Perry Ellis International (PERY) 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-21764

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida	59-1162998
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
3000 N.W. 107 Avenue Miami, Florida	33172
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (305) 592-2830

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock is 9,584,414 (as of December 6, 2005).

PERRY ELLIS INTERNATIONAL, INC.

INDEX

	PAGE
PART I: FINANCIAL INFORMATION
Item 1:
Consolidated Balance Sheets (Unaudited) as of October 31, 2005 and January 31, 2005	1
Consolidated Statements of Operations (Unaudited) for the three and nine months ended October 31, 2005 and 2004	2
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October 31, 2005 and 2004	3
Notes to Unaudited Consolidated Financial Statements	4
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3:
Quantitative and Qualitative Disclosures About Market Risk	22
Item 4:
Controls and Procedures	23
PART II: OTHER INFORMATION	24
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 6:
Exhibits	24

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share data)

	October 31, 2005		January 31, 2005
ASSETS
Current Assets:
Cash and cash equivalents	$	7,323	$	5,398
Accounts receivable, net		151,158		134,918
Inventories, net		133,638		115,321
Deferred income taxes		10,672		12,564
Prepaid income taxes		3,412		2,354
Other current assets		6,496		7,748
Total current assets		312,699		278,303
Property and equipment, net		63,367		48,978
Intangible assets, net		171,655		160,885
Deferred income taxes		3,061		10,216
Other		12,615		16,578
TOTAL	$	563,397	$	514,960
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	30,320	$	47,492
Accrued expenses and other liabilities		22,557		17,032
Accrued interest payable		2,070		4,800
Current portion of real estate mortgage		228		140
Unearned revenues		1,128		1,036
Total current liabilities		56,303		70,500
Senior subordinated notes payable		148,872		151,518
Senior secured notes payable		56,955		58,828
Senior credit facility		62,102		10,771
Real estate mortgages		12,394		11,393
Lease payable long term		485		381
Deferred pension obligation		13,779		15,617
Total long-term liabilities		294,587		248,508
Total liabilities		350,890		319,008
Minority Interest		1,811		1,384
Stockholders’ Equity:
Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock $.01 par value; 100,000,000 shares authorized; 9,584,414 shares issued and outstanding as of October 31, 2005 and 9,460,444 shares issued and outstanding as of January 31, 2005		96		95
Additional paid-in-capital		89,709		87,544
Retained earnings		120,877		106,297
Accumulated other comprehensive income		14		632
Total stockholders’ equity		210,696		194,568
TOTAL	$	563,397	$	514,960

See Notes to Unaudited Consolidated Financial Statements

1

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

	Three Months Ended October 31,				Nine Months Ended October 31,
	2005		2004		2005		2004
Revenues
Net sales	$	214,665	$	154,716	$	619,357	$	467,869
Royalty income		5,290		5,989		16,182		16,621
Total revenues		219,955		160,705		635,539		484,490
Cost of sales		149,595		108,192		438,414		331,307
Gross profit		70,360		52,513		197,125		153,183
Operating expenses
Selling, general and administrative expenses		49,648		35,663		150,754		117,064
Depreciation and amortization		2,436		1,685		6,899		4,724
Total operating expenses		52,084		37,348		157,653		121,788
Operating income		18,276		15,165		39,472		31,395
Interest expense		5,621		3,621		16,402		10,822
Income before minority interest and income taxes		12,655		11,544		23,070		20,573
Minority interest		59		180		427		334
Income tax provision		4,503		4,179		8,063		7,492
Net income	$	8,093	$	7,185	$	14,580	$	12,747
Net income per share
Basic	$	0.85	$	0.76	$	1.53	$	1.41
Diluted	$	0.80	$	0.72	$	1.45	$	1.32
Weighted average number of shares outstanding
Basic		9,571		9,454		9,516		9,011
Diluted		10,090		10,007		10,039		9,648

See Notes to Unaudited Consolidated Financial Statements

2

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

	Nine Months Ended October 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,580		$	12,747
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,410			4,071
Provisions for bad debts		693			866
Tax benefit from exercise of stock options		395			379
Amortization of debt issue costs		699			858
Amortization of bond discount		233			151
Deferred income taxes		9,013			7,210
Minority interest		427			334
Other		139			—
Changes in operating assets and liabilities (net of effects of acquisition transaction):
Accounts receivable, net		14,566			(8,925	)
Inventories, net		20,839			15,728
Other current assets and prepaid income taxes		(2,559	)		2,930
Other assets		(278	)		(5,501	)
Accounts payable, accrued expenses and other		(20,992	)		3,506
Accrued interest payable		(2,730	)		(2,313	)
Unearned revenues		92			36
Net cash provided by operating activities		41,527			32,077
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(10,645	)		(9,282	)
Payment on purchase of intangible assets		—			(3,815	)
Payment for acquired businesses, net of cash acquired		(79,907	)		—
Net cash used in investing activities		(90,552	)		(13,097	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance		—			21,108
Borrowings from senior credit facility		253,993			82,269
Payments on senior credit facility		(202,662	)		(116,984	)
Payments on termination of swap agreements		(1,210	)		—
Payments on real estate mortgage		(111	)		—
Payments on capital leases		(201	)		—
Proceeds from exercise of stock options		1,759			819
Net cash provided by (used in) financing activities		51,568			(12,788	)
Effect of exchange rate changes on cash and cash equivalents		(618	)		367
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,925			6,559
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		5,398			1,011
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,323		$	7,570
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	18,899		$	13,135
Income taxes	$	2,481		$	120
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Mortgage for real estate	$	1,200		$	—
Retirement of treasury shares	$	—		$	933

See Notes to Unaudited Consolidated Financial Statements

3

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on 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 required by GAAP. These consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2005. Certain amounts in the prior period have been reclassified to conform to the current period’s presentation.

In our opinion, the information presented reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.

2. INVENTORIES

Inventories are stated at the lower of cost (average cost) or market. Cost principally consists of the purchase price, customs duties, freight, insurance and commissions to buying agents.

Inventories consisted of the following as of:

	(in thousands)
	October 31, 2005		January 31, 2005
Finished goods	$	130,866	$	113,104
Raw materials and in process		2,772		2,217
Total	$	133,638	$	115,321

3. LETTER OF CREDIT FACILITIES

Borrowings and availability under letter of credit facilities consist of the following as of:

	(in thousands)
	October 31, 2005			January 31, 2005
Total letter of credit facilities	$	176,541		$	93,026
Outstanding letters of credit		(48,071	)		(72,210	)
Total credit available	$	128,470		$	20,816

4. 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 approximately $5.7 million and $5.8 million for the three months ended October 31, 2005 and 2004, respectively, and $15.5 million and $16.4 million for the nine months ended October 31, 2005 and 2004, respectively, and are included in selling, general and administrative expenses.

5. ACCOUNTING FOR STOCK BASED COMPENSATION

The Company has chosen to account for stock-based compensation to employees and non-employee members of the Board using the intrinsic value method prescribed by Accounting Principles Board Opinion

4

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(“APB”) No. 25,Accounting for Stock Issued to Employees, and related interpretations. As required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure,” the Company presents certain pro forma and other disclosures related to stock-based compensation plans as if compensation cost for options granted had been determined in accordance with the fair value provisions of SFAS No. 123 as follows:

	(in thousands, except per share data)
	Three Months Ended October 31,				Nine Months Ended October 31,
	2005		2004		2005		2004
Net income as reported	$	8,093	$	7,185	$	14,580	$	12,747
Add : Total stock based employee compensation expense included in reported net income		—		—		—		—
Deduct : Total stock based employee compensation expense not included in reported net income		297		241		832		697
Pro forma net income	$	7,796	$	6,944	$	13,748	$	12,050
Pro forma net income per share:
Basic	$	0.81	$	0.73	$	1.44	$	1.34
Diluted	$	0.77	$	0.69	$	1.37	$	1.25
Weighted Average Number of Shares Outstanding
Basic		9,571		9,454		9,516		9,011
Diluted		10,090		10,007		10,039		9,648

6. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average shares of outstanding common stock. The calculation of diluted net income per share is similar to basic earnings per share except that the denominator includes potentially dilutive common stock equivalents. The potentially dilutive common stock included in the Company’s computation of diluted net income per share includes the effects of stock options as determined using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share:

	(in thousands, except per share data)
	Three Months Ended October 31,				Nine Months Ended October 31,
	2005		2004		2005		2004
Numerator:
Net income	$	8,093	$	7,185	$	14,580	$	12,747
Denominator:
Basic weighted average shares		9,571		9,454		9,516		9,011
Dilutive effect: stock options		519		553		523		637
Diluted weighted average shares		10,090		10,007		10,039		9,648
Basic income per share	$	0.85	$	0.76	$	1.53	$	1.41
Diluted income per share	$	0.80	$	0.72	$	1.45	$	1.32
Antidilutive effect: stock options (1)		182		185		195		106

(1) Represents stock options to purchase shares of common stock that were not included in computing diluted income per share because their effects were antidilutive for the respective periods.

5

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. COMPREHENSIVE INCOME

Comprehensive income is comprised of net operating results and the effect of foreign currency translation reflected in stockholders’ equity. Comprehensive income was $8.3 million and $7.5 million for the three months ended October 31, 2005 and 2004, respectively and $14.0 million and $13.1 million for the nine months ended October 31, 2005 and 2004, respectively.

8. SEGMENT INFORMATION

In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,”the Company’s principal business segments are grouped into the generation of revenues from sale of products and royalties from licensing activity. These segments are identified and managed by the Company based on the products and services offered by each. The product segment derives its revenues from the design, importation and distribution of apparel to various retail channels, which include department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate incentive market, as well as clubs, and independent retailers in the United States, Puerto Rico and Canada. The licensing segment derives its revenues from royalties associated with the licensing of its trademarks to third parties, principally Perry Ellis^®, Jantzen^®, John Henry^®, Manhattan^®, Munsingwear^® and Farah^®. Trademark costs have been allocated among the segments where the brands are shared. Shared selling, general and administrative expenses are allocated amongst the segments based upon department utilization rates.

	(in thousands)
	Three Months Ended October 31,				Nine Months Ended October 31,
	2005		2004		2005		2004
Revenues:
Product	$	214,665	$	154,716	$	619,357	$	467,869
Licensing		5,290		5,989		16,182		16,621
Total Revenues	$	219,955	$	160,705	$	635,539	$	484,490
Operating Income:
Product	$	14,077	$	10,434	$	29,597	$	20,436
Licensing		4,199		4,731		9,875		10,959
Total Operating Income	$	18,276	$	15,165	$	39,472	$	31,395

	(in thousands)
	October 31, 2005		January 31, 2005
Identifiable Assets:
Product	$	397,503	$	363,317
Licensing		144,055		139,198
Corporate		21,839		12,445
Total Identifiable Assets	$	563,397	$	514,960

9. TROPICAL SPORTSWEAR INT’L CORPORATION ACQUISITION

On February 26, 2005, the Company consummated the acquisition (the “Tropical acquisition”) of certain domestic operating assets of Tropical Sportswear Int’l Corporation (“TSI”), as well as the outstanding capital stock of TSI’s U.K. subsidiary, pursuant to Section 363 of the U.S. Bankruptcy Code, which will be primarily included in the product segment.

The aggregate purchase price was approximately $83.4 million, which represents the sum of (i) $80.7 million paid in cash, and (ii) estimated acquisition costs of $2.7 million. The original purchase price was $88.5 million,

6

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

subject to adjustment based on a final valuation of the closing date accounts receivable and inventory purchased by the Company. In July 2005, a settlement was reached on this valuation and approximately $7.8 million was refunded to the Company.

The following table summarizes the revised estimated fair values of the assets acquired and liabilities assumed after the application of the final valuation. Purchase accounting adjustments include fair value adjustments and the allocation of the excess of fair value over purchase price as required under Statement of Financial Accounting Standards 141, “Business Combinations”:

	(in thousands)
Total purchase price
Cash consideration paid	$	80,651
Total purchase price		80,651
Total direct merger costs		2,716
Total adjusted purchase price	$	83,367
The total allocation of the purchase price is as follows:
Cash	$	503
Accounts receivable		31,499
Inventory		39,156
Other current assets		209
Property and equipment		9,207
Trademarks		10,639
Accounts payable		(1,635	)
Accrued expenses		(5,843	)
Capital leases		(305	)
Deferred taxes		(63	)
Fair value of net assets acquired	$	83,367

10. PRO FORMA FINANCIAL INFORMATION

The pro forma financial information presented below, gives effect to the Tropical acquisition, as if it occurred as of the beginning of the first quarter of fiscal 2006 and 2005. For fiscal 2006, the post acquisition results of Tropical’s business are reflected in the Company’s results of operations as of March 1, 2005, and pro forma results for the one month ended February 28, 2005 are included below. Pro forma third quarter fiscal 2005 results for Tropical were derived from TSI’s previously reported results for the three and nine months ended September 30, 2004.

	(in thousands, except per share data)
	Three Months Ended October 31,					Nine Months Ended October 31,
	2005		2004			2005		2004
Total revenues	$	219,955	$	223,287		$	654,362	$	710,752
Net income (loss)	$	8,093	$	(1,891	)	$	13,819	$	(516	)
Net income (loss) per share
Basic	$	0.85	$	(0.20	)	$	1.45	$	(0.06	)
Diluted	$	0.80	$	(0.20	)	$	1.38	$	(0.06	)
Weighted Average Number of Shares:
Basic		9,571		9,454			9,516		9,011
Diluted		10,090		9,454			10,039		9,011

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. BENEFIT PLAN

The Company sponsors a qualified defined benefit pension plan. The plan was frozen in December 2003. The following table provides the components of net benefit cost for the plan during the three and nine months ended October 31, 2005 and 2004, respectively:

	(in thousands)
	Three Months Ended October 31,						Nine Months Ended October 31,
	2005			2004			2005			2004
Service cost	$	—		$	—		$	—		$	—
Interest cost		745			842			2,235			2,328
Expected return on plan assets		(845	)		(850	)		(2,535	)		(2,577	)
Amortization of net gain		—			54			—			—
Net periodic benefit cost	$	(100	)	$	46		$	(300	)	$	(249	)

The Company contributed $1.5 million to the pension plan during August 2005; no further contributions are anticipated for fiscal 2006.

12. DERIVATIVES FINANCIAL INSTRUMENTS

The Company has entered into derivative financial instruments in order to manage the overall borrowing costs associated with its senior secured notes and senior subordinated notes. As of October 31, 2005, the only derivatives outstanding related to the senior secured notes.

Derivatives on $57 million senior secured notes payable

At October 31, 2005, the Company had an interest rate swap and option (the “$57 million Swap Agreement”) for an aggregate notional amount of $57 million in order to manage the overall borrowing costs associated with its 9 ¹/2% senior secured notes. The $57 million Swap Agreement is a fair value hedge as it has been designated against the 9 ¹/2% senior secured notes carrying a fixed rate of interest and effectively converts such notes to variable rate debt. The $57 million Swap Agreement is reflected at fair value in the Company’s consolidated balance sheet with a corresponding offset to the designated item. The $57 million Swap Agreement is scheduled to terminate on March 15, 2009. The fair value of the $57 million Swap Agreement recorded on the Company’s consolidated balance sheet was $0.6 million as of October 31, 2005 and $2.7 million as of January 31, 2005.

At October 31, 2005, the Company also had an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57 million associated with the 9 ¹/2% senior secured notes. The $57 million Cap Agreement is scheduled to terminate on March 15, 2009. The $57 million Cap Agreement caps the interest rate on the senior secured notes at 10%. The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in a $84,000 and $53,000 decrease of recorded interest expense on the consolidated statements of operations for the three and nine months ended October 31, 2005, respectively, and a $200,000 and $400,000 increase of recorded interest expense on the consolidated statements of operations for the three and nine months ended October 31, 2004. The fair value of the $57 million Cap Agreement recorded on the Company’s consolidated balance sheet was ($582,000) as of October 31, 2005 and ($636,000) as of January 31, 2005.

The Company also had an interest rate floor agreement (the “$57 million Floor Agreement”) for an aggregate notional amount of $57 million associated with the 9 ¹/2% senior secured notes. The $57 million Floor Agreement expired on March 15, 2005. The $57 million Floor Agreement did not qualify for hedge accounting treatment under SFAS No. 133, resulting in a $1,000 and $100,000 decrease of recorded interest expense on the consolidated statement of operations for the three and nine months ended October 31, 2004, respectively. The

8

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$57 million Floor Agreement had no impact on interest expense for Fiscal 2006. The fair value of the $57 million Floor Agreement recorded on the Company’s consolidated balance sheet was $0 as of January 31, 2005.

Derivatives on $150 million senior subordinated notes payable

In conjunction with the Company’s fiscal 2004 offering of $150 million of 8 ⁷/8% senior subordinated notes due September 15, 2013, the Company entered into interest rate swap agreements (the “$150 million Swap Agreement”) with Merrill Lynch & Co., Inc. (“Merrill”) and Wachovia Bank N. A. (“Wachovia”) each with a notional amount of $75 million for an aggregate notional amount of $150 million in order to manage the overall borrowing costs associated with the new senior subordinated notes. The $150 million Swap Agreement was scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, the Company was entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 ⁷/8% and was obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period through September 15, 2013.

On April 29, 2005, the Company terminated its $75 million notional amount swap agreement with Wachovia. In connection with the termination, the Company paid $495,000. The termination payment was comprised of the fair market value of the swap in the amount of $578,000 less accrued interest of $83,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.

On May 2, 2005, the Company terminated its $75 million notional amount swap agreement with Merrill. In connection with the termination, the Company paid $540,000. The termination payment was comprised of the fair market value of the swap in the amount of $632,000 less accrued interest of $92,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.

The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $1.5 million as of January 31, 2005.

Other

The Company does not currently have a significant exposure to foreign exchange risk and accordingly, has not entered into any transactions to hedge against those risks.

13. REAL ESTATE MORTGAGES

In October 2005, the Company acquired three administrative office units in a building in Beijing, China. The aggregate purchase price was $2.3 million, including closing costs. These purchases were partially financed with three variable interest mortgage loans totaling $1.2 million dollars in the aggregate. The mortgages mature on October 12, 2015. Interest rate is at Prime. Principal and interest, currently in the aggregate amount of $13,779, are due monthly.

14. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS

Perry Ellis International, Inc. and several of its subsidiaries have fully and unconditionally guaranteed the senior secured notes and senior subordinated notes on a joint and several basis. As such, the following consolidating condensed financial statements, which present, in separate columns: Perry Ellis, the guarantors and the non-guarantors are required to be presented. Additional columns present eliminating adjustments and consolidated totals as of October 31, 2005 and January 31, 2005, and for the three and nine months ended October 31, 2005 and 2004. The Company has not presented separate financial statements and other disclosures concerning the combined guarantors because management has determined that such information is not material to investors.

9

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS (UNAUDITED)

AS OF OCTOBER 31, 2005

(amounts in thousands, except share data)

	Parent Only			Guarantors		Non-Guarantors			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	(566	)	$	5,910	$	1,979		$	—		$	7,323
Accounts receivable, net		660			146,119		4,379			—			151,158
Intercompany receivable—Guarantors		181,065			418,848		167			(600,080	)		—
Intercompany receivable—Non Guarantors		435			12,862		60			(13,357	)		—
Inventories, net		—			131,973		1,665			—			133,638
Other current assets		4,175			16,988		(1,748	)		1,165			20,580
Total current assets		185,769			732,700		6,502			(612,272	)		312,699
Property and equipment, net		12,695			50,431		241			—			63,367
Intangible assets, net		—			150,599		21,056			—			171,655
Investment in subsidiaries		214,641			—		—			(214,641	)		—
Other		4,873			11,918		50			(1,165	)		15,676
TOTAL	$	417,978		$	945,648	$	27,849		$	(828,078	)	$	563,397
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	8,959		$	45,555	$	1,789		$	—		$	56,303
Intercompany payable—Parent		12,268			677,799		14,713			(704,780	)		—
Total current liabilities		21,227			723,354		16,502			(704,780	)		56,303
Notes payable and senior credit facility		185,582			94,741		—			—			280,323
Other long term liabilities		473			13,647		144			—			14,264
Total long-term liabilities		186,055			108,388		144			—			294,587
Total liabilities		207,282			831,742		16,646			(704,780	)		350,890
Minority interest		—			—		1,811			—			1,811
Stockholders’ equity		210,696			113,906		9,392			(123,298	)		210,696
TOTAL	$	417,978		$	945,648	$	27,849		$	(828,078	)	$	563,397

10

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEETS

AS OF JANUARY 31, 2005

(amounts in thousands, except share data)

	Parent Only			Guarantors		Non-Guarantors			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	(818	)	$	3,585	$	2,631		$	—		$	5,398
Accounts receivable, net		(218	)		132,882		2,254			—			134,918
Intercompany receivable—Guarantors		50,742			219,222		602			(270,566	)		—
Intercompany receivable—Non Guarantors		429			16,995		—			(17,424	)		—
Inventories, net		—			114,088		1,233			—			115,321
Other current assets		5,520			16,866		(807	)		1,087			22,666
Total current assets		55,655			503,638		5,913			(286,903	)		278,303
Property and equipment, net		1,566			47,132		280			—			48,978
Intangible assets, net		—			139,829		21,056			—			160,885
Investment in subsidiaries		200,037			—		—			(200,037	)		—
Other		6,395			21,486		—			(1,087	)		26,794
TOTAL	$	263,653		$	712,085	$	27,249		$	(488,027	)	$	514,960
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities	$	6,987		$	56,922	$	6,591		$	—		$	70,500
Intercompany payable—Parent		(39,711	)		404,623		13,804			(378,716	)		—
Total current liabilities		(32,724	)		461,545		20,395			(378,716	)		70,500
Notes payable and senior credit facility		101,518			130,992		—			—			232,510
Other long term liabilities		291			15,481		226			—			15,998
Total long-term liabilities		101,809			146,473		226			—			248,508
Total liabilities		69,085			608,018		20,621			(378,716	)		319,008
Minority interest		—			—		1,384			—			1,384
Stockholders’ equity		194,568			104,067		5,244			(109,311	)		194,568
TOTAL	$	263,653		$	712,085	$	27,249		$	(488,027	)	$	514,960

11

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED OCTOBER 31, 2005

(amounts in thousands)

	Parent Only			Guarantors		Non-Guarantors		Eliminations			Consolidated
Revenue	$	—		$	215,195	$	4,760	$	—		$	219,955
Gross profit		—			66,541		3,819		—			70,360
Operating income (loss)		(1	)		15,435		2,842		—			18,276
Interest, minority interest and income taxes		6			8,658		1,519		—			10,183
Equity in earnings of subsidiaries, net		8,100			—		—		(8,100	)		—
Net income		8,093			6,777		1,323		(8,100	)		8,093

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED OCTOBER 31, 2004

(amounts in thousands)

	Parent Only			Guarantors		Non-Guarantors		Eliminations			Consolidated
Revenue	$	—		$	156,275	$	4,430	$	—		$	160,705
Gross profit		—			49,219		3,294		—			52,513
Operating income (loss)		(653	)		13,495		2,323		—			15,165
Interest, minority interest and income taxes		1,034			6,183		763		—			7,980
Equity in earnings of subsidiaries, net		8,872			—		—		(8,872	)		—
Net income		7,185			7,312		1,560		(8,872	)		7,185

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, 2005

(amounts in thousands)

	Parent Only		Guarantors		Non-Guarantors		Eliminations			Consolidated
Revenue	$	—	$	622,721	$	12,818	$	—		$	635,539
Gross profit		—		186,505		10,620		—			197,125
Operating income		—		31,754		7,718		—			39,472
Interest, minority interest and income taxes		24		21,144		3,724		—			24,892
Equity in earnings of subsidiaries, net		14,604		—		—		(14,604	)		—
Net income		14,580		10,610		3,994		(14,604	)		14,580

12

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, 2004

(amounts in thousands)

	Parent Only			Guarantors		Non-Guarantors		Eliminations			Consolidated
Revenue	$	—		$	474,839	$	9,651	$	—		$	484,490
Gross profit		—			145,483		7,700		—			153,183
Operating income (loss)		(651	)		26,781		5,265		—			31,395
Interest, minority interest and income taxes		1,036			15,561		2,051		—			18,648
Equity in earnings of subsidiaries, net		14,434			—		—		(14,434	)		—
Net income		12,747			11,220		3,214		(14,434	)		12,747

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, 2005

(amounts in thousands)

	Parent Only			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(75,250	)	$	118,232		$	(838	)	$	(617	)	$	41,527
Net cash provided by (used in) investing activities		(11,321	)		(79,263	)		32			—			(90,552	)
Net cash provided by (used in) financing activities		87,441			(35,872	)		—			(1	)		51,568
Effect of exchange rate changes on cash and cash equivalents		(618	)		(772	)		154			618			(618	)
Net increase (decrease) in cash and cash equivalents		252			2,325			(652	)		—			1,925
Cash and cash equivalents at beginning of period		(818	)		3,585			2,631			—			5,398
Cash and cash equivalents at end of period		(566	)		5,910			1,979			—			7,323

13

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED OCTOBER 31, 2004

(amounts in thousands)

	Parent Only			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(18,788	)	$	30,002		$	20,388		$	475		$	32,077
Net cash provided by (used in) investing activities		(3,697	)		11,823			(21,223	)		—			(13,097	)
Net cash provided by (used in) financing activities		21,927			(34,715	)		—			—			(12,788	)
Effect of exchange rate changes on cash and cash equivalents		367			109			366			(475	)		367
Net (decrease) increase in cash and cash equivalents		(191	)		7,219			(469	)		—			6,559
Cash and cash equivalents at beginning of period		(237	)		(600	)		1,848			—			1,011
Cash and cash equivalents at end of period		(428	)		6,619			1,379			—			7,570

14

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. References in this report to the “Tropical acquisition” refer to our acquisition of certain domestic operating assets of Tropical Sportswear Int’l Corporation (“TSI”), as well as the outstanding capital stock of its United Kingdom subsidiary, that was completed in February 2005. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 31, 2005.

Forward—Looking Statements

We caution readers that this report includes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,” and similar words or phrases or corporate terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties and 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, many of which are beyond our control.

Some of the factors that could 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. These factors include:

• general economic conditions,

• a significant decrease in business from or loss of any of our major customers,

• anticipated and unanticipated trends and conditions in our industry, including the impact of recent and future retail and wholesale consolidation,

• the effectiveness of our planned advertising, marketing and promotional campaigns,

• the seasonality and performance of our swimwear business,

• our ability to contain costs,

• changes in legislation, international trade regulations or international textile agreements, that could result in, among other things, the reevaluation of the trading status of certain countries, regulatory duties, quotas or other trade sanctions, which could lead to increases in the cost of products,

• disruptions in the supply chain,

• our future capital needs and our ability to obtain financing,

• our ability to integrate acquired businesses, trademarks, tradenames and licenses, including the completed Tropical acquisition,

• our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,

• changes in the costs of raw materials, labor and advertising,

• our ability to carry out growth strategies,

• the level of consumer spending for apparel and other merchandise,

• our ability to compete,

15

• the termination or non-renewal of any material license agreements to which we are a party,

• exposure to foreign currency risk and interest rate risk,

• possible disruption in commercial activities due to terrorist activity, armed conflict and natural disaster and

• other factors set forth in this report and in our other Securities and Exchange Commission (“SEC”) filings.

You are cautioned not to place undue 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 to reflect new information or the occurrence of unanticipated events or otherwise.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2005 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by Accounting Principles Generally Accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas we use judgment in are the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment on long-lived assets, the carrying value of our deferred tax accounts, and the calculation of our pension obligation.

Revenue Recognition. Sales are recognized at the time legal title to the product passes to the customer, generally FOB Perry Ellis’ distribution facilities, net of trade allowances and a provision for estimated returns and other allowances. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. We believe that our revenue recognition policies conform to Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements.

Accounts Receivable. We maintain an allowance for doubtful accounts receivables and an allowance for estimated trade discounts, co-op advertising, allowances provided to retail customers to flow goods through the retail channel, and losses resulting from the inability of our retail customers to make required payments considering historical and anticipated trends.

Inventories. Our inventories are valued at the lower of cost or market value. We evaluate all of our inventory style-size-color stock keeping units, or SKUs, to determine excess or slow-moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, we estimate their market value or net sales value based on current realization trends. If the projected net sales value is less than cost, on an individual SKU basis, we provide a write down to reflect the lower value of that inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.

Intangible Assets. We have, at the present time, only one class of indefinite lived assets, trademarks. We review our intangible assets with indefinite useful lives for possible impairments on an annual basis in accordance with SFAS No. 142 and perform impairment testing as of February 1^st of each year by among other things, obtaining independent third party valuations. We evaluate the “fair value” of our identifiable intangible assets for purposes of recognition and measurement of impairment losses. Evaluating indefinite useful life assets for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of our operations and other factors. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected.

Deferred Taxes. We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized based on the differences between financial statement and tax basis of assets and liabilities using

16

presently enacted tax rates. A valuation allowance is recorded, if required, to reduce deferred tax assets to that portion which is expected to more likely than not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax asset may not be recoverable.

Retirement-Related Benefits. The pension obligations related to our defined benefit pension plans are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate, expected return of plan assets, and other factors, which are updated on an annual basis. Management is required to consider current market conditions, including changes in interest rates, in making these assumptions. Actual results that differ from the assumptions are accumulated and amortized over future periods, and therefore, generally affect the recognized pension expense or benefit and our pension obligation in future periods. The fair value of plan assets is based on the performance of the financial markets, particularly the equity markets. Therefore, the market value of the plan assets can change dramatically in a relatively short period of time. Additionally, the measurement of the plan’s benefit obligation is highly sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plan’s estimated accumulated benefit obligation could exceed the fair value of the plan assets and therefore, we would be required to establish an additional minimum liability, which would result in a reduction in shareholder’s equity for the amount of the shortfall. For fiscal 2005, an additional minimum pension liability was not required under the provisions of SFAS No. 87.

Results of Operations

The following is a discussion of the results of operations for the three and nine months periods in the third quarter of the fiscal year ending January 31, 2006 (“fiscal 2006”) compared with the three and nine months periods in the third quarter of the fiscal year ended January 31, 2005 (“fiscal 2005”).

Results of Operations—three and nine months ended October 31, 2005 compared to three and nine months ended October 31, 2004.

Net sales. Net sales for the three months ended October 31, 2005 were $214.7, an increase of $60.0, or 38.8%, from $154.7 million for the three months ended October 31, 2004. The increase in net sales is primarily attributable to approximately $62.2 million of additional sales generated by our men’s wholesale business of which approximately $58.2 million is attributed to the Tropical business, offset by the partially planned reduction in our swimwear business of approximately $2.4 million.

Net sales for the nine months ended October 31, 2005 were $619.4 million, an increase of $151.5 million, or 32.4%, from $467.9 million for the nine months ended October 31, 2004. The increase in net sales is primarily attributable to approximately $174.8 million generated by our men’s wholesale business of which approximately $156.7 million is attributed to the Tropical business, offset by the partially planned reduction in our swimwear business of approximately $22.6 million.

Royalty income. Royalty income for the three months ended October 31, 2005 was $5.3 million, a decrease of $0.7 million, or 11.7%, from $6.0 million for the three months ended October 31, 2004. Royalty income for the nine months ended October 31, 2005 was $16.2 million, a decrease of $0.4 million, or 2.4%, from $16.6 million for the nine months ended October 31, 2004. The decrease in royalty income was principally due to the termination of our Perry Ellis active and women’s wear licenses, partially offset by addition of new licensing agreements, as well as increased royalty income from existing licenses.

Gross profit.Gross profit was $70.4 million for the three months ended October 31, 2005, as compared to $52.5 million for the three months ended October 31, 2004, an increase of 34.1%. Gross profit was $197.1 million for the nine months ended October 31, 2005, as compared to $153.2 million for nine months ended

17

October 31, 2004, an increase of 28.7%. The increase in gross profit during the three and nine months ended October 31, 2005, as compared to the three and nine months ended October 31, 2004 was primarily attributed to the increase in the gross profit of the men’s wholesale business in the amounts of approximately $16.0 million and $46.8 million, respectively, offset by a decline in the gross profit dollars in our swimwear business due to lower sales levels.

As a percentage of total revenue, gross profit margins were 32.0% for the three months ended October 31, 2005, as compared to 32.7% for the three months ended October 31, 2004, a decrease of 0.7%. As a percentage of total revenue, gross profit margins were 31.0% for the nine months ended October 31, 2005, as compared to 31.6% for the nine months ended October 31, 2004, a decrease of 0.6%. The decline in gross profit margins as a percentage of total revenues is due to a decline in royalty income as a percentage of our total revenues (due to the Tropical acquisition).

Wholesale gross profit margins (which exclude the impact of royalty income) increased slightly for the three months ended October 31, 2005 to 30.3%, as compared to 30.1% for the three months ended October 31, 2004. The wholesale gross profit margin percentage remained flat for the nine months ended October 31, 2005 and 2004, at 29.2%. This slight increase for the three months ended October 31, 2005 came as a result of the higher margin sales in our swim business as compared to the prior year swim business, offset partially by the addition of lower margin sales of the domestic Tropical business.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended October 31, 2005, were $49.6 million, an increase of $13.9 million, or 38.9%, from $35.7 million for the three months ended October 31, 2004. As a percentage of total revenues, selling, general and administrative expenses were 22.5% for the three months ended October 31, 2005, as compared to 22.2% for the three months ended October 31, 2004. The increase in selling, general and administrative expenses is primarily attributable to additional expenses incurred by our acquisition of the Tropical business and the change in timing of some selling, general and administrative expenses that were initially planned in the first half of the year that shifted into the third quarter.

Selling, general and administrative expenses for the nine months ended October 31, 2005, were $150.8 million, an increase of $33.7 million, or 28.8%, from $117.1 million for the nine months ended October 31, 2004. As a percentage of total revenues, selling, general and administrative expenses were 23.7% for the nine months ended October 31, 2005, as compared to 24.2% for the nine months ended October 31, 2004. The increase in selling, general and administrative expenses is primarily attributable to additional expenses incurred by our acquisition of the Tropical business, offset by the results of expense management strategies.

Depreciation and amortization. Depreciation and amortization for the three months ended October 31, 2005 was $2.4 million, an increase of $0.7 million, or 41.2%, from $1.7 million for the three months ended October 31, 2004. Depreciation and amortization for the nine months ended October 31, 2005, was $6.9 million, an increase of $2.2 million, or 46.8%, from $4.7 million for the nine months ended October 31, 2004. The increase is due to depreciation expense as a result of the Tropical acquisition in the amount of $0.3 million and $0.9 million for three and nine months ended October 31, 2005, respectively, and an increase in property and equipment purchased during fiscal 2006.

Interest expense. Interest expense for the three months ended October 31, 2005, was $5.6 million, an increase of $2.0 million, or 55.6%, from $3.6 million for the three months ended October 31, 2004. Interest expense for the nine months ended October 31, 2005, was $ 16.4 million, an increase of $5.6 million, or 51.9%, from $10.8 million for the nine months ended October 31, 2004. The overall increase in interest expense is primarily attributable to: (i) increased indebtedness as a result of the acquisition of the Tropical business through additional borrowings in the amount of approximately $83 million under our senior credit facility, (ii) the impact of our elimination of the interest rate swaps on our senior subordinated notes, and (iii) the Prime and LIBOR rates during Fiscal 2006 were higher than the Prime and LIBOR rates during Fiscal 2005 by 68.8% and 279.6%, respectively. We ended the third quarter of Fiscal 2005 with no borrowings on our senior credit facility compared to a balance of $62.1 million for the third quarter of Fiscal 2006.

18

Income taxes. The income tax provision for the three months ended October 31, 2005, was $4.5 million, a $0.3 million increase as compared to $4.2 million for the three months ended October 31, 2004. For the three months ended October 31, 2005, our effective tax rate was 35.4% as compared to 36.5% for the three months ended October 31, 2004. The income tax provision for the nine months ended October 31, 2005, was $8.1 million, a $0.6 million increase as compared to $7.5 million for the nine months ended October 31, 2004. For the nine months ended October 31, 2005, our effective tax rate was 35.1% as compared to 36.4% for the nine months ended October 31, 2004. The primary decrease in the effective tax rate was due to a lower tax rate experienced by our international operations.

Net income. The net income for the three months ended October 31, 2005 was $8.1 million, an increase of $0.9 million, or 12.5%, as compared to the net income of $7.2 million for the three months ended October 31, 2004. Net income for the nine months ended October 31, 2005, was $14.6 million, an increase of $1.9 million, or 15.0%, as compared to net income of $12.7 million for the nine months ended October 31, 2004. The changes in operating results were due to the items described above.

Liquidity and Capital Resources

We rely primarily upon cash flow from operations and borrowings under our senior credit facility and letter of credit facilities to finance our operations and expansion. We believe that as a result of the growth in our business, our working capital requirements may increase. As of October 31, 2005, our total working capital was $256.4 million as compared to $207.8 million as of January 31, 2005. We believe that our cash flows from operations and available borrowings under our senior credit facility and letter of credit facilities are sufficient to meet our working capital needs for the foreseeable future.

Net cash provided by operating activities was $41.5 million for the nine months ended October 31, 2005, as compared to cash provided by operating activities of $32.1 million for the nine months ended October 31, 2004. The increase of $9.4 million in the level of cash provided by operating activities for the nine months ended October 31, 2005, as compared to the nine months ended October 31, 2004, is primarily attributable to a decrease in inventory, and an increase in sales and accounts receivable collections, partially offset by a payment of $1.5 million to the pension plan, and a decrease in accounts payable and accrued expenses.

Net cash used in investing activities was $90.6 million for the nine months ended October 31, 2005, as compared to cash used in investing activities of $13.1 million for the nine months ended October 31, 2004. The increase is primarily due to the purchase of Tropical in the amount of $79.9 million and additions to property and equipment in the amount of $10.6 million, as compared to net cash used for the nine months ended October 31, 2004, for the purchase of intangibles, property and equipment in the amount of $13.1 million.

Net cash provided by financing activities for the nine months ended October 31, 2005, was $51.6 million, as compared to net cash used in financing activities for the nine months ended October 31, 2004 of $12.8 million. The net cash provided during Fiscal 2006, primarily reflects the net borrowings from our senior credit facility of $51.3 million, which were used primarily for the Tropical acquisition, as well as proceeds from the exercise of employee stock options of $1.8 million, offset by the payments of $1.2 million in connection with the termination of the swap agreements. The net cash used during Fiscal 2005, primarily reflects the net proceeds from our stock offering of $21.1 million as well as proceeds from the exercise of employee stock options of $0.8 million, offset by the net payments made on our senior credit facility of $34.7 million.

The Tropical Sportswear Acquisition

On February 26, 2005, we acquired certain domestic operating assets of TSI, as well as the outstanding capital stock of TSI’s United Kingdom subsidiary for $80.7 million. In addition, acquisition costs amounted to approximately $2.7 million, thus bringing the aggregate purchase price to $83.4 million. The acquisition was funded from our senior credit facility.

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Tropical is a leading designer, marketer and distributor of men’s branded and private label bottoms to all channels of distribution. With the Tropical acquisition, we believe we have become one of the largest suppliers of men’s bottoms in the United States, added significant revenues, further strengthened and balanced our product mix, and added to our portfolio of brands. The Tropical acquisition also provides us with a state-of-the-art distribution facility in Tampa, Florida and a strong platform to expand our existing brands into Europe as a result of the acquired United Kingdom subsidiary.

Senior Credit Facility

On February 26, 2005, we amended our senior credit facility with Wachovia Bank, National Association (formerly Congress Financial Corporation, Florida). The following were the significant amendments to the facility: (i) the line was increased to $175 million from $110 million; (ii) eligible factored receivables in the borrowing base calculation was increased to $50 million from $30 million; (iii) the inventory borrowing limit was increased to $90 million from $60 million; (iv) the sublimit for letters of credit was increased to $60 million from $30 million, and (v) the amount of letter of credit facilities permitted outside of the facility was increased to $110 million from $60 million.

The following is a description of the terms of the senior credit facility, as amended, does not purport to be complete, and is subject to, and qualified in its entirety by reference to, all the provisions of the senior credit facility.

Certain Covenants. The senior credit facility contains certain covenants, which, among other things, requires us to maintain a minimum EBITDA if availability falls below a certain minimum. It may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We believe we are currently in compliance with all of our covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under our indentures and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Borrowing Base. Borrowings under the senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of our eligible factored accounts receivables up to $50.0 million plus (c) the lesser of (i) the inventory loan limit of $90 million, or (ii) the lesser of (A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (as defined in the senior credit facility) of eligible inventory, or (2) the loan limit; and in each case minus (x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (z) licensing reserves for which we are the licensee of certain branded products.

Interest. Interest on the principal balance under the senior credit facility accrues, at our option, at either (a) our bank prime lending rate with adjustments depending upon our quarterly average excess availability plus excess cash or leverage ratio or (b) 1.60% above the rate quoted by our bank as the average Eurodollar Rate (“Eurodollar”) for 1-, 2-, 3- and 6-month Eurodollar deposits with 20 to 25 basis point adjustments depending upon our quarterly average excess availability plus excess cash and leverage ratio at the time of borrowing.

Security. As security for the indebtedness under the senior credit facility, we granted the lenders a first priority security interest in substantially all of our existing and future assets other than our trademark portfolio existing as of March 2002, including, without limitation, accounts receivable, inventory deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries.

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Lenders under the senior credit facility have a second priority security interest in our trademark portfolio as of March 2002 and a first priority lien on the rest of our trademarks.

Letter of Credit Facilities

As of October 31, 2005, we maintained seven U.S. dollar letter of credit facilities totaling $173 million, one letter of credit facility totaling $3.2 million utilized by our Canadian joint venture, and one letter of credit facility totaling $0.4 million utilized by our United Kingdom subsidiary. Each letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets. As of October 31, 2005, there was $128.5 million available under existing letter of credit facilities.

$57 Million Senior Secured Notes Payable

In fiscal 2003, we issued $57 million 9 ¹/2% senior secured notes due March 15, 2009. The proceeds of the offering were used to finance the Jantzen acquisition, to reduce the amount of outstanding debt under the previous senior credit facility and as additional working capital. The proceeds to us were $55.6 million yielding an effective interest rate of 9.74% after deduction of discounts. We entered into certain derivative hedging transactions described in “Item 3: Quantitative and Qualitative Disclosures about Market Risks” in order to manage the overall debt service costs related to these senior secured notes.

The senior secured notes are secured by a first priority security interest granted in our existing portfolio of trademarks and licenses as of March 2002. The senior secured notes are senior secured obligations of ours and rankpari passuin right of payment with all of our existing and future senior indebtedness. The senior secured notes are effectively senior to all of our unsecured indebtedness to the extent of the value of the assets securing the senior secured notes.

Certain Covenants. The indenture governing the senior secured notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We believe we are currently in compliance with all of the covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under our senior credit facility, letter of credit facilities, real estate mortgage and the indenture relating to our senior subordinated notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

$150 million Senior Subordinated Notes Payable

In fiscal 2004, we issued $150 million 8 ⁷/8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 ¹/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We believe we are currently in compliance with all of the covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities, real estate mortgage and the indenture relating to our senior secured notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

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Real Estate Mortgages

In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami, Florida and partially refinanced the acquisition of the facility with an $11.6 million mortgage loan. The real estate mortgage loan contains certain covenants. We believe we are currently in compliance with all of our covenants under the real estate mortgage loan. We could be materially harmed if we violate any covenants because the lender under the real estate mortgage loan could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and indentures relating to our senior secured notes and senior subordinated notes resulting in all our of debt obligations becoming immediately due and payable.

In October 2005, we acquired three administrative office units in a building in Beijing, China. The aggregate purchase price was $2.3 million, including closing costs. These purchases were partially financed with three variable interest mortgage loans totaling $1.2 million dollars in the aggregate. The mortgage loans mature on October 12, 2015. Interest rate is at Prime. Principal and interest, currently in the aggregate amount of $13,779, are due monthly.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance sheet arrangements” as defined by applicable SEC rules.

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and nine months ended October 31, 2005.

Item 3: Quantitative and Qualitative Disclosures about Market Risks

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. 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 fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes except as discussed below.

Derivatives on $57 million senior secured notes payable

At October 31, 2005, we had an interest rate swap and option (the “$57 million Swap Agreement”) for an aggregate notional amount of $57 million in order to manage the overall borrowing costs associated with our 9 ¹/2% senior secured notes. The $57 million Swap Agreement is a fair value hedge as it has been designated against the 9 ¹/2% senior secured notes carrying a fixed rate of interest and effectively converts such notes to variable rate debt. The $57 million Swap Agreement is reflected at fair value in our consolidated balance sheet with a corresponding offset to the designated item. The $57 million Swap Agreement is scheduled to terminate on March 15, 2009. The fair value of the $57 million Swap Agreement recorded in our consolidated balance sheet was $0.6 million as of October 31, 2005 and $2.7 million as of January 31, 2005.

At October 31, 2005, we also had an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57 million associated with the 9 ¹/2% senior secured notes. The $57 million Cap Agreement is scheduled to terminate on March 15, 2009. The $57 million Cap Agreement caps the interest rate on the senior secured notes at 10%. The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in a $84,000 and $53,000 decrease of recorded interest expense on the consolidated statements of operations for the three and nine months ended October 31, 2005, respectively, and a $200,000 and $400,000 increase of recorded interest expense on the consolidated statements of operations for the three and

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nine months ended October 31, 2004. The fair value of the $57 million Cap Agreement recorded on the consolidated balance sheet was ($582,000) as of October 31, 2005 and ($636,000) as of January 31, 2005.

We also had an interest rate floor agreement (the “$57 million Floor Agreement”) for an aggregate notional amount of $57 million associated with the 9 ¹/2% senior secured notes. The $57 million Floor Agreement expired on March 15, 2005. The $57 million Floor Agreement did not qualify for hedge accounting treatment under SFAS No. 133, resulting in a $1,000 and $100,000 decrease of recorded interest expense on the consolidated statement of operations for the three and nine months ended October 31, 2004, respectively. The $57 million Floor Agreement had no impact on interest expense for Fiscal 2006. The fair value of the $57 million Floor Agreement recorded on the consolidated balance sheet was $0 as of January 31, 2005.

Derivatives on $150 million senior subordinated notes payable

In conjunction with our fiscal 2004 offering of $150 million of 8 ⁷/8% senior subordinated notes due September 15, 2013, we entered into interest rate swap agreements (the “$150 million Swap Agreement”) with Merrill Lynch & Co., Inc. (“Merrill”) and Wachovia Bank N. A. (“Wachovia”) each with a notional amount of $75 million for an aggregate notional amount of $150 million in order to manage the overall borrowing costs associated with the new senior subordinated notes. The $150 million Swap Agreement was scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, we were entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 ⁷/8% and were obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period through September 15, 2013.

On April 29, 2005, we terminated the $75 million notional amount swap agreement with Wachovia. In connection with the termination, we paid $495,000. The termination payment was comprised of the fair market value of the swap in the amount of $578,000 less accrued interest of $83,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.

On May 2, 2005, we terminated the $75 million notional amount swap agreement with Merrill. In connection with the termination, we paid $540,000. The termination payment was comprised of the fair market value of the swap in the amount of $632,000 less accrued interest of $92,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.

The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $1.5 million as of January 31, 2005.

Other

We do not currently have a significant exposure to foreign exchange risk and accordingly, have not entered into any transactions to hedge against those risks.

Item 4: Controls and Procedures

As of the end of the period covered by this Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting during the quarter ended October 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

Between June 2005 and August 2005, we granted stock options to 6 employees to purchase an aggregate of 36,000 shares of our common stock at exercise prices ranging between $22.22 and $24.51 per share. These options were all granted at the fair market value of our common stock on the date of grant, vest over a period of between four and five years and expire 10 years after the date of issuance. The grant of these options was made in a private transaction, without registration, pursuant to the exemption from registration provided by Section (4)(2) of the Securities Act of 1933, as amended.

ITEM 6. Exhibits

Index to Exhibits

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Section 1350.

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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: December 8, 2005	Perry Ellis International, Inc.
	By:	/s/    GEORGE PITA
		George Pita, Chief Financial Officer

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Exhibit Index

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Section 1350.