we work with our licensees to further
enhance the products, brand imagesdevelopment, image, and sales.sales of their products. We offer licensees
marketing support and use our relationshiprelationships with retailers to help them generate higher
revenues and become more profitable.
Our license agreements generally extend for a period of 3three to 5five years
with options to renew prior to expiration for an additional multi-year period.
AThe typical agreement requires that the licensee pay us the greater of a royalty
based on a percentage of the licensee's net sales of the licensed products or a
guaranteed minimum royalty that typically increases over the term of the
agreement. Generally, licensees are required to spend a percentage of the net
sales of licensed products onfor advertising and promotion of the licensed
products.
CUSTOMERSproducts in their territory.
Customers
We sell merchandise to a broad spectrum of retailers, including chainmid-tier
department stores, upscale department stores, mass merchandisersmerchants and specialty
stores. Our largest customers include Dayton Hudson, Sears Roebuck, Federated Department Stores,Target, J.C. Penney, Wal-Mart, Kohl's Wal-Mart and
J.C. Penney.Mervyn's. Net sales to our five largest customers aggregatedaccounted for approximately
48%47%, 47%42% and 54%49% of net sales in fiscal 1999, 19982002, 2001 and 1997,2000, respectively. For
fiscal 1999,2002, sales to Dayton Hudson, Sears Roebuck, and
Federated Department Stores eachTarget accounted for approximately 15%12%, 10%while sales to
J.C. Penney and 10%Wal-Mart accounted for approximately 11%, respectively,each. For fiscal 2001,
sales to Wal-Mart accounted for approximately 14% of total net sales and sales
to J.C. Penney accounted for approximately 11% of net sales. For fiscal 1998,2000,
sales to Dayton Hudson and Sears
Roebuck eachTarget accounted for approximately 12% and 13% of net sales,
respectively. For fiscal 1997, sales to Kmart Corporation, J.C. Penney and
Sears Roebuck each accounted for approximately 15%, 12% and 12%, respectively,14% of net sales. No other single
customer accounted for more than 10% of net sales during such fiscal years.
SEASONALITY AND BACKLOGSeasonality
Our products werehave historically been geared towards lighter weight productsapparel
generally worn during the spring and summer months. We believe that this
seasonality has been reduced with the introduction of fall, winter and holiday
merchandise. Our higher priced products generally tend to be less sensitive to
economic conditions and the weather as compared to our lower priced products.conditions. While the variation in our sales on
a quarterly basis has narrowed somewhat, seasonality can be affected by a
variety of factors, including the mix of advance and fill-in orders, the amountsamount
of sales to different distribution levels, and overall product mix between
traditional and fashion merchandise.
12
We generally receive orders from our retailers approximately five to seven
months prior to shipment. For approximately 80.0% of our sales, we have orders
from our retailers before we place orders with our suppliers. A summary of the
order and delivery cycle for our four primary selling seasons is illustrated
below:
MERCHANDISE SEASON ADVANCE ORDER PERIOD DELIVERY PERIOD TO RETAILERS
- -------------------- ---------------------- -----------------------------
Merchandise Season Advance Order Period Delivery Period to Retailers
-------------------- ---------------------- -------------------------------
Spring July to September (1) January to March
Summer October to December April and May
Fall January to March July to September
Holiday April to June to August January to March
Summer August to October April and May
Fall November to January July to September
Holiday February and March October and November
(1) The advanced order period for products under the Jantzen and Tommy Hilfiger
brands is September to November.
Sales and receivables are recorded when inventory is shipped, with payment
terms generally 30 to 6075 days from the date of shipment. At January 31, 1999,
ourOur backlog of orders
for our products, allinclude confirmed and unconfirmed orders, which we believe, based on industry
practice and past experience, will be confirmed. The amount of unfilled orders
at a point in time is affected by a number of factors, including the mix of
product, the timing of receipt and processing of customer orders, and the
scheduling of sourcing and shipping of product, which are expectedin most cases is dependent
on the desires of the customer. Backlog is also affected by on-going trend among
customers to be shipped
prior to September 1999, was approximately $99.6 million,reduce the lead-time on their orders. During the last half of
fiscal 2002, a number of customers delayed placing orders and re-orders compared
to approximately $104.4 million at January 31, 1998.
COMPETITIONour previous experience. As a result of these factors a comparison of
unfilled orders from period to period is not necessarily meaningful and may not
be indicative of eventual actual shipments.
15
Competition
The retail apparel industry is highly competitive and fragmented. Our
competitors include numerous apparel designers, manufacturers, importers and
licensors, many of which have greater financial and marketing resources than we
do.us.
We believe that the principal competitive factors in the industry are (1)are:
. timeliness, reliability and quality of services provided,
(2). market share and visibility,
(3). price and (4)fashion, and
. the ability to anticipate consumer demands and maintain appeal of
products to customers.
The level of competition and the nature of our competitors varies by
product segment. We believesegment with low-margin, mass-market manufacturers arebeing our main
competitors in the less expensive segment of the market and American and foreign
designers and licensors are our main competitorscompeting with us in the more upscale segment of the
market. We believe that our continued dedication to customer service, product
assortment and quality control, as well as our selectiveaggressive pursuit of licensing
and acquisition opportunities, directly addressesaddress the competitive factors
listed above in all
market segments. To date,Although we have competedbeen able to compete successfully butto date,
there can be no guaranteeassurance that we will continue to be able to do so in the
future.
TRADEMARKS
We hold or have applied for U.S.Trademarks
Most of our material trademarks for our most significant brand
names.are registered with the United States
Patent and Trademark Office. We may be subject to claims and suits against us,
as well asand may be the initiator of claims and suits against others, in the ordinary
course of our business, including claims arising from the use of our trademarks.
In international jurisdictions, there are several pending claims to our right to
use selected trademarks that we own. We do not believe that the resolution of
any pending claims in international jurisdictions will have a material adverse
affect on our business, financial condition, results of operations or cash
flows.
EMPLOYEES
We employed approximately 385 persons as ofEmployees
At January 31, 1999.2002, we had approximately 471 full-time employees
worldwide. None of our employees are subject to a collective bargaining
agreement,agreements, and we believe thatconsider our employee relations are good.
ITEMto be satisfactory.
Item 2. PROPERTIESProperties
Our administrative offices, warehouse and distribution facility are located
in a 238,000240,000 square foot leased facility in Miami, which was built to our
specifications and was completed in 1997. The facility is occupied pursuant to the Lease,a
synthetic lease, which has an initial term expiring in 2003 and a minimumJune 2002, annual rental
payment of approximately $1.1 million$900,000 and a minimum contingent rental payment of
$12.3$14.5 million if weon June 30, 2002. We do not renewanticipate renewing the synthetic
lease after the initial 5-year
term. In March 1998, forwhen it matures. Instead, we anticipate replacing it with a conventional
mortgage, which will result in recognition of both an asset and related
liability on our balance sheet. For purposes of potential future expansion, we
have purchased certainroughly three acres of land adjacent to our facility from a non-affiliated third party for
$1.1 million.
13
facility.
We also lease 15,000three warehouse facilities in Miami totaling approximately 103,000
square feet from George Feldenkreis, our Chairman and CEO, to handle the
overflow of show roomsbulk shipments and officesthe specialty and PING operations. All leases are
on a month-to-month basis at market prices.
We lease two locations in New York City pursuant to a 9-year lease with a non-affiliated third party expiringtotaling approximately 8,500 square
feet each. These leases expire in December 2007.
Upon consummation2007 and 2012. These locations are
used for offices and showrooms.
16
We lease a retail store in the Sawgrass Mills outlet mall in Sunrise,
Florida with 11,240 square feet. This lease expires in September 2005. Since we
began leasing this facility in May 2001, we have used this location as a test
retail outlet store to sell our brands.
We have, through the acquisition of the Perry Ellis International acquisition, we will
assumeJantzen, a lease expiringagreement for office
space in April 2004 on Perry Ellis International, Inc.'s New
York City facilities. We intend to integrate the New York operations of Perry
Ellis International, Inc.Portland, Oregon for an initial six-month period. This facility totals
approximately 83,900 square feet. In addition, we entered into our existing New York City facility. Upon
consummation of the John Henry/Manhattan acquisition, we will assume thea lease for a
Mexican shirt manufacturingportion of Jantzen's Seneca, South Carolina distribution center facility expiring on July 31, 1999. We intend
to sell or sublease the Mexican facility to one of our suppliers for use in the
production of our products.a
one-year period, commencing March 22, 2002. This facility employs a work forcetotals approximately
279,000 square feet. The Seneca, South Carolina facility carries an option to
acquire the facility, which we can exercise within 60 days of approximately
163 workers which are subject to a collective bargaining agreement.the March 22, 2002
commencement date.
In order to monitor Far East production of our respective products in the Far East, we maintain
an officeoffices in GuangzhouSouth Korea and China, and also lease offices jointly with Carfel,
Inc. ("Carfel"),SPX
Corporation, a privately-held corporation controlled by George Feldenkreis,
our Chairman of the Board,publicly held company, in Beijing, China and Taipei.
ITEMTaipei, Taiwan.
Item 3. LEGAL PROCEEDINGS
We areLegal Proceedings
The Company is subject to claims and suits against us, as well asit, and is the initiator
of claims and suits against others, in the ordinary course of our business,
including claims arising from the use of ourits trademarks. We doThe Company does not
believe that the resolution of any pending claims will have a material adverse
affect on ourits business, financial condition or results of operations or prospects.
ITEMoperations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14Submission of Matters to a Vote of Security Holders
Not Applicable.
17
PART II
ITEMItem 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSMarket for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
Our common stock has been listed for trading on Thethe Nasdaq National Market
under the symbol SUPI"PERY" since May 21, 1993.June 1999. Prior to that date, the trading symbol
was "SUPI" under our former name Supreme International Corporation. The
following table sets forth, for the fiscal quartersperiods indicated, the range of high and low
closing bid prices per share of our common stock as reported by Thethe Nasdaq National Market. Such
quotationsquotation represents inter-dealer prices, without retail mark-up, mark-downmarkdown or
commission and may not necessarily represent actual transactions. HIGH($) LOW($)
--------- ---------
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
Fiscal 1999
First Quarter .......... 16.38 10.38
Second Quarter ......... 17.63 15.13
Third Quarter .......... 17.63 7.50
Fourth Quarter ......... 16.00The last
reported sales price per share of our common stock on April 15, 2002 was $11.95.
Fiscal Year 2001 High Low
- ---------------- ------ -------
First Quarter $11.69 $ 9.63
Second Quarter 10.25 8.25
Third Quarter 9.94 4.66
Fourth Quarter 6.25 4.50
Fiscal Year 2002
- ----------------
First Quarter $ 7.38 $ 5.69
Second Quarter 9.00 6.26
Third Quarter 8.60 5.11
Fourth Quarter 9.50 5.30
(b) Holders
As of March 12, 1999,April 15, 2002, there were approximately 49 holders52 shareholders of record of
our common stock. We believe the number of beneficial owners of our common stock
is in excess of 1,100.
(c) Dividends
We have not paid any cash dividends since itsour inception and the Board of
Directors doesdo not
contemplate doing so in the near future. Payment of cash dividends is prohibited
under the Senior Credit Facility.our senior credit facility, synthetic lease, senior secured notes and
senior subordinated notes. See Note 10 of Notes 12 and 13 to Supreme'sthe consolidated financial
statements of the Company included in Item 8 of this Report.report. Any future decision
as toregarding payment of cash dividends will depend on theour earnings and financial
position of Supreme and such other factors, as theour Board of Directors deems relevant.
1518
ITEMItem 6. SELECTED FINANCIAL DATA
SUMMARY PRO FORMA AND SUPPLEMENTAL FINANCIAL INFORMATION
The "Pro FormaSelected Financial Information" set forth below gives effect to (i)
the Perry Ellis International acquisition and (ii) a Rule 144A offering of
$100.0 million in aggregate principal amount of senior subordinated notes due
2009. The "Supplemental Financial Information" set forth below, in addition to
giving effect to the transactions included in the Pro FormaData
Summary Historical Financial Information
gives effect(Dollars in thousands, except for per share data)
The following selected financial data is qualified by reference to, (i) the John Henry/Manhattan acquisition and the
related concurrent sale of the existing dress shirt inventory to Phillips-Van
Heusen and (ii) additional indebtedness incurred under the Senior Credit
Facility to finance the John Henry/Manhattan acquisition. The income statement
and operating information give effect to such transactions as if they had
occurred on February 1, 1998 and the balance sheet information gives effect to
such transactions as if they had occurred on January 31, 1999.
The information presented below has been derived from our audited
consolidated financial statements, the audited financial statements of Perry
Ellis International, Inc. and certain financial information received from
Salant Corporation with respect to the John Henry/Manhattan acquisition. This
information does not purport to represent what our operating results or
financial condition would actually have been had the Perry Ellis International
acquisition and/or the John Henry/Manhattan acquisition and related
transactions with Phillips-Van Heusen actually occurred as of the dates
indicated above or to project our financial condition for any future period.
The information presented below
should be read in conjunction with, ourthe consolidated financial statements of the
Company and notes thereto, the financial statements
and notes thereto of Perry Ellis International, Inc., the Unaudited Pro Forma
Combined Financial Information andrelated notes thereto included in Item 8 of this report and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." PRO FORMA
FISCAL YEAR ENDED
JANUARY 31, 1999
PRO FORMA FINANCIAL INFORMATION ----------------------
(DOLLARS IN MILLIONS)
STATEMENT OF INCOME DATA:
Total revenues ........................................ $ 240.6
Depreciation and amortization ......................... 5.9
Operating income ...................................... 23.1
Interest expense ...................................... 12.8
BALANCE SHEET DATA (AT YEAR END):
Working capital ....................................... $ 66.5
Total assets .......................................... 183.4Certain amounts in prior fiscal years have been reclassified to
conform to the current year presentation.
Fiscal Year Ended January 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002
-----------------------------------------------------------------------------
Income Statement Data:
Net sales $190,689 $221,347 $ 229,549 $261,626 $253,034
Net royalty income 4,032 3,057 22,840 25,790 26,681
-----------------------------------------------------------------------------
Total revenues 194,721 224,404 252,389 287,416 279,715
Cost of sales 145,991 166,198 171,413 200,884 191,601
-----------------------------------------------------------------------------
Gross profit 48,730 58,206 80,976 86,532 88,114
Selling, general and administrative
expenses 34,137 39,478 44,480 52,147 57,171
Depreciation and amortization 1,748 2,161 5,181 6,130 6,662
-----------------------------------------------------------------------------
Operating income 12,845 16,567 31,315 28,255 24,281
Interest expense 2,782 3,494 13,905 15,766 13,550
-----------------------------------------------------------------------------
Income before minority interest and
income tax provision 10,063 13,073 17,410 12,489 10,731
Minority interest - - - - 83
Income taxes 2,885 4,491 6,530 4,663 4,040
-----------------------------------------------------------------------------
Net income $ 7,178 $ 8,582 $ 10,880 $ 7,826 $ 6,608
=============================================================================
Net income per share:
Basic $ 1.10 $ 1.29 $ 1.62 $ 1.17 $ 1.01
Diluted $ 1.08 $ 1.27 $ 1.59 $ 1.16 $ 1.01
Weighted average number of
shares outstanding:
Basic 6,541 6,674 6,726 6,689 6,517
Diluted 6,666 6,770 6,857 6,745 6,535
Balance Sheet Data (at year end):
Working capital 66,166 71,300 70,651 88,879 60,932
Total assets 101,650 108,958 224,873 243,113 234,061
Total debt (a) 39,658 33,511 128,270 137,066 120,828
Total stockholders' equity 55,155 64,946 76,020 82,879 87,204
19
Other Financial Data and Ratios:
EBITDA (b) 14,593 18,728 36,496 34,385 30,860
Cash flows from operations (3,101) 14,341 14,047 (2,112) 22,352
Cash flows from investing (4,555) (10,240) (104,091) (5,434) (3,074)
Cash flows from financing 7,910 (4,938) 90,097 7,665 (18,319)
Capital expenditures 3,828 4,005 2,332 2,712 2,925
Ratio of earnings to fixed charges (c) 4.1x 4.2x 2.2x 1.8x 1.4x
a) Total debt ............................................ 106.5
Total stockholders' equity ............................ 64.9
OTHER FINANCIAL DATA AND RATIOS:
Pro Forma EBITDA (a) .................................. $ 29.0
Capital expenditures .................................. 4.0
Ratioincludes balances outstanding under senior credit
facilities, long-term debt and current portion of Pro Forma EBITDA to interest expense ......... 2.3x
Ratio of total debt to Pro Forma EBITDA ............... 3.7x
SUPPLEMENTAL FINANCIAL INFORMATION
The Pro Forma Financial Information set forth above does not give effect to
the John Henry/Manhattan acquisition because audited financial information for
the assets being acquired were not available from Salant Corporation prior to
the filing of this report. However, we have been provided with certain unaudited
financial information for the 11 months ended November 30, 1998 that has been
derived from Salant's internal financial records. Based on this information,
EBITDA related to
16
the John Henry and Manhattan brands being acquired for the 11 months ended
November 30, 1998 was $3.8 million ("Estimated EBITDA") (see note (b) below).
The sum of the $29.0 million Pro Forma EBITDA (with respect to the Perry Ellis
International acquisition) set forth above plus Estimated EBITDA is $32.8
million ("Adjusted EBITDA"). The information used to calculate the Estimated
EBITDA and, correspondingly, the Adjusted EBITDA may not be reliable because
Estimated EBITDA (i) has been obtained from the unaudited financial records of
Salant Corporation, (ii) reflects only 11 months of operations and (iii) does
not include the impact of any additional costs or expenses that may be recorded
by Salant Corporation in December, as a result of normal year end adjustments
or otherwise, that relate to the 11 months ended November 30, 1998.
Additionally, the Estimated EBITDA and, correspondingly, the Adjusted EBITDA do
not take into consideration any expenses of assuming the lease for the dress
shirt manufacturing facility located in Mexico, operating that facility or
disposing of that facility. Although no agreement has been reached, we intend
to either sublease the facility or not renew the lease.
The following financial information supplements the Pro Forma Financial
Information set forth above to give effect to the John Henry/Manhattan
acquisition and related Phillips-Van Heusen transactions by adjusting (i) Pro
Forma EBITDA by Estimated EBITDA and (ii) Total Debt and interest expense by
the additional debt of $27.0 million and related interest expense of $2.1
million to be incurred to finance the John Henry/Manhattan acquisition
(assuming that Phillips-Van Heusen acquires the existing dress shirt inventory
concurrently with the closing of the John Henry/Manhattan acquisition) (dollars
in millions):
Pro Forma EBITDA ..................................... $ 29.0
Estimated EBITDA(b) .................................. 3.8
--------
Adjusted EBITDA(a) ................................. $ 32.8
========
Interest expense ..................................... $ 14.9
--------
Total Debt ........................................... $ 133.5
--------
Ratio of Adjusted EBITDA to interest expense ......... 2.2x
Ratio of Total Debt to Adjusted EBITDA ............... 4.1x
- ----------------
(a)long-term debt.
b) EBITDA represents net income before taking into consideration
interest expense, income tax expense, depreciation expense and
amortization expense. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and does
not represent cash flow from operations. Accordingly, do not regard
this figure as an alternative to net income (loss) or as an indicator of our operating performance or as
an alternative to cash flows as a measure of liquidity. We believe that
EBITDA is widely used by analysts, investors and other interested parties
in our industry but it is not necessarily comparable with similarly titled
measures for other companies. See "Statements of Cash Flows" in our
consolidated financial statements and in the financial statements of Perry
Ellis International, Inc. contained in Item 8 of this report.
(b) Estimated EBITDA represents the sum of (i) royalty income related to the
John Henry and Manhattan brands being acquired less the related direct
expenses (which exclude any allocation of corporate expense), in each case
for the 11 months ended November 30, 1998 as determined from the financial
information provided by Salant Corporation referred to above and (ii) the
minimum yearly royalty required to be paid to us by Phillips-Van Heusen
pursuant to its license of the John Henry and Manhattan brands.
17
SUMMARY HISTORICAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following table presents selected historical financial and operating
data derived from the audited consolidated financial statements of Supreme and
the audited financial statements of Perry Ellis International, Inc. The
historical financial data should be read in conjunction with our consolidated
financial statements and the notes and the financial statements of Perry Ellis
International, Inc. and the notes thereto appearing elsewhere herein and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- -------------
SUPREME HISTORICAL
STATEMENT OF INCOME DATA:
Net sales .................................. $ 90,564 $ 121,839 $ 157,373 $ 190,689 $ 221,347
Net royalty income ......................... -- 759 1,654 4,032 3,057
---------- ---------- ---------- ---------- ----------
Total revenue .............................. 90,564 122,598 159,027 194,721 224,404
Cost of sales .............................. 69,187 92,145 122,046 145,991 166,198
---------- ---------- ---------- ---------- ----------
Gross profit ............................... 21,377 30,453 36,981 48,730 58,206
Selling, general and administrative
expenses .................................. 13,493 20,395 24,729 34,137 39,478
Depreciation and amortization .............. 474 725 1,147 1,748 2,161
---------- ---------- ---------- ---------- ----------
Operating income ........................... 7,410 9,333 11,105 12,845 16,567
Interest expense ........................... 1,219 2,224 1,664 2,782 3,494
---------- ---------- ---------- ---------- ----------
Income before income taxes ................. 6,191 7,109 9,441 10,063 13,073
Income taxes ............................... 2,319 2,685 3,597 2,885 4,491
---------- ---------- ---------- ---------- ----------
Net income ................................. $ 3,872 $ 4,424 $ 5,844 $ 7,178 $ 8,582
========== ========== ========== ========== ==========
Net income per share
Basic ..................................... $ 0.73 $ 0.76 $ 0.89 $ 1.10 $ 1.29
Diluted ................................... $ 0.73 $ 0.75 $ 0.89 $ 1.08 $ 1.27
Weighted average number of shares
outstanding
Basic ..................................... 5,300,000 5,800,000 6,534,446 6,540,604 6,674,103
Diluted ................................... 5,300,000 5,874,470 6,595,147 6,665,635 6,769,810
OTHER FINANCIAL DATA AND RATIOS:
EBITDA (a) ................................. $ 7,884 $ 10,058 $ 12,252 $ 14,593 $ 18,728
Capital expenditures ....................... 747 1,309 1,058 3,828 4,005
Ratio of earnings to fixed charges (b) ..... 5.3x 3.8x 5.7x 4.1x 4.2x
BALANCE SHEET DATA (AT YEAR END):
Working capital ............................ $ 43,067 $ 47,760 $ 23,575 $ 66,166 $ 71,300
Total assets ............................... 55,512 53,735 88,158 101,650 108,958
Total debt (c) ............................. 28,256 6,968 31,949 39,658 33,511
Total stockholders' equity ................. 22,016 43,833 47,775 55,155 64,946
(CONTINUED ON FOLLOWING PAGE)
18
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
PERRY ELLIS INTERNATIONAL, INC. HISTORICAL
STATEMENT OF INCOME DATA:
Net royalty income ................................... $10,917 $15,660 $16,177
Selling, general and administrative expenses ......... 8,606 7,109 8,398
Depreciation and amortization ........................ 212 226 228
------- ------- -------
Operating income ..................................... 2,099 8,325 7,551
Interest income ...................................... 144 136 32
------- ------- -------
Income before income taxes ........................... 2,243 8,461 7,583
Income taxes ......................................... 218 852 760
------- ------- -------
Net income ........................................... $ 2,025 $ 7,609 $ 6,823
======= ======= =======
OTHER FINANCIAL DATA AND RATIOS:
EBITDA (a) ........................................... $ 2,455 $ 8,688 $ 7,811
Capital expenditures ................................. 47 87 21
BALANCE SHEET DATA (AT YEAR END):
Working capital ...................................... $ 1,995 $ (27) $ 2,665
Total assets ......................................... 4,803 3,112 4,563
Total debt ........................................... -- -- --
Total stockholders' equity ........................... 3,439 1,369 3,839
- ----------------
(a) EBITDA represents net income before taking into consideration interest
expense, income tax expense, depreciation expense, and amortization
expense. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and does not represent cash flow
from operations. Accordingly, do not regard this figure as an alternative
to net income or as an indicator of our operating performance or as an
alternative to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts,
investors and other interested parties in our industry but is not
necessarily comparable with similarilysimilarly titled measures for other
companies.
See "Statements of Cash Flows" in our consolidated
financial statements and in the financial statements of Perry Ellis
International, Inc. contained in Item 8 of this report.
(b)c) For purposepurposes of computing this ratio, earnings consist of earnings
before income taxes including minority interest and fixed charges.
Fixed charges consist of interest expense, amortization of deferred
debt issuance costs and the portion of rental expense of the Leaseour
synthetic lease deemed representative of the interest factor.
(c) Total debt includes balances outstanding under credit facilities, long-term
debt20
Item 7. Management's Discussion and current portionAnalysis of long-term debt.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEWFinancial Condition and Results
of Operations
Results of Operations
We are a leading designer and marketer of a broad line of high quality
men's sportswear, including sport and dress shirts, golf sportswear, sweaters,
urban wear and casual and dress pants which we sell to all levels of retail
distribution. We have built a broad portfolio of brands through selective
acquisitions and the establishment of our own brands over our 32-year operating
history. We are currently one of the top five branded suppliers to department
stores in the knit and woven shirt product categories. We currently use over 70
independent suppliers, mostly located in the Far East, other parts of Asia,
Mexico, and Central America.
We own or licensegenerate revenues from third parties the brand names under which mosttwo primary sources: sales of our products are sold. These brand names include Crossings and
Natural Issue
for casual sportswear, John Henry for dress casual wear, Andrew Fezza for dress
sportswear, Ping and Munsingwear for golf sportswear and PNB Nation for urban
wear. We market our brands to a wide rangelicensing of demographic segments, targeted at
consumers in specific age, income and ethnic groups. Currently, our products
are predominantly produced for the men's segment of the apparel industry, in
which fashion trends tend to be less volatile than in other segments. The
percentage of our revenues from branded products increased to 81.4% in fiscal
1999 from 71.5% in fiscal 1997.
We also license our proprietary brands to third parties for the
manufacture and marketing of various products which we do not sell, including
underwear, activewear and loungewear. In addition to generating additional
sources of revenue for us, these licensing arrangements raise overall awareness
of our brands.
RECENT DEVELOPMENTS
In order to expand our licensing operations, we recently signed a
definitive agreement to acquire Perry Ellis International, Inc. which owns and
licenses the prestigious and well-known Perry Ellis brand name. We have also
signed a definitive agreement to purchase the trademarks for John Henry, the
leading brand for men's dress casualwear at Sears Roebuck, for Manhattan, the
best selling dress shirt brand at Wal-Mart and Kmart Corporation and for Lady
Manhattan.
PERRY ELLIS INTERNATIONAL ACQUISITION. In January 1999, we agreed to buy
Perry Ellis International, Inc. for approximately $74.6 million in cash, net of
purchase price adjustments. Perry Ellis International, Inc. is a privately held
company which owns and licenses the Perry Ellis brand name, currently one of
the top selling brands in department stores in the United States. Perry Ellis
International, Inc. is currently the licensor under 34 license agreements,
primarily for various men's wear, boys' wear and fragrances. During the years
ended December 31, 1998, Perry Ellis International, Inc. had revenues of $16.2
million and EBITDA of $7.8 million. Under our management of the brand, we
expect to benefit from certain operating efficiencies and to enhance the
licensing royalties the Perry Ellis brand generates. Net income from royalties
at Perry Ellis International, Inc. grew 48.2% from fiscal year end December 31,
1996 to December 31, 1998 while operating expenses grew at a rate of 55.6%
primarily as a result of increased advertising.
JOHN HENRY/MANHATTAN ACQUISITION. In December 1998, we entered into an
agreement to buy certain assets of the John Henry and Manhattan dress shirt
business from Salant Corporation which is currently in Chapter 11 bankruptcy
proceedings. On February 24, 1999, the bankruptcy court approved the purchase
for $27.0 million, plus the value of the existing dress shirt inventory (which
is currently estimated to be approximately $17.2 million). The assets to be
purchased consist of the John Henry, Manhattan and Lady Manhattan trademarks,
tradenames, license agreements, certain manufacturing equipment and the
existing dress shirt inventory. Phillips-Van Heusen Corporation has agreed,
subject to certain conditions including regulatory approval, to buy the
existing dress shirt inventory at our acquisition cost concurrently with the
acquisition and to license from us the John
20
Henry and Manhattan brands for men's dress shirts. In connection with the John
Henry/Manhattan acquisition, we will also assume a lease for a shirt
manufacturing facility in Mexico which expires in July 1999. Although no
agreement has been reached, we intend to sublease the Mexican facility to one
of our suppliers for use in the production of our products or not renew the
lease. The John Henry/Manhattan acquisition is subject to a number of
conditions, including regulatory approval, amendment of the Senior Credit
Facility, amendment of the Lease and, if consummated, is expected to close in
late March or early April 1999. The acquisition price, net of the $1.0 million
deposit we have paid and the proceeds from sale of the existing dress shirt
inventory, will be approximately $26.0 million and is intended to be financed
with borrowings under our Senior Credit Facility which we expect to amend prior
to consummation of the acquisition.
RESULTS OF OPERATIONStrademarks. The following table sets forth, for the periods
indicated, selected items in our consolidated statements of income expressed as
a percentage of total revenues:
FISCAL YEAR ENDED JANUARYFiscal Year Ended January 31,
------------------------------------
1997 1998 1999
---------- ---------- ------------------------------------------------------
2000 2001 2002
------ ------ ------
Net sales ............................................ 99.0% 97.9% 98.6%91.0% 91.0% 90.5%
Royalty income ....................................... 1.0 2.1 1.4
----- ----- -----9.0% 9.0% 9.5%
------ ------ ------
Total revenues ....................................... 100.0 100.0 100.0100.0% 100.0% 100.0%
Cost of sales ........................................ 76.7 75.0 74.1
----- ----- -----67.9% 69.9% 68.5%
------ ------ ------
Gross profit ......................................... 23.3 25.0 25.932.1% 30.1% 31.5%
Selling, general and administrative
expenses ......... 16.3 18.4 18.5
----- ----- -----17.6% 18.1% 20.4%
Depreciation and amortization 2.1% 2.1% 2.4%
------ ------ ------
Operating income ..................................... 7.0 6.6 7.412.4% 9.9% 8.7%
Interest expense ..................................... 1.0 1.4 1.6
----- ----- -----5.5% 5.5% 4.9%
------ ------ ------
Income before minority interest and
income taxes ........................... 6.0 5.2 5.86.9% 4.4% 3.8%
Minority interest - - -
Income tax provision ................................. 2.3 1.5 2.0
----- ----- -----2.6% 1.6% 1.4%
------ ------ ------
Net income ........................................... 3.7% 3.7% 3.8%
===== ===== =====4.3% 2.8% 2.4%
====== ====== ======
FISCAL 1999 AS COMPARED TO FISCAL 1998
TOTAL REVENUES.Fiscal 2002 as Compared to Fiscal 2001
Total revenues. Total revenues consist of net sales and royalty income.
Total revenue grew $29.7decreased $7.7 million or 15.3%2.7% to $224.4$279.7 million in fiscal 19992002
from $194.7$287.4 million in the prior year. The decrease was due to a decrease in net
sales of $8.6 million offset by an increase in royalty income of $0.9 million as
described below.
Net sales. Net sales decreased $8.6 million or 3.3% to $253.0 million in
fiscal 19982002 from $261.6 million in the comparable period last year. The decrease
is primarily attributable to three factors. First, shipments to K-Mart
Corporation were lower in the fourth quarter of fiscal 2002 due to K-Mart's
financial difficulties during the year and its bankruptcy filing in January
2002. This decrease totaled approximately $3.0 million. Second, we experienced a
short-term delay in receipt of some product orders of approximately $2.0
million, which we previously planned to ship in late January, because a Miami-
based bank, which was our primary source of letter of credit financing, was
seized by federal regulators. We have since been able to obtain adequate letter
of credit facilities with other financial institutions. Third, general economic
conditions, which adversely impacted retail sales, resulted in lower than
expected sell through and reorder rates from retailers.
21
Royalty income. Royalty income was $26.7 million in fiscal 2002, a $0.9
million or 3.5% increase over the prior year amount of $25.8 million. The
increase was due to two one-time accelerated payments for early termination of
licensing agreements. Excluding accelerated payments by two licensees for early
contract terminations during fiscal 2002 totaling a net of $1.6 million,
royalties decreased by $0.7 million last year primarily due to the general
economic conditions, which resulted in certain licensees experiencing a decrease
in their sales volume.
Cost of sales. Cost of sales for fiscal 2002 of $191.6 million was $9.3
million, or 4.6% lower than the prior year amount of $200.9 million due mainly
to the decrease in net sales as described above. As a percent of revenues, cost
of sales decreased from 69.9% in fiscal 2001 to 68.5% in fiscal 2002, due
primarily to a change in our sales mix between private label and branded label
sales. Gross profit was $88.1 million in fiscal 2002 or 31.5% of revenues as
compared to $86.5 million or 30.1% of revenues in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $57.2 million in fiscal 2002, as compared to $52.1
million in the prior year, an increase of $5.1 million or 9.8%. As a percent of
total revenues, selling, general and administrative expenses increased from
18.1% in fiscal year 2001 to 20.4% in fiscal 2002. The increase was due
primarily to a charge of $1.4 million resulting from the K-Mart bankruptcy,
accounting for the consolidation of our new Canadian joint venture with expenses
of $0.9 million in fiscal 2002, expenses incurred by our newly formed European
subsidiary of $1.6 million and expenses incurred by our Sawgrass Mills outlet
store of $0.6 million.
Depreciation and amortization expenses. Depreciation and amortization
expense in fiscal 2002 was $6.7 million or 2.4% of revenues as compared to $6.1
million or 2.1% of revenues in fiscal 2001. The increase of $0.6 million in
fiscal 2002 as compared to the prior year was due primarily to a full year
effect of amortization of the Pro Player and Mondo di Marco trademarks acquired
in fiscal 2001.
Interest expense. Interest expense in fiscal 2002 was $13.6 million as
compared to $15.8 million in the prior year. The decrease is primarily
attributable to the decrease in borrowings under the senior credit facility,
favorable interest rates and the recognition of $0.7 million in income derived
from an interest rate swap agreement entered into by the Company during the
third quarter of fiscal 2002.
Income taxes. Income taxes in fiscal 2002 were $4.0 million, a $0.7 million
decrease as compared to $4.7 million in fiscal 2001. The decrease was due
primarily to a decrease in pretax income. The effective tax rates for fiscal
2001 and 2002 were 37.5% and 37.9%, respectively.
Net income. Net income for fiscal 2002 decreased $1.2 million or 15.4% from
fiscal 2001, as a result of the items discussed above.
Fiscal 2001 as Compared to Fiscal 2000
Total revenues. Total revenues consist of net sales and royalty income.
Total revenue increased $35.0 million or 13.9% to $287.4 million in fiscal 2001
from $252.4 million in fiscal 2000. The increase was due to increases in both
net sales of $32.1 million and royalty income of $3.0 million as a result of
internal growth.
NET SALES.growth and acquisitions.
Net sales. Net sales increased $30.6$32.1 million or 16.1%14.0% to $221.3$261.6 million in
fiscal 19992001 from $190.7$229.5 million in fiscal 1998 as brandedthe comparable period last year, due mainly
to private label programs with Wal-Mart and J.C. Penney. Sales from private
label products grewincreased to represent nearly 81.4%34% of the net sales mix in fiscal 1999 compared to 75.4% of net
sales2001 from 21% in
fiscal 1998. Within2000. Decreases in branded products, the increase in net sales was
primarily the result of the sales growth in the Munsingwear brand where net
sales increased by $23.6 million to approximately $66.0 million in fiscal 1999.
In addition, net sales of the Natural Issue brand increasedand Munsingwear during
fiscal 2001 were somewhat offset by approximately,
$10.2 million to $76.2increases in sales of PING, Grand Slam and
other brands.
Royalty income. Royalty income was $25.8 million for fiscal 1999. In2001, a $3.0
million or 12.9% increase over the portfolioprior year amount of other
branded products,$22.8 million. The
increase was primarily attributable to the acquisitions of the Perry
22
Ellis, John Henry brand also experienced an increaseand Manhattan brands, which had a full year of operations in
netfiscal 2001 and only ten months of operations in the fiscal 2000.
Cost of sales. We first introducedCost of sales for fiscal 2001 of $200.9 million was $29.5
million or 17.2% higher than the Andrew Fezza, PNB Nation and Ping brands during
fiscal 1999. They also contributedprior year amount of $171.4 million due mainly
to the increase in net sales. The increasesAs a percentage of revenues, cost of sales
increased from 67.9% in fiscal 2000 to 69.9% in fiscal 2001, due primarily to
our increased net sales in fiscal 1999 were slightly offset by declines in net salesmix attributable to private label product as well as
markdown pressures from some of our other branded and private label products.
ROYALTY INCOME. We had royalty income of $3.1 million for fiscal 1999
compared to $4.0 million for fiscal 1998. The decline of $0.9 millionretailers. Gross profit was primarily due to our relationship with one customer, which shifted from
primarily a licensee basis to primarily a sales basis. Net sales to this
customer increased by $7.0 million to $11.5$86.5 million
in fiscal 1999.
21
COST OF SALES. Cost of sales for fiscal 1999 was $166.2 million2001, or 74.1%30.1% of total revenue as compared to $146.0$81.0 million, or 75.0%32.1%
of total revenue for the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $52.1 million in fiscal 1998. The decrease2001, as compared to $44.5
million in the costprior year, an increase of sales as$7.6 million or 17.1%, due primarily
to increases in payroll, advertising and facility costs to support the increase
in revenues from internal growth and acquisitions. As a percentage of total
revenues, is a result of our increased sales in branded products, which
typically generate higher gross profit margin than private label products.
Gross profit was $58.2 million or 25.9% of total revenue for fiscal 1999 as
compared to $48.7 million or 25.0% of total revenue in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,selling, general and administrative expenses including depreciation and amortization, forincreased from 17.7% in
fiscal 1999 were $41.6 million or 18.5%2000 to 18.1% in fiscal 2001 due mainly to a full year of total revenueactivities in
licensing operations, other increases such as compared to $35.9 million
or 18.4% of total revenue for fiscal 1998. The increase is primarily
attributable to costs associated with recent license acquisitions and the $0.7
million in costs associated with the increase in temporary personnel hired in
connection with our new inventory management system. The costs associated with
the recent license acquisitions are primarily related to payroll, advertising and samples. We will continuefacility
costs to incur expenses related to start up costs of
acquired licenses, includingsupport the completion and integrationrevenue increase, as well as startup cost for the launch of
the Perry Ellis International acquisitionAmerica brand.
Depreciation and amortization expenses. Depreciation and amortization
expense for fiscal 2001 was $6.1 million or 2.1% of total revenues, as compared
to $5.2 million or 2.1% of total revenues in fiscal 2000. The increase of $0.9
million in fiscal 2001 as compared to the prior year was due to a full year of
amortization of intangible assets from the acquisitions of the Perry Ellis, John
Henry/Henry and Manhattan acquisition. We believe
that we will achieve greater efficienciesbrands in our new corporatefiscal 2001 as compared to ten months of
amortization in fiscal 2000, as well as the amortization of intangible assets
from the purchase of the Pro Player and warehouse
facility during the comingMondo di Marco trademarks in fiscal
year, somewhat offsetting these increases.
INTEREST EXPENSE.2001.
Interest expense. Interest expense for fiscal 19992001 was $3.5$15.8 million as
compared to $2.8 million for fiscal 1998. The increase was the result of
additional indebtedness incurred to support the increase in working capital
requirements during the fiscal year particularly in the third quarter.
INCOME TAXES. During fiscal 1999, our effective tax rate was 34.4%
compared to 28.7% in fiscal 1998, which resulted in an increase in the income
tax provision by $1.6 million to $4.5 million. The prior year tax rate was
lower than normal as we adjusted our provision for overpayments in fiscal 1997.
NET INCOME. Net income for fiscal 1999 increased $1.4 million or 19.4% to
$8.6 million or 3.8% of total revenue from $7.2 million or 3.7% of total
revenue for fiscal 1998.
FISCAL 1998 AS COMPARED TO FISCAL 1997
TOTAL REVENUES. Total revenues grew 22.5% or $35.7 million to $194.7$13.9 million in fiscal 1998 from $159.0 million in fiscal 1997 primarily2000. The increase is due to the additional
indebtedness incurred as a result of the growth from our acquisitionacquisitions of the Munsingwear brandPerry Ellis, John
Henry and Manhattan brands in fiscal 2000, and to a lesser extent the related
license income.
NET SALES. Net sales foreffect of
floating rates increases in interest expense associated with our senior credit
facility during fiscal 1998 increased 21.2% or $33.32001.
Income taxes. Income taxes during fiscal 2001 were $4.7 million, a $1.8
million decrease as compared to $190.7$6.5 million from $157.4 million forin fiscal 1997.2000. The increase in net salesdecrease was
due primarily attributable to the Munsingwear and Grand Slam brands which
increased approximately $33.0 million as well as an increase in the Crossings
brand. We acquired the Munsingwear brand during the final quarter of fiscal
1997. This increase was partially offset by a decrease in revenue from sales of
the Natural Issue brand and private label products.
ROYALTY INCOME. We had royalty income of $4.0 millionpretax income. The effective tax rates for
fiscal 1998
compared to $1.7 million2001 and 2000 were relatively consistent at 37.5% and 37.4%,
respectively.
Net income. Net income for fiscal 1997. The increase of $2.3 million was
primarily due to the increase in royalties from the licensing of the
Munsingwear brand.
COST OF SALES. Cost of sales for fiscal 1998 was $146.02001 decreased $3.1 million or 75.0%
of total revenue as compared to $122.0 million or 76.7% of total revenue for28.4% from
fiscal 1997. The decrease in the cost of sales as a percentage of total revenue
reflects a continued shift to more sales of branded products which typically
generate higher gross profit margin than private label products. Gross profit
was $48.7 million or 25.0% of total revenue for fiscal 1998 as compared to
$37.0 million or 23.3% of total revenue in fiscal 1997.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses, including depreciation and amortization, for fiscal
1998 were $35.9 million or 18.4% of total revenue as
22
compared to $25.9 million or 16.3% of sales for fiscal 1997. This increase was
due to increased levels of staffing required to service the Munsingwear brand
and increased advertising costs relating to the start of consumer advertising2000, as a result of brand imaging.
INTEREST EXPENSE. Interest expense for fiscal 1998 was $2.8 million
compared to $1.7 million for fiscal 1997. This increase in interest expense was
the result of the additional indebtedness incurred by us in connection with the
acquisition of the Munsingwearitems discussed above.
Liquidity and Jolem labels, as well as to support
increased levels of working capital requirements proportionate with the
increased levels of revenue.
INCOME TAXES. During fiscal 1998, our effective tax rate was 28.7%
compared to 38.1% in fiscal 1997. This decrease was the result of our
adjustment of our income tax provision because of tax overpayments for the
prior two fiscal years.
NET INCOME. Net income for fiscal 1998 was $7.2 million or 3.7% of total
revenue as compared to $5.8 million or 3.7% of total revenue for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCESCapital Resources
We rely primarily upon cash flow from operations and borrowings under our
Senior Credit Facilitysenior credit facility to finance operations and expansion. CashNet cash provided by
operating activities was $14.3$22.4 million in fiscal 1999,2002, as compared to a usage of
cash of $3.1$2.1
million used in operations in fiscal 19982001, and $14.0 million provided by
operations in fiscal 2000. The $22.4 million of cash provided by operating activities
of $1.9 million in 1997. The $17.4 million increaseoperations in
fiscal 1999 cash flow
from operations2002 as compared to fiscal 1998the $2.1 million used in operations in the prior year
is primarily attributable to earnings and to a decrease in accounts receivable
of $7.0 million since the beginning of the year due primarily to decreasesincreased cash
collections and lower sales in January 2002 and an increase in inventory of $1.5
million due to the timing of receipts of goods at January 31, 2002 and levels of
replenishment inventory. In fiscal 2001, net cash used in operating activities
was $2.1 million, primarily attributable to earnings and to a decrease in
accounts receivable levels from year-to-year in the amountand inventory of $6.4$13.2 million and $3.2$7.6 million,
respectively, as well as increases in accounts
payable and accrued expenses of $5.3 million.
Netrespectively.
In fiscal 2002, net cash used in investing activities was $10.2$3.0 million,
in fiscal 1999,principally due to purchases of which $5.0 million was for the deposit on the pending Perry Ellis International
acquisitionproperty and $1.0 million was related to the pending John Henry/Manhattan
acquisition.equipment. Net cash used in
investing activities for fiscal 1998 totaled $4.62001 was $5.4 million, of which $3.8 million related principallymainly due to the
new distribution23
acquisitions of the Pro Player and office facility.
NetMondo di Marco brands, which totaled $3.5
million, net and $2.7 million in purchases of property and equipment.
In fiscal 2002, net cash used in financing activities forof $18.3 million was
due mainly to payments made under our senior credit facility of $16.1 million
and purchase of treasury stock of $2.2 million. The net decrease in borrowings
under the senior credit facility resulted primarily from lower accounts
receivable and lower levels of inventories. In fiscal 1999 totaled $4.9 million
which was primarily due to a reduction of $6.1 million from borrowings on the
Letter of Credit Facilities and the Senior Credit Facility. Net2001, net cash provided
by financing activities forwas $7.7 million resulting from the net increased
borrowings of $8.6 million under our senior credit facility offset by the
purchases of treasury stock of $1.0 million. The net decrease in borrowings
under our senior credit facility in fiscal 1998 totaled $7.92001 resulted from $19.9 million which wasin
borrowings primarily due to an increase in borrowings under the Senior Credit Facilities.
Working capital (current assets minus current liabilities) was $71.3
million at the end of fiscal 1999 as compared to $66.2 million at the end of
fiscal 1998. The $5.1 million increase in working capital primarily resulted
from an increaseincreases in accounts receivable and
other current assets due toinventories, offset by the sales growth$11.3 million repayment of the term loan portion of
our senior credit facility.
Capital expenditures for fiscal 2002 totaled $2.9 million and deposits madeconsisted
primarily of purchases of office equipment, leasehold improvements and computer
software. Capital expenditures of $2.7 million for pending acquisitions. The current ratio
(current assets divided by current liabilities) was 8.2:1fiscal 2001 consisted
primarily of purchases of office equipment, warehouse machinery and 7.9:1 at the end
of fiscal 1999 and fiscal 1998, respectively.
We have the $60.0 millioncomputer
software.
Senior Credit Facility
In March 2002, we amended our senior credit facility with aour group of
banks. As amended, the senior credit facility now provides us with a revolving
credit line up to an aggregate amount of $60.0 million. This amendment was done
concurrently with the sale of $57.0 million of senior secured notes. The
indebtedness under the senior credit facility ranks pari passu with our senior
secured notes. The following is a description of the terms of the senior credit
facility, as amended, and does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the senior
credit facility. The outstanding balance under our senior credit facility was
$21.8 million on January 31, 2002.
Certain Covenants. The senior credit facility contains certain covenants
which require us to maintain certain financial ratios, a minimum net worth and
which restricts the payment of dividends. As of January 31, 2002, we were not
in compliance with a certain funded indebtedness to EBITDA financial covenant of
our senior credit facility. The senior lenders of our bank group under our
senior credit facility have waived the noncompliance of the financial covenant
in connection with the March 2002 amendment of the senior credit facility.
The senior credit facility expires on October 1, 2002 and as such the
Company has classified its senior credit facility as current in the consolidated
balance sheet as of January 31, 2002. The Company is currently in active
discussions to renew or replace its existing senior credit facility. Management
believes this discussion will be successfully completed prior to the October 1,
2002 expiration date.
Borrowings Base. Borrowings under the senior credit facility are limited
under its terms to a borrowing base calculation, which generally restricts the
outstanding balances to 85.0%the sum of a) 80.0% of eligible receivables plus 50.0%b)
90.0% of our eligible factored accounts receivable plus c) 60.0% of eligible
inventories, as defined.inventory minus d) the full amount of all outstanding letters of credit issued
pursuant to the senior credit facility which are not fully secured by cash
collateral and e) $9.0 million synthetic lease reserve, which must be maintained
until the expiration date of our synthetic lease in June 2002.
The maximum amount of borrowing under the senior credit facility
attributable to eligible inventory is $30.0 million.
Interest. Interest on borrowings is
variable based,the principal balance under the senior credit
facility shall accrue, at our option, at either a) our bank prime lending rate
with adjustments depending upon either LIBOR plus 1.25%our ratio of indebtedness to EBITDA at the time
of borrowing or b) 2.75% above the agent bank's
prime rate. The Senior Credit Facility contains certain covenants,rate quoted by our bank as the most
restrictiveaverage London
interbank offered rate ("LIBOR") for 1, 2, 3 and 6-month Eurodollar deposits
with adjustments depending upon our ratio of which requires usindebtedness to maintain certain financial ratios and
minimum net worth. In addition,EBIDTA at the Senior Credit Facility restrictstime
of borrowing.
24
Security. As security for the payment
of dividends. The Senior Credit Facility is secured byindebtedness under the senior credit
facility, we granted the lenders a first priority security interest in
substantially all of our existing and future assets, including, without
limitation, accounts receivable, inventory deposit accounts, general intangibles
and is
guaranteed by our subsidiaries. The outstanding balanceequipment. Lenders under the Seniorsenior credit facility have a second priority
security interest in our trademarks.
Letters of Credit
Facility onAs of January 31, 1999 was $33.5 million. The Senior Credit Facility
expires in April 2001.
We are currently in the process of amending the Senior Credit Facility to
increase the maximum amount available under the revolving portion of the Senior
Credit Facility and to add a $20.0 million term loan to the facility.
Borrowings under the increased facility will be used to finance the John
23
Henry/Manhattan acquisition for which the acquisition price, net of the $1.0
million deposit2002, we have paid and assuming Phillips-Van Heusen acquires the
existing dress shirt inventory, will be approximately $26.0 million. We have
entered into an agreement to sell the dress shirt inventory being acquired in
the acquisition (with a value currently estimated to be $17.2 million) to
Phillips-Van Heusen Corporation concurrently with this acquisition. We intend
to finance the $75.0 million acquisition of Perry Ellis International, Inc.,
with the net proceeds from a Rule 144A offering of $100.0 million in aggregate
principal amount of senior subordinated notes due 2009. The remaining net
proceeds from the Rule 144A offering will be used to reduce borrowings under
the amended Senior Credit Facility.
We also maintain threemaintained two letter of credit facilities
which total $60.0totaling $42.0 million. Each letter of credit is collateralizedsecured by the consignment of
merchandise in transit under that letter of credit. Indebtedness under these
letters of credit bears interest at variable rates approximately equal to the
lenders' specified base lending rates minus 1.0% per annum. As of January 31, 1999,2002,
there was $36.2$31.0 million available under theseexisting letter of credit facilities.
OneSubsequent to January 31, 2002, the Company added two additional letter of
credit facilities, totaling $25.0 million and reduced the availability under one
of its two existing letter of credit facilities by $5.0 million. As of April
15, 2002, the Company had four letter of credit facilities totaling $62.0
million.
Senior Secured Notes
On March 22, 2002, the Company completed a private offering of $57.0
million 9 1/2% senior secured notes due 2009. The proceeds of the facilitiesprivate
offering were used to fund the acquisition of certain assets of Jantzen, to
reduce the amount of outstanding debt under the senior credit facility and as
additional working capital.
Synthetic Lease
The synthetic lease, as amended in March 2002, expires in July 1999June 2002 and we
have an obligation to pay $14.5 million at the termination of the term. The
synthetic lease was entered into with a group of financial institutions to
finance the acquisition and construction of our corporate headquarters. The
financial institutions assumed our obligation to purchase the facility and, in
turn, leased the facility to us. The obligations under the synthetic lease are
secured by a security interest in substantially all our existing and future
assets, whether tangible or intangible, including, without limitation, accounts
receivable, inventory deposit accounts, general intangibles, intellectual
property and equipment.
In addition to customary covenants found in secured lending agreements, the
synthetic lease also contains various restrictive financial and other covenants
including, without limitation, (a) prohibitions on the incurrence of additional
indebtedness or guarantees, (b) restrictions on the creation of additional
liens, (c) certain limitations on dividends and distributions or capital
expenditures by the Company, (d) restrictions on mergers or consolidations,
sales of assets, investments and transactions with affiliates, and (e) certain
financial maintenance tests. Such financial maintenance tests, include, among
others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a minimum
current ratio, (iii) a minimum net worth, and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, we were not in compliance with the
funded indebtedness to EBITDA financial covenant. The lessor under, and the
other two facilities, aggregating $15.0
million,financial institutions which financed, the synthetic lease have perpetual terms.
Capital expenditures, principally associatedwaived the
noncompliance with this financial covenant.
25
Contractual Obligations and Commercial Commitments
The following tables illustrate our contractual obligations and commercial
commitments as of January 31, 2002 and include the new office and
warehouse facility, were $4.0 million, $3.8 million and $1.1 million for fiscal
1999, 1998 and 1997 respectively. Capital expenditures, including the
integration costs for the pending Perry Ellis International and John
Henry/Manhattan acquisitions, for fiscal 2000 and 2001 are expected to be
approximately $4.0 million and $4.5 million, respectively.
Our products have historically been geared toward lighter-weight products
generally worn during the spring and summer months, which typically caused a
disproportionately higher amount of revenues to be realized during the first
quarter of each fiscal year. The introduction of fall, winter and holiday
merchandise has also positively affected the third quarter. Our business is
currently more affected by the variations in retail buying patterns than the
seasonseffects of the year.transactions
and amendments discussed above and in Part I of this report that occurred
subsequent to January 31, 2002.
- -------------------------------------------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------------------------------------
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 year years years years
- -------------------------------------------------------------------------------------------------------------
Senior Secured Notes $100,000,000 - - $100,000,000 -
=============================================================================================================
Senior Subordinate Notes $ 57,000,000 - - - $57,000,000
=============================================================================================================
Senior Credit Facility $ 21,756,094 $21,756,094 - - -
=============================================================================================================
Operating Leases $ 24,654,724 $17,627,421 $3,268,977 $ 2,741,201 $ 1,017,125
=============================================================================================================
Total Contractual Cash
Obligations $203,410,818 $39,383,515 $3,268,977 $102,741,201 $58,017,125
=============================================================================================================
- ---------------------------------------------------------------------------------------------------
Amount of Commitment Expiration Per Period
-------------------------------------------------
Other Total
Commercial Amounts Less than 1 - 3 4 - 5 After 5
Commitments Committed 1 year years years years
- ---------------------------------------------------------------------------------------------------
Letter of Credit $11,035,880 $11,035,880 - - -
===================================================================================================
Stand by Letters of
Credit $ 8,250,000 $ 5,500,000 - $ 2,750,000 -
===================================================================================================
Total Commercial
Commitments $19,285,880 $16,535,880 - $ 2,750,000 -
===================================================================================================
Management believes that the combination of the borrowing availability under
the amended Senior Credit Facility, the completionsenior credit facility, letter of this offering,
funds anticipated from changes in working capitalcredit facilities, and funds
anticipated to be generated from operating activities will be sufficient to meet
our operating and capital needs in the foreseeable future.
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
We doDerivatives Financial Instruments
The Company adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, effective
February 1, 2001. SFAS No. 133 requires that all derivative financial
instruments such as interest rate swap contracts and foreign exchange contracts,
be recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them. Changes in the fair value of
derivative financial instruments are either recognized in income or
shareholders' equity (as a component of comprehensive income), depending on
whether the derivative qualifies as a hedge and is being used to hedge changes
in fair value or cash flows. The adoption of SFAS No. 133 did not believe that inflationhave a
material effect on the Company's financial statements.
26
During fiscal 2002, the Company entered into derivative financial
instruments in order to manage the overall borrowing costs associated with its
senior subordinate notes. At January 31, 2002, the Company had an interest rate
swap agreement with a notional amount of $40.0 million dollars maturing on April
1, 2006. The swap is a fair value hedge as it has significantly affected ourbeen designated against the
senior subordinate notes carrying a fixed rate of interest and converts such
notes to variable rate debt. The hedge qualifies for short-cut accounting and
accordingly, the interest rate swap contracts are reflected at fair value in the
Company's consolidated balance sheet and the related portion of fixed-rate debt
being hedged adjusted for an offsetting amount with no effect on the statement
of income.
At January 31, 2002, the Company had an interest rate cap maturing on April
1, 2006 and a basis swap maturing on April 3, 2003, both with a notional amount
of $40.0 million. The interest rate cap hedges against increases in the
variable rate of interest paid on the interest rate swap and the basis swap
decreased the spread on the interest rate swap for 18 months. Neither of these
derivatives qualified for hedge accounting and accordingly, are reflected at
fair value in the Company's consolidated balance sheet with the offset being
recognized in income for the current period. Interest expense for the fiscal
year January 31, 2002 has been reduced by approximately $0.7 million as a result
of the recognition of these derivatives.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on amounts reported in
these financial statements. A summary of those significant accounting policies
can be found in Note 1 to the consolidated financial statements. In particular,
judgment is used in areas such as determining the allowance for uncollectible
accounts receivable, provision for sales returns and allowances, inventory
valuations, and provisions for assets impairments on long-lived assets.
New Accounting Pronouncements
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products)." This issue
addresses the recognition, measurement and income statement classification of
consideration from a vendor to a customer in connection with the customer's
purchase or promotion of the vendor's products. This consensus is expected to
impact revenue and expense classifications by immaterial amounts and have no
effect on reported income. In accordance with the consensus reached, the
Company will adopt EITF Issue No. 01-9 for its fiscal year beginning February 1,
2002.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the pooling-
of-interests method. SFAS No. 141 also addresses the recognition and
measurement of goodwill and other intangibles assets acquired in a business
combination. The Company intends to apply the provisions of this pronouncement
to the Jantzen acquisition. SFAS No. 141 is not expected to have a significant
effect on the financial position or the results of operations.
We purchaseoperation of the Company.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting treatment as it applies to goodwill and
other identifiable intangible assets with indefinite useful lives from foreign suppliersan
amortization method to an impairment-only approach. Under SFAS No. 142, proper
accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in U.S. dollars. Accordingly, the Company,case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date has not been materially adversely affected by foreign
currency fluctuations.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides
guidance for capitalizing and expensing the costs of computer software developed
or obtained for internal use. SOP 98-1SFAS No. 142
is effective for financial statements for fiscal years beginning after December 15, 1998. Management2001. The Company has adopted
SFAS No. 142 for its fiscal year beginning February 1, 2002. In accordance with
27
SFAS No. 142, we obtained a preliminary valuation of all of our trademarks from
a third-party independent valuation firm. Based on this preliminary valuation,
we do not determinedexpect to record any significant impairment in the effect, if any,value of adopting SOP 98-1.
In April 1998,our
trademarks upon adoption of the American Institute of Certified Public Accountantsstandard.
On October 3, 2001, the FASB issued Statements of Position 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES ("SOP 985"). SOP 98-5 establishes accounting standardsSFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of certain costs associated withlong-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the start-upImpairment of
operations, linesLong-Lived Assets and Long-Lived Assets to be Disposed Of," it retains many of
business, etc. SOP 98-5 requires that coststhe fundamental provisions of start-up activities, including
organizational costs, be expenses as incurredSFAS No. 121. SFAS No. 144 also supersedes the
accounting and that inreporting provisions of APB Opinion No. 30, "Reporting the
yearResults of adoption,
start-up costs recorded should be expensed.
24
SOP 98-5Operations---Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The effective date
of SFAS No. 144 is effective for fiscal years beginning subsequent toafter December 15, 1998. Management has not determined the effect, if any, of adopting SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING Activities. Among other provisions,2001. SFAS No.
133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It also requires that an entity recognize all derivatives as either
assets or liabilities in144 is not expected to have a significant effect on the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for financial statements
for fiscal year beginning after June 15, 1999. Management has not determinedor
the effect, if any,results of adopting SFAS No. 133.
YEAR 2000 READINESS DISCLOSURE
BACKGROUND. The Year 2000 issue refers to the inability of certain
data-sensitive computer chips, software and systems to recognize a two-digit
date field as belonging to the 21st century. Many computer software programs,
as well as certain hardware and equipment containing date-sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the year 2000 and later, which could
result in a significant system and equipment failures. This is a significant
issue for most if not all companies, with far reaching implications, some of
which cannot be anticipated or predicted with any degree of certainty. We
recognize that we must take action to ensure that our operations will not be
adversely impacted by Year 2000 software failures.
We have undertaken a study of our functional application systems to
determine their compliance with year 2000 issues and, to the extent of
noncompliance, the required remediation. As a result of such study, we believe
the majority of our systems are year 2000 compliant. Our current distribution
software was modified by expanding the date to be century compliant, and all
entry forms were modified using a windowing algorithm. The financial systems
Account Receivables, Accounts Payables and General Ledger were replaced with
Oracle Financial release 11.01, under Oracle 8.0.5 database. This is year 2000
compliant, and enhances our business analysis capabilities.
Our EDI application is software purchased from NGC, a company in Miami
Lakes, Florida. While we do not own the source code to this software, NGC
provided written certification of year 2000 compliance. Furthermore, we passed
the EDI year 2000 compliance test from NRF (National Retail Federation).
Resultsoperation of the test can be found at http://www.nrf.com. We are ready to change
to the new EDI 4010 documents whenever our customers are ready. Some of our
larger customers are already doing 4010 transactions with us. Our EDI software
is also ready to convert any non-compliant year 2000 EDI documents to an
internal year 2000 compliant transaction.
All of our PBXs or telephone systems are year 2000 compliant and were
certified and tested by Lucent Technologies. The security system equipment Year
2000 compliant certification could be found under
http://www.napcosecurity.com/nsg nsg2000.html. The monitoring company Security
One has provided us a Year 2000 certification of any Date Based System. We
completed the required remediation noted above, including testing, by December
31, 1998. However, there are also less significant hardware options which will
be remediated during 1999. To date, the expense to outsiders incurred by us in
order to become year 2000 compliant, including computer software costs, have
been $0.2 million and the current additional estimated cost to outsiders to
complete such remediation is expected to be $0.2 million. Such costs, other
than software, have been and will continue to be expensed as incurred.
An assessment of the readiness of year 2000 compliance of third party
entities with which we have relationships, such as our banking institutions,
customers, payroll processors and others is ongoing. We have inquired, or are
in the process of inquiring, of the significant aforementioned third party
entities as to their readiness with respect to year 2000 compliance and to date
has received indications that many of them are either compliant or in the
process of remediation. We will continue
25
to monitor these third party entities to determine the impact on our business
and the actions we must take, if any, in the event of non-compliance by any of
these third parties. Our initial assessment of compliance by third party is
that there is not a material business risk to us posed by any such
noncompliance and, as such, we have not yet developed any related contingency
plan.
FORWARD-LOOKING STATEMENTSCompany.
Forward Looking Statements
Except for the historical information contained herein, this "ItemItem 7.
Management's"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.
ITEMItem 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial statements represents the
potential changes in the fair value, earnings or cash flows arising from changes
in interest rates or foreign currency exchange rates. We manage this exposure
through regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. Our policy allows the use
of derivative financial instruments for identifiable market risk exposure,
including interest rate and foreign currency fluctuations. We do not enter into
derivative financial contracts for trading or other speculative purposes except
for as discussed below.
In August 2001, the Company entered into interest rate swap, option and
interest rate cap agreements (the "August Swap Agreement"), for an aggregate
notional amount of $40.0 million in order to minimize its debt servicing costs
associated with its $100.0 million of 12 1/4% senior subordinated notes due
April 1, 2006. The August Swap Agreement was subsequently modified through a
basis swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is entitled to receive semi-annual interest payments on October 1,
and April 1, at a fixed rate of 12 1/4% and is obligated to make semi-annual
interest payments on October 1, and April 1, at a floating rate based on the 6-
month LIBOR rate plus 715 basis points for the 18 months period October 1, 2001
through March 31, 2003 (per October Swap Agreement); and 3-month LIBOR rate plus
750 basis point for the period April 1, 2003 through April 1, 2006 (per the
August Swap Agreement). The Swap Agreement has optional call provisions with
trigger dates of April 1, 2003, April 1, 2004 and April 1, 2005, which contain
certain premium requirements in the event the call is exercised.
As of January 31, 2002, the fair value of the August 2001 swap and the
option contracts recorded on the Company's Consolidated Balance Sheet was
($0.08) million and ($0.16) million, respectively. The interest rate cap and
basis swap refer to, Item 7. "Management's Discussion and Analysis of Financial
Conditions," did not qualify for hedge accounting treatment under the SFAS No.
133, resulting in $0.7 million reduction of recorded interest expense on the
Statement of Operations for the fiscal year ended January 31, 2002.
As a result of our hedging and interest rate risk policies, a 25 basis
point change in interest rates would have impacted the Company's net earnings by
approximately $62,700 and $91,500 during fiscal 2002 and 2001, respectively.
28
In conjunction with the March 22, 2002 offering of $57.0 million of 9 1/2%
senior secured notes due March 15, 2009, the Company entered into interest rate
swap and option agreements for an aggregate notional amount of $57.0 million in
order to minimize the debt servicing costs associated with the notes. The swap
agreement is scheduled to terminate on March 15, 2009. Under the swap
agreement, we are entitled to receive semi-annual interest payments on September
15 and March 15 at a fixed rate of 9 1/2% and are obligated to make semi-annual
interest payments on September 15 and March 15 at a floating rate based on the
three-month LIBOR rate plus 369 basis points for the period from March 22, 2002
through March 15, 2009. The swap agreement has optional call provisions with
trigger dates of March 15, 2005, March 15, 2006 and March 15, 2007, which
contain premium requirements in the event the call is exercised.
The Company's current exposure to foreign exchange risk is not significant
and accordingly, the Company has not entered into any transactions to hedge
against those risks.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAFinancial Statements And Supplementary Data
See pages F-1 through F-33F-22 appearing at the end of this report.
ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
26Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
PART III
ITEMItem 10. DIRECTORS AND EXECUTIVE OFFICES OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
OurDirectors And Executive Officers Of The Registrant
The information concerning the Company's directors and executive officers
are as follows:
NAME AGE POSITION
- ----------------------- ----- --------------------------------------------------
George Feldenkreis(1) 63 Chairman of the Board and Chief Executive Officer
Oscar Feldenkreis 39 President, Chief Operating Officer and Director
Joseph Roisman 53 Executive Vice President
Fanny Hanono 38 Secretary-Treasurer
Ronald L. Buch 63 Director
Gary Dix(1) 51 Director
Salomon Hanono 49 Director
Richard W. McEwen(2) 78 Director
Leonard Miller(1)(2) 69 Director
- ----------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
GEORGE FELDENKREIS founded Supreme in 1967. He has been involved in all
aspects of its operations since that time and served as our President and a
Director until February 1993, at which time 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. He is Vice President
of the Greater Miami Jewish Federation and is a trustee of the University of
Miami.
OSCAR FELDENKREIS was elected Vice President and a Director in 1979 and
joined Supreme on a full-time basis in 1980. Mr. Feldenkreis has been involved
in all aspects of its 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.
He is also a board member of the Greater Miami Jewish Federation.
JOSEPH ROISMAN was appointed Executive Vice President in September 1995.
Previously, Mr. Roisman, who has been employed by Supreme since 1988, was Vice
President, Sales.
FANNY HANONO was elected Secretary-Treasurer in September 1990. Mrs.
Hanono has been employed by Carfel since 1988 in various administrative
positions, most recently as Vice President of Carfel. Since 1996, Mrs. Hanono
has served as a board member of the Michael-Ann Russell Jewish Community
Center.
RONALD L. BUCH was elected to Supreme's Board of Directors in January
1996. Prior to his retirement in 1995, Mr. Buch was employed by Kmart
Corporation for over 39 years, most recently as Vice President and General
Merchandise Manager.
GARY DIX was elected to Supreme'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.
SALOMON HANONO was elected to Supreme's Board of Directors in February
1993. Mr. Hanono has been employed by Carfel in various sales capacities since
1987 and currently is its Export Director,regarding compliance with overall responsibilities for
Carfel's export sales. Mr. Hanono devotes substantially all of his working time
to the affairs of Carfel.
27
RICHARD W. MCEWEN was elected to Supreme's Board of Directors in September
1994. Mr. McEwen serves as a director of 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 Supreme'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 Supreme's directors and executive officers.
Supreme's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors.
Supreme's Articles of Incorporation were amended in 1998 to divide the
Board of Directors into three approximately equal classes with staggered terms.
Directors are elected for three-year terms and, in each case, until their
successors are duly elected and qualified or until their earlier death,
resignation or removal. Messrs. Buch and Hanono hold office until the 1999
Annual Meeting of Shareholders, Messrs. McEwen and Oscar Feldenkreis hold
office until the 2000 Annual Meeting of Shareholders, and Messrs. Dix, Miller
and George Feldenkreis hold office until the 2001 Annual Meeting of
Shareholders.
COMPENSATION OF DIRECTORS
During fiscal 1999, 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. Mr. Hanono receives no cash
compensation for his services as a director. Directors are reimbursed for
travel and lodging expenses in connection with their attendance at meetings.
Directors are also entitled to receive options under the Company's 1993 Stock
Option Plan, as amended (the "1993 Plan") and the Directors' Stock Option Plan
(the "Directors' Plan"). During fiscal 1999, each non-employee director was
granted options to purchase 5,000 shares of Common Stock at an exercise price
of $15.75 per share. As of January 31, 1999, the following options were
outstanding under the Directors' Plan:
NAME OF OPTIONEE NUMBER OF SHARES EXERCISE PRICE($) EXPIRATION DATE
- ---------------------------- ------------------ ------------------- ----------------
Ronald L. Buch ............. 5,000 15.75 May 7, 2008
Gary Dix ................... 5,000 15.75 May 7, 2008
11,250 8.00 June 2, 2000
Richard W. McEwen .......... 5,000 15.75 May 7, 2008
7,500 8.00 June 2, 2000
Leonard Miller ............. 5,000 15.75 May 7, 2008
11,250 8.00 June 2, 2000
Salomon Hanono ............. 5,000 15.75 May 7, 2008
11,250 8.00 June 2, 2000
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a)16 of the Securities Exchange Act of 1934
as amended, requires
the Company's executive officers, directors and holders of more than ten
percent of the Company's Common Stock, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission and the Nasdaq
National Market. Such persons are required to furnish the Company with copies
of all Section 16(a) forms they file.
28
Based solely on it review of the copies of such forms received by it, or
oral or written representations from certain reporting persons from whom no
Form 5 were required, Supreme believes that, with respect to fiscal 1999, its
executive officers, directors and greater than ten percent beneficial owners
complied with all such filing requirement, except that due to an administrative
oversight, Joseph Reisman, Supreme's Executive Vice President, failed to timely
file a Form 5 reporting a May 1998 grant of 3,000 options under the 1993 Plan.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following compensation table sets forth for fiscal 1999, fiscal 1998
and fiscal 1997, the cash and certain other compensation paid to the Chief
Executive Officer ("CEO") and such other executive officers whose annual salary
and bonus exceeded $100,000 during fiscal 1999 (together with the CEO,
collectively, the "Named Executive Officers"):
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------- ----------------------------------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) OPTION/SAR'S (#) COMPENSATION ($)(1)
- ----------------------------- ------------- ------------ ----------- ----------------------- --------------------
George Feldenkreis 1999 141,000 0 150,000 1,731
Chairman and CEO 1998 125,000 100,000 -- 4,750
1997 120,000 50,000 -- 500
Oscar Feldenkreis 1999 373,000 200,000 55,000 1,753
President and Chief 1998 350,000 460,000 -- 4,750
Operating Officer 1997 350,000 450,000 -- 500
Joseph Roisman 1999 152,000 15,000 3,000 1,109
Executive Vice President 1998 147,000 21,000 -- 4,750
1997 140,000 10,000 -- 500
- ----------------
(1) The dollar amount represents Company contributions for the Named Executive
Officer under the Company's 401(K) plan.
EMPLOYMENT AGREEMENTS
Supreme has an employment agreement with Oscar Feldenkreis, the President
and Chief Operating Officer, which was renewed in May 1998 for a two-year
period. In connection with the renewal of the employment agreement, Mr.
Feldenkreis was granted ten-year options under the 1993 Plan to purchase a
total of 55,000 shares of Common Stock at an exercise price of $15.75 per
share. The employment agreement provides for an annual salary of $350,000,
subject to annual cost-of-living increases, and an annual bonus as maythis item will be
determined by the Compensation Committee in its discretion, up to a maximum of
$500,000. The employment agreement also prohibits Mr. Feldenkreis from directly
or indirectly competing with us for one year after termination of his
employment for any reason except our termination of Mr. Feldenkreis without
cause. Upon termination of the employment agreement by reason of his death or
disability, Mr. Feldenkreis or his estate will receive a lump sum payment equal
to one year's salary plus a bonus as may be determined by the Compensation
Committee in its discretion.
Supreme also has an employment agreement with George Feldenkreis, the
Chairman of the Board and CEO, which was renewed in May 1998 for a two-year
period. In connection with the renewal of the employment agreement, Mr.
Feldenkreis was granted options under the 1993 Plan to purchase a total of
150,000 shares of Common Stock at an exercise price of $15.75 per share. The
employment agreement provides for an annual salary of $375,000, subject to
annual cost-of-living increases, and an annual bonus as may be determined by
the Compensation Committee in its discretion, up to a maximum of $250,000.
George Feldenkreis' employment agreement contains termination and
non-competition provisions similar to those set forth in Oscar Feldenkreis'
agreement.
29
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
options made during fiscal 1999the Company's definitive Proxy
Statement, to any of the Named Executive Officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF TOTAL APPRECIATION FOR
NUMBER OF SHARES OPTIONS GRANTED EXERCISE OR OPTION TERM ($)(1)
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE 5% 10%
- ------------------------- -------------------- ----------------- ------------ ----------- ----------- ----------
George Feldenkreis ...... 150,000 38.8 15.75 5/07/08 1,485,764 3,765,217
Oscar Feldenkreis ....... 55,000 14.2 15.75 5/07/08 544,780 1,380,579
Joseph Roisman .......... 3,000 0.8 10.00 5/04/03 8,288 18,315
- ----------------
(1) Based upon the exercise price, which was equal to the fair market on the
date of grant, and annual appreciation at the rate stated on such price
through the expiration date of the options. Amounts represented
hypothetical gains that could be achieved for the options if exercised atfiled within 120 days after the end of the term.fiscal year covered
by this Form 10-K, and is incorporated by reference from the Company's Proxy
Statement.
Item 11. Executive Compensation
The assumed 5% and 10% rates of stock price
appreciation are providedinformation required by this item will be set forth in accordance with the rulesCompany's
definitive Proxy Statement, to be filed within 120 days after the end of the
Securitiesfiscal year covered by this Form 10-K, and Exchange Commission (the "Commission") and do not representis incorporated by reference from the
Company's estimate or projectionProxy Statement.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information required by this item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
future stock price. Actual gains,
if any, are contingent uponfiscal year covered by this Form 10-K, and is incorporated by reference from the
continued employmentCompany's Proxy Statement.
Item 13. Certain Relationships And Related Transactions
The information required by this item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
Named
Executive Officer through the expiration date, as well as being dependent
upon the general performance of the Common Stock. The potential realizable
values have not taken into account amounts required to be paid for federal
income taxes.
STOCK OPTIONS HELD AT END OF FISCAL 1999
The following table indicates the total numberfiscal year covered by this Form 10-K, and value of exercisable
and unexercisable stock options heldis incorporated by each of the Named Executive Officers as
of January 31, 1999. No options to purchase stock were exercised by any of the
Named Executive Officers in fiscal 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
- ---------------------------- ------------- --------------- ---------------- --------------
George Feldenkreis ......... 150,000 0 37,500 0
Oscar Feldenkreis .......... 100,000 0 354,400 0
Joseph Roisman ............. 12,000 2,250 98,213 13,500
- ----------------
(1) Based on the Nasdaq National Market last sales price forreference from the
Company's Common Stock on January 29, 1999 in the amount of $16.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.Proxy Statement.
30
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 January 31, 1999, 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 BENEFICIAL OWNER(1)(2) NUMBER OF SHARES % OF CLASS OUTSTANDING
- -------------------------------------------- ------------------ -----------------------
George Feldenkreis(3) ...................... 1,738,153 25.3
Oscar Feldenkreis(4) ....................... 1,308,188 19.2
Fanny Hanono(5) ............................ 399,858 6.0
Salomon Hanono(5)(6) ....................... 416,108 6.2
Carfel, Inc.(7) ............................ 361,525 5.4
Joseph Roisman(8) .......................... 13,500 *
Ronald Buch(9) ............................. 5,750 *
Gary Dix(10) ............................... 21,800 *
Richard W. McEwen(11) ...................... 14,750 *
Leonard Miller(12) ......................... 55,250 *
FMR Corporation
82 Devonshire Street
Boston, Massachusetts 02109(13) ........... 872,500 13.0
The Kaufmann Funds, Inc.
140 East 45th Street, 43rd Floor
New York, New York 10017(14) .............. 450,000 6.7
All directors and executive offers
as a group (9 persons)(15) ................ 3,405,199 48.4
- ----------------
* Less than 1%.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Supreme International Corporation, 3000 N.W. 107th Avenue, Miami, Florida
33172.
(2) Except as otherwise indicated, we believe 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) 150,000 shares of Common Stock issuable upon the exercise
of stock options held by George Feldenkreis, (c) 361,525 shares of Common
Stock held by Carfel, of which company Mr. Feldenkreis is a director,
executive officer and principal shareholder and (d) 84,900 shares of
Common Stock held by a charitable foundation of which George Feldenkreis,
Oscar Feldenkreis and Fanny Hanono are each directors and officers (the
"Foundation").
(4) Represents (a) 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) 1,000 shares of Common
Stock held by Mr. Feldenkreis directly, (c) 100,000 shares of Common Stock
issuable upon the exercise of stock options held by Oscar Feldenkreis and
(d) 84,900 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) 84,900 shares held by the
Foundation. Fanny Hanono and Salomon Hanono are husband and wife.
(6) Also includes 16,250 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 (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.
(9) Represents (a) 750 shares of Common Stock held by Mr. Buch and (b) 5,000
shares of Common Stock issuable upon the exercise of stock options held by
Mr. Buch.
(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) 16,250 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)
12,500 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)
16,250 shares of Common Stock issuable upon the exercise of stock options
held by Mr. Miller.
(13) Based solely on information contained in an amendment to Schedule 13G
dated December 30, 1998 filed with the Commission. 380,000 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).
31
In connection with the pending John Henry/Manhattan acquisition, we
granted IAC in April 1998 the right to purchase 1,320,000 shares of Supreme
common stock at a price of $12 per share, representing approximately 16.4% of
our outstanding common stock as of January 31, 1999. This right is exercisable
upon the consummation of the John Henry/Manhattan acquisition.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
LEASE AGREEMENTS
See "Business--Facilities" with respect to certain facilities leased
jointly by Supreme and Carfel.
Prior to the consolidation of our administrative offices and warehouse and
distribution facilities, we occupied the following properties from affiliated
parties.
We lease an approximately 16,900 square foot building in Miami, Florida
which housed our 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 annual rental for the office facility is
approximately $128,000. Supreme will continue to pay rent on this facility
until the expiration of the lease or until the lease of the facility to another
party.
We also leased an approximately 49,000 square foot warehouse/office
building adjacent to our former executive offices from George Feldenkreis
pursuant to a lease which expired in April 1998. Fiscal 1999 rental for this
facility was approximately $282,000. In January 1999, we vacated this building.
We also lease an approximately 32,000 square foot warehouse building from
a partnership of which Mr. Feldenkreis is a general partner. This warehouse was
leased pursuant to a lease which expired in June 1998. Fiscal 1999 rental for
this facility was approximately $136,000. This facility is currently being
leased on a month-to-month basis for a monthly rental of $11,333.
LICENSING AGREEMENTS
In January 1995, we entered into a license agreement ("Isaco License
Agreement") with Isaco International, Inc. ("Isaco"), pursuant to which Isaco
was granted an exclusive license to use the Natural Issue brand in the United
States and its territories and possessions to market a line of men's underwear
and loungewear. In June 1998, Supreme and Isaco extended the Isaco License
Agreement for an additional year at a guaranteed minimum royalty of $137,500.
Royalty income earned from Isaco License Agreement amounted to approximately
$298,000, $296,000 and $243,000 for fiscal 1999, 1998 and 1997, respectively.
The principal shareholder of Isaco is Isaac Zelcer, who is Oscar Feldenkreis'
father-in-law.
In January 1998, we entered into two additional three-year license
agreements with Isaco for use of the Natural Issue brand in the United States
and its territories and possessions to market lines of hosiery and neckwear.
The license agreement for neckwear provides for a guaranteed minimum annual
royalty of $15,000 and the license agreement for hosiery provides for a
guaranteed minimum annual royalty of $25,000 during the first year, increasing
by $5,000 in each subsequent year.
The Company believes that its arrangements with George Feldenkreis, Carfel
and Isaco are on terms at least as favorable as the Company could secure from a
non-affiliated third party.
32
PART IV
ITEMItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMExhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
(1) Financial Statements.
(1)Consolidated Financial Statements.
The following consolidated financial
statementsConsolidated Financial Statements of SupremePerry Ellis
International, CorporationInc. and subsidiaries are included in Part II, Item
8:
PAGE
-----
Independent Auditors' Report ........................................ F-1
Consolidated Balance Sheets as of January 31, 1998 and 1999 ......... F-2
Consolidated Statements of Income
For Each of the Three Years in the Period Ended January 31, 1999 .... F-3
Consolidated Statements of Changes in Stockholders' Equity
For Each of the Three Years in the Period Ended January 31, 1999 .... F-4
Consolidated Statements of Cash Flow
For Each of the Three Years in the Period Ended January 31, 1999 .... F-5
Notes to Consolidated Financial Statements .......................... F-6
The following financial statements of Perry Ellis International, Inc.
are included in Part II, Item 8:
PAGE
-----
Independent Auditors' Report ........................................ F-21
Balance Sheet as of December 31, 1997 and 1998 ...................... F-22
Statement of Operations for the years ended
December 31, 1996, 1997 and 1998 ................................... F-23
Undistributed Income for the years ended
December 31, 1996, 1997 and 1998 ................................... F-24
Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 ................................... F-25
Notes to Financial Statements ....................................... F-26
The following Unaudited Pro Forma Combined Financial Information of
Supreme and Perry Ellis International, Inc. are included in Part II,
Item 8:
PAGE
-----
Introduction ........................................................ F-29
Balance Sheet as of January 31, 1999 ................................ F-30
Income Statement for the year ended January 31, 1999 ................ F-31
Notes to Unaudited Pro Forma Combined Financial Information ......... F-32
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 2002 and 2001 F-3
Consolidated Statements of Income for each of the three years in the
period ended January 31, 2002 F-4
Consolidated Statements of Changes in Stockholders' Equity for each
of the three years in the period ended January 31, 2002 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended January 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
(2) Consolidated Financial Statement Schedule
All schedules for which provision is made in applicable regulations
of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information
have been included in the Consolidated Financial Statements and
therefore such schedules have been omitted.
33
(3) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- ---------------------------------------------------------------------------------------------
3.1 Registrant's Second Amended and Restated Articles of Incorporation(6)
3.2 Registrant's Amended and Restated Bylaws(1)
4.1 Form of Common Stock Certificate(1)
10.3 Form of Indemnification Agreement between the Registrant and each of the Registrant's
Directors and Officers(1)
10.6 Business Lease dated October 4, 1990, between George Feldenkreis and the Registrant
relating to warehouse facilities(1)
10.7 Business Lease dated May 1, 1990, between George Feldenkreis and the Registrant relating
to warehouse facilities(1)
10.9 1993 Stock Option Plan (1)(2)
10.10 Directors Stock Option(1)(2)
10.15 Loan and Security Agreement dated as of October 5, 1994, between the Registrant and
NationsBank
10.16 First Amendment to Loan and Security Agreement dated as of August 19, 1995, between
the Registrant and NationsBank of George N.A.(4)
10.17 Amendment to Business Lease between George Feldenkreis and the Registrant relating to
office facilities(4)
10.18 Revocable Credit Facility Agreement dated May 26, 1995 between the Registrant and
Hamilton Bank, N.A.(4)
10.19 Revolving Line of Credit Agreement dated June 23, 1995 between the Registrant and Ocean
Bank(4)
10.20 Profit Sharing Plan(2)(4)
10.21 Amended and Restated Employment Agreement between the Registrant and George
Feldenkreis(2)(4)
10.22 Amended and Restated Employment Agreement between the Registrant and Oscar
Feldenkreis(2)(4)
10.23 Business Lease dated December 26, 1995 between George Feldenkreis and the Registrant
relating to office facilities(5)
10.24 Lease Agreement [Land] dated as of August 28, 1997 between SUP Joint Venture, as Lessor
and Registrant, as Lessee(7)
10.25 Lease Agreement [Building] dated as of August 28, 1997 between SUP Joint Venture, as
Lessor and Registrant, as Lessee(7)
10.26 Amended and Restated Loan and Security Agreement dated as of March 31, 1998(7)
10.27 Amendment to Amended and Restated Loan and Security Agreement dated as of August 1,
1998(6)
22.1 Subsidiaries of Registrant(3)
23.2 Consent of Deloitte & Touche LLP(6)
27.1 Financial Data Schedule (SEC use only)Exhibit
No. 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)
4.2 Indenture dated April 6, 1999 between the Company and State Street Bank
and Trust Company, as amended (6)
- ----------------4.4 Purchase Agreement dated March 31, 1999 by and among the Company and the
Initial Purchasers (6)
4.5 Specimen Forms of 121/4% Senior Subordinated Notes due April 1, 2006 (6)
4.6 Indenture dated March 22, 2002 between the Company and State Street Bank
and Trust Company (11)
4.7 Purchase Agreement dated March 15, 2002 by and among the Company and the
Initial Purchaser (11)
4.8 Pledge and Security Agreement dated March 22, 2002 by and among the
Company, Jantzen Apparel Corp. and State Street Bank and Trust Company
(11)
4.9 Specimen Forms of 9 1/2% Senior Secured Notes due March 15, 2009 (11)
10.3 Form of Indemnification Agreement between the Company and each of the
Company's Directors and Officers (1)
10.9 1993 Stock Option Plan (1)(2)
10.10 Directors Stock Option (1)(2)
31
10.17 Amendment to Business Lease between George Feldenkreis and the Company
relating to office facilities (4)
10.18 Revocable Credit Facility Agreement dated May 26, 1995 between the
Company and Hamilton Bank, N.A. (4)
10.19 Revolving Line of Credit Agreement dated June 23, 1995 between the
Company and Ocean Bank (4)
10.20 Profit Sharing Plan (2)(4)
10.21 Amended and Restated Employment Agreement between the Company and George
Feldenkreis (2)(4)
10.22 Amended and Restated Employment Agreement between the Company and Oscar
Feldenkreis (2)(4)
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 the Company, as Lessee (6)
10.26 Amended and Restated Loan and Security Agreement dated as of March 31,
1998 (6)
10.27 Amendment to Amended and Restated Loan and Security Agreement dated as
of August 1, 1998 (7)
10.28 Purchase and Sale Agreement dated as of December 28, 1998 among Salant
Corporation, Frost Bros. Enterprises, Inc., Maquiladora Sur, S.A. de C.V.
and the Company (the "Salant Purchase Sale Agreement") (7)
10.29 First Amendment to the Salant Purchase and Sale Agreement dated as of
February 24, 1999 (7)
10.30 Amended and Restated Loan and Security Agreement dated as of March 26,
1999 (7)
10.31 Inventory Purchase Agreement dated March 12, 1999 between the Company and
Phillips-Van Heusen Corporation (7)
10.32 Stock Purchase Agreement dated as of January 28, 1999 by and among the
Company and Christopher C. Angell, Barbara Gallagher and Morgan Guaranty
Trust Company of New York, as Trustees of the PEI Trust created under
Par. E. of Article 3 of the Agreement dated November 19, 1985, as amended
January 27, 1986 (the "Perry Ellis Purchase and Sale Agreement") (8)
10.33 First Amendment to the Perry Ellis Purchase and Sale Agreement dated as
of March 31, 1999 (8)
10.34 Employment Agreement between Allan Zwerner and the Company (2)(6)
10.35 Employment Agreement between Timothy B. Page and the Company (2)(11)
10.36 Incentive Stock Option Plan (2)(9)
10.37 Asset Purchase Agreement dated as of March 15, 2002 by and among the
Company, Jantzen, Inc. and VF Canada, Inc. (11)
10.38 Fifth Amendment dated March 14, 2002 to Amended and Restated Loan and
Security Agreement dated March 26, 1999 (11)
10.39 Fourth Amendment to Master Agreement dated March 14, 2002, by and among
the Company, SUP Joint Venture, SunTrust Bank and Israeli Discount Bank
(11)
21.1 Subsidiaries of Registrant (11)
23.2 Consent of Deloitte & Touche LLP (11)
____________________
(1) Previously filed as an Exhibit of the same number to Registrant's
Registration Statement on Form S -1 (File No. 33-60750) and incorporated
herein by reference.
(2) Management Contract or Compensation Plan.
(3) Previously filed as an Exhibit of the same number to Registrant's Annual
Report on Form 10-K for the year ended January 31, 1995 and incorporated
herein by reference.
(4) Previously files as an Exhibit of the same number to Registrant's
Registration Statement on Form S-1 (File No. 33-96304) and incorporated
herein by reference.
(5) Previously filed as an Exhibit of the same number to Registrant's Annual
Report on Form 10-K for the year ended January 31, 1996 and incorporated
herein by reference.
(6) Filed herewith.Previously filed as an Exhibit to Registrant's Registration Statement on
Form S-4 (File No. 33-78427) and incorporated herein by reference.
32
(7) Previously filed as an exhibit of the same numberExhibit to Registrant's AnnualCurrent Report on Form
10-K for the year ended January 31, 19978-K dated March 29, 1999 as amended and incorporated herein by
reference.
34
(8) Previously filed as an Exhibit to Registrant's Current Report on Form
8-K dated April 6, 1999 as amended and incorporated herein by
reference.
(9) Previously filed as an Exhibit to Registrant's Proxy Statement for
its 2000 Annual Meeting and incorporated herein by reference.
(10) Previously filed as an Exhibit to Registrant's Current Report on Form
8-K dated March 22, 2002 and incorporated herein by reference.
(11) Filed herewith.
(b) Reports on Form 8-K
On January 15, 1999 Supreme filed a current report on Form 8-K to
disclose that it had entered into a definitive agreement with respect to
the John Henry/Manhattan acquisition.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.
3533
SIGNATURES
Pursuant to the requirement of Section 12 of the Securities Exchange Act of
1934, the Registrant has caused this report or amendment to thereto to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUPREMEPERRY ELLIS INTERNATIONAL, CORPORATION
By:INC.
Dated: April 19, 2002 BY: /s/ GEORGE FELDENKREIS
By: /s/ GEORGE FELDENKREIS
-------------------------------------------------------------------------
George Feldenkreis
Chairman of the Board and
Chief Executive Officer
Dated: March 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in thetheir capacities and on
the date indicated:
NAME AND SIGNATURE TITLE DATE
- -------------------------------- ------------------------------------- ---------------Name and Signature Title Date
------------------ ----- ----
/s/ GEORGE FELDENKREIS Chairman of the Board and March 15, 1999April 19, 2002
- --------------------------------------------------------- Chief Executive Officer
George Feldenkreis (Principal Executive Financial)
and Accounting Officer)
/s/ OSCAR FELDENKREIS President, Chief OperationsOperating April 19, 2002
- ------------------------- Officer March 15, 1999
- -------------------------------- and Director
Oscar Feldenkreis
/s/ TIMOTHY B. PAGE Chief Financial Officer April 19, 2002
- ------------------------- (Principal Financial and Accounting
Timothy B. Page Officer)
/s/ ALLAN ZWERNER President of Licensing April 19, 2002
- ------------------------- and Director
Allan Zwerner
/s/ RONALD BUCH Director March 15, 1999April 19, 2002
- ---------------------------------------------------------
Ronald Buch
/s/ GARY DIX Director March 15, 1999April 19, 2002
- ---------------------------------------------------------
Gary Dix
/s/ SALOMON HANONO Director March 15, 1999April 19, 2002
- ---------------------------------------------------------
Salomon Hanono
/s/ RICHARD McEWENJOSEPH P. LACHER Director March 15, 1999April 19, 2002
- --------------------------------
Richard McEwen-------------------------
Joseph P. Lacher
/s/ LEONARD MILLER Director March 15, 1999April 19, 2002
- ---------------------------------------------------------
Leonard Miller
3634
INDEX TO FINANCIAL STATEMENTS
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 2002 and 2001 F-3
Consolidated Statements of Income for each of the three years
in the period ended January 31, 2002 F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended January 31, 2002 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended January 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of SupremePerry Ellis International, Corporation and subsidiaries:Inc.:
We have audited the consolidated balance sheets of SupremePerry Ellis International,
CorporationInc. and subsidiaries (the "Company") as of January 31, 19982002 and 1999,2001, and the
related consolidated statements of income,operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended January 31, 1999.2002.
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 auditing standards generally accepted
auditing
standards.in the United States of America. 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, 19982002
and 1999,2001, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 19992002 in conformity with accounting
principles generally accepted accounting principles.in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 12, 1999
F-119, 2002, except for Note 20,
As to which the date is March 22, 2002
F-2
SUPREMEPERRY ELLIS INTERNATIONAL, CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31,
1998 AND 1999
1998 1999
--------------- ---------------2001 2002
------------ -------------
ASSETS
Current Assets:
Cash .............................................................and cash equivalents $ 1,010,256344,741 $ 173,4931,303,978
Accounts receivable, net ......................................... 35,502,607 38,969,84558,821,622 50,370,245
Inventories ...................................................... 35,799,388 32,965,65543,556,374 45,409,047
Deferred income taxes ............................................ 1,154,905 1,091,482
Deposits for acquisitions ........................................ -- 6,000,0001,951,553 2,384,316
Prepaid income taxes 136,718 -
Other current assets ............................................. 2,253,328 2,040,2002,305,283 1,886,163
------------ ------------
Total current assets ........................................... 75,720,484 81,240,675107,116,291 101,353,749
Property and equipment, net ....................................... 4,899,656 7,851,5929,820,628 10,897,334
Intangible assets, net ............................................ 19,716,064 18,842,797122,016,681 117,938,894
Other ............................................................. 1,313,747 1,022,4674,159,482 3,870,703
------------ ------------
TOTAL .......................................................... $101,649,951 $108,957,531$243,113,082 $234,060,680
============ ============
LIABILITIES AND& STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................. $ 4,048,3256,712,859 $ 4,595,6885,966,368
Accrued expenses ................................................. 2,062,912 4,931,525
Borrowings under letter of3,660,364 3,259,602
Income taxes payable - 1,381,551
Accrued interest payable 4,215,835 3,808,997
Current portion - senior credit facilities ..................... 3,000,000 --agreement - 21,756,094
Unearned revenues 1,996,752 1,838,929
Other current liabilities ........................................ 442,790 413,5051,651,467 2,410,583
------------ ------------
Total current liabilities ...................................... 9,554,027 9,940,71818,237,277 40,422,124
Senior subordinated notes payable, net 99,152,667 99,071,515
Deferred income tax ............................................... 282,905 559,7284,930,829 6,749,832
Long term debt--seniordebt- senior credit agreement ........................... 36,658,174 33,511,15737,913,126 -
------------ ------------
Total long-term liabilities 141,996,622 105,821,347
------------ ------------
Total liabilities .............................................. 46,495,106 44,011,603160,233,899 146,243,471
------------ ------------
Commitments and Contingencies:Contingencies (Note 16)19)
Minority Interest - 613,671
------------ ------------
Stockholders' Equity:
Preferred stock--$.01stock $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding ................................. -- --- -
Class A Common Stock--$.01common stock $.01 par value; 30,000,000 shares authorized;
no shares issued or outstanding ................................. -- --- -
Common stock--$.01stock $.01 par value; 30,000,000 shares authorized;
6,555,681 and 6,712,3746,739,374 shares issued and 6,579,374 shares outstanding as of
January 31, 19982001 and 1999, respectively ................... 65,556 67,1236,337,440 shares issued and 6,286,740 shares
outstanding as of January 31, 2002 67,393 63,374
Additional paid-in-capital ........................................ 27,598,618 28,806,45529,063,407 26,286,040
Retained earnings ................................................. 27,490,671 36,072,35054,778,302 61,386,244
Accumulated other comprehensive income - (121,753)
------------ ------------
Total 83,909,102 87,613,905
Common stock in treasury at cost; 160,000 shares as of January 31, 2001
and 50,700 shares as of January 31, 2002 (1,029,919) (410,367)
------------ ------------
Total stockholders' equity ..................................... 55,154,845 64,945,92882,879,183 87,203,538
------------ ------------
TOTAL .......................................................... $101,649,951 $108,957,531$243,113,082 $234,060,680
============ ============
See Notesnotes to consolidated financial statements.
F-2F-3
SUPREMEPERRY ELLIS INTERNATIONAL, CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31
1999
1997 1998 1999
----------------- ----------------- -----------------2000 2001 2002
------------- ------------ ------------
Revenues
Net Sales ........................................... $ 157,372,796 $ 190,689,212 $ 221,347,295$229,549,158 $261,626,463 $253,033,752
Royalty Income ...................................... 1,654,262 4,031,878 3,057,357
------------- ------------- -------------22,839,698 25,789,975 26,680,987
------------ ------------ ------------
Total Revenues ..................................... 159,027,058 194,721,090 224,404,652252,388,856 287,416,438 279,714,739
Cost of Sales ........................................ 122,045,614 145,991,132 166,198,450
------------- ------------- -------------171,412,946 200,883,860 191,601,211
------------ ------------ ------------
Gross Profit ......................................... 36,981,444 48,729,958 58,206,20280,975,910 86,532,578 88,113,528
Operating Expenses
Selling, General and Administrative Expenses ......... 25,876,115 35,885,443 41,639,672
------------- ------------- -------------44,479,497 52,146,750 57,170,447
Depreciation and Amortization 5,181,286 6,130,708 6,662,158
------------ ------------ ------------
Total Operating Expenses 49,660,783 58,277,458 63,832,605
------------ ------------ ------------
Operating Income ..................................... 11,105,329 12,844,515 16,566,53031,315,127 28,255,120 24,280,923
Interest Expense ..................................... 1,664,392 2,781,509 3,493,985
------------- ------------- -------------13,905,498 15,766,461 13,549,746
------------ ------------ ------------
Income Before Minority Interest and Income Tax
Provision ................... 9,440,937 10,063,006 13,072,54517,409,629 12,488,659 10,731,177
Minority Interest - - 83,240
Income Tax Provision ................................. 3,596,918 2,884,844 4,490,866
------------- ------------- -------------6,529,681 4,662,655 4,039,995
------------ ------------ ------------
Net Income ........................................... $ 5,844,01910,879,948 $ 7,178,1627,826,004 $ 8,581,679
============= ============= =============6,607,942
============ ============ ============
Net Income Perper Share
Basic ............................................... $ 0.891.62 $ 1.101.17 $ 1.29
============= ============= =============1.01
============ ============ ============
Diluted ............................................. $ 0.891.59 $ 1.081.16 $ 1.27
============= ============= =============1.01
============ ============ ============
Weighted Average Number of Shares Outstanding
Basic ............................................... 6,534,446 6,540,604 6,674,103
============= ============= =============6,725,722 6,689,476 6,516,807
Diluted ............................................. 6,595,147 6,665,635 6,769,810
============= ============= =============6,856,538 6,745,441 6,534,749
See Notesnotes to consolidated financial statements.
F-3F-4
SUPREMEPERRY ELLIS INTERNATIONAL, CORPORATIONINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31
1999
ACCUMULATED
OTHER
ADDITIONAL COMPRE- COMPRE-
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN TREASURY HENSIVE HENSIVE RETAINED
----------------------
SHARES AMOUNT CAPITAL STOCK INCOME INCOME EARNINGS TOTAL
--------- --------- ----------- ----------- ------------- ---------- -------------- -------------- -------------------------- ------------
BALANCE, JANUARY 31, 1996 ................... 6,800,0001999 6,712,374 $ 68,00067,123 $28,806,455 $ 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)- $ - $ 36,072,350 $64,945,928
Exercise of stock options ................... 7,500 75 48,675 -- 48,750
Net Income .................................. -- -- -- 5,844,019 5,844,019
--------- -------- ------------ ----------- ------------
BALANCE, JANUARY 31, 1997 ................... 6,529,431 65,295 27,397,670 20,312,509 47,775,474
Exercise of stock options ................... 26,250 261 200,948 -- 201,209
Net Income .................................. -- -- -- 7,178,162 7,178,162
--------- -------- ------------ ----------- ------------
BALANCE, JANUARY 31, 1998 ................... 6,555,681 65,556 27,598,618 27,490,671 55,154,845
Exercise of stock options ................... 78,525 785 457,367 -- 458,15219,500 195 163,333 - - - - 163,528
Exercise of warrants ........................ 78,168 782 (782) -- --- - - - - - - -
Net Income .................................. -- -- -- 8,581,679 8,581,679income - - - - - - 10,879,948 10,879,948
Tax benefit for exercise of
non-qualified stock options ............... -- -- 751,252 -- 751,252- - 30,867 - - - - 30,867
----------- --------- -------- ------------ ----------- ---------------------- ----------- ---------- ----------- -----------
BALANCE, JANUARY 31, 1999 ................... 6,712,3742000 6,731,874 67,318 29,000,655 - - - 46,952,298 76,020,271
Exercise of stock options 7,500 75 57,425 - - - - 57,500
Net income - - - - - - 7,826,004 7,826,004
Tax benefit for exercise of
non-qualified stock options - - 5,327 - - - - 5,327
Purchase of treasury stock (160,000) (1,029,919) - - - (1,029,919)
----------- --------- ----------- ----------- ----------- ---------- ----------- -----------
BALANCE, JANUARY 31, 2001 6,579,374 67,393 29,063,407 (1,029,919) - - 54,778,302 82,879,183
Exercise of stock options 2,666 27 15,395 - - - - 15,422
Net income - - - - - 6,607,942 6,607,942 6,607,942
Foreign currency translation
adjustment - - - - (121,753) (121,753) - (121,753)
-----------
Comprehensive income $ 67,1236,486,189
===========
Tax benefit for exercise of
non-qualified stock options - - - - - - --
Purchase of treasury stock (295,300) - - (2,177,256) - - (2,177,256)
Retirement of treasury stock (4,046) (2,792,762) 2,796,808 - - -
----------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 2002 6,286,740 $ 28,806,455 $36,072,35063,374 $26,286,040 $ 64,945,928(410,367) $ (121,753) $61,386,243 $87,203,538
=========== ========= ======== ============ =========== ======================= =========== =========== ===========
See Notesnotes to consolidated financial statements.
F-4F-5
SUPREMEPERRY ELLIS INTERNATIONAL, CORPORATIONSINC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWFLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31
1999
1997 1998 1999
--------------- --------------- ---------------2000 2001 2002
-------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 5,844,01910,879,948 $ 7,178,1627,826,004 $ 8,581,6796,607,942
Adjustments to reconcile net income to net cash
provided by (used in)
provided by operating activities:
Depreciation and amortization .................................. 1,147,091 1,748,006 2,161,398
Loss on sale and abandonment of property ....................... 257,221 187,692 --
Decrease (increase) in5,181,286 5,521,762 6,190,801
Provision for bad debts 450,541 330,435 1,575,000
Provision for deferred taxes .......................... 159,655 (203,342) 340,2461,412,735 2,098,295 1,386,240
Amortization of debt issue cost 299,711 608,946 614,347
Amortization of bond discount 136,667 164,000 164,000
Minority Interest - - 83,240
Other 32,758 67,234 (64,250)
Changes in operating assets and liabilities:liabilities
(net of effects of acquisition)acquisitions):
Accounts receivable, net ...................................... (8,951,318) (6,695,371) (3,467,238)(6,662,205) (13,174,087) 7,048,510
Inventories ................................................... 293,527 (3,598,866) 2,833,733(3,037,630) (7,579,495) (1,528,619)
Other current assets .......................................... (359,942) (727,633) 213,128and prepaid income taxes (1,291,628) 1,728,313 586,446
Other assets .................................................. (1,915,477) 889,854 291,280509,924 (265,952) (701,044)
Accounts payable and accrued expenses ......................... 4,835,234 (1,907,414) 3,415,9761,686,981 603,704 (1,160,561)
Income taxes payable - - 1,385,210
Accrued interest payable 4,233,183 (194,796) (604,768)
Other current liabilities ..................................... 563,756 28,055 (29,285)and unearned revenues 214,260 153,951 792,354
------------- ------------ -------------------------
Net cash provided by (used in) operating activities ..................................... 1,873,766 (3,100,857) 14,340,91714,046,531 (2,111,686) 22,374,847
------------- ------------ -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................. (1,058,061) (3,828,142) (4,004,588)
Proceeds from sale of property and equipment .................... 164,545 32,102 --(2,331,513) (2,711,741) (2,921,930)
Payment on purchase of intangible assets ........................ (137,027) (758,598) (235,479)
Deposit for John Henry/Manhattan acquisition .................... -- -- (1,000,000)
Deposit for Perry Ellis International acquisition ............... -- -- (5,000,000)(1,025,185) (3,472,001) (98,928)
Proceeds from sale of trademark - 750,000 -
Payment for Jolem acquisition ................................... (3,657,435) -- --
Payment for Munsingwear acquisition ............................. (19,768,380) -- --acquired businesses, net of cash acquired (100,734,467) - -
------------- ------------ -------------------------
Net cash used in(used in) investing activities ........................ (24,456,358) (4,554,638) (10,240,067)activities: (104,091,165) (5,433,742) (3,020,858)
------------- ------------ -------------------------
CASH FLOWFLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease)borrowings (repayments) in borrowings under letter ofterm loan 11,250,000 (11,250,000) -
Net (payments) proceeds from senior credit facilities ............................................. 6,812,629 (3,812,629) (3,000,000)facility (15,479,661) 19,881,630 (16,157,032)
Net proceeds from (repayments of) long-term debt ................ 18,168,857 11,521,373 (3,147,017)
Purchase of treasury stock ...................................... (1,950,379) -- --senior subordinated notes 98,852,000 - -
Debt issuance costs (4,719,962) - -
Tax benefit for exercise of non-qualified stock options ......... -- -- 751,25230,867 5,327 -
Purchase of treasury stock - (1,029,919) (2,177,256)
Proceeds from exercise of stock options ......................... 48,750 201,209 458,152163,528 57,500 15,421
------------- ------------ -------------------------
Net cash provided by (used in) financing activities .......... 23,079,857 7,909,953 (4,937,613)activities: 90,096,772 7,664,538 (18,318,867)
------------- ------------ ------------
Effect of exchange rate changes on cash and cash equivalents - - (75,886)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH ................................. 497,265 254,458 (836,763)52,138 119,110 959,237
CASH AT BEGINNING OF YEAR ....................................... 258,533 755,798 1,010,256173,493 225,631 344,741
------------- ------------ -------------------------
CASH AT END OF YEAR ............................................. $ 755,798225,631 $ 1,010,256344,741 $ 173,4931,303,978
============= ============ =========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATIONINFORMATION:
Cash paid during the yearperiod for:
Interest ....................................................... $ 1,433,4039,672,315 $ 2,820,01615,961,257 $ 3,293,87714,028,640
============= ============ =========================
Income taxes ................................................... $ 3,394,4668,556,537 $ 3,174,807750,000 $ 1,762,4791,608,192
============= ============ ============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Change in fair value of Mark-to-Market interest rate swap/option $ - $ - $ (245,152)
============= ============ ============
See Notesnotes to consolidated financial statements.
F-5F-6
SUPREMEPERRY ELLIS INTERNATIONAL, CORPORATIONINC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 19992002
1. GENERAL
Supreme International Corporation and subsidiaries (the "Company") was
incorporated in the State of Florida and has been in business since 1967.General
The Company is a leading licensor, designer and marketer of a broad line of
high quality men's sportswear, including sport and dress shirts, golf
sportswear, sweaters urban wear,and casual and dress pants and shorts, which sells to all
levels of retail distribution. The Company licenses its trademark portfolio
domestically and internationally for apparel and other products that it does not
sell including dress sportswear, outerwear, fragrances and accessories. The
Company has built a broad portfolio of brands through selective acquisitions and
the establishment of its own brands over its 35-year operating history. The
Company's distribution channels include regional, national and international
upscale department stores, mid-tier department stores, chain stores, mass
merchants, specialty stores and corporate wear distributors throughout the
United States, Puerto Rico and Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting Policies
The following is a summary of the Company's significant accounting
policies:
PRINCIPLES OF CONSOLIDATION--TheCONSOLIDATION- The consolidated financial statements include
the accounts of SupremePerry Ellis International, CorporationInc., its wholly owned subsidiaries
and its wholly-owned
subsidiaries.an entity in which the Company has a controlling interest. The ownership
interest of the noncontrolling owner in such entity is reflected as minority
interest. All intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES--TheESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted accounting principlesin the United States of America
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--TheINSTRUMENTS - The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-term
nature. The carrying amount of debt andthe senior credit facilities approximatefacility approximates fair
value due to their statedthe relatively frequent resets of its floating interest rate approximating arate. The
fair value of the 12 1/4% senior subordinated notes is approximately $104.0
million, based on quoted market rate.prices. These estimated fair value amounts have
been determined using available market information or other appropriate
valuation methodologies.
INVENTORIES--InventoriesCASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Due to the short maturity period of cash equivalents, the
carrying amount of these instruments approximates fair value.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-outfirst-
out basis) or market. Costs consistCost consists of the purchase price, customs, duties,
freight, insurance and commissions to buying agents.
PROPERTY AND EQUIPMENT--PropertyEQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line and accelerated methodsmethod 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 per asset class range from five to ten years.as
follows:
F-7
Avg. Useful
Asset Class Lives in Years
---------------------------------- --------------------
Furniture, fixtures and equipment 7
Vehicles 7
Leasehold Improvements 11
INTANGIBLE ASSETS--IntangibleASSETS - Intangible assets primarily represent costs capitalized
in connection with the acquisition,acquisitions, registration and maintenanceprotection of brand names and
license rights. The amortization periods for the intangible assetsIntangibles are amortized over their estimated useful lives,
which range from fifteeneight to twentyforty years with a weighted average of nineteen31.7 years.
Avg. Useful
Asset Class Lives in Years
-------------------------------- ----------------
Trademarks and Licensing Rights 15 - 40
Legal Costs 8
Goodwill 15
DEFERRED DEBT ISSUE COSTS - Costs incurred in connection with the financing
are capitalized and amortized on a half
years.
LONG LIVED-ASSETS--Managementstraight-line basis, which approximates the
interest method, over the term of the related financing. Such amounts are
included in other long-term assets in the consolidated balance sheet.
LONG-LIVED ASSETS - Management reviews long-lived assets, including
identifiable
intangible assets, for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. If there
is an indication of impairment, management prepares an estimate of future cash
flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition. If these cash flows are less
than the carrying amount of the asset, an impairment loss is recognized to
reduce the asset to its estimated fair value. Preparation of estimated expected
future cash flows is inherently subjective and is based on management's best
F-6
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
estimate of assumptions concerning future conditions. At January 31, 1999,2002,
management believes there was no impairementsignificant impairment to long-lived assets.
ADVERTISING AND RELATED COSTS - The Company's accounting policy relating to
advertising and related costs is to expense these costs in the period incurred.
Advertising and related costs were $7.1 million, $8.2 million and $7.7 million
for the years ended January 31, 2000, 2001 and 2002, respectively.
REVENUE RECOGNITION--SalesRECOGNITION - Sales are recognized upon shipment, returns for
defective goods are netted against sales,transfer of legal title and
an allowance is providedrisk of loss to the customer (at shipment), net of trade allowances and a
provision for estimated returns and other chargebacks.allowances. Royalty income is
recognized when earned on the basis of the terms specified in the underlying
contractual agreements. Royalties collected prior to being earned are deferred
and recognized as earned. The Company believes that its revenue recognition
policies conform to Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. The Company operates predominantly in North America, with
over 90% of its sales in the domestic market. One customer accounted for
approximately 14% of net sales for fiscal year 2000; two customers accounted for
approximately 14% and 11% of net sales for fiscal year 2001; and three customers
accounted for approximately 12%, 11% and 11% of net sales for fiscal year 2002.
The Company does not believe that these concentrations of sales and credit risk
represent a material risk of loss with respect to its financial position as of
January 31, 2002.
FOREIGN CURRENCY TRANSLATION - For the Company's international operations,
local currencies are considered their functional currencies. The Company
translates assets and liabilities to their
F-8
U.S. dollar equivalents at rates in effect at the balance sheet date and revenue
and expenses are translated at average monthly exchange rates. Translation
adjustments resulting from this process are recorded in Stockholders' Equity as
a component of Accumulated Other Comprehensive Income.
INCOME TAXES--DeferredTAXES - 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 ("SFAS") No. 109, ("SFAS No. 109"), Accounting for Income Taxes, which requires
the asset and liability method of computing deferred income taxes. Under the asset and liability
method, deferred taxes are adjusted for tax rate changes as they occur.
NET INCOME PER SHARE--BasicSHARE - 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 potential dilutive potential common stock. The
potential dilutive potential common stock included in the Company's computation of diluted
net income per share includes the effects of the stock options and warrants
described in Note 14,17, as determined using the treasury stock method. The weighted average numbereffect
of these dilutive securities amounted to 17,942 shares for stock options included in the
dilutive weighted average2002, 55,956 shares outstanding were 60,701, 125,031in
2001 and 95,707130,816 shares in 1997, 1998 and 1999, respectively.
STOCK SPLIT--On July 21, 1997, the Company's Board of Directors declared a
3 for 2 stock split in the form of a stock dividend. The accompanying financial
statements reflect the stock split as if it had occurred as of the earliest
period being presented.2002.
ACCOUNTING FOR STOCK-BASED COMPENSATION--TheCOMPENSATION - 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, "AccountingAccounting for Stock Issued to Employees," and related
interpretations. As required by Statement of Financial Accounting StandardsSFAS No. 123, ("SFAS No. 123"), Accounting"Accounting for Stock-Based
Compensation," the Company has presented certain pro forma and other disclosures
related to stock-based compensation plans.
RECLASSIFICATIONS--Certain amounts in the 1998 and 1997 financial
statements have been reclassified to conform to the 1999 presentation.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires that
all components of comprehensive income be reported on one of the following: (1)
the statement of income; (2) the statement of changes in stockholders' equity,
or (3) a separate statement of comprehensive income. Comprehensive income is
comprised of net income and all changes to stockholders' equity, except those
due to investments by stockholders (changes in paid-in capital) and
distributions to stockholders (dividends). SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997.DERIVATIVE FINANCIAL INSTRUMENTS - The Company adopted SFAS No. 130
F-7
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
for the fiscal year ended January 31, 1999. The components of comprehensive
income which are excluded from net income are not significant, individually or
in the aggregate, and therefore no separate statement of comprehensive income
has been presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 changes the way
public companies report information about segments of their business in their
annualutilizes derivative
financial statements and requires theminstruments to report selected segment
information in their quarterly reports issued to shareholders. SFAS No. 131
also requires entity-wide disclosure about products and services an entity
provides, the foreign countries in which it holds assets and reports revenues
and its major customers. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. The Company adopted SFAS No. 131 for the fiscal year
ended January 31, 1999 (see Note 15).
In March 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides
guidance for capitalizing and expensing the costs of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Management has
not determined the effect, if any, of adopting SOP 98-1.
In April 1998, the American Institute of Certified Public Accountants
issued Statements of Position 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES ("SOP 98-5"). SOP 98-5 establishes accounting standards for the
reporting of certain costs associated with the start-up of operations, lines of
business, etc. SOP 98-5 requires that costs of start-up activities, including
organizational costs, be expenses as incurred and that in the year of adoption,
start-up costs recorded should be expensed. SOP 98-5 is effective for fiscal
years beginning subsequent to December 15, 1998. Management has not determined
the effect, if any, of adopting SOP 98-5.reduce interest rate risk. In June 1998, the Financial
Accounting Standards Board ("FASB") issued StatementSFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended in June 2000
by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and hedging activities. They require that
an entity recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and measure those instruments at fair value. Changes
in the fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. Derivative financial instruments that do not
qualify for hedge accounting will be reported in earnings.
RECLASSIFICATIONS - Certain amounts in the prior years' financial
statements may have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENT - In November, the Financial Accounting
Standards Board ("FASB") Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Product)." This issue addresses the
recognition, measurement and income statement classification of consideration
from a vendor to a customer in connection with the customer's purchase or
promotion of the vendor's products. This consensus is expected to only impact
revenue and expense classifications and not change reported income. In
accordance with the consensus reached, the Company will adopt the required
accounting beginning with the fiscal year beginning February 1, 2002. The
Company's adoption of EITF No. 01-9 will result in reclassification of certain
marketing expenses to reflect them as reduction of revenues. The
reclassification will have no effect on net income.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING Activities ("SFAS No. 133")."Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
F-9
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by SFAS No. 138, is effective for financial statements for fiscal yearyears
beginning after June 15, 1999.
Management has not determined2000. The Company adopted the effect, if any,provisions of adopting SFAS No.
133.
3. ACQUISITIONS
MUNSINGWEAR ACQUISITION--On September 6, 1996,133 effective February 1, 2001. On the Company acquired
certain assetsdate of Munsingwear, Inc. ("Munsingwear"),adoption, SFAS No. 133 did not
have a manufacturersignificant impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the use of men's
casual apparel, for approximately $18,400,000. The assets acquired consisted of
brand names including GRAND SLAM/registered trademark/, GRAND SLAM
TOUR/registered trademark/, PENGUIN SPORT/registered trademark/, and other
intangible assets. The purchase price amounted to approximately $19,800,000,
which included $1,400,000 of transaction costs, and was primarily allocated to
working capital and intangible assets as follows: inventories $300,000;
accounts receivable $300,000; and brand
F-8
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
3. ACQUISITIONS--(CONTINUED)
names $19,200,000. The acquisition was accounted for under the purchase method of accounting for all business
combinations initiated after June 30, 2001 and was financedeliminates the pooling-of-
interests method. SFAS No. 141 also addresses the recognition and measurement
of goodwill and other intangibles assets acquired in a business combination.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting treatment as it applies to goodwill and
other identifiable intangible assets with borrowingsindefinite useful lives from an
amortization method to an impairment-only approach. Under SFAS No. 142, proper
accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in the case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the revolving credit
agreement (see Note 10).
JOLEM ACQUISITION--On May 6, 1996,initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date of this
statement is for fiscal years beginning after December 15, 2001. The Company
intends to adopt SFAS No. 142 for its fiscal year beginning February 1, 2002.
In accordance with SFAS No. 142, the Company acquiredhas obtained a preliminary
valuation and estimated useful life report of all its trademarks from a third-
party independent valuation firm. Preliminary results of this analysis, which
the Company is still evaluating, would indicate no significant impairment in the
carrying value of its trademarks upon adoption of the standard and the
trademarks have indefinite useful lives. Under the new pronouncement,
amortization expense relating to identifiable intangible assets of
Jolem Imports, Inc. ("Jolem"), a Miami based manufacturer of men's and boy's
casual apparel. The purchase pricewith indefinite
useful lives, which amounted to approximately $3,700,000$3,584,000, $3,955,000 and
was
primarily allocated$4,912,000 for fiscal January 31, 2000, 2001 and 2002, respectively, will not be
required in future years.
On October 3, 2001, the FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to working capitalbe Disposed Of," it retains many of
the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting and intangible assets as follows:
inventories $1,800,000; accounts receivable $1,500,000;reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations---Reporting the Effects of Disposal of a Segment of a
Business, and brand names
$400,000.Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The acquisition was accountedeffective date
of SFAS No.144 is for underfiscal years beginning after December 15, 2001. SFAS No.
144 is not expected to have a significant effect on the purchase methodfinancial position or
the results of accounting.operation of the Company.
3. Shares Repurchase
On July 11, 2000, the Board of Directors of the Company approved a share
repurchase program in which up to 500,000 shares of common stock may be
purchased from time to time during the following 12 months. On July 11, 2001,
the Board of Directors extended the current share repurchase program for an
additional year, and on September 25, 2001 increased the number of shares
authorized for repurchase to 750,000 shares. The shares may be purchased in the
open market or in privately negotiated transactions.
For the fiscal year ended January 31, 2002, the Company had repurchased
295,300 additional shares at an average price of $7.37 per share. On March 2,
2001 and October 29, 2001, the Company retired 160,000 and 244,600 shares held
in the treasury, respectively.
F-10
4. ACCOUNTS RECEIVABLEAccounts Receivable
Accounts receivable consistedconsist of the following as of January 31:
1998 1999
--------------- ---------------2001 2002
------------ -----------
Trade accounts ................................................ $ 37,499,297 $ 43,219,125$51,848,737 $47,778,539
Royalties and other receivables ............................... 2,217,338 1,479,149
------------ ------------7,400,850 4,506,696
----------- -----------
Total ......................................................... 39,716,635 44,698,27459,249,587 52,285,235
Less: Allowance for doubtful accounts ......................... (609,874) (609,874)
Allowance for sales returns and other chargebacks .......... (3,604,154) (5,118,555)
------------ ------------(427,965) (1,914,990)
----------- -----------
Total ......................................................... $ 35,502,607 $ 38,969,845
============ ============$58,821,622 $50,370,245
=========== ===========
The activity for the allowance accounts arefor doubtful account is as follows:
1997 1998 1999
--------------- ---------------- ----------------2000 2001 2002
------------ ---------- ----------
Allowance for doubtful accounts:accounts
Beginning balance ............................ $ 242,792 $ 250,000 $ 609,874 $1,014,576 $ 427,965
Provision .................................... 135,854 799,129 167,659450,541 330,435 1,575,000
Write-offs, net of recoveries ................ (128,646) (439,255) (167,659)
------------ ------------- -------------(45,839) (917,046) (87,975)
----------- ---------- ----------
Ending balance ............................... $ 250,0001,014,576 $ 609,874 $ 609,874
============ ============= =============
Allowance for sales returns and other
chargebacks:
Beginning balance ............................ $ 567,014 $ 1,670,565 $ 3,604,154
Provision .................................... 9,057,342 13,047,822 11,984,955
Actual returns and other chargebacks ......... (7,953,791) (11,114,233) (10,470,554)
------------ ------------- -------------
Ending balance ............................... $ 1,670,565 $ 3,604,154 $ 5,118,555
============ ============= =============427,965 $1,914,990
=========== ========== ==========
The Company carries accounts receivable at the amount it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best estimates.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that become uncollectible could differ from those
estimated.
F-9
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999estimates.
5. INVENTORIES
Inventories
consistedInventories consist of the following as of January 31:
1998 1999
--------------- --------------
Finished goods ........................ $ 31,972,723 $ 30,730,131
Raw
2001 2002
----------- -----------
Finished goods $37,960,098 $40,467,911
Ras materials and in process 1,063,772 -
Merchandise in transit 4,532,504 4,941,136
----------- -----------
Total $43,556,374 $45,409,047
=========== ===========
6. Property and in process .......... 1,204,841 255,085
Merchandise in transit ................ 2,621,824 1,980,439
------------ ------------
Total ................................. $ 35,799,388 $ 32,965,655
============ ============
6. PROPERTY AND EQUIPMENTEquipment
Property and equipment consistedconsists of the following as of January 31:
1998 1999
--------------- ---------------
Land .................................. $ -- $ 1,125,000
Furniture, fixture and equipment ...... 5,723,557 7,205,651
Vehicles .............................. 309,955 371,364
Leasehold improvements ................ 1,617,288 2,299,704
------------ ------------
7,650,800 11,001,719
Less: accumulated depreciation ........ (2,751,144) (3,150,127)
------------ ------------
Total ................................. $ 4,899,656 $ 7,851,592
============ ============
2001 2002
----------- -----------
Furniture, fixture and equipment $11,509,202 $11,615,513
Vehicles 188,906 167,940
Leasehold improvements 2,458,947 3,209,254
Land 1,581,702 1,581,702
----------- -----------
Total 15,738,757 16,574,409
Less: accumulated depreciation
and amortization (5,918,129) (5,677,075)
----------- -----------
Total $ 9,820,628 $10,897,334
=========== ===========
Depreciation expense relating to property and equipment amounted to
approximately $800,000, $847,000,$1,241,000, $1,567,000 and $1,052,000$1,849,000 for the fiscal years ended
January 31, 1997, 19982000, 2001 and 1999,2002, respectively.
F-11
7. INTANGIBLE ASSETSIntangible Assets
Intangible assets consisted of the following as of January 31:
1998 1999
-------------- --------------2001 2002
------------ ------------
Trademarks & Licenses ............. $ 21,306,788 $ 21,544,562and licenses $132,216,093 $132,315,018
Goodwill .......................... 17,86416,165 16,165
------------ ------------
21,324,652 21,560,727Total 132,232,258 132,331,183
Less: Accumulated Amortization .......... (1,608,588) (2,717,930)amortization (10,215,577) (14,392,289)
------------ ------------
Balance, net ...................... $ 19,716,064 $ 18,842,797$122,016,681 $117,938,894
============ ============
Amortization expense relating to the intangible assets amounted to
approximately $347,000, $901,000$3,584,000, $3,955,000 and $1,109,000,$4,342,000 for the fiscal years ended
January 31, 1997, 19982000, 2001 and 1999,2002, respectively.
F-10
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
8. ACCRUED EXPENSESAccrued Expenses
Accrued expenses consistedconsists of the following as of January 31:
1998 1999
------------- -------------
Income taxes ...................... $ 370,687 $2,107,4572001 2002
---------- ----------
Salaries and commissions .......... 662,865 1,549,758$1,808,047 $1,735,024
Royalties 318,325 281,280
Buying commissions ................ 597,280 818,188401,787 287,944
Other ............................. 432,080 456,1221,132,205 955,354
---------- ----------
Total ............................. $2,062,912 $4,931,525$3,660,364 $3,259,602
========== ==========
9. BORROWINGS UNDER LETTER OF CREDIT FACILITIESOther Current Liabilities
Other current liabilities consists of the following as of January 31:
2001 2002
---------- ----------
Unearned advertising reimbursements $1,334,969 $2,059,667
Other 316,498 350,916
---------- ----------
Total $1,651,467 $2,410,583
========== ==========
10. Derivatives Financial Instruments
The Company has an interest rate risk management policy with the objective
of managing its interest costs. To meet this objective the Company employs
hedging and derivatives strategies to limit the effects of changes in interest
rates on its operating income and cash flows, and to lower its overall fixed
rate interest cost on its senior subordinated notes.
The Company believes its interest rate risk management policy is generally
effective. Nonetheless, the Company's profitability may be adversely affected
during particular periods as a $45result of changing interest rates. In addition,
hedging transactions using derivative instruments involve risks such as counter-
party credit risk and risks regarding the legal enforceability of hedging
contracts. The counter-parties to the Company's arrangements are lenders of the
hedged debt instruments or are major financial institutions.
In August 2001, the Company entered into an interest rate swap, option and
interest rate cap agreements (the "August Swap Agreement") for an aggregate
notional amount of $40.0 million facilityin order to minimize its debt servicing costs
associated with its $100.0 million of 12 1/4% senior subordinated notes due
April 1, 2006. The August Swap Agreement was subsequently modified through a
basis swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is
F-12
entitled to receive semi-annual interest payments on October 1, and April 1, at
a fixed rate of 12 1/4% and is obligated to make semi-annual interest payments
on October 1, and April 1, at a floating rate based on the 6-month LIBOR rate
plus 715 basis points for the 18 months period October 1, 2001 through March 31,
2003 (per October Swap Agreement); and 3-month LIBOR rate plus 750 basis point
for the period April 1, 2003 through April 1, 2006 (per the August Swap
Agreement). The Swap Agreement has optional call provisions with trigger dates
of April 1, 2003, April 1, 2004 and April 1, 2005, which provides upcontain certain premium
requirements in the event the call is exercised.
The fair value of the interest rate swap and option are recorded on the
Company's Consolidated Balance Sheet was ($0.245) million as of January 31,
2002. The interest rate cap and basis swap did not qualify for hedge accounting
treatment under the SFAS No. 133, resulting in $0.7 million reduction of
recorded interest expense in results of operations for the fiscal year ended
January 31, 2002.
The Company does not currently have a significant exposure to $35 millionforeign
exchange risk and accordingly, has not entered into any transactions to issue sight lettershedge
against those risks. See summary of "Significant Accounting Policies" for policy
description of foreign currency translation.
11. Borrowings under Letter of Credit Facilities
The Company maintains two letter of credit including a sub-limit of $2 million to issue time
lettersfacilities totaling $42.0
million. Each letter 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 collateralizedsecured by the consignment of merchandise in
transit under eachthat letter of credit. Indebtedness under this facility bears
interest at variable rates substantially equal to the lenders' prime rate minus
1.0% per annum (6.75% asAs of January 31, 1999).2002, there was $31.0
million available under then existing letter of credit facilities.
Amounts outstanding under the
$10 million sub-limit are collateralized by a secondary interest in the
Company's accounts receivable and inventories.
The Company has two additional letters of credit facilities which provide
for borrowings of up to $15 million to issue sight letters of credit. The
facilities are collateralized by the consignment of the merchandise in transit
under each letter of credit.
Borrowings available under letter of credit facilities consistedconsist of the
following as of January 31:
1998 1999
--------------- ---------------2001 2002
------------ ------------
Total letter of credit facilities ...... $ 60,000,00052,000,000 $ 60,000,000
Borrowings ............................. (3,000,000) --42,000,000
Outstanding letters of credit .......... (26,673,016) (23,831,172)
------------- -------------(27,923,927) (11,035,880)
------------ ------------
Available .............................. $ 30,326,98424,076,073 $ 36,168,828
============= =============
10. LONG-TERM DEBT--SENIOR CREDIT FACILITY30,964,120
============ ============
12. Long Term Debt-Senior Credit Facility
The Company amended its revolvingsenior credit facility (the "Senior Credit
Facility") on August 1, 1998March 26, 1999 with a
group of banks giving it the right to
borrow $60 million or a portion thereof for its general corporate purposes. The
Senior Credit Facility expires in April 2001 . Borrowings are limited under the
termsconsisting of a borrowing base calculation which generally restricts the outstanding
balancerevolving credit facility of up to 85%an aggregate
amount of eligible receivables plus 50% of eligible inventories, as
defined. Interest on borrowings is variable, based upon the Company's option of
selecting a LIBOR plus 1.25% or the bank's prime rate.$75.0 million. The weighted average interest rate on the senior credit
facility was 6.69% as of8.7% and 7.3% for the fiscal years ending January 31, 1999.2001 and
2002, respectively. The Senior Credit Facilityfacility contains certain covenants the most restrictive of which require the Company to
maintain certain financial and net worth ratios. In addition, the Senior
Credit Facilityratios and restricts the payment of
dividends. As of January 31, 2002, the Company was not in compliance with a
certain funded indebtedness to EBITDA financial covenant which noncompliance has
been waived subsequent to January 31, 2002. The Senior Credit Facilitysenior credit facility is
secured by the Company's assets.assets of the Company.
The outstandingsenior credit facility expires on October 1, 2002 and as such the
Company has classified its credit facility as current in the consolidated
balance under the Senior
Credit Facilitysheet as of January 31, 1998 and 1999 amounted to $36,658,174 and
$33,511,157, respectively.
F-11
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
10. LONG-TERM DEBT--SENIOR CREDIT FACILITY--(CONTINUED)2002. The Company has receivedis currently in active
discussions to renew or replace its existing senior credit facility. Management
believes this discussion will be successfully completed prior to the October 1,
2002 expiration date.
13. Senior Subordinated Notes Payable
The Company issued $100.0 million senior subordinated notes on April 6,
1999, the proceeds of which were used to acquire the Perry Ellis, John Henry and
Manhattan brands and to pay down the
F-13
outstanding balance of the senior credit facility. The notes mature on April 1,
2006, and bear interest at the rate of 12 1/4 % payable on April 1 and October 1
in each year. The proceeds to the Company were $98,852,000, yielding an
effective interest rate of 12.39% after deduction of discounts.
The notes are unsecured senior subordinated obligations and are
subordinated to all of the Company's existing and future senior indebtedness.
The notes rank equally with all of the Company's future senior subordinated
indebtedness.
The indenture agreement contains certain covenants which requires the
Company to maintain certain financial ratios and restricts the payment of
dividends. As of January 31, 2002, the Company was in compliance with its debt
covenants of the senior subordinated notes.
Optional Redemption. The notes are redeemable at the option of the Company,
as a proposal letterwhole or in part from time to amendtime, at any time on or after April 1, 2003
at the Senior Credit
Facility. As amended,redemption prices (expressed as percentages of principal amount) set
forth below, together with accrued interest, if any, to the Senior Credit Facility will provide (a) a revolving
credit facilitydate of redemption,
if redeemed during the 12-month period beginning on April 1 of the years
indicated below (subject to the right of holders of record on relevant record
dates to receive interest due on an interest payment date):
Year Redemption Price
---- ----------------
2003.......................... 106.125%
2004.......................... 103.063%
2005 and thereafter........... 100.000%
In addition, at any time or from time to time before April 1, 2002, the
Company may redeem up to an35% of the aggregate principal amount of $80 million (the "Revolver")
and (b)the notes
within 60 days of one or more public equity offerings with the net proceeds of
such offering at a term loan inredemption price equal to 112.25% of the principal amount
thereof, together with accrued interest, if any, to the date of redemption
(subject to the right of holders of record on relevant record dates to receive
interest due on relevant interest payment dates); provided that, after giving
effect to any such redemption, at least 65% of the aggregate principal amount of
$20 million (the "Term Loan").the notes initially issued remains outstanding. The amended agreement will have a term of five years.
11. INCOME TAXESCompany did not exercise the
redemption option before April 1, 2002.
14. Income Taxes
The income tax provision consistedconsists of the following for each of the years
ended January 31:
1997 1998 1999
------------- ------------- -------------2000 2001 2002
---------- ---------- ----------
Current income taxes:
Federal ................... $2,910,509 $2,780,815 $3,057,838$4,677,353 $2,450,203 $2,115,199
State ..................... 526,754 307,371 1,002,692528,929 242,627 300,810
Foreign ................... -- -- 90,090(89,337) (128,460) 237,746
---------- ---------- ----------
Total ...................... $3,437,263 $3,088,186 $4,150,6205,116,945 2,564,370 2,653,755
Deferred income taxes:
Federal and state ......... 159,655 (203,342) 340,2461,412,735 2,098,295 1,386,240
---------- ---------- ----------
Total ...................... $3,596,918 $2,884,844 $4,490,866$6,529,680 $4,662,665 $4,039,995
========== ========== ==========
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:
F-14
1997 1998 1999
------------- ------------- -------------2000 2001 2002
---------- ---------- ----------
Statutory federal income tax rate ............................... 35.0 % 35.0 % 35.0 %35.0% 35.0% 35.0%
Increase (decrease) resulting from
State income taxes, net of federal
incomeIncome tax benefit .......... 3.9 2.1 2.9 2.5 2.7
Benefit of graduated rate ...................................... (1.0) (1.0) (1.0)
Reversal of certain income tax reserves ........................ -- (5.0) --(0.6) (0.6)
Other ........................................................... 0.2 (2.4) (2.5) ----- ----- -----0.6 0.8
---------- ---------- ----------
Total ........................................................... 38.1 % 28.7 % 34.4 %
===== ===== =====34.4% 37.5% 37.9%
========== ========== ==========
F-12
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
11. INCOME TAXES--(CONTINUED)Deferred income taxes are provided for the temporary differences between
financial reporting basis and the tax basis of the Company's assets and
liabilities under SFAS No. 109. The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows as of
January 31:
1998 1999
------------ ------------31 are as follows:
2001 2002
----------- -----------
Deferred income tax assets:
Inventories .............................Tax Assets
Inventory $ 642,944855,394 $ 795,442
Accounts receivable ..................... 227,468 220,165909,481
Allowance for doubtful accounts 155,168 698,971
Accrued expenses ........................ 183,750 --26,458 104,655
Unearned revenue 723,966 671,209
Other ................................... 100,743 75,875
--------- ---------190,567 -
----------- -----------
Subtotal 1,951,553 2,384,316
----------- -----------
Deferred income tax assets .............. 1,154,905 1,091,482
--------- ---------
Deferred income tax liabilities:Tax Liabilities
Fixed assets ............................ (61,742) (318,580)(1,419,643) (1,635,853)
Intangible .............................. (99,694) (241,148)assets (3,410,355) (4,889,857)
Other ................................... (121,469) --
--------- ---------
Deferred income tax liabilities ......... (282,905) (559,728)
--------- ---------100,831 (224,122)
----------- -----------
Subtotal (4,930,829) (6,749,832)
----------- -----------
Net deferred income tax asset ........... $872,000 $531,754
========= =========
A(liability) $(2,979,276) $(4,365,516)
=========== ===========
Management believes that a valuation allowance for deferred income tax
assets is not deemed necessary as the assets are expected to be recovered.
12. RETIREMENT PLANDeferred taxes have not been recognized on unremitted earnings of the Company's
foreign subsidiaries based on the "indefinite reversal" criteria of APB Opinion
No. 23.
15. Retirement Plan
The Company adoptedhas a 401(K)401(k) Profit Sharing Plan (the "Plan") in which eligible
employees may participate. Employees are eligible to participate in the Plan
upon the attainment of age 21, and completion of one year of service.
Participants may elect to contribute up to 15% of their annual compensation, not
to exceed amounts prescribed by statutory guidelines. The Company is required to
contribute an amount equal to 50% of each participant's eligible contribution up
to 4%6% of the participant's annual compensation. The Company may elect to
contribute additional amounts at its discretion. The Company's contributions to
the planPlan were approximately $34,000, $74,000,$128,000, $173,000 and $115,000$199,000 for the fiscal years
ended January 31, 1997, 19982000, 2001 and 19992002, respectively.
13. RELATED PARTY TRANSACTIONSF-15
16. Related Party Transactions
The Company leases certain office and warehouse space owned by the Company's Chairman
of the Board of Directors and Chief Executive Officer under non-cancelable operatingcertain lease
arrangements.arrangements, most of which are month-to-month. Rent expense, including taxes,
for these leases amounted to approximately $600,000, $625,000$265,000, $316,000 and $546,000$537,000, for the
fiscal years
ended January 31, 1997, 19982000, 2001 and 1999,2002, respectively.
The Company entered into a license agreementlicensing agreements (the "License Agreement"Agreements")
with Isaco International, Inc. ("Isaco"), pursuant to which Isaco was granted
anthe exclusive license to use the Natural IssuesIssue, Perry Ellis and Career Club
brand namenames in the United States and Puerto Rico to market a line of men's
underwear, hosiery and loungewear. The License
Agreement provides for a guaranteed minimum royalty payment to the Company of
$137,500 and expires on May 31, 1999. The principal shareholder of Isaco is the
father-in-law of the Company's President and Chief Operating Officer. Royalty
income earned from the License F-13
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
13. RELATED PARTY TRANSACTIONS--(CONTINUED)
AgreementAgreements amounted to approximately $243,000, $296,000$438,000, $834,000 and
$298,000$1,230,000 for the
fiscal years ended January 31, 1997, 19982000, 2001 and 1999,2002, respectively.
In January 1998, the Company entered into two additional three-year
license agreements with Isaco for use of the Natural Issue brand in the United
States17. Stock Options and its territories and possessions to market lines of hosiery and
neckwear.Warrants
Stock Options - The license agreement for neckwear provides for a guaranteed minimum
annual royalty of $15,000 and the license agreement for hosiery provides for a
guaranteed minimum annual royalty of $25,000 during the first year, increasing
by $5,000 in each subsequent year.
14. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS--The Company adopted a 1993 Stock Option Plan (the "1993
Plan") and a Directors Stock Option Plan (the "Directors Plan") (collectively,
the "Stock Option Plans"), under which shares of common stock are reserved for
issuance upon the exercise of the options. The number of shares issuable under
the Directors Plan is 150,000. The 1993 Plan was amended during fiscal 1999 to
increase the number of shares issuable from 450,000 shares to 900,000 shares.under the 1993
plan is 1,500,000. The Stock Option Plans are designed to serve as an incentive
for attracting and retaining qualified and competent employees, directors,
consultants, and independent contractors of the Company. The 1993 Plan provides
for the granting of both incentive stock options and nonstatutory stock options.
Incentive stock options may only be granted to employees. Only non-employee
directors are eligible to receive options under the Directors Plan. All matters
relating to the Directors Plan are administered by a committee of the Board of
Directors consisting of two or more employee directors, including selection of
participants, allotment of shares, determination of price and other conditions
of purchase, except that the per share exercise price of options granted under
the Directors Plan may not be less than the fair market value of the common
stock on the date of grant.
Options can be granted under the 1993 Plan on such terms and at such prices
as determined by the Board of Directors, or a committee thereof, except that the
per share exercise price of incentive stock options granted under the 1993 Plan
may not be less than the fair market value of the common stock on the date of
grant, and in the case of an incentive stock option granted to a 10%
shareholder, the per share exercise price will not be less than 110% of such
fair market value.
The aggregate fair market valueA summary of the shares covered by
incentive stock option activity for options grantedissued under the 1993
Plan that become exercisable by
a grantee in any calendar yearand the Directors Plan is subject to a $100,000 limit.
On December 9, 1998, in order to provide an appropriate incentive to
certain members of management whose stock option exercise prices were higher
than the market price on that date, the Company allowed certain options to be
repriced. This repricing was at the consent of the option holders, and all
other terms of the options, including grant dates and exercise dates, remain
intact and in accordance with the 1993 Plan.
F-14
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
14. STOCK OPTIONS AND WARRANTS--(CONTINUED)
A summary of the status of the option plans as of andfollows for the changes
during each of the three years in the period ended January 31, 1999 is
presented below:31:
OPTION PRICE PER SHARE OPTIONS EXERCISABLE
--------------------------------- -----------------------------
NUMBER NUMBER WEIGHTED AVERAGE
OF SHARES LOW HIGH WEIGHTED OF SHARES EXERCISE PRICE
------------- ----------Option Price Per Share Options Exercisable
-------------------------- ---------------------------
Number Number Weighted Average
of Shares Low High Weighted of Shares Exercise Price
----------- ---------- ----------- ----------------------- ------ -------- --------- ----------------
Outstanding January 31, 1996 218,2501999 566,000 $6.67 $15.75 $11.95 410,375 $12.66
Granted 2000 501,000 $8.81 $13.50 $ 6.339.26
Exercised 2000 (19,500) $6.67 $10.07 $ 10.758.39
Cancelled 2000 (15,000) $6.50 $15.25 $ 7.71 114,938 $ 8.06
Granted 1997 ................ 90,000 $ 6.67 $ 10.75 $ 8.87
Exercised 1997 .............. (7,500) $ 6.50 $ 6.50 $ 6.50
Cancelled 1997 .............. (7,500) $ 6.50 $ 6.50 $ 6.50
-------9.59
-----------
Outstanding January 31, 1997 293,2502000 1,032,000 $7.67 $15.75 $10.69 833,459 $10.73
Granted 2001 167,000 $5.13 $13.00 $ 6.338.41
Exercised 2001 (7,500) $7.67 $ 10.757.67 $ 8.01 192,938 $ 8.14
Granted 1998 ................ 24,000 $ 9.17 $ 10.17 $ 9.84
Exercised 1998 .............. (26,250) $ 6.67 $ 10.75 $ 7.737.67
Cancelled 1998 .............. --
-------2001 (78,500) $9.63 $14.25 $10.13
-----------
Outstanding January 31, 1998 291,0002001 1,113,550 $5.13 $15.75 $10.44 940,616 $10.41
Granted 2002 71,667 $5.13 $ 6.338.85 $ 10.757.37
Exercised 2002 (2,666) $5.13 $ 7.92 221,7506.88 $ 7.90
Granted 1999 ................ 387,000 $ 9.75 $ 15.75 $ 13.18
Exercised 1999 .............. (103,125) $ 6.33 $ 10.67 $ 7.36
Cancelled 1999 .............. (8,875) $ 10.67 $ 15.25 $ 10.96
--------
Outstanding January 31, 1999 566,000 $ 6.67 $ 15.75 $ 11.95 410,375 $ 12.66
========5.79
The following table summarizes the information about options outstanding
at January 31, 1999:F-16
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------------- ------------- ------------------ ---------------- ------------- ---------------
Cancelled 2002 (88,750) $5.13 $13.44 $10.40
----------
Outstanding January 31, 2002 1,093,801 $5.13 $15.75 $10.27 980,774 $10.40
==========
The following table summarizes information about options outstanding as of
January 31, 2002:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------- ------------- ---------------- ---------------- ----------- --------------
$ 6.50 -5.13 $ 9.75 152,750 3.07.50 88,501 6.4 $ 8.20 135,6255.57 62,666 $ 8.195.21
$ 7.51 $ 10.00 - $15.00 172,250 4.7663,750 4.3 $ 10.69 42,7508.80 621,292 $ 10.128.80
$ 15.25 - $15.75 241,000 9.110.01 $ 15.73 232,00012.00 78,550 1.0 $ 10.56 42,149 $ 10.56
$ 12.01 $ 15.75 263,000 6.7 $ 15.49 254,667 $ 15.56
F-15
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
14. STOCK OPTIONS AND WARRANTS--(CONTINUED)
As described in Note 2, the Company accountswe account for stock-based compensation using the
provisions of APB No. 25 and related interpretations. No compensation expense
has been recognized in the years ended January 31, 1997, 19982000, 2001 and 19992002 as the
exercise prices for the stock options granted arewere 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 No. 123, the
Company'sour net
income and net income per share would have been as followsreduced to the pro forma amounts
presented below for the years ended January 31:
1997 1998 1999
--------------- ---------------- ---------------
Net income:
As reported ......... $ 5,844,019 $ 7,178,162 $ 8,581,679
=========== ============ ============2000 2001 2002
----------- ---------- ----------
Pro forma ........... $ 5,710,383 $ 7,026,242 $ 8,145,789net income $10,150,643 $7,078,649 $6,185,478
=========== ============ ============
Net========== ==========
Pro forma net income per share:
As reported
Basic .............. $ 0.89 $ 1.10 $ 1.29
=========== ============ ============
Diluted ............ $ 0.891.51 $ 1.08 $ 1.270.95
=========== ============ ============
Pro forma:
Basic ...............========== ==========
Diluted $ 0.87 $ 1.07 $ 1.22
=========== ============ ============
Diluted ............. $ 0.871.48 $ 1.05 $ 1.200.95
=========== ============ ====================== ==========
The fair value forof these options was estimated at the date of grant date using
the Black-Scholes Option Pricing Model with the following weighted-average
assumptions for 1997, 19982000, 2001 and 1999:
1997 1998 1999
--------- --------- ---------2002:
2000 2001 2002
----------------------------
Risk free interest rate ................ 6.5% 6.5% 6.5%3.3%
Dividend yield ......................... 0.0% 0.0% 0.0%
Volatility factors ..................... 58.0% 45.9%64.0% 67.9% 67.3%
Weighted average life (years) .......... 5.0 5.0 5.09.0 4.5 1.9
Using the Black-Scholes Option Pricing Model, the estimated weighted-averageweighted-
average fair value per option granted in 1997, 19981999, 2000 and 1999 were
$4.97, $5.992001 was $6.99, $4.43
and $9.22,$2.75, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options whichthat 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.
F-17
Because the Company'sour 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 itsour stock options.
The pro forma amounts may not be representative of the future effects on
reported net income and net income per share that will result from the future
granting of stock options, since the pro forma compensation expense is allocated
over the periods in which options become exercisable and new option awards are
granted each year.
F-16
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
14. STOCK OPTIONS AND WARRANTS--(CONTINUED)
WARRANTS--In conjunction18. Segment Information
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," the Company's initial public offering in May
1993,principal segments are
grouped between the Company granted 180,000 warrants entitlinggeneration of revenues from products and royalties. The
Licensing segment derives its revenues from royalties associated from the holdersuse of
each
warrantits brand names, principally Perry Ellis, John Henry, Manhattan and Munsingwear.
The Product segment derives its revenues from the design, import and
distribution of apparel to purchase one share of common stock at an exercise price of $9.35 per
share. The warrants became exercisable on May 21, 1995. All warrants were
exercised during fiscal 1999.
15. SEGMENT INFORMATION
The Company is engageddepartment stores and other retail outlets,
principally in one line of business, that being a
leading designerthroughout the United States. Trademark assets and marketer of a broad line of high quality men's sportswear,
including sport and dress shirts, golf sportswear, sweaters, urban wear, casual
and dress pants and shorts to all levels of retail distribution. We own or
licensecosts have been
allocated among the divisions where the brands under which most of our products are sold. The percentage of
our revenues from branded products amounted to 75% in fiscal 1998shared.
2000 2001 2002
------------- ------------- -------------
Revenues
Product $ 229,549,158 $ 261,626,463 $ 253,033,752
Licensing 22,839,698 25,789,975 26,680,987
------------- ------------- -------------
Total Revenues $ 252,388,856 $ 287,416,438 $ 279,714,739
============= ============= =============
Operating Income
Product $ 15,065,942 $ 10,772,903 $ 7,882,648
Licensing 16,249,185 17,482,217 16,398,275
------------- ------------- -------------
Total Operating Income $ 31,315,127 $ 28,255,120 $ 24,280,923
============= ============= =============
Interest Expense
Product $ 3,417,678 $ 3,353,726 $ 1,630,120
Licensing 10,487,820 12,412,735 11,919,626
------------- ------------- -------------
Total Interest Expense $ 13,905,498 $ 15,766,461 $ 13,549,746
============= ============= =============
Income Tax Provision
Product $ 4,368,823 $ 2,721,285 $ 2,637,938
Licensing 2,160,858 1,941,370 1,402,057
------------- ------------- -------------
Total Income Tax Provision $ 6,529,681 $ 4,662,655 $ 4,039,995
============= ============= =============
Depreciation and Amortization
Product $ 1,493,055 $ 1,824,137 $ 2,181,229
Licensing 3,688,231 4,306,571 4,480,929
------------- ------------- -------------
Total Depreciation and Amortization $ 5,181,286 $ 6,130,708 $ 6,662,158
============= ============= =============
Identifiable Assets
Product $ 113,454,814 $ 120,506,469
Licensing 127,685,408 111,057,137
F-18
Corporate 1,972,860 2,497,074
------------- -------------
Total Identifiable Assets $ 243,113,082 $ 234,060,680
============= =============
F-19
19. Commitments and 81% in
fiscal 1999. Sales to any one customer exceeding ten percent amounted to 15%,
12% and 12% for the year ended January 31, 1997; 12% and 13% for the year ended
January 31, 1998; and 15%, 10% and 10% for the year ended January 31, 1999. The
Company does not believe that these concentrations of sales and credit risk
represent a material risk of loss with respect to its financial position as of
January 31, 1999.
16. COMMITMENTS AND CONTINGENCIESContingencies
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, 2000.2003. Total royalty payments under these license
agreements amounted to approximately $405,000, $330,000$1,105,716, $1,198,106 and $573,000$1,635,239 for the years ended
January 31, 1997, 19982000, 2001 and 1999,2002, respectively, and were classified as selling, generalcost of
sales.
The Company's administrative offices, warehouse and administrative expenses.distribution facility
are located in a 240,000 square foot leased facility in Miami, which was built
to our specifications and completed in 1997. The Companyfacility is party to an employment agreement with Oscar Feldenkreis,
the Company's President and Chief Operating Officer, which expires in May 2000,
and is subject to annual renewal. The employment agreement currently provides
for an annual salary of $350,000, subject to annual cost-of-living increases,
and an annual bonus as may be determined by the Compensation Committee in its
discretion, upoccupied pursuant
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 tosynthetic lease, which has an employment agreement with George
Feldenkreis, the Company's Chairman of the Board and Chief Executive Officer,initial term expiring in May 2000, and is subject to annual renewal. The employment
agreement currently provides for an annual salary of $375,000, subject to
annual cost-of-living increases, and an annual bonus as may be determined by
the Compensation Committee in its discretion, up to a maximum of $250,000.
Pursuant to his employment agreement, Mr. Feldenkreis devotes a majority of his
working time to the affairs of the Company. George Feldenkreis' employment
agreement contains termination and non-competition provisions similar to those
set forth in Oscar Feldenkreis' agreement.
F-17
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company consolidated its administrative offices and warehouses and
distribution facilities into a 238,000 square foot facility in Miami. The lease
has a term of five years, minimumAugust 2002, annual
rental payment of approximately $1,000,000$900,000 and
requires a minimum contingent rental payment
of $14.5 million at the terminationend of the 5-year term. The synthetic lease will not be
renewed and the Company is in the process of $12,325,000.arranging new financing for its
facilities through a mortgage lender.
The minimum contingent rental payment is not required if, atsynthetic lease was entered into with a group of financial institutions
to finance the acquisition and construction of the Company's option,corporate
headquarters. The financial institutions assumed the Company's obligation to
purchase the facility and, in turn, leased the facility to us. The obligations
under the synthetic lease is renewed afterare secured by a security interest in substantially
all the five year term.Company's existing and future assets, whether tangible or intangible,
including, without limitation, accounts receivable, inventory deposit accounts,
general intangibles, intellectual property and equipment.
In addition to customary covenants found in secured lending agreements, the
synthetic lease also contains various restrictive financial and other covenants
including, without limitation, (a) prohibitions on the incurrence of additional
indebtedness or guarantees, (b) restrictions on the creation of additional
liens, (c) certain limitations on dividends and distributions or capital
expenditures by the Company, (d) restrictions on mergers or consolidations,
sales of assets, investments and transactions with affiliates and (e) certain
financial maintenance tests. Such financial maintenance tests, include, among
others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a minimum
current ratio, (iii) a minimum net worth and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, the Company was not in compliance with
the funded indebtedness to EBITDA financial covenant. The lessor under, and the
financial institutions which financed, the synthetic lease have waived the
noncompliance with this financial covenant.
The Company leases three warehouse facilities in Miami totaling
approximately 103,000 square feet from our Chairman and CEO and partnerships
controlled by him, to handle the overflow of bulk shipments and the specialty
division and PING operations. All leases are on a month-to-month basis at
market prices.
The Company leases two locations in New York City totaling approximately
8,500 square feet each, these leases expire in December 2007 and 2012. These
locations are used for offices and showrooms.
The Company leases a retail store in the Sawgrass Mills outlet mall in
Sunrise, Florida with 11,240 square feet. This lease expires in September 2005.
Since the Company began leasing this facility in May 2001, the location have
been used as a test retail outlet store to sell our brands, principally Perry
Ellis America.
In order to monitor production of the Company's products in the Far East,
we maintain offices in South Korea, and China, and also lease offices jointly
with SPX Corporation, a publicly held company, in Beijing, China and Taipei,
Taiwan.
F-20
Minimum aggregate annual commitments for all of the Company's noncancelablenon-
cancelable operating lease commitments, including the related party leases
described in Note 13 and the minimum contingent rental
payment described above, are as follows.
YEAR ENDING JANUARY 31,
- -------------------------
2000 ................. $ 1,461,800
2001 ................. 1,335,600
2002 ................. 1,206,200
2003 ................. 13,154,500
2004 ................. 372,100
------------
Total ............... $ 17,530,200
============
Year Ending January 31,
- -----------------------
2003 $15,951,620 (A)
2004 465,650
2005 461,725
2006 461,725
2006 453,142
Future 1,017,125
-------------
Total $18,810,987
=============
(A) Includes synthetic lease payments of $15.4 million
Rent expense for these operating leases, including the related party rent
payments discussed in Note 13,16 amounted to $1,078,000, $1,460,000,$1,946,000, $1,660,632 and $1,946,000$2,526,293
for
the fiscal years endedending January 31, 1997, 19982000, 2001 and 1999,2002, respectively.
The Company guarantees up to $600,000 of letters of credit of an
unaffiliated entity.
Upon consummation of the John Henry/Manhattan acquisition described in
Note 17, the Company will be required to pay Icahn Associates Corp. or its
affiliates ("IAC") a financial advisory fee of $1.0 million. In addition, IAC
has the right to acquire 1,320,000 shares of the Company's common stock at $12
per share. Simultaneously with the exercise of the right, IAC will be required
to enter into a two-year standstill agreement and will receive certain
registration rights with respect to the shares.
The Company is subject to claims and suits, against it, as well asand is the initiator of claims
and suits against others, in the ordinary course of its
business, including claims arising from the use of its trademarks.business. The Company does
not believe that the resolution of any pending claims will have a material
adverse affecteffect on its financial position, results of operations or cash flows.
F-18
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
17. SUBSEQUENT EVENTS
PERRY ELLIS INTERNATIONAL, INC. In January 1999,20. Subsequent Events
Senior Secured Notes
On March 22, 2002, the Company agreedcompleted a private offering of $57.0
million 9 1/2% senior secured notes due March 15, 2009. The proceeds of the
private offering were used to buy
Perry Ellis International, Inc. for approximately $75.0 millionfund the Jantzen acquisition, to reduce the amount
of outstanding debt under the Company's senior credit facility and as additional
working capital. The senior secured notes are secured by a security interest
granted in cash. Perry
Ellis International, Inc. is a privately-held company, which ownsthe Company's existing portfolio of trademarks and licenses, and the
Perry Ellis brand, currently onetrademarks and licenses acquired in connection with the Jantzen acquisition (see
below); all license agreements with respect to these trademarks; and all income,
royalties and other payments with respect to such licenses. The senior secured
notes are senior secured obligations of the top selling brandsCompany and will rank pari passu in
specialty
chains and department stores in the United States. Perry Ellis International,
Inc. is currently the licensor under approximately 34 license agreements,
primarily for various categoriesright of men's wear, boys' wear and fragrances.
During the year ended December 31, 1998, Perry Ellis International, Inc. had
revenuespayment with all of $16.2 million. The Company anticipates completing the Perry Ellis
International acquisition in early April, 1999.
SENIOR SUBORDINATED NOTES. Concurrently with the Company's acquisitionexisting and future senior
indebtedness. The senior secured notes are effectively senior to all unsecured
indebtedness of
Perry Ellis International, Inc., the Company intends to issue $100,000,000 in
senior subordinated notes due 2009.
JOHN HENRY/MANHATTAN. In December 1998,the extent of the value of the assets securing
the notes.
Jantzen Acquisition
On March 22, 2002, the Company entered into an
agreement to buycompleted the acquisition from subsidiaries
of VF Corporation of certain assets of the John Henry and Manhattan dress shirtJantzen swimwear business from Salant Corporation, which is currently in a Chapter 11 bankruptcy
proceeding. On February 24, 1999, the bankruptcy court approved the purchase for
approximately $44.2$24.0 million, excluding fees related to the transaction. The
Jantzen brand has a history of over 90 years and its products are sold in
cash.upscale department stores, mid-tier department stores, chain stores, mass
merchants and specialty shops. The assets consistacquisition was financed with a portion of
the John Henry,
Manhattan and Lady Manhattan trademarks and trade names, license agreements,proceeds from a $57.0 million private offering of 9 1/2% senior secured
notes due March 15, 2009, which we closed simultaneously with the existing dress shirt inventory with a value of approximately $17.2 million and
certain manufacturing equipment.acquisition.
The Company will also assumehas, through the acquisition of Jantzen, a lease agreement for
the Mexican dress shirt manufacturingJantzen's Portland, Oregon office space for an initial six-month period.
This facility and other ordinary course of business
liabilities. This acquisition is expected to close on or about March 22, 1999.totals approximately 83,900 square feet. The Company has entered
into a lease for a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period, commencing March 22, 2002. This facility
totals approximately 279,000 square feet. The Seneca, South Carolina facility
carries an option to acquire the facility, which the Company can exercise within
60 days of the March 22, 2002 commencement date. The Company has been assigned
a lease agreement for office and showroom space in New York City totaling 8,200
square feet through August 2006, which contains certain renewal provisions. In
addition, the Company has entered into a lease agreement with Phillips-Van Heusen CorporationTommy Hilfiger
F-21
to licenseoccupy approximately 200 square feet of space in Tommy Hilfiger's facility
located in New York City through 2005.
Interest Rate Swap and Option Agreement
On March 15, 2002, the John HenryCompany entered into interest rate swap and Manhattan brands.option
agreements for an aggregate notional amount of $57.0 million in order to
minimize the debt servicing costs associated with the senior secured notes. The
swap agreement alsois scheduled to terminate on March 15, 2009. Under the swap
agreement, the Company is entitled to receive semi-annual interest payments on
September 15 and March 15 at a fixed rate of 9 1/2% and are obligated to make
semi-annual interest payments on September 15 and March 15 at a floating rate
based on the three-month LIBOR rate plus 369 basis points for the period from
March 22, 2002 through March 15, 2009. The swap agreement has optional call
provisions with trigger dates of March 15, 2005, March 15, 2006 and March 15,
2007, which contain premium requirements in the event the call is exercised.
Senior Credit Facility
In March 2002, the Company amended its existing senior credit facility with
the Company's group of banks, which as amended, provides the Company with a
revolving credit facility of up to an aggregate amount of $60.0 million. This
amendment was done concurrently with the $57.0 million senior subordinated notes
offering discussed above. Borrowings are limited under the terms of a borrowing
base calculation, which generally restricts the outstanding balance to the sum
of (a) 80% of eligible receivables plus, (b) 90% of eligible factored accounts
receivable plus 60% of eligible inventories, as defined. Interest on borrowings
is variable, based upon the Company's option of selecting the bank's prime rate,
or a short term LIBOR rate plus an additional amount based on the Company's debt
coverage and other financial ratios.
Letters of Credit
Subsequent to January 31, 2002, the Company added two additional letter of
credit facilities for an aggregate amount of $25.0 million. Concurrently with
adding the additional facilities, the Company lowered one of its two existing
facilities by the amount of $5.0 million. The Company now has four facilities
totaling $62.0 million.
Synthetic Lease
In March 2002, the Company amended its synthetic lease with the lessor and
the financial institution that financed the synthetic lease, which as amended
provides that Phillips-Van Heusen will buy the existing dress shirt inventory from the Company atshall exercise the purchase option of the lease on or
prior to June 30, 2002, increased the amount of stand-by letter of credit to
$5.5 million and waived the noncompliance of a certain financial covenant the
Company was not in compliance as of January 31, 2002. The Company is in the
process of arranging new financing to replace the synthetic lease through a
mortgage lender and the Company received a satisfactory financing offer from
such lender, subject to additional due diligence. The transaction will result
in the recognition of both an asset and a related liability on the Company's
cost concurrent with the closing of the John Henry/Manhattan
acquisition.
F-19balance sheet.
F-22
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1999
18. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)21. Summarized Quarterly Financial Data
(Unaudited)
1Q 2Q 3Q 4Q TOTAL
------------ ------------ ------------ ------------ -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------------------
(Dollars in thousands)
FISCAL YEAR ENDED JANUARY 31, 19992002
Net Sales ........................$80,866 $58,926 $60,511 $52,731 $253,034
Royalty Income 6,065 6,858 6,403 7,355 26,681
----------------------------------------------------------------------------------------------
Total Revenues 86,931 65,784 66,914 60,086 279,715
Gross Profit 26,150 20,673 19,542 21,749 88,114
Net Income $ 60,0853,198 $ 49,7091,487 $ 65,012970 $ 46,541952 $ 221,3476,608
Income per share:
Basic $ 0.49 $ 0.23 $ 0.15 $ 0.15 $ 1.01
Diluted $ 0.49 $ 0.23 $ 0.15 $ 0.15 $ 1.01
FISCAL YEAR ENDED JANUARY 31, 2001
Net Sales $78,232 $58,941 $64,356 $60,097 $261,626
Royalty Income 6,093 6,747 6,275 6,675 25,790
----------------------------------------------------------------------------------------------
Total Revenues 84,325 65,688 70,631 66,772 287,416
Gross Profit 25,453 20,923 19,121 21,036 86,533
Net Income $ 3,590 $ 1,818 $ 351 $ 2,067 $ 7,826
Income per share:
Basic $ 0.53 $ 0.27 $ 0.05 $ 0.31 $ 1.17
Diluted $ 0.53 $ 0.27 $ 0.05 $ 0.31 $ 1.16
FISCAL YEAR ENDED JANUARY 31, 2000
Net Sales $59,479 $45,273 $66,618 $58,179 $229,549
Royalty income ................... 1,022 981 492 562 3,057
-------- -------- -------- -------- ---------2,316 6,744 6,454 7,326 22,840
----------------------------------------------------------------------------------------------
Total revenues ................... 61,107 50,690 65,504 47,103 224,40461,795 52,017 73,072 65,505 252,389
Gross Profit ..................... 15,648 13,166 16,085 13,307 58,20617,623 18,707 23,210 21,435 80,975
Net Income ....................... 2,637 1,053 2,812 2,080 8,582$ 2,892 $ 1,607 $ 3,964 $ 2,417 $ 10,880
Net income per share:
Basic ........................... $ 0.400.43 $ 0.160.24 $ 0.42 $ 0.31 $ 1.29
Diluted ......................... $ 0.39 $ 0.15 $ 0.42 $ 0.31 $ 1.27
FISCAL YEAR ENDED JANUARY 31, 1998
Net Sales ........................ $ 48,841 $ 42,037 $ 54,550 $ 45,261 $ 190,689
Royalty income ................... 1,123 1,051 887 971 4,032
-------- -------- -------- -------- ---------
Total revenues ................... 49,964 43,088 55,437 46,232 194,721
Gross Profit ..................... 12,963 10,538 12,477 12,752 48,730
Net Income ....................... 2,149 826 2,411 1,792 7,178
Net income per share:
Basic ........................... $ 0.33 $ 0.13 $ 0.37 $ 0.27 $ 1.10
Diluted ......................... $ 0.33 $ 0.120.59 $ 0.36 $ 0.271.62
Diluted $ 1.08
FISCAL YEAR ENDED JANUARY 31, 1997
Net Sales ........................0.43 $ 37,8070.23 $ 31,1590.58 $ 46,7460.35 $ 41,661 $ 157,373
Royalty income ................... 28 70 405 1,151 1,654
-------- -------- -------- -------- ---------
Total revenues ................... 37,835 31,229 47,151 42,812 159,027
Gross Profit ..................... 8,672 6,824 11,116 10,369 36,981
Net Income ....................... 1,615 689 1,974 1,566 5,844
Net income per share:
Basic (1) ....................... $ 0.25 $ 0.11 $ 0.30 $ 0.24 $ 0.89
Diluted ......................... $ 0.25 $ 0.10 $ 0.30 $ 0.24 $ 0.891.59
- ----------------
(1) Total does not equal sum of quarters due to effect of the weighted
averaging of shares outstanding.
F-20
INDEPENDENT AUDITORS' REPORT
Perry Ellis International, Inc.:
We have audited the accompanying balance sheet of Perry Ellis
International, Inc. as of December 31, 1997 and December 31, 1998, and the
related statement of operations, undistributed income and cash flows for the
three years ended December 31, 1996, December 31, 1997 and December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based
upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement.
An audit includes examining on a test basis evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
Management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Perry Ellis International,
Inc. as of December 31, 1997 and December 31, 1998, and the results of its
operations and cash flows for the three years ended December 31, 1996, December
31, 1997, and December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Saul L. Klaw & Co., P.C.
Certified Public Accountants
Dated: March 12, 1999
F-21
PERRY ELLIS INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31,
-----------------------------
1997 1998
------------- -------------
ASSETS
Current Assets
Cash Balances ..................................................... $ 527,161 $1,776,722
Due from Licensees ................................................ 389,281 944,885
Prepaid Expenses .................................................. 758,171 543,383
Prepaid Franchise Taxes ........................................... -0- 75,232
Unexpired Insurance ............................................... 41,317 43,200
Employee Loan Receivable .......................................... -0- 6,183
---------- ----------
Total Current Assets ............................................... 1,715,930 3,389,605
Fixed Assets ....................................................... 1,995,817 2,016,958
Less: Accumulated Depreciation ..................................... (647,380) (875,444)
Security Deposits .................................................. 47,688 32,334
---------- ----------
Total Assets ....................................................... $3,112,055 $4,563,453
========== ==========
LIABILITIES
Current Liabilities
Accounts Payable, Expenses ........................................ $ 542,170 $ 163,443
Accrued Payroll ................................................... 500,425 452,884
Employment Termination Payable, Current ........................... 90,000 108,296
Franchise Taxes Payable ........................................... 610,058 -0-
---------- ----------
Total Current Liabilities .......................................... 1,742,653 724,623
---------- ----------
CAPITAL
Capital Stock--no par value; 200 shares authorized; 50 shares issued
and outstanding .................................................. 1,000 1,000
Undistributed Income ............................................... 1,368,402 3,837,830
---------- ----------
Total Capital ...................................................... 1,369,402 3,838,830
---------- ----------
Total Liabilities and Capital ...................................... $3,112,055 $4,563,453
========== ==========
(See Notes to Financial Statements)
F-22
PERRY ELLIS INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
-------------- -------------- --------------
Royalty Revenues ................ $12,191,490 $15,739,291 $16,210,696
Less Agent's Commission ......... 1,273,879 78,750 33,750
----------- ----------- -----------
Net Royalty Revenues ............ 10,917,611 15,660,541 16,176,946
Operating Expenses .............. 5,544,425 7,334,551 8,625,713
Non-recurring Items ............. 3,273,529 -0- -0-
----------- ----------- -----------
Operating Income ................ 2,099,657 8,325,990 7,551,233
Interest Income ................. 143,765 135,537 32,061
----------- ----------- -----------
Income Before Taxes ............. 2,243,422 8,461,527 7,583,294
State and Local Taxes ........... 218,631 852,072 760,346
----------- ----------- -----------
Net Income for the Year ......... $ 2,024,791 $ 7,609,455 $ 6,822,948
=========== =========== ===========
(See Notes to Financial Statements)
F-23
PERRY ELLIS INTERNATIONAL, INC.
UNDISTRIBUTED INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
Balance at Beginning ......................... $2,826,046 $3,437,637 $1,368,402
Net Income for the Year ...................... 2,024,791 7,609,455 6,822,948
---------- ---------- ----------
Total ........................................ 4,850,837 11,047,092 8,191,350
---------- ---------- ----------
Less Distributions to Stockholder during year:
Dividend Paid ........................... 1,390,000 9,625,000 4,325,000
Foreign Tax Credits ..................... 23,200 53,690 28,520
---------- ---------- ----------
Total ........................................ 1,413,200 9,678,690 4,353,520
---------- ---------- ----------
Balance at End ............................... $3,437,637 $1,368,402 $3,837,830
========== ========== ==========
(See Notes to Financial Statements)
F-24
PERRY ELLIS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
Cash Flow from Operating Activities:
Net Income .............................................. $ 2,024,791 $ 7,609,455 $ 6,822,948
Depreciation ............................................ 212,000 225,783 228,064
Loss on Investment in Limited Partnership ............... 154,187 -0- -0-
Changes in Operating Assets and Liabilities:
Due from Licensees ..................................... 167,120 (362,559) (555,604)
Prepaid Expenses ....................................... (265,840) (396,439) 212,905
Other Current Assets ................................... -0- -0- (6,183)
Accounts Payable ....................................... 486,503 (140,906) (378,727)
Accrued Payroll ........................................ (24,814) 325,192 (47,541)
Corporate Taxes Payable ................................ (350,947) 610,058 (685,290)
Employment Termination ................................. (75,000) (126,000) 18,296
Commissions Payable .................................... 200,000 (200,000) -0-
Non-Current Assets ..................................... (851) (846) 15,354
Non-Current Liabilities ................................ (216,000) (90,000) -0-
------------ ------------ ------------
Net Cash Provided by Operating Activities ................ 2,311,149 7,453,738 5,624,222
------------ ------------ ------------
Cash Flow from Investing Activities:
(Credit) for Disposal of Service Agreement .............. (1,000,001) 1,000,001 -0-
(Additions) to Fixed Assets ............................. (47,461) (87,160) (21,141)
------------ ------------ ------------
Net Cash (Used) Provided by Investing Activities ......... (1,047,462) 912,841 (21,141)
------------ ------------ ------------
Cash Flow from Financing Activities:
Distribution to Stockholders ............................ (1,413,200) (9,678,690) (4,353,520)
------------ ------------ ------------
Net (Decrease) Increase in Cash Flows .................... (149,513) (1,312,111) 1,249,561
Cash at Beginning of Year ................................ 1,988,785 1,839,272 527,161
------------ ------------ ------------
Cash at End of Year ...................................... $ 1,839,272 $ 527,161 $ 1,776,722
============ ============ ============
Supplemental Disclosure of
Cash Flow Information:
Taxes Paid ............................................. $ 627,773 $ 192,652 $ 1,446,000
============ ============ ============
(See Notes to Financial Statements)
F-25
PERRY ELLIS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
1. DESCRIPTION OF BUSINESS
The Company was incorporated on September 12, 1978 and operates as a
licensor. Its income consists primarily of royalties received from licensees
under licensing agreements. Revenues to a major customer accounted for
approximately 36% in 1997 and 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, receivables and
payables, for which carrying amounts approximate fair value due to the
short-term nature of the instruments.
FIXED ASSETS
Fixed Assets consist of fixtures, equipment and improvements and are
stated at cost.
Depreciation is computed using the straight-line basis over the estimated
useful life of the assets. The useful lives range from five to ten years.
Maintenance and Repairs are expensed as incurred. Expenditures for major
renewals are capitalized. Upon the sale, replacement or retirement of assets,
the cost and accumulated depreciation or amortization thereon are removed from
the accounts.
INCOME TAXES
The Company has qualified as a small business ("S") corporation under the
Internal Revenue Code. The federal income tax effect of income and losses is
passed through to the stockholders. Consequently, there is no provision for
federal income taxes in the financial statements. However, the Company is
subject to state and local income taxes in certain taxing districts in which it
does business.
F-26
PERRY ELLIS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
3. CASH BALANCES
Cash balances consist of the following:
1997 1998
----------- -----------
Cash in Checking and Savings Accounts ........... $519,972 $1,559,711
Cash in Pierpont Money Market Accounts .......... 7,189 217,011
-------- ----------
Total ........................................... $527,161 $1,776,722
======== ==========
4. DUE FROM LICENSEES
The balance due from licensees in the amount of $944,885 represents
charges of advertising and other expenses advanced for the account of the
individual licensees of the Company.
5. PREPAID EXPENSES
The prepaid expense balance consists of the following:
1997 1998
----------- ----------
Deposit for Advertising Campaign ............... $197,785 $ 75,718
Deposit Paid for Photoshoots ................... 424,441 444,365
Deposit for Outdoor Systems Billboard .......... -0- 20,486
Deposit for Trade Shows ........................ 116,592 -0-
Other Expenses ................................. 19,353 2,814
-------- --------
Total .......................................... $758,171 $543,383
======== ========
6. PROPERTY AND EQUIPMENT
Property and equipment balances consist of the following:
1997 1998
------------- -------------
Furniture, fixtures and equipment ........................ $ 420,329 $ 437,763
Leasehold improvements ................................... 1,575,488 1,579,195
---------- ----------
1,995,817 2,016,958
Less: accumulated depreciation and amortization .......... (647,380) (875,444)
---------- ----------
Total .................................................... $1,348,437 $1,141,514
========== ==========
7. ACCRUED PAYROLL
Accrued Payroll consists of incentive bonuses earned by executives during
the calendar year and payable in the following year.
8. PENSION PLAN
The Company has a Money Purchase and Profit Sharing Plan in effect. All
employees are eligible to participate in both plans upon the completion of one
year of service and reaching the age of 21. The Company is required to
contribute 10% of the compensation of all participants to the Money Purchase
Pension Plan on an annual basis. There is no contribution requirement for the
Proft Sharing Plan. Employees are not required to contribute to either plan.
The contributions for the calendar year 1997 aggregated $127,066 and for
1998, $66,265.
F-27
PERRY ELLIS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
9. RENTS
The Company leases its executive and design offices. As at December 31,
1998, total minimum rentals are approximately as follows:
1999 ............... $215,000
2000 ............... 230,000
2001 ............... 246,000
Thereafter ......... 478,000
Rent expense for this lease amounted to approximately $196,000, $197,000
and $219,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
10. SUBSEQUENT EVENT
In January 1999, the Company's sole shareholder agreed to sell 100% of the
Company's outstanding common stock to Supreme International Corporation for
approximately $75 million in cash. The sale is expected to close in April 1999.
F-28
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
INTRODUCTION
The following sets forth the Unaudited Pro Forma Combined Financial
Information of Supreme as of and for the fiscal year ended January 31, 1999,
giving effect to the Perry Ellis acquisition under the "purchase" method of
accounting, and the Rule 144A offering of an aggregate principal amount of
$100.0 million in senior subordinated notes due 2009. Supreme's Unaudited Pro
Forma Combined Income Statement Information presents the acquisition of Perry
Ellis International, Inc. and the Rule 144A offering as if they had been
consummated on February 1, 1998. The Unaudited Pro Forma Combined Balance Sheet
Information of Supreme presents the Perry Ellis International acquisition and
the Rule 144A offering as if they had been consummated on January 31, 1999. The
Unaudited Pro Forma Combined Financial Information of the combined companies
are presented for illustrative purposes only, and therefore do not purport to
present the financial position or results of operations of Supreme had the
Perry Ellis International acquisition and the Rule 144A offering occurred on
the dates indicated, nor are they necessarily indicative of the results of
operations which may be expected to occur in the future.
The historical financial information for Supreme and Perry Ellis
International, Inc. has been derived from the audited financial statements of
Supreme and Perry Ellis International, Inc., respectively, included in Item 8.
The pro forma adjustments relating to the acquisition and integration of Perry
Ellis International, Inc. represent Supreme's preliminary determinations of
these adjustments and are based upon available information and certain
assumptions Supreme considers reasonable under the circumstances. Final amounts
could differ from those set forth herein.
The Unaudited Pro Forma Combined Financial Information does not give
effect to the pending John Henry/Manhattan acquisition and the related
Phillips-Van Heusen transactions. See "Item 6. Selected Financial Data--Summary
Pro Forma and Supplemental Financial Information."
F-29
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BALANCE SHEET
BALANCE SHEET JANUARY 31, 1999
HISTORICAL(1) PRO FORMA
--------------------------- ----------------------------------
SUPREME PERRY ELLIS ADJUSTMENTS(2) COMBINED
----------- ------------- -------------------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash ............................................. $ 174 $ 1,777 $ (1,777)(a) $ 174
Accounts receivable, net ......................... 38,970 945 -- 39,915
Inventories ...................................... 32,966 -- -- 32,966
Deferred income taxes ............................ 1,091 -- -- 1,091
Deposits for acquisitions ........................ 6,000 -- (5,000)(b) 1,000
Other current assets ............................. 2,040 667 (75)(c) 2,632
-------- -------- -------- --------
Total Current Assets .......................... 81,241 3,389 (6,852) 77,778
Property and equipment, net ....................... 7,852 1,142 (900)(d) 8,094
Intangible assets, net ............................ 18,843 -- 74,104 (e) 92,947
Other assets ...................................... 1,022 32 3,479 (f) 4,533
-------- -------- -------- --------
Total Assets .................................. $108,958 $ 4,563 $ 69,831 $183,352
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable ................................. $ 4,596 $ 163 -- $ 4,759
Accrued expenses ................................. 4,931 561 -- 5,492
Other current liabilities ........................ 414 -- $ 640 (g) 1,054
-------- -------- -------- ---------
Total Current Liabilities ..................... 9,941 724 640 11,305
Deferred income taxes ............................. 560 -- -- 560
Senior Credit Facility ............................ 33,511 -- (26,970)(h) 6,541
Notes offered in the Rule 144A offering ........... -- -- 100,000 (i) 100,000
-------- -------- -------- --------
Total Liabilities ............................. 44,012 724 73,670 118,406
Stockholders' equity .............................. 64,946 3,839 (3,839)(j) 64,946
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity..... $108,958 $ 4,563 $ 69,831 $183,352
======== ======== ======== ========
See Notes to Unaudited Pro Forma Combined Financial Information.
F-30
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
INCOME STATEMENT
YEAR ENDED JANUARY 31, 1999
HISTORICAL(1) PRO FORMA
----------------------------- -----------------------------------
SUPREME PERRY ELLIS ADJUSTMENTS(3) COMBINED
------------- ------------- ------------------- -------------
(DOLLARS IN THOUSANDS)
Net sales ............................................. $ 221,347 $ -- $ -- $ 221,347
Royalty income ........................................ 3,057 16,177 -- 19,234
--------- -------- -------- ---------
Total revenues ........................................ 224,404 16,177 -- 240,581
Cost of sales ......................................... 166,198 -- -- 166,198
--------- -------- -------- ---------
Gross profit .......................................... 58,206 16,177 -- 74,383
Selling, general, and administrative expenses ......... 41,639 8,594 1,059 (a) 51,292
--------- -------- -------- ---------
Operating income ...................................... 16,567 7,583 (1,059) 23,091
Interest expense ...................................... 3,494 -- 9,298 (b) 12,792
--------- -------- -------- ---------
Income before provision for income taxes .............. 13,073 7,583 (10,357) 10,299
Provision for income taxes ............................ 4,491 760 (954)(c) 4,297
--------- -------- -------- ---------
Net income ............................................ $ 8,582 $ 6,823 $ (9,403) $ 6,002
========= ======== ======== =========
Other Operating Data:
Ratio of earnings to fixed charges(4) ................ 4.2x -- -- 1.8x
Depreciation and amortization ........................ $ 2,161 $ 228 $ 3,525 $ 5,914
EBITDA(5) ............................................ $ 18,728 $ 7,811 $ 2,466 $ 29,005
See Notes to Unaudited Pro Forma Combined Financial Information.
F-31
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
(1) The year ended January 31, 1999 is Supreme's historical financial reporting
period. For the pro forma year ended January 31, 1999 Perry Ellis
International, Inc. financial information has been included as of and for
the twelve months ended December 31, 1998 because they have historically
reported on a calendar year end. Supreme believes the effect of the
difference in these reporting periods is not significant and is not
reflected in the Unaudited Pro Forma Combined Financial Information.
(2) The purchase price is $75,000, adjusted for working capital less other
agreed upon adjustments. Based upon the Perry Ellis International, Inc.
December 31, 1998 balance sheet, the purchase price is calculated as
follows:
PURCHASE PRICE DETERMINATION:
Gross purchase price .......................... $ 75,000
Net adjustments to purchase price ............. (449)
--------
Net purchase price ......................... $ 74,551
========
PURCHASE PRICE ALLOCATION:
Current assets ................................ $ 1,537
Property, plant and equipment ................. 242
Other assets .................................. 32
Trademarks .................................... 74,104
Accounts payable and accrued expenses ......... (1,364)
--------
Net purchase price ......................... $ 74,551
========
For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet,
the Perry Ellis assets acquired and liabilities assumed have been recorded
at their estimated fair values. A final determination of the required
purchase accounting adjustments and of the fair value of the assets and
liabilities of Perry Ellis International, Inc. acquired or assumed has not
yet been made. Accordingly, the purchase accounting adjustments made in
connection with the development of the unaudited pro forma financial
information reflect the Company's best estimate based upon currently
available information.
AS OF
JANUARY 31, 1999
-----------------
(a) Cash balances of Perry Ellis International, Inc. which are not being
acquired ............................................................. $ (1,777)
(b) Deposit applied to Perry Ellis International acquisition ............. (5,000)
(c) Other current assets of Perry Ellis International, Inc. which are not
being acquired ....................................................... (75)
(d) Property, plant and equipment have been adjusted to their estimated
fair value ........................................................... (900)
(e) Trademarks acquired .................................................. 74,104
(f) Deferred financing costs related to the notes offered in the
Rule 144A offering ................................................... 3,479
(g) Liabilities assumed, including severance and acquisition
costs payable ........................................................ 640
(h) Pay down of Senior Credit Facility ................................... (26,970)
(i) Issuance of notes offered in the Rule 144A offering .................. 100,000
(j) Elimination of Perry Ellis International, Inc.'s stockholders' equity (3,839)
F-32
(3) The pro forma income statement data for the year ended January 31, 1999
present the effects of the Perry Ellis International acquisition and the
Rule 144A offering, in each case as if they occurred as of the beginning
of such period, including:
(a) Adjustments to selling, general and administrative expenses:
Decrease in depreciation expense to reflect the fair value and useful lives
of the acquired property, plant and equipment ................................. $ (180)
Amortization expense of trademarks (straight line--20 years) .................. 3,705
Elimination of consulting fees, licensing fees, severance costs, occupancy
costs and employment costs that will not be incurred by the Company ........... (2,466)
--------
Total adjustment to selling, general and administrative expenses ................ 1,059
--------
(b) The pro forma adjustments to interest expense arising from the Perry Ellis
International acquisition and the offering of the notes in the Rule 144A
offering are presented below:
Reduction of interest expense related to the:
Lower balance outstanding under the credit facility (at 7.60%) ................ (2,050)
Additional interest cost related to:
The notes offered in the Rule 144A offering ................................... 11,000
Amortization of deferred financing costs ...................................... 348
--------
Total adjustment to interest expense ............................................ 9,298
--------
(c) Adjustment to the provision for income taxes at an effective rate of 34.4% ...... (954)
--------
Total adjustment to income statement ............................................ $ 9,403
========
In addition to the above, the company believes additional cost savings will
be realized through the combination of the two companies.
(4) For purpose of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
amortization of deferred debt issuance costs and the portion of rental
expense of the Lease deemed representative of the interest factor.
(5) EBITDA represents net income before taking into consideration interest
expense, income tax expense, depreciation expense, and amortization
expense. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and does not represent cash flow
from operations. Accordingly, do not regard this figure as an alternative
to net income or as an indicator of our operating performance or as an
alternative to cash flows as a measure of liquidity. We believe that
EBITDA is widely used by analysts, investors and other interested parties
in our industry but is not necessarily comparable with similarily titled
measures for other companies. See "Statements of Cash Flow" in our
consolidated financial statements and in the financial statements of Perry
Ellis International, Inc. contained elsewhere in this Item 8.
F-33
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- -----------------------------------------------------------------------------------
3.1 Registrant's Second Amended and Restated Articles of Incorporation
10.27 Amendment to Amended and Restated Loan and Security Agreement dated as of August 1, 1998-------------
EXHIBIT NUMBER DESCRIPTION
- --------------- -----------
4.6 Indenture dated March 22, 2002 between the Company
and State Street Bank and Trust Company
4.7 Purchase Agreement dated March 15, 2002 by and among
the Company and the Initial Purchaser
4.8 Pledge and Security Agreement dated March 22, 2002
by and among the Company, Jantzen Apparel Corp.
and State Street Bank and Trust Company
4.9 Specimen Forms of 9 1/2% Senior Secured Notes due
March 15, 2009
10.35 Employment Agreement between Timothy B. Page and the
Company
10.38 Fifth Amendment dated March 14, 2002 to Amended and
Restated Loan and Security Agreement dated March
26, 1999
10.39 Fourth Amendment to Master Agreement dated March 14,
2002, by and among the Company, SUP Joint
Venture, SunTrust Bank and Israeli Discount Bank
21.1 Subsidiaries of Registrant
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (SEC use only)