SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21764
SUPREME INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-1162998
(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
3000 N.W. 107 AVENUE
MIAMI, FLORIDA 33172
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 592-2830
Former name, former address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock is 6,724,374
(as of June 4, 1999).
<PAGE>
SUPREME INTERNATIONAL CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
ITEM 1:
Consolidated Balance Sheets
as of April 30, 1999 (Unaudited) and January 31, 1999 1
Consolidated Statements of Operations (Unaudited)
for the three months ended April 30, 1999
and April 30 1998 2
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended April 30, 1999
and April 30, 1998 3
Notes to Consolidated Financial Statements 4
ITEM 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Year 2000 Readiness Disclosure 12
PART II: OTHER INFORMATION 14
Signature 15
<PAGE>
<TABLE>
<CAPTION>
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999 JANUARY 31, 1999
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 448,551 $ 173,493
Accounts receivable, net 54,615,839 38,969,845
Inventories 28,155,298 32,965,655
Deferred income taxes 1,091,482 1,091,482
Deposits for acquisitions -- 6,000,000
Other current assets 4,211,552 2,040,200
------------ ------------
Total current assets 88,522,722 81,240,675
PROPERTY AND EQUIPMENT, NET 7,744,995 7,851,592
INTANGIBLE ASSETS, NET 122,243,599 18,842,797
OTHER 1,101,790 1,022,467
------------ ------------
TOTAL $219,613,106 $108,957,531
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,790,864 $ 4,595,688
Accrued expenses 4,303,243 4,931,525
Other current liabilities 1,034,554 413,505
------------ ------------
Total current liabilities 12,128,661 9,940,718
Bonds payable, net 95,901,381 --
Deferred income taxes 559,728 559,728
Long term debt - senior credit agreement 28,090,346 33,511,157
Long term debt - term loans 15,000,000 --
------------ ------------
Total liabilities 151,680,116 44,011,603
------------ ------------
Commitments and Contingencies: (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 1,000,000
shares authorized; no shares issued or
outstanding
Class A common stock - $.01 par value;
30,000,000 shares authorized; 6,723,374
and 6,712,374 shares issued and outstanding
as of April 30, 1999 and January 31, 1999,
respectively 67,233 67,123
Additional paid-in-capital 28,901,619 28,806,455
Retained earnings 38,964,138 36,072,350
------------ ------------
Total stockholders' equity 67,932,990 64,945,928
------------ ------------
TOTAL $219,613,106 $108,957,531
============ ============
</TABLE>
See Notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
---------------------------
APRIL 30, APRIL 30,
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Net Sales $59,478,771 $60,085,191
Royalty Income 2,316,518 1,021,784
----------- -----------
TOTAL REVENUES 61,795,289 61,106,975
COST OF SALES 44,172,579 45,459,010
----------- -----------
GROSS PROFIT 17,622,710 15,647,965
SELLING, GENERAL & ADMINSTRATIVE EXPENSES 10,179,795 10,153,871
DEPRECIATION & AMORTIZATION 978,599 492,977
----------- -----------
TOTAL OPERATING EXPENSES 11,158,394 10,646,848
----------- -----------
OPERATING INCOME 6,464,316 4,945,406
INTEREST EXPENSE 1,947,989 891,226
----------- -----------
INCOME BEFORE INCOME
TAX PROVISIONS 4,516,327 4,109,891
INCOME TAX PROVISIONS 1,624,539 1,472,789
----------- -----------
NET INCOME $ 2,891,788 $ 2,637,102
=========== ===========
NET INCOME PER SHARE:
BASIC $ 0.43 $ 0.40
DILUTED $ 0.43 $ 0.39
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING:
BASIC 6,723,374 6,585,168
DILUTED 6,803,228 6,760,770
</TABLE>
See Notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
--------------------------------
APRIL 30, APRIL 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,891,788 $ 2,637,102
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 978,599 492,977
Amortization of bond discount 49,381 --
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable, net (14,528,133) (6,457,177)
Inventories 4,810,357 (2,193,424)
Other current assets (481,827) 231,090
Other assets (46,987) (406,363)
Accounts payable and accrued expenses 3,204,096 (229,458)
Other current liabilities (1,486,408) 1,215,628
------------- -------------
Net cash used in operating activities: (4,609,134) (4,709,625)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (139,550) (1,831,419)
Payment on purchase of other intangible assets (99,500) (37,015)
Payment for acquired businesses (100,403,221) --
------------- -------------
Net cash used in investing activities: (100,642,271) (1,868,434)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in borrowings under credit facilities 15,000,000 5,060,000
Net (payments) proceeds from long-term debt (5,420,811) 1,741,344
Net proceeds from bonds payable 95,852,000 --
Proceeds from exercise of stock options 95,274 332,018
------------- -------------
Net cash provided by
financing activities: 105,526,463 7,133,362
------------- -------------
NET INCREASE IN CASH 275,058 555,303
CASH AT BEGINNING OF YEAR 173,493 1,010,256
------------- -------------
CASH AT END OF PERIOD $ 448,551 $ 1,565,559
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 706,628 $ 831,58
============= =============
Income taxes $ 1,896,580 $ 69,875
============= =============
</TABLE>
See Notes to consolidated financial statements.
3
<PAGE>
SUPREME INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
The accompanying unaudited consolidated financial statements of Supreme
International Corporation and subsidiaries "Supreme" have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and changes in cash flows in conformity with
generally accepted accounting principles. The unaudited consolidated financial
statements should be read in conjunction with the audited financial statements
and related notes included in the Registrant's Annual Report on Form 10-K for
the year ended January 31, 1999. In the opinion of management, the unaudited
consolidated financial statements contain all adjustments necessary for a fair
presentation of the interim periods presented and all adjustments are of a
normal and recurring nature. The results of operations for the three months
ended April 30, 1999 are not necessarily indicative of the results which may be
expected for the entire fiscal year.
Certain amounts in the prior period have been reclassified to conform to the
current periods' presentation.
2. INVENTORIES
Inventories consist principally of finished goods and are stated at lower of
cost or market on a first-in first-out basis.
3. LETTERS OF CREDIT FACILITIES
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Total letter of credit facilities $ 60,000,000 $ 60,000,000
Borrowings
Outstanding letters of credit (21,747,287) (23,831,172)
------------ ------------
Total Available $ 38,252,713 $ 36,168,828
============ ============
</TABLE>
4
<PAGE>
4. BONDS PAYABLE (SENIOR SUBORDINATED NOTES)
The following is a schedule of bonds payable and the unamortized discount:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Principal amount $100,000,000 $ 0
Less unamortized discount 4,098,619 0
------------ ------------
Bonds payable less unamortized discount $ 95,901,381 $ 0
============ ============
</TABLE>
5. STOCKHOLDERS' EQUITY
The following is a schedule of the activity in common stock and additional
paid-in capital:
<TABLE>
<CAPTION>
COMMON STOCK
` ---------------------- ADDITIONAL
SHARES AMOUNT PAID-IN CAPITAL
----------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 6,712,374 $ 67,123 $28,806,455
Exercise of stock options 11,000 110 95,164
----------- ----------- -----------
Balance, April 30, 1999 6,723,374 $ 67,233 $28,901,619
=========== =========== ===========
</TABLE>
6. ACQUISITIONS
On March 29, 1999 Supreme acquired the John Henry, Manhattan and Lady Manhattan
trademarks and certain manufacturing equipment for $27 million. In connection
with the acquisition, Supreme also assumed a lease for a shirt manufacturing
facility in Mexico which expires in July, 1999. In June, 1999 Supreme sold the
Mexican facility and related equipment to a non-affiliated third party. The
acquisition, accounted for according to the purchase method of accounting,
includes operations of the John Henry, Manhattan and Lady Manhattan brand names
commencing on March 29, 1999. Supreme intends to amortize the trademarks over a
period of 20 years based on the straight line method.
On April 6, 1999 Supreme acquired Perry Ellis International, Inc. For
approximately $75 million in cash, as well as the components of working capital
and the assumption of severance payments for certain employees of the former
company. Perry Ellis International, Inc. was a privately held company which
owned and licensed the Perry Ellis brand name, currently one of the top selling
brands in specialty chains and department stores in the United States. The
acquisition, accounted for according to the purchase method of accounting,
includes operations of the Perry Ellis brand name commencing on April 6, 1999,
the date of purchase. Supreme intends to amortize the trademarks over a period
of 20 years based on the straight line method.
Management is currently in the process of determining the fair value of these
trademarks in order to finalize the allocation of the purchase price. The
acquisitions were accounted for using the purchase method of accounting, which
resulted in costs in excess of the carrying value of the net assets acquired of
approximately $104,014,157.
5
<PAGE>
The carrying value of the trademarks acquired was determined as follows:
<TABLE>
<S> <C>
Purchase price $102,000,000
Plus purchase price adjustments 1,684,624
Plus expenses incurred in connection with the
acquisition 4,856,189
------------
Adjusted purchase price 108,540,813
Tangible asset acquired:
Cash 2,137,592
Accounts receivable 1,117,861
Other current assets 1,721,859
PP&E 19,599
------------
103,543,902
Liabilities assumed:
Accounts payables and accrued expenses: 470,255
------------
Trademarks $104,014,157
============
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
The following information presents the non-cash impact on the balance sheets of
assets acquired and liabilities assumed in connection with the Perry Ellis and
John Henry/Manhattan acquisitions. The non-cash effect of these investing
activities during the three months ended April 30, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C>
Assets acquired $ 104,154,879
Liabilities assumed (470,255)
-------------
Cash paid $ 103,684,624
Less cash acquired (2,137,592)
Less deposits in prior period (6,000,000)
-------------
Net cash paid for acquisitions $ 95,547,032
Cost related to acquisition 4,856,189
-------------
Cash paid for acquisitions and acquisition
costs, net of cash acquired $ 100,403,221
=============
</TABLE>
6
<PAGE>
8. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below, based under the assumption
that operations were in effect for each of the quarters ending March 31, 1998
and 1999, gives effect to (i) the Perry Ellis International, Inc. Acquisition,
(ii) the John Henry/Manhattan acquisition and (iii) the offering of the senior
subordinated notes. The information presented below is for illustrative
information purposes only and is not indicative of results which would have been
achieved or results which may be achieved in the future.
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
-------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1999 1998
------------ -----------
<S> <C> <C>
Total revenues $ 65,719,367 $66,568,681
============ ===========
Net income $ 2,306,661 $ 992,797
============ ===========
Net income per share (diluted) $ 0.34 $ 0.15
============ ===========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Supreme is party to an employment agreement with Oscar Feldenkreis, Supreme'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 $370,000, subject to annual cost-of-living increases, an annual
bonus defined as 4% of pretax profit with a minimum to be paid of $470,000, and
an award of 100,000 options to purchase shares priced at the close of business
Friday, April 23, 1999. The employment agreement requires Mr. Feldenkreis to
devote his full time to the affairs of Supreme. 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 Supreme for one year after termination of
his employment for any reason except Supreme's termination of Mr. Feldenkreis
without cause.
7
<PAGE>
Supreme is also party to an employment agreement with George Feldenkreis,
Supreme's Chairman of the Board and Chief Executive Officer, expiring in May,
2000, and is subject to annual renewal. The employment agreement currently
provides for an annual salary of $400,000, subject to annual cost-of-living
increases, and the award of 100,000 shares priced at the close of business on
Friday, April 23, 1999. Pursuant to his employment agreement, Mr. Feldenkreis
devotes a majority of his working time to the affairs of Supreme. George
Feldenkreis' employment agreement contains termination and non-competition
provisions similar to those set forth in Oscar Feldenkreis' agreement.
Supreme has entered into an employment agreement with Alan Zwerner as President
of Licensing. The agreement terminates without notice on April 30, 2002 or can
terminate "for cause" at any time or without notice. The employment agreement
provides for an annual salary of $350,000, with increases on May 1 of each
subsequent year subject to annual cost-of-living increases, performance bonuses
based on certain revenue increases not to exceed $70,000 per year and
non-qualified stock options to purchase 25,000 shares of common stock at an
exercise price equal to closing stock price as of May 3, 1999. The employment
agreement requires Mr. Zwerner to devote his entire time, attention and energies
to Supreme's business. Upon termination of the employment agreement by reason of
the employee's death, the employment agreement and Supreme's obligation to pay
Mr. Zwerner's salary and compensation shall automatically end. If by reason of
disability his employment duties cannot be performed for a cumulative period of
six months within a span of twelve months, this agreement, employment and
compensation will be automatically terminated.
Supreme has entered into an employment agreement with Neal Nackman as Chief
Financial Officer. The agreement terminates without further notice on January
31, 2001 or can terminate "for cause" at any time with or without notice. The
employment agreement provides for an annual salary of $244,400, a guaranteed
performance bonus of $20,000 per annum, as well as options to purchase 30,000
shares of common stock at an exercise price equal to the closing stock price as
of June 14, 1999. For the fiscal year commencing February 1, 2001, Mr. Nackman,
if employed by Supreme will receive a salary increase and performance bonus
based on Supreme's ability to substantially increase certain financial
indicators. On January 31, 2001 the Company shall grant the purchase of an
additional 20,000 options to purchase shares of common stock at an exercise
price equal to the fair market value on that date. The employment agreement
requires Mr. Nackman to devote his entire time, attention and energies to
Supreme's business. Upon termination of the employment agreement by reason of
the employee's death the employment agreement and Supreme's obligation to pay
Mr. Nackman's salary and compensation shall automatically end. If by reason of
disability, his employment duties cannot be performed for a cumulative period of
six months within a span of twelve months, this agreement, employment and
compensation will be automatically terminated.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
OF OPERATIONS
Supreme International Corporation (the "Company") cautions readers that certain
important factors may affect the Company's actual results and could cause such
results to differ materially from any forward-looking statements which may be
deemed to have been made in this report or which are otherwise made by or on
behalf of the Company. For this purpose, any statements contained in this report
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may", "will", "expect", "believe", "anticipate", "intend", "could", "would",
"estimate", or "continue" or the negative other variations thereof or comparable
terminology are intended to identify forward-looking statements. Factors which
may affect Supreme's results include, but are not limited to, risks related to
Supreme's level of indebtedness; fashion trends; the retail industry; reliance
on key customers; contract manufacturing; foreign sourcing; imports and export
restrictions; competition; rapid expansion of business and integration of
acquisitions; dependence on key personnel and other factors discussed herein and
in the Company's filings with the Securities and Exchange Commission.
RECENT DEVELOPMENTS
In order to expand it's licensing operations, in April 1999, Supreme acquired
Perry Ellis International, Inc., which owns and licenses the prestigious and
well-known Perry Ellis brand names. In March 1999, Supreme also purchased the
trademarks for John Henry, a leading brand for men's dress casualwear at Sears
Roebuck, for Manhattan, the best selling dress shirt brand at Wal-Mart and
K-Mart Corporation and for Lady Manhattan.
PERRY ELLIS INTERNATIONAL ACQUISITION. In January 1999, Supreme agreed to buy
Perry Ellis International, Inc. for approximately $75.0 million in cash. Perry
Ellis International, Inc. was a privately held company which owned and licensed
the Perry Ellis brand name, currently one of the top selling brands in specialty
chains and department stores in the United States. Perry Ellis International,
Inc. is currently the licensor under approximately 40 license agreements,
primarily for various men's wear, boy's wear and fragrances. During the year
ended December 31, 1998, Perry Ellis International, Inc. had revenues of $16.2
million and EBITDA of $7.8 million. Under Supreme's management of the brand the
Company expects to benefit from certain operating efficiencies and to enhance
the licensing royalties it 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 45.0% primarily as a result
of increased advertising. The acquisition was financed through a private
offering of $100 million in principal amount of 12 1/4% Series B Senior
Subordinated Notes due 2006 (the "Debt Offering").
9
<PAGE>
JOHN HENRY/MANHATTAN ACQUISITION. In December 1998, Supreme entered into an
agreement to buy certain assets of the John Henry and Manhattan dress shirt
business from Salant Corporation, which was in Chapter 11 bankruptcy proceedings
from December 1998 to April 1999. On February 24, 1999, the bankruptcy court
approved the purchase of the trademarks for $27.0 million, plus the value of the
existing dress shirt inventory (which was estimated to be approximately $17.2
million). The acquisition was completed on March 29, 1999. The assets purchased
consisted of the John Henry, Manhattan and Lady Manhattan trademarks, certain
manufacturing equipment, and the existing dress shirt inventory. On March 29,
1999, Phillips-Van Huesen Corporation ("PVC") purchased the existing dress shirt
inventory at Supreme's acquisition cost concurrently with Supreme's acquisition
of the trademarks and Supreme licensed the John Henry and Manhattan brands to
PVC for men's dress shirts. In connection with the John Henry/Manhattan
acquisition, Supreme also assumed a lease for a shirt manufacturing facility in
Mexico. In June, 1999 Supreme sold the Mexican facility and related equipment to
a non-affiliated third party. The acquisition price, net of the $1.0 million
deposit Supreme paid and the proceeds from sale of the existing dress shirt
inventory was approximately $26.0 million and was financed with borrowings under
Supreme's senior credit facility with a group of banks (the `Senior Credit
Facility').
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1999 AS COMPARED TO THREE MONTHS ENDED APRIL 30,
1998.
TOTAL REVENUES. Total revenues consist of net sales and royalty income. Total
revenues grew $0.7 million or 1.1% to $61.8 million for the three months ended
April 30, 1999 from $61.1 million for the three months ended April 30, 1998
primarily as a result of the growth in royalty income from the recent
acquisitions of the John Henry, Manhattan and Perry Ellis brands.
NET SALES. Net sales declined $0.6 million or 1.0% to $59.5 million for the
three months ended April 30, 1999 from $60.1 million in the year ago period. The
decrease in sales was the result of the licensing of Supreme's boyswear
business, the financial instability of certain retail customers and a general
softness in the golf apparel market. These declines were partially offset by
increases in other branded products overall which grew to represent 85.3% of net
sales. Within branded products, the Natural Issue/Crossings brands increased
approximately $11.2 million to $23.4 million in net sales with smaller increases
experienced in the Andrew Fezza, PNB Nation and PING brand names. Net sales of
the Munsingwear brand declined during the three months ended April 30, 1999 to
approximately $16.2 million in net sales from $19.9 million in net sales from
the year ago period due to the softness in the golf apparel market.
ROYALTY INCOME. Royalty income increased $1.3 million or 126.7% to $2.3 million
for the three months ended April 30, 1999. All of the increase is attributed to
income generated by our recent acquisitions of the John Henry, Manhattan and
Perry Ellis brands.
COST OF SALES. Cost of sales for the three month period ended April 30, 1999 was
$44.2 million, or 74.3% of net sales as compared to $45.5 million or 75.7% of
net sales for the three months ended April 30, 1998. The decrease in cost of
sales as a percentage of net sales is a result of Supreme's increased sales of
branded products which typically generate higher gross profit margin than
private label products. Gross profit was $17.6 million or 29.6% of net sales for
the three months ended April 30, 1999 as compared to $15.6 million or 26.0% of
net sales for the three months ended April 30, 1998 due to the reasons stated
above.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses excluding depreciation and amortization for the three
months ended April 30, 1999 were $10.2 million or 16.5% of total revenues as
compared to $10.2 million or 16.6% of total revenue for the three months ended
April 30, 1998. Depreciation and amortization for the three months ended April
30, 1999 increased $0.5 million to $1.0 million from the comparable period a
year ago reflecting the additional amortization resulting from the recent
acquisitions of the John Henry, Manhattan and Perry Ellis brands.
INTEREST EXPENSE. Interest expense increased $1.1 million for the three months
ended April 30, 1999, to $1.9 million from the comparable period a year ago. The
increase is attributable to the additional interest resulting from the $100
million Debt Offering. The proceeds of this financing were used for the purchase
of Perry Ellis International, Inc. and to repay debt under the Senior Credit
Facility. The average indebtedness during the three month period ended April 30,
1999 was $42.7 million and the average interest rate was 7.54%.
INCOME TAXES. During the three month period ended April 30, 1999, Supreme's
effective tax rate remained unchanged at 36.0% compared to the three month
period ended April 30, 1998.
NET INCOME. Net income increased $0.3 million or 9.7% to $2.9 million or 4.7% of
total revenues for the three months ended April 30, 1999 as compared to $2.6
million or 4.3% of total revenues for the three months ended April 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Supreme relies primarily upon cash flow from operations and borrowings under the
Senior Credit Facility to finance operations and expansion. Cash used in
operating activities was $4.6 million in the three months ended April 30, 1999
compared to $4.7 million in the year ago period.
Net cash used in investing activities was $100.6 million for the three months
ended April 30, 1999 of which $27.9 million reflects the purchase of the John
Henry/Manhattan brand names and $72.5 million is the result of the acquisition
of Perry Ellis International Inc.
Net cash provided by financing activities for the three months ended April 30,
1999 totaled $105.6 million which was primarily the result of the net proceeds
of a $95.9 million subordinated debt offering and a net increase of $15.0
million in borrowings under the term loan agreement. These funds were used for
the acquisition of the John Henry, Manhattan and Perry Ellis brands.
Supreme has a Senior Credit Facility which consists of a $75.0 million revolving
credit facility and a $15.0 million term loan facility. Borrowings under the
revolving credit facility are limited under term to a borrowing base
calculation, which generally restricts the outstanding balances to 85.0% of
eligible receivables plus 60.0% of eligible inventories, as defined. Interest on
borrowings is variable based, at Supreme's option, upon either LIBOR plus 2.50%
currently, or the agent's bank's prime rate plus 0.50%. The Senior Credit
Facility contains certain covenants, the most restrictive of which requires
Supreme to maintain certain financial ratios and minimum net worth. In addition,
the Senior Credit Facility restricts the payment of dividends. The Senior Credit
Facility is secured by all of Supreme's assets and is guaranteed by Supreme's
subsidiaries. The outstanding balance under the revolving credit facility on
April 30, 1999 was $28.1 million.
11
<PAGE>
The Senior Credit Facility also has a $15 million term loan facility which was
used to finance the John Henry/Manhattan acquisition. The term loan facility is
self-amortizing and requires quarterly payments of principal and interest of
$1,250,000 beginning July 1999. The Senior Credit Facility expires in October
2002.
Supreme also maintains three letters of credit facilities which total $60.0
million. Each letter of credit is collaterized by the consignment of merchandise
in transit under that letter of credit. As of April 30, 1999, there was $38.3
million available under these facilities. One of the facilities expires in July
1999 and the other two facilities, aggregating $15.0 million, have perpetual
terms. The current ratio (current assets divided by current liabilities) was
7.3:1 and 8.2:1 at April 30, 1999 and January 31, 1999, respectively.
Working capital (current assets less current liabilities) was $76.4 million and
$71.3 million at April 30, 1999 and January 31, 1999, respectively. Such amount
represents an increase in working capital of $5.1 primarily as a result of an
increase in account receivables.
The Company issued $100 million in notes in the Debt Offering on April 6, 1999.
The actual proceeds to Supreme were $95,852,000 after the deduction of
discounts. Supreme will pay interest on the notes on April 1 and October 1 of
each year, commencing on October 1, 1999. The notes will mature on April 1,
2006. The notes may be redeemed in whole, or in part, at any time on or after
April 1, 2003. In addition, on or before April 1, 2002, Supreme may redeem up to
35% of the aggregate principal amount of the notes with the net proceeds of a
public equity offering if at least 85% of the aggregate principal amount of the
notes originally issued remains outstanding after such redemption.
The notes are unsecured senior subordinated obligations and are subordinated to
all of Supreme's existing and future senior indebtedness. The notes rank equally
with all of Supreme's future senior subordinated indebtedness, and rank
senior to all Supreme's subordinated indebtedness outstanding as of the date of
issue. The notes are guaranteed on a senior subordinated basis by all of
Supreme's subsidiaries. The guarantees are unsecured and subordinated to all
existing and future guarantor senior indebtedness of Supreme's subsidiaries.
Management believes that the combination of borrowing availability under the
Senior Credit Facility, existing working capital and funds anticipated to be
generated from operating activities will be sufficient to meet the Company's
anticipated operating and capital needs for the foreseeable future.
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 21 century. Many computer software programs, as
well as certain hardware and equipment containing date-sensitive data, were
structured to utilize a two-digit date filed. 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. The
Company recognizes that it must take action to ensure that its operations will
not be adversely impacted by Year 2000 software failures.
12
<PAGE>
Supreme has undertaken a study of its 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, Supreme
believes the majority of its systems are year 2000 compliant.. Supreme's 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 Receivable, 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.
Supreme's EDI application is software purchased from NGC, a company in Miami
Lakes, Florida. While Supreme does not own the source code to this software, NGC
provided written certification of year 2000 compliance. Furthermore, Supreme
passed the EDI year 2000 compliance test from NFR (National Retail Federation).
Results of the test can be found at http://www.nrf.com. Supreme is ready to
change to the new EDI 4010 documents whenever our customers are ready. Some of
Supreme's large customers are already doing 4010 transactions with us. Supreme's
EDI software is also ready to convert any non-compliant year 2000 EDI document
to an internal year 2000 compliant transaction.
All of Supreme's PBX 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/nsg2000.html. The monitoring company Security One
has provided us a Year 2000 certification of any Date Based System. Supreme
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 Supreme
in order to become Year 2000 compliant, including 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 Supreme has relationships, such as its banking institutions,
customers, payroll processors and others is ongoing. Supreme has inquired, or is
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 Supreme will continue to monitor these third party
entities to determine the impact on the business of the Company and the actions
the Company must take, if any, in the event of non-compliance by any of these
third parties. Supreme's initial assessment of compliance by third party is that
there is not a material business risk to the Company posed by any such
noncompliance and, as such, the Company has not yet developed any related
contingency plan.
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
The Company does not believe that inflation or foreign currency fluctuations
significantly affected its results of operations for the three months ended
April 30, 1999 and 1998.
13
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PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (for SEC only)
(b) Reports on Form 8-K
(c) Exhibit 10.35 - Neal Nackman Employment Agreement
On April 9, 1999 Supreme filed a current report on Form 8-K and amended such
report on April 16, 1999 to disclose the acquisition of the John Henry and
Manhattan brands and the amendment to Supreme's Senior Credit Facility.
On April 16, 1999 Supreme filed a current report on Form 8-K to disclose the
acquisition of Perry Ellis International, Inc. and the completion of the $100
million private debt offering used to finance the acquisition.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.-
Date: June 14, 1999 By: /S/ ROSEMARY B. TRUDEAU
-------------------------
Vice President of Finance
15
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 448,551
<SECURITIES> 0
<RECEIVABLES> 54,615,839
<ALLOWANCES> 0
<INVENTORY> 28,155,298
<CURRENT-ASSETS> 88,522,722
<PP&E> 7,744,995
<DEPRECIATION> 0
<TOTAL-ASSETS> 219,613,106
<CURRENT-LIABILITIES> 12,128,661
<BONDS> 95,901,381
0
0
<COMMON> 67,233
<OTHER-SE> 67,865,757
<TOTAL-LIABILITY-AND-EQUITY> 219,613,106
<SALES> 59,478,771
<TOTAL-REVENUES> 61,795,289
<CGS> 44,172,579
<TOTAL-COSTS> 44,172,579
<OTHER-EXPENSES> 11,158,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,947,989
<INCOME-PRETAX> 4,516,327
<INCOME-TAX> 1,624,539
<INCOME-CONTINUING> 2,891,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,891,788
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.43
</TABLE>
