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, 2001
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 (IRS Employer Identification
Incorporation or organization) Number)
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 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 6,335,774
(as of December 12, 2001).
PERRY ELLIS INTERNATIONAL, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1:
Consolidated Balance Sheets
as of October 31, 2001 (Unaudited) and January 31, 2001 1
Consolidated Statements of Income (Unaudited)
for the three and nine months ended October 31, 2001 and 2000 2
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended October 31, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
PART II: OTHER INFORMATION 11
Signature 13
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2001 January 31, 2001
---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 125,353 $ 344,741
Accounts receivable, net 56,232,798 58,821,622
Inventories 34,503,956 43,556,374
Deferred income taxes 1,951,553 1,951,553
Prepaid income taxes - 136,718
Other current assets 2,677,851 2,305,283
-------------- ---------------
Total current assets 95,491,511 107,116,291
Property and equipment, net 10,344,562 9,820,628
Intangible assets, net 118,955,132 122,016,681
Other 5,194,071 4,159,482
-------------- ---------------
TOTAL $ 229,985,276 $ 243,113,082
============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,445,504 $ 6,712,859
Accrued expenses 2,884,448 3,660,364
Income taxes payable 2,221,819 -
Accrued interest payable 1,054,402 4,215,835
Unearned Revenues 1,807,379 1,996,752
Current portion of senior credit agreement 23,069,228 -
Other current liabilities 2,077,460 1,651,467
-------------- ---------------
Total current liabilities 38,560,240 18,237,277
Senior subordinated notes payable, net 99,741,096 99,152,667
Deferred income tax 4,930,829 4,930,829
Long term debt - senior credit agreement - 37,913,126
-------------- ---------------
Total long-term liabilities 104,671,925 141,996,622
-------------- ---------------
Total liabilities 143,232,165 160,233,899
-------------- ---------------
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;
no shares issued or outstanding - -
Common stock $.01 par value; 30,000,000 shares authorized;
6,335,774 shares issued and 6,333,074 shares outstanding as of
October 31, 2001 and 6,739,374 shares issued and 6,579,374 shares
outstanding January 31, 2001 63,357 67,393
Additional paid-in-capital 26,277,511 29,063,407
Retained earnings 60,432,484 54,778,302
-------------- ---------------
Total 86,773,352 83,909,102
Common stock in treasury at cost; 2,700 shares and 160,000 shares
as of October 31, 2001 and as of January 31, 2001, respectively (20,241) (1,029,919)
-------------- ---------------
Total stockholders' equity 86,753,111 82,879,183
-------------- ---------------
TOTAL $ 229,985,276 $ 243,113,082
============== ===============
See Notes to Consolidated Financial Statements.
1
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------- ---------------------------------
2001 2000 2001 2000
------------- ------------- -------------- --------------
Revenues
Net Sales $ 60,511,125 $ 64,355,857 $ 200,302,991 $ 201,528,826
Royalty Income 6,402,886 6,275,228 19,325,950 19,115,446
------------- ------------- -------------- --------------
Total Revenues 66,914,011 70,631,085 219,628,941 220,644,272
Cost of Sales 47,372,009 51,509,922 153,264,855 155,146,314
------------- ------------- -------------- --------------
Gross Profit 19,542,002 19,121,163 66,364,086 65,497,958
Operating Expenses
Selling, General and Administrative Expenses 13,518,700 13,082,515 41,924,360 39,824,463
Depreciation and Amortization 1,686,912 1,575,377 4,926,577 4,601,051
------------- ------------- -------------- --------------
Total Operating Expenses 15,205,612 14,657,892 46,850,937 44,425,514
------------- ------------- -------------- --------------
Operating Income 4,336,390 4,463,271 19,513,149 21,072,444
Interest Expense 2,850,189 3,893,232 10,587,043 11,814,680
------------- ------------- -------------- --------------
Income Before Share of Income from
Unconsolidated Subsidiary and Income Taxes 1,486,201 570,039 8,926,106 9,257,764
Share of Income from Unconsolidated
Subsidiary - net 60,950 - 85,485 -
Income Taxes 577,476 218,689 3,357,409 3,498,680
------------- ------------- -------------- --------------
Net Income $ 969,675 $ 351,350 $ 5,654,182 $ 5,759,084
============= ============= ============== ==============
Net Income per Share
Basic $ 0.15 $ 0.05 $ 0.87 $ 0.85
============= ============= ============== ==============
Diluted $ 0.15 $ 0.05 $ 0.87 $ 0.85
============= ============= ============== ==============
Weighted Average Number of Shares Outstanding
Basic 6,572,398 6,739,374 6,516,256 6,737,878
Diluted 6,592,860 6,772,743 6,534,655 6,805,559
See Notes to Consolidated Financial Statements.
2
PERRY ELLIS INTERNATIONAL
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED OCTOBER 31,
------------------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,654,182 $ 5,759,084
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,569,237 4,205,800
Amortization of bond discount 123,000 123,000
Amortization of debt issue cost 462,011 452,214
Gain on sale of trademark - (33,176)
Other (58,453) -
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net 2,588,824 (9,937,919)
Inventories 9,052,418 693,443
Prepaid income taxes 136,718 1,856,815
Other current assets (322,568) (422,365)
Other assets (1,063,024) (15,762)
Accounts payable and accrued expenses (1,984,818) (2,573,917)
Income taxes payable 2,221,819 832,693
Accrued interest payable (3,161,433) (3,235,200)
Other current liabilities 236,620 (1,089,172)
------------- -------------
Net cash provided by (used in) operating activities: 18,454,533 (3,384,462)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,930,689) (2,016,432)
Payment on purchase of intangible assets (119,079) (169,672)
Proceeds from sale of trademark - 750,000
Payment for acquired businesses - (1,370,170)
------------- -------------
Net cash used in investing activities: (2,049,768) (2,806,274)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in borrowings under (14,843,898) 18,298,940
credit facilities
Net payments from long-term debt - (11,250,000)
Purchase of treasury stock (1,787,130) (958,369)
Proceeds from exercise of stock options 6,875 57,501
------------- -------------
Net cash (used in) provided by financing activities: (16,624,153) 6,148,072
------------- -------------
NET DECREASE IN CASH (219,388) (42,664)
CASH AT BEGINNING OF YEAR 344,741 225,631
------------- -------------
CASH AT END OF PERIOD $ 125,353 $ 182,967
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 14,028,640 $ 15,049,880
============= =============
Income taxes $ 1,608,192 $ 720,000
============= =============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Value of Mark-to-Market interest rate swap/option $ 465,429 $ -
============= =============
See Notes Consolidated Financial Statements.
3
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
Item 1. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 ("GAAP") for interim financial information and in accordance with
the requirements of 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, 2001.
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 in 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 or market on a first-in,
first-out basis and consist principally of finished goods.
3. LETTER OF CREDIT FACILITIES
Borrowings and availability under letter of credit facilities consist of
the following as of:
October 31, January 31,
2001 2001
-------------- --------------
Total letter of credit facilities $ 52,000,000 $ 52,000,000
Outstanding letters of credit (27,923,927) (27,543,633)
-------------- --------------
Total available $ 24,456,367 $ 24,076,073
============== ==============
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 $2.2 million and $2.3 million for the three months ended October 31, 2001
and October 31, 2000, respectively and $6.1 million and $6.4 million for the
nine months ended October 31, 2001 and October 31, 2000, respectively.
4
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
useful lives of property and equipment consists of the following:
Avg. Useful
Asset Class Lives in Years
--------------------------------- ------------------------
Furniture, fixtures and equipment 7
Vehicles 7
Leasehold Improvements 11
6. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," our 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 Licensing segment
derives its revenues from royalties associated with the licensing of its brand
names to third parties, principally Perry Ellis(R), John Henry(R), Manhattan(R)
and Munsingwear(R). The Product segment derives its revenues from the design,
import and distribution of apparel to department stores and other retail
outlets, principally throughout the United States. 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.
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
--------------------------------------- ----------------------------------------
2001 2000 2001 2000
---------------- ---------------- ----------------- -----------------
Revenues:
Product $ 60,511,125 $ 64,355,857 $ 200,302,991 $ 201,528,826
Licensing 6,402,886 6,275,228 19,325,950 19,115,446
---------------- ---------------- ----------------- -----------------
Total Revenues $ 66,914,011 $ 70,631,085 $ 219,628,941 $ 220,644,272
================ ================ ================= =================
Operating Income
Product $ 494,839 $ 367,699 $ 8,268,228 $ 8,301,484
Licensing 3,841,551 4,095,572 11,244,921 12,770,960
---------------- ---------------- ----------------- -----------------
Total Operating Income $ 4,336,390 $ 4,463,271 $ 19,513,149 $ 21,072,444
================ ================ ================= =================
7. TRADEMARK PURCHASES
During the year ended January 31, 2001, Perry Ellis purchased intellectual
property for approximately $3.05 million which included the following
trademarks: Pro-Player(R), Artex(R), Fun Gear(R), Salem Sportswear(R), and Mondo
di Marco(R).
5
8. SHARE REPURCHASE
On July 11, 2000 the Board of Directors of Perry Ellis approved a share
repurchase program in which up to 500,000 shares of common stock may be
purchased from time to time during the following 12 months. On July 11, 2001,
the Board of Directors extended the current share repurchase program for an
additional year, and on September 25, 2001 increased the number of shares
authorized for repurchase to 750,000 shares. The shares may be purchased in the
open market or in privately negotiated transactions.
For the nine months ended October 31, 2001, the Company had repurchased
247,300 additional shares at an average price of $7.23 per share. On March 2,
2001 and October 29, 2001, the Company retired 160,000 and 244,600 shares held
in the treasury, respectively.
9. RECENT ACCOUNTING PRONOUNCEMENT
In April 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force reached a consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products." This issue addresses the recognition, measurement and income
statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus is expected to only impact revenue and expense classifications
and not change reported income. In accordance with the consensus reached, the
Company will adopt the required accounting beginning with the fiscal year ending
January 31, 2003.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting treatment as it applies to goodwill and
other identifiable intangible assets with indefinite useful lives from an
amortization method to an impairment-only approach. Under SFAS No. 142, proper
accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in the case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date of this statement
is for fiscal years beginning after December 15, 2001. The Company intends to
adopt SFAS No. 142 for its fiscal year beginning February 1, 2002. The impact of
this pronouncement on the Company's financial position and results of operations
is currently being evaluated.
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001 and eliminates the pooling-of-interests method. SFAS No. 141 also
addresses the recognition and measurement of goodwill and other intangibles
assets acquired in a business combination.
On October 3, 2001, the (FASB) issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121
6
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of," it retains many of the fundamental provisions of that Statement.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations---Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
The effective date of this statement is for fiscal years beginning after
December 15, 2001. SFAS No. 144 is not expected to have a significant effect on
the financial position or the results of operation of the Company.
10. DERIVATIVES FINANCIAL INSTRUMENTS
The Company adopted FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 138, effective February
1, 2001. SFAS 133 requires that all derivative financial instruments such as
interest rate swap contracts and foreign exchange contracts, be recognized in
the financial statements and measured at fair value regardless of the purpose or
intent for holding them. Changes in the fair value of derivative financial
instruments are either recognized in income or shareholders' equity (as a
component of comprehensive income), depending on whether the derivative is being
used to hedge changes in fair value or cash flows. The adoption of SFAS 133 did
not have a material effect on the Company financial statements
The Company has entered into derivative financial instruments in order to
manage the overall borrowing costs associated with its senior subordinate notes.
At October 31, 2001, the company has an interest rate swap agreement with a
notional amount of $40.0 million dollars maturing on April 1, 2006. The swap is
a fair value hedge as it has been designated against the senior subordinate
notes carrying a fixed rate of interest and converts such notes to variable rate
debt. The hedge qualifies for short-cut accounting and accordingly, the interest
rate swap contracts are reflected at fair value in the company's consolidated
balance sheet and the related portion of fixed-rate debt being hedged adjusted
for an offsetting amount with no effect on the statement of income.
At October 31, 2001, the Company had an interest rate cap maturing on
April 1, 2006 and a basis swap maturing on April 3, 2003, both with a notional
amount of $40.0 million dollars. The interest rate cap effectively hedges
against increases in the variable rate of interest paid on the interest rate
swap and the basis swap decreased the spread on the interest rate swap for 18
months. Neither of these derivatives qualified for hedge accounting and
accordingly, are reflected at fair value in the company's consolidated balance
sheet with the offset being recognized in income for the current period.
Interest expense for the nine months ended October 31, 2001 has been reduced by
approximately $0.5 million as a result of the recognition of these derivatives.
7
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company cautions readers that certain important factors may affect
the Company's actual results and could cause such results to differ materially
from any forward-looking statements which may be deemed to have been made in
this report or which are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in this report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "would," "estimate," or "continue"
or the negative other variations thereof or comparable terminology are intended
to identify forward-looking statements. Factors which may affect the Company's
results include, but are not limited to, risk related to fashion trends; the
retail industry; reliance on key customers; contract manufacturing; foreign
sourcing; import and export restrictions; competition; seasonality; rapid
expansion of business, general economic conditions; dependence on key personnel
and other factors discussed herein and in the Company's other filings with the
Securities and Exchange Commission.
Results of Operations
Three and nine months ended October 31, 2001 as compared to three and nine
months ended October 31, 2000.
Total revenues. Total revenues consist of net sales and royalty income.
Total revenues for the three months ended October 31, 2001 were $66.9 million, a
decrease of 4.8% from $70.3 million for the same period last year. For the nine
months ended October 31, 2001, total revenues were $219.6 million, a 0.5%
decrease from $220.6 million for the same period last year. The decrease for the
three months period is primarily the result of a decrease in product sales as
described below and to a slight increase in licensing income. For the nine
months period, revenues in both product sales and licensing were comparable to
revenues for the same period last year.
Net sales. Net sales for the three months ended October 31, 2001 were
$60.5 million compared to $64.4 million during the same period a year ago. The
decrease in net sales for the three months ended October 31, 2001 is attributed
to the decline of private label net sales of 9.7% and the decline of branded
label net sales of 3.5% compared to the same period last year. Net sales for the
nine month period was comparable to net sales for the same period last year.
Private label sales increased 3.8% while branded label net sales decreased by
3.0% compared to the same period last year. The Company had a single branded
product that exceeded 10.0% of its total consolidated net sales for the nine
months ended October 31, 2001 and 2000, representing 13.9% and 13.8%,
respectively of net sales.
Royalty income. Royalty income increased slightly to $6.4 million for
the three months ended October 31, 2001 compared to $6.3 million in the
comparable period last year. Royalty income for the nine months period ended
October 31, 2001 remained relatively unchanged at $19.3 million compared to
$19.1 million for the year ago period.
Cost of sales. Cost of sales for the three months ended October 31,
2001 decreased $4.1 million or 8.0% to $47.4 million from $51.5 million in the
comparable prior period. For the nine
8
months period ended October 31, 2001, cost of sales decreased 1.2% to $153.3
million from $155.1 million in the comparable period a year ago. As a percentage
of net sales, cost of sales decreased to 78.3% from 80.0% and to 76.5% from
77.0% for the three and nine months period ended October 31, 2001, respectively,
compared to the prior year periods. The reduction for both the three and nine
months ended periods was the result of a slight change between private label
sales and branded label sales.
Gross Profit. For the three months ended October 31, 2001, gross profit
increased 2.1% to $19.5 million compared to $19.1 million for the comparable
period last year. For the three months ended October 31, 2001 the private label
gross profit decreased by 20.0% compared to the same period last year, while
branded products gross profit increased by 18.8% compared to the same period
last year. For the nine months ended October 31, 2001, gross profit increased
1.4% to $66.4 million from $65.5 million for the period ended October 31, 2000.
The private label gross profit decreased by 6.5%, while branded product gross
profit increased by 5.9% compared to the same period last year.
Selling, general and administrative expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, increased $0.4
million or 3.3%, and $2.1 million or 5.3%, respectively, for the three and nine
months periods ended October 31, 2001, to $13.5 million and $41.9 million from
$13.1 million and $39.8 million in the comparable period last year. As a
percentage of total revenue, selling, general and administrative expenses were
20.2% and 19.1% for the three and nine months ended October 31, 2001,
respectively, compared to 18.5% and 18.0% in the comparable period last year.
The increase in selling, general and administrative costs for the nine months
ended October 31, 2001 is primarily attributable to expenses incurred by our
European subsidiary, newly formed in the first quarter this year, of $1.6
million.
Depreciation and amortization. Depreciation and amortization for the three
and nine month periods ended October 31, 2001 increased to $1.7 million and $4.9
million, respectively, from $1.6 million and $4.6 million in the comparable 2000
period. The small increase primarily reflects an increase in amortization due to
the purchase of the Pro-Player and Mondo di Marco trademarks during the fiscal
year ended January 31, 2001.
Interest expense. Interest expense decreased $1.0 million and $1.2 million
for the three and nine months periods ended October 31, 2001 to $2.9 million and
$10.6 million, respectively, from $3.9 million and $11.8 million in the
comparable 2000 period. The decrease for both the three and nine month periods
is primarily attributable to the decrease in borrowings under the senior credit
agreement, lower interest rates and the recognition of $0.5 million in income
derived from the cap agreement entered into by the Company during the third
quarter of fiscal year ended January 31, 2001.
Income taxes. For the three and nine month periods ended October 31, 2001,
the Company's effective tax rate was 38.9% and 37.6%, respectively, compared to
38.4% and 37.8% for the comparable period last year.
Net income. Net income for the three months ended October 31, 2001
increased to $1.0 million from $0.4 million for the comparable period last year.
For the nine months ended October 31, 2001 net income decreased slightly to $5.7
million from $5.8 million in the comparable period last year. For the three
months ended October 31, 2001 as a percentage of
9
total revenue, net income was 1.5% from 0.6% for the comparable period last
year. For the nine months ended October 31, 2001 and 2000 net income was 2.6% of
total revenues.
Liquidity and Capital Resources
The Company relies primarily upon cash flow from operations and borrowings
under its senior credit facility to finance operations and expansion. Cash
provided by operating activities was $18.5 million in the nine months ended
October 31, 2001, compared to cash used in operating activities of $3.4 million
in the nine months ended October 31, 2000. The increase in the level of cash
provided by operating activities is primarily attributable to cash collections
on accounts receivable and to more effective management of inventories.
Net cash used in investing activities was $2.0 million for the nine months
ended October 31, 2001, which primarily reflects purchases of computer equipment
and related software enhancement costs and other property and equipment.
Net cash used in financing activities for the nine months ended October 31,
2001 totaled $16.6 million, which was primarily the result of repayments of
borrowings under the Company's senior credit facility of $14.8 million and the
purchase of treasury stock of $1.8 million.
The Company has a senior credit facility consisting of a revolving credit
facility allowing for aggregate borrowings of $75.0 million. Borrowings are
limited under the terms of a borrowing base calculation that restricts the
outstanding balance to 85% of eligible of open trade receivables, 90% of
factored receivables plus 60% of eligible inventories. Interest on borrowings is
variable, based upon the Company's option of selecting a short term LIBOR rate
plus an additional amount based on the Company's debt coverage and other
financial ratios or the bank's prime rate. During the next fiscal quarter, the
Company's borrowing cost under the senior credit facility will be LIBOR plus
2.00%. The senior credit facility contains covenants which require the Company
to maintain certain financial and net worth ratios and restricts the payment of
dividends. The Company is currently in compliance with all debt covenants. The
facility is secured by substantially all the Company's assets.
The senior credit facility expires on October 1, 2002 and as such the
Company has classified its credit facility as current in the Consolidated
Balance Sheet as of October 31, 2001. The Company is currently in active
discussions to renew or replace its existing senior credit facility. Management
believes that these discussions will be sucessfully completed prior to the
October 1, 2002 expiration date.
The Company occupies its main administrative office, warehouse and
distribution facility under a synthetic operating lease for a 240,000 square
foot facility in Miami. The lease has a term of five years expiring in August
2002, minimum annual rental of approximately $1.3 million and requires a minimum
contingent rental payment at the termination of the lease of $12.3 million. The
minimum contingent rental payment is not required if, at the Company's option,
the lease is renewed after the initial five year term. The Company is presently
in discussions with the lessor and reviewing extension, renewal, and purchase
options available, and anticipates it will be able to successfully restructure
this lease prior to the August 2002 termination date.
10
Management believes that the combination of borrowing available under the
senior credit facility, existing working capital and funds anticipated to be
generated from operating activities and successful extension of its existing
senior credit facility will be sufficient to meet the Company's anticipated
operating and capital needs in the foreseeable future.
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 and
nine months ended October 31, 2001.
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 or foreign currency exchange rates. We manage this exposure
through regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. Our policy allows the use
of derivative financial instruments for identifiable market risk exposure,
including interest rate and foreign currency fluctuations. We do not enter into
derivative financial contracts for trading or other speculative purposes except
for as discussed below.
In August 2001 the Company entered into an interest rate swap, option and
interest rate cap agreements (the "August Swap Agreement"), for an aggregate
notional amount of $40.0 million in order to minimize its debt servicing costs
associated with its $100.0 million of 12.25% senior subordinated notes due April
1, 2006. The August Swap Agreement was subsequently modified through a basis
swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is entitled to receive semi-annual interest payments on October 1,
and April 1, at a fixed rate of 12.25% and is obligated to make semi-annual
interest payments on October 1, and April 1, at a floating rate based on the 6-
month LIBOR rate plus 715 basis points for the 18 months period October 1, 2001
through March 31, 2003 (per October Swap Agreement); and 3-month LIBOR rate plus
750 basis point for the period April 1, 2003 through April 1, 2006 (per the
August Swap Agreement). The Swap Agreement has optional call provisions with
trigger dates of April 1, 2003, April 1, 2004 and April 1, 2005, which contain
certain premium requirements in the event the call is exercised.
The fair value of the August 2001 swap and the option contract recorded on
the Company's Consolidated Balance Sheet was $0.7 million and ($0.2 million),
respectively, as of October 31, 2001. The interest rate cap and basis swap did
not qualify for hedge accounting treatment under the SFAS No. 133, resulting in
$0.5 million reduction of recorded interest expense on the Statement of
Operations for the third quarter ended October 31, 2001.
The Company does not currently have an exposure to foreign exchange risk
and accordingly, has not entered into any transactions to hedge against those
risks.
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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 - None
(b) Reports on Form 8-K - None
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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 14, 2001 By: /s/ Timothy B. Page
-----------------------------------------
Timothy B. Page, Chief Financial Officer
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