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 April 30, 2002
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 6,414,690
(as of June 14, 2002).
PERRY ELLIS INTERNATIONAL, INC.
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1:
Consolidated Balance Sheets
as of April 30, 2002 (Unaudited) and January 31, 2002 1
Consolidated Statements of Income (Unaudited)
for the three months ended April 30, 2002 and 2001 2
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended April 30, 2002 and 2001 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2:
Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
PART II: OTHER INFORMATION 24
Signature 25
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
April 30, 2002 January 31, 2002
---------------- ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,021,238 $ 1,303,978
Accounts receivable, net 68,317,610 50,370,245
Inventories 36,785,031 45,409,047
Deferred income taxes 2,384,316 2,384,316
Other current assets 1,687,054 1,886,163
------------- ------------
Total current assets 114,195,249 101,353,749
Property and equipment, net 11,720,306 10,897,334
Intangible assets, net 142,291,609 117,938,894
Other 6,538,532 3,870,703
------------- ------------
TOTAL $ 274,745,696 $234,060,680
============= ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,433,825 $ 5,966,369
Accrued expenses 5,963,351 3,259,602
Income taxes payable 1,897,076 1,381,551
Accrued interest payable 1,253,910 3,808,997
Current portion - senior credit agreement - 21,756,094
Unearned Revenues 1,911,320 1,838,929
Other current liabilities 2,659,058 2,410,583
------------- ------------
Total current liabilities 19,118,540 40,422,125
Senior subordinated notes payable, net 99,161,293 99,071,515
Deferred income tax 6,749,832 6,749,832
Senior secured notes payable, net 56,762,745 -
------------- ------------
Total long-term liabilities 162,673,870 105,821,347
------------- ------------
Total liabilities 181,792,410 146,243,472
------------- ------------
Minority Interest 654,735 613,671
------------- ------------
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;
6,322,974 shares issued and outstanding as of April 30, 2002 and
6,337,440 shares issued and 6,286,740 shares outstanding as of
January 31, 2002 63,229 63,374
Additional paid-in-capital 26,192,003 26,286,040
Retained earnings 66,152,444 61,386,243
Accumulated other comprehensive income (109,125) (121,753)
------------- ------------
Total 92,298,551 87,613,904
Common stock in treasury at cost; 50,700 shares as of January 31, 2002 - (410,367)
------------- ------------
Total stockholders' equity 92,298,551 87,203,537
------------- ------------
TOTAL $ 274,745,696 $234,060,680
============= ============
See Notes to Consolidated Financial Statements.
1
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended April 30,
------------------------------------------
2002 2001
----------- -----------
Revenues
Net sales $78,619,092 $80,462,674
Royalty income 6,076,793 6,065,629
----------- -----------
Total revenues 84,695,885 86,528,303
Cost of sales 57,932,099 60,781,609
----------- -----------
Gross profit 26,763,786 25,746,694
Operating expenses
Selling, general and administrative expenses 14,510,386 15,007,493
Depreciation and amortization 659,738 1,598,338
----------- -----------
Total operating expenses 15,170,124 16,605,831
----------- -----------
Operating income 11,593,662 9,140,863
Interest expense 3,866,731 4,091,767
----------- -----------
Income before minority interest and income tax
provision 7,726,931 5,049,096
Minority interest 32,020 -
Share of income from unconsolidated subsidiary, net - (32,049)
Income taxes 2,928,711 1,883,545
----------- -----------
Net income $ 4,766,200 $ 3,197,600
=========== ===========
Net income per share
Basic $ 0.75 $ 0.49
=========== ===========
Diluted $ 0.75 $ 0.49
=========== ===========
Weighted average number of shares outstanding
Basic 6,325,674 6,576,430
Diluted 6,391,139 6,590,839
See Notes to Consolidated Financial Statements.
2
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended April 30,
------------------------------------------
2002 2001
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,766,200 $ 3,197,600
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 502,162 1,473,140
Amortization of debt issue cost 189,169 157,337
Amortization of bond discount 74,589 41,000
Minority Interest 32,020 -
Other 12,628 (33,959)
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (17,947,365) (6,655,503)
Inventories 10,815,158 3,293,816
Other current assets and prepaid income taxes 186,734 621,937
Other assets (1,673,546) (830,379)
Accounts payable and accrued expenses 213,988 (836,325)
Income taxes payable 515,525 1,381,032
Accrued interest payable (2,555,087) (2,970,245)
Other current liabilities and unearned revenues 320,866 (528,637)
----------------- ----------------
Net cash used in operating activities (4,546,959) (1,689,186)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (831,473) (189,337)
Payment on purchase of intangible assets (12,218) (41,469)
Payment for acquired business (25,050,474) -
----------------- ----------------
Net cash used in investing activities: (25,894,165) (230,806)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from senior credit facility (21,756,094) 2,185,892
Net proceeds from senior secured notes 55,589,250 -
Purchase of treasury stock - (149,260)
Proceeds from exercise of stock options 316,184 -
----------------- ----------------
Net cash provided by financing activities: 34,149,340 2,036,632
----------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 9,044 -
----------------- ----------------
NET INCREASE IN CASH 3,717,260 116,640
CASH AT BEGINNING OF YEAR 1,303,978 344,741
----------------- ----------------
CASH AT END OF PERIOD $ 5,021,238 $ 461,381
================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 6,634,281 $ 7,062,012
================= ================
Income taxes $ 2,422,500 $ 652,872
================= ================
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Change in fair value of mark-to-market interest rate swap/option $ 1,188,684 $ -
================= ================
See Notes to 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, 2002.
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 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:
April 30, January 31,
2002 2002
--------------- --------------
Total letter of credit facilities $ 64,400,000 $ 44,362,500
Outstanding letters of credit (21,322,191) (11,035,880)
--------------- --------------
Total available $ 43,077,809 $ 33,326,620
=============== ==============
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 $1.4 million and $2.2 million for the three months ended April 30, 2002 and
April 30, 2001, 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 Product segment derives its revenues
from the design, importation and distribution of apparel and swimwear to various
retail channels, which include regional, national and international mass
merchants, chain stores, department stores and other specialty retail stores,
principally throughout the United States, Puerto Rico and Canada. 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). 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 APRIL 30,
--------------------------------------
2002 2001
--------------------------------------
Revenues:
Product $ 78,619,092 $ 80,462,674
Licensing 6,076,793 6,065,629
--------------- ---------------
Total Revenues $ 84,695,885 $ 86,528,303
=============== ===============
Operating Income
Product $ 6,126,099 $ 5,886,615
Licensing 5,467,563 3,254,248
--------------- ---------------
Total Operating Income $ 11,593,662 $ 9,140,863
=============== ===============
5
7. ACQUISITION OF JANTZEN
On March 22, 2002, the Company acquired the Jantzen swimwear business from
subsidiaries of VF Corporation for approximately $24.0 million, excluding fees
related to the transaction. The acquisition was financed with a portion of the
proceeds from a $57.0 million offering of 9 1/2% senior secured notes, which
closed simultaneously with the acquisition.
The Jantzen assets acquired consist primarily of the Jantzen trademarks and
tradenames, license agreements, certain equipment, other items of personal
property, showroom leases and inventory relating to the 2003 season, which
commences on July 1, 2002. As part of this acquisition, the Company also
acquired the licenses for the Tommy Hilfiger(R) brand for women's swimwear and
the Nike(R) brand for women's and girl's swimwear, men's and boy's racing
swimsuits, swim equipment, swimwear accessories and apparel.
In connection with the Jantzen acquisition, the Company entered into a
lease agreement with VF Corporation to occupy Jantzen's Portland, Oregon
administrative facility for an initial six-month period. In addition, the
Company entered into a lease agreement to occupy a portion of Jantzen's Seneca,
South Carolina distribution center facility for a one-year period. The Company
was also granted a right of first refusal to purchase the Seneca distribution
center facility, which was exercised on May 20, 2002 at a price of $2.5 million.
The Company anticipates closing on this purchase in approximately 90 days.
The Jantzen assets acquired and liabilities assumed have been recorded at
their estimated fair values. A final determination of the required purchase
accounting adjustments and of the fair value of the assets and liabilities of
Jantzen acquired or assumed has not yet been made. The following is a summary of
the purchase price and management's estimate of the purchase price allocation.
(Dollars in Thousands)
Purchase price determination:
Net purchase price $ 23,978
Liabilities assumed and expenses incurred in
connection with the acquisition 3,030
----------
Gross purchase price $ 27,008
----------
Purchase price allocation:
Inventories $ 2,191
Machinery and equipment 465
Trademarks 24,352
----------
Gross purchase price $ 27,008
Less: liabilities assumed (1,957)
----------
Cash paid for acquisition and
acquisition cost $ 25,051
----------
6
8. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below, gives effect to the
Jantzen acquisition, the offering of the senior secured notes and repayment
of the senior credit facility, in each case as if they occurred as of the
beginning of the quarters ended April 30, 2002 and 2001. The information
presented below is for illustrative purposes only and is not indicative of
results, which would have been achieved, or results, which may be achieved
in the future.
THREE MONTHS ENDED APRIL 30,
------------------------------
2002 2001
------------------------------
(Dollars in Thousands)
Total Revenues $ 86,725 $ 96,984
----------- ------------
Net Income $ 5,015 $ 4,250
----------- ------------
Net Income per Share
Basic $ 0.79 $ 0.65
----------- ------------
Diluted $ 0.78 $ 0.64
----------- ------------
9. 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.
On March 26, 2002, the Company retired 51,500 shares, which totaled all
shares held in the treasury.
10. RECENT ACCOUNTING PRONOUNCEMENT
In April 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on Issue No. 01-09, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)." This issue addresses the recognition, measurement and
income statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus is expected to only impact revenue and expense classifications by
immaterial amounts and have no effect on reported income.
Beginning in the first quarter of fiscal 2003, the Company recognized the
impact of EITF Issue No. 01-09 on sales incentives in its financial statements
and restated previously issued
7
financial statements to reflect the provisions of these guidelines. The net
impact from the adoption of these rules did not impact operating income, net
income or the financial position of the Company, but resulted in the
reclassification of certain selling, general and administrative expenses to net
sales.
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. SFAS No. 141 is not expected to have
a significant effect on the financial position or results of operations of the
Company upon adoption.
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. 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 has adopted SFAS No. 142 for its fiscal year beginning
February 1, 2002.
In accordance with SFAS No. 142, the Company obtained a valuation of all
its trademarks from a third party independent valuation firm. Based on this
valuation, no significant impairment was identified. Under SFAS No. 142,
goodwill and identifiable intangible assets with an indefinite useful life are
no longer subject to amortization. SFAS No. 142 does not permit the restatement
of previously issued financial statements, but does require the disclosure of
prior results adjusted to exclude amortization expense related to goodwill and
intangible assets, which are no longer being amortized. Basic and diluted
earnings per share for the first three months of fiscal 2002, adjusted to
exclude amounts no longer being amortized under the provisions of SFAS No. 142,
were $0.58 and $0.59, respectively.
THREE MONTHS ENDED APRIL 30,
-------------------------------------------
2002 2001
-------------------------------------------
Net Income:
Reported net Income $ 4,766,200 $ 3,197,600
Intangible amortization 649,536
-------------------------------------------
Adjusted net income $ 4,766,200 $ 3,847,136
-------------------------------------------
Basic Earnings Per Share
Reported basic earnings per share $ 0.75 $ 0.49
Intangible amortization 0.10
-------------------------------------------
Adjusted basic earnings per share $ 0.75 $ 0.59
-------------------------------------------
Diluted Earnings Per Share
Reported diluted earnings per share $ 0.75 $ 0.48
Intangible amortization 0.10
-------------------------------------------
Adjusted diluted earnings per share $ 0.75 $ 0.58
-------------------------------------------
8
On October 3, 2001, the FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to 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.
11. 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 subordinated
notes. At April 30, 2002, 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 subordinated
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 April 30, 2002, the Company had an interest rate cap maturing on April
1, 2006 and a basis swap maturing on April 3, 2003, both with a notional amount
of $40.0 million 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 three months ended April 30, 2002 has been increased by approximately $0.3
million as a result of the recognition of these derivatives.
In conjunction with the March 2002 offering of $57.0 million of 9 1/2%
senior secured notes due March 15, 2009, the Company entered into interest rate
swap and option agreements (the "March Swap Agreement") for an aggregate
notional amount of $57.0 million in order to minimize the debt servicing costs
associated with the notes. The March Swap Agreement is scheduled to terminate on
March 15, 2009. Under the March Swap Agreement, the Company is entitled to
receive semi-annual interest payments on September 15 and March 15 at a fixed
rate of 9 1/2% and are obligated to make semi-annual interest payments on
September 15 and March 15 at a floating rate based on the three-month LIBOR rate
plus 369 basis points for the period from March 22, 2002 through March 15, 2009.
The March Swap Agreement has optional call provisions with trigger dates of
March 15, 2005, March 15, 2006 and March 15, 2007, which contain premium
requirements in the event the call is exercised.
The March Swap Agreement is a fair value hedge as it has been designated
against the senior secured 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.
9
12. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
The following are consolidating condensed financial statements, which
present, in separate columns: Perry Ellis International, Inc., the Guarantors on
a combined, or where appropriate, consolidated basis, and the Non-Guarantors on
a consolidated basis. Additional columns present eliminating adjustments and
consolidated totals as of April 30, 2002 and January 31, 2002, and for the three
months ended April 30, 2002 and 2001. The combined Guarantors are wholly owned
subsidiaries of Perry Ellis International, Inc., and have fully and
unconditionally guaranteed the senior secured notes on a joint and several
basis. 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.
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,821,412 $ 13,035 $1,186,791 $ 5,021,238
Accounts receivable, net 67,166,558 820,706 456,537 (126,191) 68,317,610
Intercompany Receivable - Guarantors 2,004,517 (2,004,517) -
Intercompany Receivable - Non Guarantors 594,291 (594,291)
Inventories 34,309,934 2,375,251 99,846 36,785,031
Deferred income taxes 2,384,316 2,384,316
Other current assets 1,580,945 98,680 7,429 1,687,054
---------------- ----------- ---------- ----------- ------------
Total current assets 111,861,973 3,307,672 1,750,603 (2,724,999) 114,195,249
Property and equipment, net 11,057,982 629,700 32,624 11,720,306
Intangible assets, net 117,949,912 24,341,697 142,291,609
Investment in subsidiaries (147,955) 147,955 -
Other 5,940,447 598,085 6,538,532
---------------- ----------- ---------- ----------- ------------
TOTAL $ 246,662,359 $28,877,154 $1,783,227 $(2,577,044) $274,745,696
================ =========== ========== =========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,271,590 $ 151,641 $ 136,785 $ (126,191) $ 5,433,825
Accrued expenses 3,239,113 2,527,013 197,225 5,963,351
Intercompany Payable - Parent 2,004,517 594,291 (2,598,808) -
Income taxes payable 2,260,833 (394,369) 30,612 1,897,076
Accrued interest payable 1,064,688 189,222 1,253,910
Unearned Revenues 1,911,320 1,911,320
Other current liabilities 2,533,641 4,664 120,753 2,659,058
---------------- ----------- ---------- ----------- ------------
Total current liabilities 16,281,185 4,482,688 1,079,666 (2,724,999) 19,118,540
Senior subordinated notes payable, net 99,161,293 99,161,293
Deferred income tax 6,749,832 6,749,832
Senior secured notes payable, net 32,179,377 24,583,368 56,762,745
---------------- ----------- ---------- ----------- ------------
Total long-term liabilities 138,090,502 24,583,368 - - 162,673,870
---------------- ----------- ---------- ----------- ------------
Total liabilities 154,371,687 29,066,056 1,079,666 (2,724,999) 181,792,410
---------------- ----------- ---------- ----------- ------------
Minority Interest 654,735 654,735
---------------- ----------- ---------- ----------- ------------
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; 6,322,974 shares issued and
outstanding as of April 30, 2002. 63,229 100 556,954 (557,054) 63,229
Additional paid-in-capital 26,192,003 26,192,003
Retained earnings 66,152,444 (189,002) (516,007) 705,009 66,152,444
Accumulated other comprehensive income (117,004) 7,879 (109,125)
---------------- ----------- ---------- ----------- ------------
Total 92,290,672 (188,902) 48,826 147,955 92,298,551
Common stock in treasury at cost
---------------- ----------- ---------- ----------- ------------
Total stockholders' equity 92,290,672 (188,902) 48,826 147,955 92,298,551
---------------- ----------- ---------- ----------- ------------
TOTAL $ 246,662,359 $28,877,154 $1,783,227 $(2,577,044) $274,745,696
================ =========== ========== =========== ============
10
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
--------------- ------------ ------------ -------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 115,441 $ 9,557 $ 1,178,980 $ 1,303,978
Accounts receivable, net 49,636,377 21,064 712,804 50,370,245
Intercompany Receivable - Guarantors 915,506 (915,506) -
Intercompany Receivable - Non Guarantors 698,854 (698,854)
Inventories 45,110,440 206,686 91,921 45,409,047
Deferred income taxes 2,384,316 2,384,316
Prepaid income taxes -
Other current assets 1,729,653 156,510 1,886,163
------------- --------- ----------- ------------ -------------
Total current assets 100,590,587 393,817 1,983,705 (1,614,360) 101,353,749
Property and equipment, net 10,862,844 34,490 10,897,334
Intangible assets, net 117,938,894 - 117,938,894
Investment in subsidiaries 128,354 (128,354)
Other 3,866,993 3,710 3,870,703
------------- --------- ----------- ------------ -------------
TOTAL $ 233,387,672 $ 397,527 $ 2,018,195 $ (1,742,714) $ 234,060,680
============= ========= =========== ============ =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,760,265 $ 34,504 $ 171,599 $ 5,966,368
Accrued expenses 3,202,176 27,426 30,000 3,259,602
Intercompany Payable - Parent 915,506 698,854 (1,614,360) -
Income taxes payable 1,617,168 (395,722) 160,105 1,381,551
Accrued interest payable 3,808,997 3,808,997
Current portion - senior credit agreement 21,819,334 (63,240) 21,756,094
Unearned Revenues 1,838,929 1,838,929
Other current liabilities 2,315,918 3,704 90,961 2,410,583
------------- --------- ----------- ------------ -------------
Total current liabilities 40,362,787 585,418 1,088,279 (1,614,360) 40,422,124
Senior subordinated notes payable, net 99,071,515 99,071,515
Deferred income tax 6,749,832 6,749,832
Long term debt - senior credit agreement -
-
------------- --------- ----------- ------------ -------------
Total long-term liabilities 105,821,347 - - - 105,821,347
------------- --------- ----------- ------------ -------------
Total liabilities 146,184,134 585,418 1,088,279 (1,614,360) 146,243,471
------------- --------- ----------- ------------ -------------
Commitments and Contingencies (Note 20)
Minority Interest 613,671 613,671
------------- --------- ----------- ------------ -------------
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; 6,337,440 shares issued and 6,286,740
shares outstanding as of January 31, 2002 63,374 100 556,954 (557,054) 63,374
Additional paid-in-capital 26,286,040 26,286,040
Retained earnings 61,386,244 (187,991) (240,709) 428,700 61,386,244
Accumulated other comprehensive income (121,753) (121,753)
------------- --------- ----------- ------------ -------------
Total 87,613,905 (187,891) 316,245 (128,354) 87,613,905
Common stock in treasury at cost; 50,700 shares as
of January 31, 2002 (410,367) (410,367)
------------- --------- ----------- ------------ -------------
Total stockholders' equity 87,203,538 (187,891) 316,245 (128,354) 87,203,538
------------- --------- ----------- ------------ -------------
TOTAL $ 233,387,672 $ 397,527 $ 2,018,195 $ (1,742,714) $ 234,060,680
============= ========= =========== ============ =============
11
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- ---------------
Revenues
Net Sales $ 76,358,233 $ 1,613,179 $ 647,680 $ 78,619,092
Royalty Income 6,076,793 - - 6,076,793
------------- ----------- ----------- ------------- --------------
Total Revenues 82,435,026 1,613,179 647,680 84,695,885
Cost of Sales 56,376,420 989,908 565,771 57,932,099
------------- ----------- ----------- ------------- --------------
Gross Profit 26,058,606 623,271 81,909 26,763,786
Operating Expenses
Selling, General and Administrative Expenses 13,662,591 383,705 464,090 14,510,386
Depreciation and Amortization 623,286 34,586 1,866 659,738
------------- ----------- ----------- ------------- --------------
Total Operating Expenses 14,285,877 418,291 465,956 15,170,124
------------- ----------- ----------- ------------- --------------
Operating Income 11,772,729 204,980 (384,047) 11,593,662
Interest Expense 3,664,946 200,943 842 3,866,731
------------- ----------- ----------- ------------- --------------
Income Before Minority Interest and Income Tax
Provision 8,107,783 4,037 (384,889) 7,726,931
Minority Interest - - 32,020 32,020
Equity in earnings of subsidiaries, net 276,310 (276,310) -
Income Taxes 3,065,273 5,048 (141,610) 2,928,711
------------- ----------- ----------- ------------- --------------
Net Income $ 4,766,200 $ (1,011) $ (275,299) $ 276,310 $ 4,766,200
============= =========== =========== ============= ==============
12
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 2001
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- --------------
Revenues
Net Sales $ 74,415,254 $ (52,569) $ 6,099,989 $ 80,462,674
Royalty Income 6,065,629 - - 6,065,629
------------- ----------- ------------ ----------- -------------
Total Revenues 80,480,883 (52,569) 6,099,989 86,528,303
Cost of Sales 56,720,976 2,717 4,057,916 60,781,609
------------- ----------- ------------ ----------- -------------
Gross Profit 23,759,907 (55,286) 2,042,073 25,746,694
Operating Expenses
Selling, General and Administrative Expenses 12,997,944 80,480 1,929,069 15,007,493
Depreciation and Amortization 1,597,588 750 1,598,338
------------- ----------- ------------ ----------- -------------
Total Operating Expenses 14,595,532 81,230 1,929,069 16,605,831
------------- ----------- ------------ ----------- -------------
Operating Income 9,164,375 (136,516) 113,004 9,140,863
Interest Expense 4,081,449 4,065 6,253 4,091,767
------------- ----------- ------------ ----------- -------------
Income Before Minority Interest and Income Tax
Provision 5,082,926 (140,581) 106,751 5,049,096
Minority Interest -
Equity in earnings of subsidiaries, net 16,610 (32,049) (16,610) (32,049)
Income Taxes 1,901,936 (58,423) 40,032 1,883,545
------------- ----------- ------------ ----------- -------------
Net Income $ 3,197,600 $ (82,158) $ 98,768 $ (16,610) $ 3,197,600
============= =========== ============ =========== =============
13
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,766,200 $ (1,011) $ (275,299) $ 276,310 $ 4,766,200
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 495,064 5,232 1,866 502,162
Amortization of debt issue cost 172,191 16,978 189,169
Amortization of bond discount 57,611 16,978 74,589
Minority Interest - - 32,020 32,020
Equity in earnings of subsidiaries, net 276,310 (276,310) -
Other 4,749 - 7,879 12,628
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (18,514,629) 289,369 151,704 126,191 (17,947,365)
Inventories 10,800,506 22,577 (7,925) 10,815,158
Other current assets and prepaid income
taxes 136,333 57,830 (7,429) 186,734
Other assets (1,056,961) (616,585) - (1,673,546)
Accounts payable and accrued expenses (451,739) 659,506 132,412 (126,191) 213,988
Income taxes payable 643,665 1,353 (129,493) 515,525
Accrued interest payable (2,744,309) 189,222 - (2,555,087)
Other current liabilities and unearned
revenues 290,114 960 29,792 320,866
------------ ------------ ----------- ------------- --------------
Net cash provided by (used in)
operating activities (5,124,895) 642,409 (64,473) - (4,546,959)
------------ ------------ ----------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (666,773) (164,700) - (831,473)
Payment on purchase of intangible assets (22,071) 9,853 - (12,218)
Payment for acquired businesses, net of cash
acquired - (25,050,474) (25,050,474)
------------ ------------ ----------- ------------- --------------
Net cash used in investing
activities: (688,844) (25,205,321) - - (25,894,165)
------------ ------------ ----------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from senior credit
facility (21,819,334) - 63,240 (21,756,094)
Net proceeds from senior secured notes 31,022,860 24,566,390 55,589,250
Proceeds from exercise of stock options 316,184 - 316,184
------------ ------------ ----------- ------------- --------------
Net cash provided by
financing activities: 9,519,710 24,566,390 63,240 - 34,149,340
------------ ------------ ----------- ------------- --------------
Effect of exchange rate changes on cash
and cash equivalents 9,044 9,044
------------ ------------ ----------- ------------- --------------
NET INCREASE IN CASH 3,705,971 3,478 7,811 3,717,260
CASH AT BEGINNING OF YEAR 115,441 9,557 1,178,980 1,303,978
------------ ------------ ----------- ------------- --------------
CASH AT END OF YEAR $ 3,821,412 $ 13,035 $ 1,186,791 $ - $ 5,021,238
============ ============ =========== ============= ============
14
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2001
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,197,600 $ (82,158) $ 98,768 (16,610) $ 3,197,600
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,472,390 750 1,473,140
Provision for bad debts
Provision for deferred taxes
Amortization of debt issue cost 157,337 157,337
Amortization of bond discount 41,000 41,000
Minority Interest - -
Equity in earnings of subsidiaries, net (16,610) 16,610 -
Other (33,959) (33,959)
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (5,145,321) (284,610) (1,225,572) (6,655,503)
Inventories 3,448,856 65,204 (220,244) 3,293,816
Other current assets and prepaid income
taxes 91,144 530,793 621,937
Other assets (804,587) 6,300 (32,092) (830,379)
Accounts payable and accrued expenses (2,261,483) 38,064 1,387,094 (836,325)
Income taxes payable 1,612,442 (499,398) 267,988 1,381,032
Accrued interest payable (2,970,245) - (2,970,245)
Other current liabilities and unearned
revenues (528,637) - (528,637)
------------ ----------- ------------ ------------- -------------
Net cash provided by (used in)
operating activities (1,740,073) (225,055) 275,942 - (1,689,186)
------------ ----------- ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (189,337) (189,337)
Payment on purchase of intangible assets (41,469) (41,469)
Proceeds from sale of trademark -
Payment for acquired businesses, net of cash acquired - -
------------ ----------- ------------ ------------- -------------
Net cash used in investing activities: (230,806) - - (230,806)
------------ ----------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) in borrowings under
term loan -
Net (payments) proceeds from senior credit facility 2,185,892 2,185,892
Net proceeds from senior subordinated notes - -
Debt issuance costs - -
Tax benefit for exercise of non-qualified stock
options -
Purchase of treasury stock (149,260) (149,260)
Proceeds from exercise of stock options - -
------------ ----------- ------------ ------------- -------------
Net cash provided by financing
activities: 2,036,632 - - 2,036,632
------------ ----------- ------------ ------------- -------------
NET (DECREASE) INCREASE IN CASH 65,753 (225,055) 275,942 - 116,640
CASH AT BEGINNING OF YEAR 65,843 278,898 - 344,741
------------ ----------- ------------ ------------- -------------
CASH AT END OF YEAR $ 131,596 $ 53,843 $ 275,942 $ - $ 461,381
============ =========== ============ ============= =============
15
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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," "estimate," "expect," "project," "believe," "intend," "envision,"
and similar words or phrases. These forward-looking statements involve known and
unknown risks, 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.
Some of the factors that would affect our financial performance, cause
actual results to differ from our estimates, or underlie such forward-looking
statements, are set forth in various places in this report. These factors
include:
. general economic conditions;
. the effectiveness of our planned advertising, marketing and
promotional campaigns;
. our ability to carry out growth strategies;
. our ability to contain costs;
. our ability to integrate acquired businesses, trademarks, tradenames
and licenses into our existing organization and operations;
. our future capital needs and the ability to obtain financing;
. our ability to predict consumer preferences;
. our ability to compete;
. the termination or non-renewal of any material license agreements to
which we are a party;
. anticipated trends and conditions in our industry, including future
consolidation;
. changes in fashion trends and customer acceptance of both new designs
and newly introduced products;
. the level of consumer spending for apparel and other merchandise;
. competition among department and specialty stores;
. possible disruption in commercial activities due to terrorist
activity and armed conflict; and
. other factors set forth in this report and in our filings with the
Securities and Exchange Commission.
16
Critical Accounting Policies
Financial Reporting Release No. 60 requires all registrants to outline
critical accounting policies or methods used in the preparation of its financial
statements. Included in the footnotes to the consolidated financial statements
in the Company's Annual Report on Form 10-K for the year ended January 31, 2002
is a summary of all significant accounting policies used in the preparation of
the Company's consolidated financial statements. The Company follows the
accounting methods and practices as required by the United States Generally
Accepted Accounting Principles ("U.S. GAAP"). In particular, the Company uses
judgment in areas such as determining the allowance for recoverability of
customer accounts receivable, provision for customer sales returns and
allowances, inventory valuations, and provisions for assets impairments on long-
lived assets.
Results of Operations
The following is a discussion of the results of operations for the first
quarter of the fiscal year ending January 31, 2003 ("fiscal 2003") compared with
the first quarter of the fiscal year ended January 31, 2002 ("fiscal 2002"), and
a discussion of the changes in financial condition during the three months of
fiscal 2003.
Items Affecting Comparability of the First Quarter Fiscal 2003 with First
Quarter Fiscal 2002
Adoption of New Accounting Standards. As is more completely disclosed in
Note 11 to the Consolidated Financial Statements, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets," as of February 1, 2002. Under the
provisions of SFAS No. 142, goodwill is no longer amortized after the date of
adoption. Intangible assets as of the date of adoption are evaluated to
determine if they have finite or indefinite useful lives. Intangible assets
determined to have finite lives are amortized over those lives and intangible
assets that have indefinite useful lives are not amortized. SFAS No. 142 does
not permit the restatement of previously issued financial statements, but does
require the disclosure of prior years results adjusted to exclude amortization
expense related to goodwill and intangible assets which are no longer being
amortized. Basic and diluted earnings per share for the first quarter of fiscal
2002, adjusted to exclude amounts no longer being amortized under the provisions
of SFAS No. 142, were $0.58 and $0.59, respectively.
Adoption of Accounting Standard for the Recording and Reporting of Sales
Incentives. As is more completely disclosed in Note 11 to the Consolidated
Financial Statements, the Company adopted Emerging Issues Task Force ("EITF")
Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products," as of February 1, 2002. The
provisions of EITF No. 01-09, relates to the measurement, recognition and
presentation of certain sales incentives offered to the company's customers.
These new accounting rules apply to certain sales incentives such as discounts,
coupons, rebates and certain payments made to retailers for shelf space or
reimbursement of advertising costs. These accounting rules generally require
these incentives to be reflected as a reduction in revenue on the income
statement rather than selling, general and administrative expense. Upon
adoption of these
17
rules at the beginning of fiscal 2003, all prior financial statement results
have been restated to reflect the impact of the change. Previously reported net
sales for the first quarter of fiscal 2002 were reduced by $403,000 to conform
to the new accounting standard. The adoption of this new accounting standard had
no impact on the Company's income before minority interest and income taxes, net
income or financial position.
Consolidated Results - First Quarter of Fiscal 2003 Compared with First
Quarter of Fiscal 2002
Total revenues. Total revenues consist of net sales and royalty income.
Total revenues for the three months ended April 30, 2002 were $84.7 million, a
decrease of 2.1% from $86.5 million for the fiscal 2002 quarter. The decrease
was due mainly to a reduction in net sales as discussed below. Royalty income
for the fiscal quarter 2003 was unchanged from the fiscal 2002 quarter.
Net sales. Net sales decreased $1.9 million or 2.4% to $78.6 million for
the fiscal 2003 quarter from $80.5 million in the fiscal 2002 quarter. Fiscal
2002 quarter net sales included $6.1 million from sales of Perry Ellis America
shoes by the Company's European subsidiary. In periods both prior and
subsequent to such quarter this product was sold by a third party licensee and
accordingly, the Company only recognized royalty income from those sales during
those periods. The decrease in net sales in Europe in the fiscal 2003 quarter
was offset in part by an increase in net sales in the United States and Canada.
Royalty income. Royalty income was unchanged at $6.1 million for the three
months ended April 30, 2002 and 2001.
Cost of sales. Cost of sales for the fiscal 2003 quarter of $57.9 million
was $2.9 million, or 4.8% lower than $60.8 million in the fiscal 2002 quarter
due mainly to the decrease in net sales as described above. As a percentage of
net sales, cost of sales decreased to 73.7% in the fiscal 2003 quarter from
75.5% for three months period ended April 30, 2002, due primarily to a change in
our sales mix from private to branded label products.
Gross Profit. For the three months ended April 30, 2002, gross profit
increased 4.3% to $26.8 million compared to $25.7 million for the fiscal 2002
quarter. For the fiscal 2003 quarter, private label gross profit increased
slightly by 0.6%, while branded product gross profit increased by 4.6% from the
fiscal 2002 quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses, excluding depreciation and amortization, decreased $0.5
million or 3.3%, to $14.5 million in the fiscal 2003 quarter from $15.0 million
in the fiscal 2002 quarter. As a percentage of total revenue, selling, general
and administrative expenses were 17.1% in the fiscal 2003 quarter compared to
17.3% in the fiscal 2002 quarter. The decrease in selling, general and
administrative costs for the fiscal 2003 quarter is primarily attributable to
the elimination of expenses of our European subsidiary of $1.2 million, offset
by expenses incurred by initial Jantzen operations of $0.3 million, and expenses
of the Company's Canadian-joint venture of $0.2 million.
Depreciation and amortization. Depreciation and amortization decreased
$0.9 million for the three months ended April 30, 2002 to $0.7 million from $1.6
million in the fiscal 2002 quarter. The decrease is due primarily to the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," as of February
1, 2002. Under the provisions of SFAS No. 142, goodwill is no longer
18
amortized after the date of adoption. Intangible assets as of the date of
adoption are evaluated to determine if they have finite or indefinite useful
lives. Intangible assets determined to have finite lives are amortized over
those lives and intangible assets that have indefinite useful lives are not
amortized.
Interest expense. Interest expense decreased $0.2 million or 4.9% for the
three months ended April 30, 2002 to $3.9 million from $4.1 million in the
fiscal 2002 quarter. The decrease is mainly due to the reduction in borrowings,
favorable interest rates and the interest rate swap agreements on the Company's
12 1/4% senior subordinated notes and the 9 1/2% senior secured notes.
Income taxes. For the three months ended April 30, 2002, the effective
tax rate was 37.7% compared to 37.3% for the fiscal 2002 quarter.
Net income. Net income for the three months ended April 30, 2002 increased
$1.6 million to $4.8 million from $3.2 million for the fiscal 2002 quarter. As
a percentage of total revenues, net income was 5.7% for the three months ended
April 30, 2002, compared to 3.7% in the fiscal 2002 quarter.
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 used
in operating activities was $2.6 million in the three months ended April 30,
2002, compared to cash used in operating activities of $1.7 million in the
fiscal 2002 quarter. The decrease of $.9 million in the level of cash provided
by operating activities is primarily attributable to earnings and to an increase
in accounts receivable offset by a decrease in inventory.
Net cash used in investing activities was $27.9 million for the three
months ended April 30, 2002, which primarily reflects the $27.0 million purchase
price of Jantzen (including fees related to the transaction) and purchases of
computer equipment and related software enhancement cost of $0.8 million.
Net cash provided by financing activities for the three months ended April
30, 2002 totaled $34.1 million, which was primarily the result of net proceeds
of the offering of the 9 1/2% senior secured notes offering of $ 55.6 million,
net repayments of borrowings under the Company's senior credit facility of $21.8
million and proceeds from the exercise of employee stock options of $0.3
million.
Senior Credit Facility
In March 2002, the Company amended its senior credit facility with a group
of banks. As amended, the senior credit facility now provides the Company with
a revolving credit line up to an aggregate amount of $60.0 million. This
amendment was done concurrently with the private offering of $57.0 million of
9 1/2% senior secured notes. The indebtedness under the senior credit facility
ranks pari passu with the senior secured notes. The following is a description
of the terms of the senior credit facility, as amended, and does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the senior credit facility. As of April 30, 2002, the
Company had no short-term borrowings under the senior credit facility and
19
had net cash of approximately $5.0 million as compared to $40.1 million of
borrowings outstanding as of April 30, 2001.
Certain Covenants. The senior credit facility contains certain covenants,
which require us to maintain certain financial ratios, a minimum net worth and
which restrict the payment of dividends. The Company is currently in compliance
with all its covenants.
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 April 30, 2002. The Company is currently in active
discussions to renew or replace its existing senior credit facility. Management
believes this discussion will be successfully completed prior to the October 1,
2002 expiration date.
Borrowings Base. Borrowings under the senior credit facility are limited
under its terms to a borrowing base calculation, which generally restricts the
outstanding balances to the sum of a) 80.0% of eligible receivables plus b)
90.0% of our eligible factored accounts receivables plus c) 60.0% of eligible
inventory minus d) the full amount of all outstanding letters of credit issued
pursuant to the senior credit facility which are not fully secured by cash
collateral.
The maximum amount of borrowing under the senior credit facility
attributable to eligible inventory is $30.0 million.
The borrowing base has been further reduced by a $9.0 million reserve,
which must be maintained until the expiration date of our synthetic lease in
June 2002, as described below.
Interest. Interest on the principal balance under the senior credit
facility accrues, at the Company's option, at either a) the Company's bank prime
lending rate with adjustments depending upon the Company's ratio of indebtedness
to EBITDA at the time of borrowing or b) 2.75% above the rate quoted by the
Company's bank as the average London Inter-bank Offered Rate ("LIBOR") for 1, 2,
3 and 6-month Eurodollar deposits with adjustments depending upon the Company's
ratio of indebtedness to EBIDTA at the time of borrowing.
Security. As security for the indebtedness under the senior credit
facility, the Company granted the lenders a first priority security interest in
substantially all of the Company's existing and future assets, including,
without limitation, accounts receivable, inventory deposit accounts, general
intangibles and equipment. Lenders under the senior credit facility have a
second priority security interest in the Company's trademarks.
Letters of Credit
As of April 30, 2002, the Company maintained four US dollar letter of
credit facilities totaling $62.0 million and one letter of credit facility
totaling $3.75 million Canadian dollars utilized by the Company's consolidated
Joint Venture in Canada. Each letter of credit is secured by the consignment of
merchandise in transit under that letter of credit. As of April 30, 2002, there
was $43.1 million available under existing letter of credit facilities.
20
Senior Secured Notes
On March 22, 2002, the Company completed a private offering of $57.0
million 9 1/2% senior secured notes due 2009. The proceeds of the private
offering were used to fund the Jantzen acquisition, to reduce the amount of
outstanding debt under the senior credit facility and as additional working
capital.
The senior secured notes are secured by a first priority security interest
granted in our existing portfolio of trademarks and licenses, including the
trademarks and licenses acquired in the Jantzen acquisition; all license
agreements with respect to these trademarks; and all income, royalties and other
payments with respect to such licenses. The senior secured notes are senior
secured obligations of Perry Ellis and rank pari passu in right of payment with
all of our existing and future senior indebtedness. The senior secured notes
are effectively senior to all unsecured indebtedness of Perry Ellis to the
extent of the value of the assets securing the notes.
Synthetic Lease
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, as amended, expires on June 30, 2002, and
requires a minimum contingent rental payment at the termination of the lease of
$14.5 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 synthetic lease was entered into with a group of financial institutions
to finance the acquisition and construction of our corporate headquarters. The
financial institutions assumed the Company's obligation to purchase the facility
and, in turn, leased the facility to the Company. The obligations under the
synthetic lease are secured by a security interest in substantially all our
existing and future assets, whether tangible or intangible, including, without
limitation, accounts receivable, inventory deposit accounts, general
intangibles, intellectual property and equipment. The Company is in the
process of arranging new financing to replace the synthetic lease through a
mortgage lender. The Company has received a satisfactory commitment from such
lender, subject to additional due diligence, has scheduled a closing date on or
about June 30, 2002.
In addition to customary covenants found in secured lending agreements, the
synthetic lease also contains various restrictive financial and other covenants
including, without limitation, (a) prohibitions on the incurrence of additional
indebtedness or guarantees, (b) restrictions on the creation of additional
liens, (c) certain limitations on dividends and distributions or capital
expenditures by Perry Ellis, (d) restrictions on mergers or consolidations,
sales of assets, investments and transactions with affiliates and (e) certain
financial maintenance tests. Such financial maintenance tests, include, among
others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a minimum
current ratio, (iii) a minimum net worth and (iv) a minimum fixed charge
coverage ratio. As of April 30, 2002, the Company is in compliance with all the
covenants.
21
Contractual Obligations and Commercial Commitments
The following tables illustrate our contractual obligations and commercial
commitments as of April 30, 2002 and include the effects of the transactions and
amendments discussed above that occurred during the first quarter ended April
30, 2002 and subsequent to January 31, 2002.
- ---------------------------------------------------------------------------------------------------------------
Payments Due by Period
---------------------------------------------------------------------------------
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 year years years years
- ---------------------------------------------------------------------------------------------------------------
Senior Secured Notes $100,000,000 - - $100,000,000 -
===============================================================================================================
Senior Subordinated Notes $ 57,000,000 - - - $57,000,000
===============================================================================================================
Senior Credit Facility $ -0- $ - - -
===============================================================================================================
Operating Leases $ 24,707,426 $16,287,740 $5,308,848 $ 1,505,766 $ 1,605,072
===============================================================================================================
Total Contractual Cash
Obligations $181,707,426 $16,287,740 $5,308,848 $101,505,766 $58,605,072
===============================================================================================================
- -----------------------------------------------------------------------------------------------------
Amount of Commitment Expiration Per Period
------------------------------------------------------
Other Total
Commercial Amounts Less than 1 - 3 4 - 5 After 5
Commitments Committed 1 year years years years
- -----------------------------------------------------------------------------------------------------
Letter of Credit $21,322,191 $21,322,191 - - -
=====================================================================================================
Stand by Letters of
Credit $ 8,250,000 $ 5,500,000 - $2 ,750,000 -
=====================================================================================================
Total Commercial
Commitments $29,572,191 $26,822,191 - $ 2,750,000 -
=====================================================================================================
Management believes that the combination of borrowing availability under
the amended senior credit facility, letter of credit facilities, and funds
anticipated to be generated from operating activities, will be sufficient to
meet our operating and capital needs in the foreseeable future.
Effects of Inflation and Foreign Currency Fluctuations
The Company does not believe that inflation or foreign currency
fluctuations significantly affected its results of operations for the three
months ended April 30, 2002.
22
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 component of the Swap
Agreement recorded on the Company's Consolidated Balance Sheet was $0.1 million
and $0.1 million, respectively, as of April 30, 2002. The interest rate cap and
basis swap component of the Swap Agreement did not qualify for hedge accounting
treatment under the SFAS No. 133, resulting in $0.3 million increase in interest
expense on the Statement of Operations for the first quarter ended April 30,
2002.
In conjunction with the March 2002 offering of $57.0 million of 9 1/2%
senior secured notes due March 15, 2009, the Company entered into interest rate
swap and option agreements (the "March Swap Agreement") for an aggregate
notional amount of $57.0 million in order to minimize the debt servicing costs
associated with the notes. The March Swap Agreement is scheduled to terminate
on March 15, 2009. Under the March Swap Agreement, the Company is entitled to
receive semi-annual interest payments on September 15 and March 15 at a fixed
rate of 9 1/2% are obligated to make semi-annual interest payments on September
15 and March 15 at a floating rate based on the three-month LIBOR rate plus 369
basis points for the period from March 22, 2002 through March 15, 2009. The
March Swap Agreement has optional call provisions with trigger dates of March
15, 2005, March 15, 2006 and March 15, 2007, which contain premium requirements
in the event the call is exercised.
The fair value of the March 2002 swap and the option component of the March
Swap Agreement recorded on the Company's Consolidated Balance Sheet was $1.7
million and ($0.6) million, respectively, as of April 30, 2002.
The Company current exposure to foreign exchange risk is not significant
and accordingly, the Company has not entered into any transactions to hedge
against those risks.
23
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (for SEC only)
(b) On April 2, 2002, the Company filed a Report on Form 8-K to
disclose its acquisition of Jantzen and the completion of the
related private offering of $57.0 million in 9 1/2% senior
secured notes.
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 14, 2002 By: /s/ Timothy B. Page
-----------------------
Timothy B. Page, Chief Financial Officer
25