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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21764
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PERRY ELLIS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-1162998
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 N.W. 107 Avenue
Miami, Florida 33172
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 592-2830
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 6,419,724
(as of December 12, 2002).
PERRY ELLIS INTERNATIONAL, INC.
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1:
Consolidated Balance Sheets
as of October 31, 2002 (Unaudited) and January 31, 2002 1
Consolidated Statements of Income (Unaudited)
for the three and nine months ended October 31, 2002 and 2001 2
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended October 31, 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 19
Item 3:
Quantitative and Qualitative Disclosures About Market Risk 26
Item 4:
Internal Controls 27
PART II: OTHER INFORMATION 28
Signature 29
Certifications 30
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2002 January 31, 2002
-------------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,066,138 $ 1,303,978
Accounts receivable, net 61,949,009 50,370,245
Inventories, net 45,966,043 45,409,047
Deferred income taxes 2,704,281 2,384,316
Prepaid income taxes 2,775,404 -
Other current assets 3,690,506 1,886,163
-------------------- -------------------
Total current assets 118,151,381 101,353,749
Property and equipment, net 30,311,900 10,897,334
Intangible assets, net 142,534,058 117,938,894
Other 11,776,691 3,870,703
-------------------- -------------------
TOTAL $ 302,774,030 $ 234,060,680
==================== ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,894,061 $ 5,966,369
Accrued expenses 5,374,027 3,259,602
Income taxes payable - 1,381,551
Accrued interest payable 1,266,760 3,808,997
Current portion - senior credit facility - 21,756,094
Unearned revenues 1,926,398 1,838,929
Other current liabilities 2,385,529 2,410,583
-------------------- -------------------
Total current liabilities 20,846,775 40,422,125
Senior subordinated notes payable, net 98,862,338 99,071,515
Senior secured notes payable, net 60,571,612 -
Senior credit facility 4,087,767 -
Real estate mortgage 11,600,000 -
Deferred income tax 9,624,126 6,749,832
-------------------- -------------------
Total long-term liabilities 184,745,843 105,821,347
-------------------- -------------------
Total liabilities 205,592,618 146,243,472
-------------------- -------------------
Minority Interest 716,337 613,671
-------------------- -------------------
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;
6,416,390 shares issued and outstanding as of October 31, 2002 and
6,337,440 shares issued and 6,286,740 shares outstanding as of
January 31, 2002 64,164 63,374
Additional paid-in-capital 27,111,889 26,286,040
Retained earnings 69,398,992 61,386,243
Accumulated other comprehensive income (109,970) (121,753)
-------------------- -------------------
Total 96,465,075 87,613,904
Common stock in treasury at cost; 50,700 shares as of January 31, 2002 - (410,367)
-------------------- -------------------
Total stockholders' equity 96,465,075 87,203,537
-------------------- -------------------
TOTAL $ 302,774,030 $ 234,060,680
==================== ===================
See Notes to Unaudited 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,
------------------------------------ ---------------------------------
2002 2001 2002 2001
-------------- ----------------- -------------- ---------------
Revenues
Net sales $ 63,037,262 $ 59,957,359 $198,050,391 $ 199,132,288
Royalty income 7,561,270 6,402,886 21,238,697 19,325,950
-------------- ----------------- -------------- ---------------
Total revenues 70,598,532 66,360,245 219,289,088 218,458,238
Cost of sales 46,046,555 47,372,009 146,514,444 153,264,855
-------------- ----------------- -------------- ---------------
Gross profit 24,551,977 18,988,236 72,774,644 65,193,383
Operating expenses
Selling, general and administrative expenses 17,710,051 12,964,934 45,703,916 40,753,657
Depreciation and amortization 853,366 1,686,912 2,256,194 4,926,577
-------------- ----------------- -------------- ---------------
Total operating expenses 18,563,417 14,651,846 47,960,110 45,680,234
-------------- ----------------- -------------- ---------------
Operating income 5,988,560 4,336,390 24,814,534 19,513,149
Interest expense 4,153,081 2,850,189 11,806,392 10,587,043
-------------- ----------------- -------------- ---------------
Income before minority interest and income tax
provision 1,835,479 1,486,201 13,008,142 8,926,106
Minority interest (79,103) - (88,948) -
Share of income from unconsolidated subsidiary - 60,950 - 85,485
Income taxes 694,499 577,476 4,906,445 3,357,409
-------------- ----------------- -------------- ---------------
Net income $ 1,061,877 $ 969,675 $ 8,012,749 $ 5,654,182
============== ================= ============== ===============
Net income per share
Basic $ 0.17 $ 0.15 $ 1.26 $ 0.87
============== ================= ============== ===============
Diluted $ 0.16 $ 0.15 $ 1.24 $ 0.87
============== ================= ============== ===============
Weighted average number of shares outstanding
Basic 6,416,390 6,572,398 6,376,215 6,516,256
Diluted 6,601,985 6,592,860 6,481,413 6,534,655
See Notes to Unaudited Consolidated Financial Statements
2
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended October 31,
---------------------------------------------------
2002 2001
----------------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,012,749 $ 5,654,182
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,725,400 4,569,237
Amortization of debt issue cost 612,188 462,011
Amortization of bond discount 257,356 123,000
Deferred income taxes 2,554,329 -
Minority interest 88,948 -
Other 11,783 (58,453)
Changes in operating assets and liabilities
(net of effects of acquisition transaction):
Accounts receivable, net (11,578,764) 2,588,824
Inventories 1,634,146 9,052,418
Other current assets and prepaid income taxes (4,632,567) (185,850)
Other assets (1,802,855) (1,063,024)
Accounts payable and accrued expenses 4,075,046 (1,984,818)
Income taxes payable (1,381,551) 2,221,819
Accrued interest payable (2,542,237) (3,161,433)
Other current liabilities and unearned revenues 62,415 236,620
----------------------- -----------------------
Net cash (used in) provided by operating activities (2,903,614) 18,454,533
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (20,611,092) (1,930,689)
Payment on purchase of intangible assets (210,914) (119,079)
Payment for acquired businesses (25,084,374) -
----------------------- -----------------------
Net cash used in investing activities: (45,906,380) (2,049,768)
----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments from senior credit facility (17,668,327) (14,843,898)
Net payments from senior subordinated notes (2,199,492) -
Net proceeds from senior secured notes 55,589,250 -
Net proceeds from real estate mortgage 11,600,000 -
Purchase of treasury stock - (1,787,130)
Proceeds from exercise of stock options 1,237,005 6,875
----------------------- -----------------------
Net cash provided by (used in) financing activities: 48,558,436 (16,624,153)
----------------------- -----------------------
Effect of exchange rate changes on cash and cash equivalents 13,718 -
----------------------- -----------------------
NET DECREASE IN CASH (237,840) (219,388)
CASH AT BEGINNING OF YEAR 1,303,978 344,741
----------------------- -----------------------
CASH AT END OF PERIOD $ 1,066,138 $ 125,353
======================= =======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 15,609,746 $ 14,028,640
======================= =======================
Income taxes $ 6,302,561 $ 1,608,192
======================= =======================
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Change in fair value of mark-to-market interest rate swap/option $ 6,715,321 $ 465,429
----------------------- -----------------------
See Notes to Unaudited Consolidated Financial Statements
3
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
Item 1. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements of Perry Ellis
International, Inc. and subsidiaries ("Perry Ellis" or the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States ("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:
October 31, 2002 January 31, 2002
------------------ ------------------
Total letter of credit facilities $ 59,394,375 $ 44,362,500
Oustanding letters of credit (29,260,088) (11,035,880)
------------------ ------------------
Total credit available $ 30,134,287 $ 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 $2.9 million and $2.2 million for the three months ended October 31, 2002
and October 31, 2001, respectively and $7.4 million and $6.1 million for the
nine months ended October 31, 2002 and October 31, 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:
Asset Class Avg. Useful Lives in Years
--------------------------------- ---------------------------
Furniture, fixtures and equipment 7
Vehicles 7
Leasehold improvements 11
The Company occupied its main administrative office, warehouse and
distribution facility under a synthetic operating lease for a 240,000 square
foot facility in Miami, Florida. The lease, as amended, expired on June 30,
2002, and required a final payment at termination of $14.5 million. On June 30,
2002, the Company made the required payment under the synthetic lease and
partially refinanced the acquisition of the Miami facility with an $11.6 million
mortgage.
6. SEGMENT INFORMATION
In accordance with Statement of Financial Accounting Standards ("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 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 October 31, Nine Months Ended October 31,
----------------------------------------- -------------------------------------------
2002 2001 2002 2001
------------------- ------------------- -------------------- --------------------
Revenues:
Product $ 63,037,262 $ 59,957,359 $ 198,050,391 $ 199,132,288
Licensing 7,561,270 6,402,886 21,238,697 19,325,950
------------------- ------------------- -------------------- --------------------
Total Revenues $ 70,598,532 $ 66,360,245 $ 219,289,088 $ 218,458,238
=================== =================== ==================== ====================
Operating Income:
Product $ 48,287 $ 494,839 $ 6,870,779 $ 8,268,228
Licensing 5,940,273 3,841,551 17,943,755 11,244,921
------------------- ------------------- -------------------- --------------------
Total Operating Income $ 5,988,560 $ 4,336,390 $ 24,814,534 $ 19,513,149
=================== =================== ==================== ====================
5
7. JANTZEN ACQUISITION
On March 22, 2002, the Company acquired the Jantzen swimwear business from
subsidiaries of VF Corporation for approximately $24.0 million, excluding costs
related to the transaction. The acquisition was financed with a portion of the
proceeds from a $57.0 million private 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
commenced in July 2002. As part of this acquisition, the Company also acquired
licenses for the Tommy Hilfiger(R) brand for women's swimwear and for 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, thereafter on a
month-to-month basis. 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. The option was
exercised on May 20, 2002 at a price of $2.5 million. The Company closed on this
purchase during September 2002.
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 3,063
---------------
Gross purchase price $ 27,041
---------------
Purchase price allocation:
Inventories $ 2,191
Machinery and equipment 465
Trademarks 24,385
---------------
Gross purchase price $ 27,041
Less: liabilities assumed (1,957)
---------------
Cash paid for acquisition and acquisition cost $ 25,084
---------------
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 fiscal year for the three and nine months ended October 31, 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 October 31, Nine Months Ended October 31,
------------------------------- ------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- --------------
(Dollars in Thousands) (Dollars in Thousands)
Total Revenues $ 70,599 $ 69,730 $ 221,318 $ 238,121
-------------- --------------- -------------- --------------
Net Income $ 1,062 $ 1,097 $ 8,262 $ 6,763
-------------- --------------- -------------- --------------
Net Income per Share
Basic $ 0.17 $ 0.17 $ 1.30 $ 1.04
-------------- --------------- -------------- --------------
Diluted $ 0.16 $ 0.17 $ 1.27 $ 1.03
-------------- --------------- -------------- --------------
9. 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 adopted EITF
Issue No. 01-09 on sales incentives in its financial statements and restated
previously issued 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 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 intangible assets acquired in a business
combination. SFAS No. 141 did not have a significant effect on the financial
position or results of operations of the Company.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting treatment as it applies to goodwill and
other identifiable intangible assets with indefinite useful lives from 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
7
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 three months ended October 31, 2001, adjusted to
exclude amounts no longer being amortized under the provisions of SFAS No. 142,
were $0.25. Basic and diluted earnings per share for the nine-month period ended
October 31, 2001 were $1.17.
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------- ------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- --------------
Net income
Reported net income $ 1,061,877 $ 969,675 $ 8,012,749 $ 5,654,182
Amortization of trademarks - 646,692 - 1,939,555
-------------- --------------- -------------- --------------
Adjusted net income $ 1,061,877 $ 1,616,367 $ 8,012,749 $ 7,593,737
-------------- --------------- -------------- --------------
Basic earnings per share
Reported basic earnings per share $ 0.17 $ 0.15 $ 1.26 $ 0.87
Amortization of trademarks - 0.10 - 0.30
-------------- --------------- -------------- --------------
Adjusted basic earnings per share $ 0.17 $ 0.25 $ 1.26 $ 1.17
-------------- --------------- -------------- --------------
Diluted earnings per share
Reported diluted earnings per share $ 0.16 $ 0.15 $ 1.24 $ 0.87
Amortization of trademarks - 0.10 - 0.30
-------------- --------------- -------------- --------------
Adjusted diluted earnings per share $ 0.16 $ 0.25 $ 1.24 $ 1.17
-------------- --------------- -------------- --------------
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. The
adoption of SFAS No. 144 is not expected to have a significant effect on the
financial position or the results of operation of the Company.
8
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB No. 13, and Technical Corrections ," ("SFAS 145")
which all but eliminates the presentation in income statements of debt
extinguishments as extraordinary items. SFAS 145 will be effective for fiscal
years beginning after May 15, 2002. The Company plans to implement SFAS 145 at
the beginning of fiscal 2004. SFAS 145 is not expected to have a significant
effect on the financial position or results of operations of the Company.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit of Disposal Activities," ("SFAS 146") which requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. SFAS 146 is not expected to have a significant effect on the financial
position or results of operations 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 subordinated notes
and senior secured notes.
At October 31, 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 interest rate swap contracts are reflected at fair value in the
Company's consolidated balance sheet.
At October 31, 2002, the Company also 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 decreases 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 the consolidated statement of income
for the current period. Interest expense for the three and nine months ended
October 31, 2002 has been increased by approximately $0.2 million and increased
by approximately $0.4 million, respectively 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
9
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 interest rate swap contracts are reflected
at fair value in the company's consolidated balance sheet.
11. 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 October 31, 2002 and January 31, 2002, and for the
three months and nine months ended October 31, 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.
10
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF OCTOBER 31, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
--------------- -------------- ------------- --------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 157,648 $ (61,072) $ 969,562 $ 1,066,138
Accounts receivable, net 800,051 60,480,154 668,804 61,949,009
Intercompany receivable - Guarantors - 14,746,772 - (14,746,772) -
Intercompany receivable - Non Guarantors - 606,065 - (606,065) -
Inventories, net - 45,522,331 443,712 45,966,043
Deferred income taxes - 2,704,281 - 2,704,281
Prepaid income taxes - 2,775,404 - 2,775,404
Other current assets 358,435 3,294,001 38,070 3,690,506
-------------- ------------- ----------- -------------- -------------
Total current assets 1,316,134 130,067,936 2,120,148 (15,352,837) 118,151,381
Property and equipment, net - 30,280,440 31,460 30,311,900
Intangible assets, net 15,568,834 126,965,224 142,534,058
Investment in subsidiaries 74,622,685 - (74,622,685) -
Other 912,349 10,864,342 11,776,691
-------------- ------------- ----------- -------------- -------------
TOTAL $ 92,420,002 $ 298,177,942 $ 2,151,608 $ (89,975,522) $ 302,774,030
============== ============= =========== ============== =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 17,207 $ 9,611,959 $ 264,895 $ 9,894,061
Accrued expenses 606,415 4,694,037 73,575 5,374,027
Intercompany payable - Parent (4,875,369) 19,622,141 606,065 (15,352,837) -
Accrued interest payable - 1,266,760 1,266,760
Unearned revenues 206,674 1,719,724 1,926,398
Other current liabilities - 2,330,806 54,723 2,385,529
-------------- ------------- ----------- -------------- -------------
Total current liabilities (4,045,073) 39,245,427 999,258 (15,352,837) 20,846,775
Senior subordinated notes payable, net - 98,862,338 98,862,338
Senior secured notes payable, net - 60,571,612 60,571,612
Senior credit facility - 4,087,767 4,087,767
Real estate mortgage - 11,600,000 556,922 (556,922) 11,600,000
Deferred income tax - 9,624,126 9,624,126
-------------- ------------- ----------- -------------- -------------
Total long-term liabilities - 184,745,843 556,922 (556,922) 184,745,843
-------------- ------------- ----------- -------------- -------------
Total liabilities (4,045,073) 223,991,270 1,556,180 (15,909,759) 205,592,618
-------------- ------------- ----------- -------------- -------------
Minority Interest 716,306 31 716,337
-------------- ------------- ----------- -------------- -------------
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; 6,416,390 shares issued and
outstanding as of October 31, 2002 64,164 100 63 (163) 64,164
Additional paid-in-capital 27,111,889 27,111,889
Contributing Capital - 6,196,830 (6,196,830) -
Retained earnings 69,398,992 68,108,669 (129,898) (67,978,771) 69,398,992
Accumulated other comprehensive income (109,970) (118,927) 8,957 109,970 (109,970)
-------------- ------------- ----------- -------------- -------------
Total 96,465,075 74,186,672 (120,878) (74,065,794) 96,465,075
Common stock in treasury at cost
-------------- ------------- ----------- -------------- -------------
Total stockholders' equity 96,465,075 74,186,672 (120,878) (74,065,794) 96,465,075
-------------- ------------- ----------- -------------- -------------
TOTAL $ 92,420,002 $ 298,177,942 $ 2,151,608 $ (89,975,522) $ 302,774,030
============== ============= =========== ============== =============
11
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JANUARY 31, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 124,998 $ 1,178,980 $ - $ 1,303,978
Accounts receivable, net 793,111 48,978,288 712,804 (113,958) 50,370,245
Intercompany receivable - Guarantors - 456,813 (456,813) -
Intercompany receivable - Non Guarantors - 698,854 (698,854) -
Inventories - 45,317,126 91,921 - 45,409,047
Deferred income taxes - 1,951,553 432,763 2,384,316
Other current assets 188,616 1,697,547 - 1,886,163
------------- ------------ ------------ -------------- --------------
Total current assets 981,727 99,225,179 1,983,705 (836,862) 101,353,749
Property and equipment, net - 10,862,844 34,490 - 10,897,334
Intangible assets, net 15,568,834 102,370,060 - 117,938,894
Investment in subsidiaries 60,993,698 - (60,993,698) -
Other 309,656 3,561,047 - 3,870,703
------------- ------------ ------------ -------------- --------------
TOTAL $ 77,853,915 $216,019,130 $ 2,018,195 $ (61,830,560) $ 234,060,680
============= ============ ============ ============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ - $ 5,908,727 $ 171,599 $ (113,958) $ 5,966,368
Accrued expenses 325,960 2,903,642 30,000 - 3,259,602
Intercompany payable - Parent (9,926,537) 10,383,350 698,854 (1,155,667) -
Income taxes payable - 2,607,686 160,105 (1,386,240) 1,381,551
Accrued interest payable - 3,808,997 - - 3,808,997
Current portion - senior credit facility - 21,819,334 (63,240) - 21,756,094
Unearned revenues 250,954 1,587,975 - - 1,838,929
Other current liabilities - 2,319,622 90,961 - 2,410,583
------------- ------------ ------------ -------------- --------------
Total current liabilities (9,349,623) 51,339,333 1,088,279 (2,655,865) 40,422,124
Senior subordinated notes payable, net - 99,071,515 - - 99,071,515
Deferred income tax - 4,930,829 - 1,819,003 6,749,832
------------- ------------ ------------ -------------- --------------
Total long-term liabilities - 104,002,344 - 1,819,003 105,821,347
------------- ------------ ------------ -------------- --------------
Total liabilities (9,349,623) 155,341,677 1,088,279 (836,862) 146,243,471
------------- ------------ ------------ -------------- --------------
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 60,799,106 (240,709) (60,558,397) 61,386,244
Accumulated other comprehensive income (121,753) (121,753) 121,753 (121,753)
------------- ------------ ------------ -------------- --------------
Total 87,613,905 60,677,453 316,245 (60,993,698) 87,613,905
Common stock in treasury at cost (410,367) - - - (410,367)
------------- ------------ ------------ -------------- --------------
Total stockholders' equity 87,203,538 60,677,453 316,245 (60,993,698) 87,203,538
------------- ------------ ------------ -------------- --------------
TOTAL $ 77,853,915 $216,019,130 $ 2,018,195 $ (61,830,560) $ 234,060,680
============= ============ ============ ============== ==============
12
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
-------------- -------------- ------------- ------------- --------------
Revenues
Net sales $ - $ 61,215,789 $ 1,821,473 $ - $ 63,037,262
Royalty income 1,400,015 6,161,255 - - 7,561,270
------------- -------------- ------------ ------------- --------------
Total revenues 1,400,015 67,377,044 1,821,473 - 70,598,532
Cost of sales - 45,150,015 896,540 - 46,046,555
------------- -------------- ------------ ------------- --------------
Gross profit 1,400,015 22,227,029 924,933 - 24,551,977
Operating expenses
Selling, general and administrative expenses 932,500 16,267,916 509,635 - 17,710,051
Depreciation and amortization - 851,481 1,885 - 853,366
------------- -------------- ------------ ------------- --------------
Total operating expenses 932,500 17,119,397 511,520 - 18,563,417
------------- -------------- ------------ ------------- --------------
Operating income 467,515 5,107,632 413,413 - 5,988,560
Interest expense (18,058) 4,168,890 2,249 - 4,153,081
------------- -------------- ------------ ------------- --------------
Income before minority interest and income tax
provision 485,573 938,742 411,164 - 1,835,479
Minority interest - - (79,103) - (79,103)
Equity in earnings of subsidiaries, net (757,911) - - 757,911 -
Income taxes 181,607 346,625 166,267 - 694,499
------------- -------------- ------------ ------------- --------------
Net income $ 1,061,877 $ 592,117 $ 165,794 $ (757,911) $ 1,061,877
============= ============== ============ ============= ==============
13
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
----------- ------------ ------------- -------------- ------------
Revenues
Net sales $ - $ 61,694,928 $ (1,183,803) $ - $ 60,511,125
Royalty income 778,181 5,624,705 - - 6,402,886
----------- ------------ ------------- -------------- ------------
Total revenues 778,181 67,319,633 (1,183,803) - 66,914,011
Cost of sales - 47,607,000 (234,991) - 47,372,009
----------- ------------ ------------- -------------- ------------
Gross profit 778,181 19,712,633 (948,812) - 19,542,002
Operating expenses
Selling, general and administrative expenses 583,094 12,894,043 41,563 - 13,518,700
Depreciation and amortization 133,397 1,553,515 - - 1,686,912
----------- ------------ ------------- -------------- ------------
Total operating expenses 716,491 14,447,558 41,563 - 15,205,612
----------- ------------ ------------- -------------- ------------
Operating income 61,690 5,265,075 (990,375) - 4,336,390
Interest expense (11,401) 2,861,590 - - 2,850,189
----------- ------------ ------------- -------------- ------------
Income before minority interest and income tax
provision 73,091 2,403,485 (990,375) - 1,486,201
Equity in earnings of subsidiaries, net (925,016) - 60,950 925,016 60,950
Income taxes 28,432 897,653 (348,609) - 577,476
----------- ------------ ------------- -------------- ------------
Net income $ 969,675 $ 1,505,832 $ (580,816) $ (925,016) $ 969,675
=========== ============ ============= ============== ============
14
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
--------------- -------------- ------------- -------------- --------------
Revenues
Net sales $ - $ 195,527,563 $ 2,522,828 $ - $ 198,050,391
Royalty income 3,350,103 17,888,594 - - 21,238,697
--------------- -------------- ------------ -------------- --------------
Total revenues 3,350,103 213,416,157 2,522,828 - 219,289,088
Cost of sales - 145,000,204 1,514,240 - 146,514,444
--------------- -------------- ------------ -------------- --------------
Gross profit 3,350,103 68,415,953 1,008,588 - 72,774,644
Operating expenses
Selling, general and administrative expenses 2,422,308 42,628,013 653,595 - 45,703,916
Depreciation and amortization - 2,253,164 3,030 - 2,256,194
--------------- -------------- ------------ -------------- --------------
Total operating expenses 2,422,308 44,881,177 656,625 - 47,960,110
--------------- -------------- ------------ -------------- --------------
Operating income 927,795 23,534,776 351,963 - 24,814,534
Interest expense (18,058) 11,820,671 3,779 - 11,806,392
--------------- -------------- ------------ -------------- --------------
Income before minority interest and income tax
provision 945,853 11,714,105 348,184 - 13,008,142
Minority interest - - (88,948) - (88,948)
Equity in earnings of subsidiaries, net (7,420,374) 7,420,374 -
Income taxes 353,478 4,404,542 148,425 - 4,906,445
--------------- -------------- ------------ -------------- --------------
Net income $ 8,012,749 $ 7,309,563 $ 110,811 $ (7,420,374) $ 8,012,749
=============== ============== ============ ============== ==============
15
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2001
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- ------------
Revenues
Net sales $ - $194,011,479 $ 5,120,809 $ - $199,132,288
Royalty income 2,757,782 16,568,168 - - 19,325,950
------------- ------------ ------------ -------------- ------------
Total revenues 2,757,782 210,579,647 5,120,809 - 218,458,238
Cost of sales - 149,295,074 3,969,781 - 153,264,855
------------- ------------ ------------ -------------- ------------
Gross profit 2,757,782 61,284,573 1,151,028 - 65,193,383
Operating expenses
Selling, general and administrative expenses 1,759,757 36,937,815 2,056,085 - 40,753,657
Depreciation and amortization 400,187 4,526,390 - - 4,926,577
------------- ------------ ------------ -------------- ------------
Total operating expenses 2,159,944 41,464,205 2,056,085 - 45,680,234
------------- ------------ ------------ -------------- ------------
Operating income 597,838 19,820,368 (905,057) - 19,513,149
Interest expense (42,348) 10,623,137 6,253 - 10,587,042
------------- ------------ ------------ -------------- ------------
Income before minority interest and income tax
provision 640,186 9,197,231 (911,310) - 8,926,107
Equity in earnings of subsidiaries, net (5,263,028) - 85,485 5,263,028 85,485
Income taxes 249,032 3,427,338 (318,960) 3,357,410
------------- ------------ ------------ -------------- ------------
Net income $ 5,654,182 $ 5,769,893 $ (506,865) $ (5,263,028) $ 5,654,182
============= ============ ============ ============== ============
16
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2002
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,012,749 $ 7,309,563 $ 110,811 $ (7,420,374) $ 8,012,749
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization - 1,722,370 3,030 - 1,725,400
Amortization of debt issue cost - 612,188 - - 612,188
Amortization of bond discount - 257,356 - - 257,356
Deferred income taxes - 2,554,329 - - 2,554,329
Minority Interest - - 88,948 - 88,948
Equity in earnings of subsidiaries, net (13,617,204) 6,196,830 - 7,420,374 -
Other 2,826 8,957 - 11,783
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net 4,604,311 (16,134,286) (48,789) - (11,578,764)
Inventories - 1,985,937 (351,791) - 1,634,146
Other current assets and prepaid income taxes (169,819) (4,424,678) (38,070) - (4,632,567)
Other assets (602,693) (1,200,162) - - (1,802,855)
Accounts payable and accrued expenses 687,004 3,320,988 67,054 - 4,075,046
Income taxes payable 50,575 (1,341,838) (90,288) - (1,381,551)
Accrued interest payable - (2,542,237) - - (2,542,237)
Other current liabilities and unearned revenues (44,280) 142,933 (36,238) - 62,415
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (1,079,357) (1,537,881) (286,376) - (2,903,614)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (20,611,092) - - (20,611,092)
Payment on purchase of intangible assets, net - (210,914) - - (210,914)
Payment for acquired businesses, net of cash acquired - (25,084,374) - - (25,084,374)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities: - (45,906,380) - - (45,906,380)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of senior subordinated notes - (2,199,492) - - (2,199,492)
Net (payments) proceeds from senior credit facility - (17,731,567) 63,240 - (17,668,327)
Net proceeds from senior secured notes - 55,589,250 - - 55,589,250
Net proceeds from real estate mortgage - 11,600,000 - - 11,600,000
Proceeds from exercise of stock options 1,237,005 - - - 1,237,005
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities: 1,237,005 47,258,191 63,240 - 48,558,436
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 13,718 13,718
NET (DECREASE) INCREASE IN CASH 157,648 (186,070) (209,418) - (237,840)
CASH AT BEGINNING OF YEAR - 124,998 1,178,980 - 1,303,978
------------ ------------ ------------ ------------ ------------
CASH AT END OF YEAR $ 157,648 $ (61,072) $ 969,562 $ - $ 1,066,138
============ ============ ============ ============ ============
17
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2001
Non-
Parent Only Guarantors Guarantors Eliminations Consolidated
------------- ------------ ------------ -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,654,182 $ 5,769,893 $ (506,865) $ (5,263,028) $ 5,654,182
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 400,187 4,169,050 - - 4,569,237
Amortization of debt issue cost - 462,011 - - 462,011
Amortization of bond discount - 123,000 - - 123,000
Equity in earnings of subsidiaries, net (5,263,028) - - 5,263,028 -
Other (58,453) - - (58,453)
Changes in operating assets and liabilities (net of
effects of acquisitions):
Accounts receivable, net 1,321,162 648,035 580,013 39,614 2,588,824
Inventories - 9,096,938 (44,520) - 9,052,418
Other current assets and prepaid income taxes 12,743 (198,593) - - (185,850)
Other assets (82,768) (894,771) (85,485) - (1,063,024)
Accounts payable and accrued expenses (77,592) (2,051,443) 183,831 (39,614) (1,984,818)
Income taxes payable - 2,302,152 (80,333) - 2,221,819
Accrued interest payable - (3,161,433) - - (3,161,433)
Other current liabilities and unearned revenues (46,570) 283,190 - - 236,620
------------- ------------ ------------ -------------- --------------
Net cash provided by operating activities 1,918,316 16,489,576 46,641 - 18,454,533
------------- ------------ ------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (1,930,689) - - (1,930,689)
Payment on purchase of intangible assets, net (138,061) 18,982 - - (119,079)
------------- ------------ ------------ -------------- --------------
Net cash used in investing activities: (138,061) (1,911,707) - - (2,049,768)
------------- ------------ ------------ -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments in borrowings under term loan - (14,843,898) - - (14,843,898)
Purchase of treasury stock (1,787,130) - - - (1,787,130)
Proceeds from exercise of stock options 6,875 - - - 6,875
------------- ------------ ------------ -------------- --------------
Net cash used in financing activities: (1,780,255) (14,843,898) - - (16,624,153)
------------- ------------ ------------ -------------- --------------
NET (DECREASE) INCREASE IN CASH - (266,029) 46,641 - (219,388)
CASH AT BEGINNING OF YEAR - 344,741 - - 344,741
------------- ------------ ------------ -------------- --------------
CASH AT END OF YEAR $ - $ 78,712 $ 46,641 $ - $ 125,353
============= ============ ============ ============== ==============
18
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 other filings with
the Securities and Exchange Commission.
19
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 Accounting Principles Generally
Accepted in the United States of America ("GAAP"). In particular, the Company's
critical accounting policies and areas it uses judgment in are the areas of
revenue recognition, the allowance for recoverability of customer accounts
receivable, provision for customer sales returns and allowances, inventory
methods and valuations, and provisions for impairments on long-lived assets
including trademarks.
Results of Operations
The following is a discussion of the results of operations for the
three and nine month periods ended October 31, 2002 compared with the three and
nine month periods ended October 31, 2001
Items Affecting Comparability of Fiscal 2002 Period
Adoption of SFAS No. 142. As is disclosed in Note 9 to the Unaudited
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 three months ended October 31,
2001, adjusted to exclude amounts no longer being amortized under the provisions
of SFAS No. 142, were $0.25. Basic and diluted earnings per share for the
nine-month period ended October 31, 2001 were $1.17.
Adoption of EITF Issue No. 01-09. As is disclosed in Note 9 to the
Unaudited 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 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, second and
third quarters of fiscal 2002 were reduced by $403,000, $214,000 and $554,000,
respectively 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.
20
Results Of Operations- Three and Nine Months Ended October 31, 2002 Compared
with Three and Nine Months Ended October 31, 2001.
Total revenues. Total revenues consist of net sales and royalty income.
Total revenues for the three months ended October 31, 2002 were $70.6 million,
an increase of 6.4% from $66.4 million for the third quarter of the fiscal year
ended January 31, 2002 ("fiscal 2002"). Total revenues for the nine months ended
October 31, 2002 increased 0.4% to $219.3 million from $218.5 million for the
nine months ended October 31, 2001. The increase was due mainly to an increase
in net sales and royalty income as discussed below.
Net sales. Net sales increased $3.0 million or 5.1% to $63.0 million
for the third quarter of the fiscal year ending January 31, 2003 ("fiscal 2003")
from $60.0 million in the third quarter of the fiscal year ended January 31,
2002 ("fiscal 2002"). The increase was mainly due to increases in net sales of
branded products in the chain department stores and corporate wear channels of
distribution, and net sales of the Jantzen swimwear line acquired in March 2002,
offset by a reduction in sales of private label products and in the off-price
stores channel of distribution. Net sales decreased $1.0 million or 0.5% to
$198.1 million for the nine months ended October 31, 2002 from $199.1 million
for the nine months ended October 31, 2001. Net sales for the nine months ended
October 31, 2001 included $5.1 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. During the nine month period ended October 31, 2002, the decrease in
net sales in Europe and in the private label products and in the off-price
stores channel of distribution was offset in part by an increase in net sales in
Canada of $2.3 million and net sales of the Jantzen swimwear line of $7.3
million.
Royalty income. Royalty income for the three months ended October 31,
2002 was $7.6 million, an increase of 18.1% from $6.4 million for the comparable
fiscal 2002 quarter. Royalty income for the nine months ended October 31, 2002
increased 9.9% to $21.2 million from $19.3 million for the nine months ended
October 31, 2001. The increase in royalty income for the three and nine months
ended October 31, 2002 was due primarily to increased royalty income from
licenses for the Perry Ellis brand and royalties from licenses for the Jantzen
brand.
Cost of sales. Cost of sales for the three months ended October 31,
2002 decreased $1.3 million or 2.8% to $46.1 million from $47.4 million in the
comparable fiscal 2002 quarter. For the nine months ended October 31, 2002, cost
of sales of $146.5 million was $6.8 million, or 4.4% lower than $153.3 million
for the nine months ended October 31, 2001. The decrease in costs of sales for
the three and nine month periods ended October 31, 2002 was due mainly to the
decrease in net sales to certain channels of distribution as described above in
net sales. As a percentage of net sales, cost of sales for the three months
ended October 31, 2002 decreased to 73.0% from 79.0% for three months ended
October 31, 2001. As a percentage of net sales, cost of sales for the nine
months ended October 31, 2002 decreased to 74.0% from 77.0% for the comparable
period of fiscal 2002. The decrease in cost of sales as a percentage of net
sales for the three and nine month periods of fiscal 2003 was due primarily to
improvements in the Company's sourcing costs, more effective inventory
management and a change in sales mix from private label to branded products.
Gross Profit. For the three months ended October 31, 2002, gross profit
increased 29.3% to $24.6 million from $19.0 million for the comparable fiscal
2002 quarter. For the nine months of fiscal 2003, gross profit increased 11.6%
to $72.8 million from $65.2 million for the comparable fiscal 2002 period. The
increase in gross profit for the three and nine month periods ended October
21
31, 2002 is primarily attributable to improvements in the Company's sourcing
costs, more effective inventory management, a change in the Company's product
sales mix, and an increase in royalty income all as described above.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.7 million or 36.6%, to $17.7 million for
the quarter ended October 31, 2002 from $13.0 million for the fiscal 2002
quarter. As a percentage of total revenue, selling, general and administrative
expenses were 25.1% in the fiscal 2003 quarter compared to 19.6% in the
comparable fiscal 2002 quarter. The increase in selling, general and
administrative costs for the quarter ended October 31, 2002 is primarily
attributable to the increase in operating expenses of $3.6 million related to
the Jantzen acquisition, operating expenses of the Canadian joint venture of
$0.35 million, and the timing of certain other recurring operating expenses.
Selling, general and administrative expenses, excluding depreciation and
amortization, increased $4.9 million or 12.1%, to $45.7 million for the nine
months ended October 31, 2002 from $40.8 million in the comparable fiscal 2002
period. As a percentage of total revenue, selling, general and administrative
expenses were 20.8% in the nine month period ended October 31, 2002 compared to
18.7% in the comparable fiscal 2002 period. The increase in selling, general and
administrative costs for the nine month period ended October 31, 2002 of fiscal
2003 is primarily attributable to expenses incurred by the Jantzen operation of
$5.3 million, operating expenses of the Company's Canadian joint venture of $0.6
million and increased operating expenses of the Company's retail outlet by $0.6
million, offset by the elimination of expenses of our European subsidiary of
$2.0 million.
Depreciation and amortization. Depreciation and amortization decreased
$0.8 million for the three months ended October 31, 2002 to $0.9 million from
$1.7 million in the comparable quarter of fiscal 2002. Depreciation and
amortization decreased $2.7 million for the nine months ended October 31, 2002
to $2.2 million from $4.9 million in the comparable fiscal 2002 period. 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 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 increased $1.3 million or 45.7% for
the three months ended October 31, 2002 to $4.2 million from $2.9 million in the
comparable fiscal 2002 quarter. The increase is mainly due to the 9 1/2% senior
secured notes issued in March 2002, offset by 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. Interest
expense increased $1.2 million or 11.5% for the nine months ended October 31,
2002 to $11.8 million from $10.6 million in the comparable fiscal 2002 period.
The increase is mainly due to the 9 1/2 % senior secured notes issued in March
2002, offset by reduction in borrowings, favorable interest rates and the effect
of 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 and nine months ended October 31,
2002, the effective tax rate was 37.8% and 37.7% as compared to 38.9% and 37.6%
for the comparable fiscal 2002 period.
Net income. Net income for the three months ended October 31, 2002
increased $0.1 million to $1.1 million from $1.0 million for the comparable
fiscal 2002 quarter. As a percentage of total
22
revenues, net income was 1.5% for the three months ended October 31, 2002,
compared to 1.5% in the comparable fiscal 2002 quarter. Net income for the nine
months ended October 31, 2002 increased $2.3 million to $8.0 million from $5.7
million for the comparable fiscal 2002 period. As a percentage of total
revenues, net income was 3.7% for the nine months ended October 31, 2002,
compared to 2.6% in the comparable fiscal 2002 period. The increase in net
income was due to the changes described above.
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 $2.9 million in the nine months ended
October 31, 2002, compared to cash provided by operating activities of $18.5
million in the comparable fiscal 2002 quarter. The increase of $21.4 million in
the level of cash used in operating activities is primarily attributable to an
increase in accounts receivable and other current assets, offset in part by
higher earnings, and a decrease in inventory.
Net cash used in investing activities was $45.9 million for the nine
months ended October 31, 2002, which primarily reflects the $27.0 million
purchase of the Jantzen business (including fees related to the transaction). In
addition, the Company used $20.6 million for the purchase of property, plant and
equipment which included the $14.5 million contingent rental payment that was
required by the termination of the synthetic lease and the acquisition of the
building, $2.5 million purchase of the Seneca distribution center and purchases
of computer equipment and related software enhancement costs of $3.6 million.
Net cash provided by financing activities for the nine months ended
October 31, 2002 totaled $48.6 million, which was primarily the result of net
proceeds of the offering of the 9 1/2% senior secured notes of $ 55.6 million,
net repayments of borrowings under the Company's senior credit facility of $17.7
million, net repayments of senior subordinated notes of $2.2 million, proceeds
from the exercise of employee stock options of $1.2 million and the real estate
mortgage of $11.6 million on the Company's main administrative office, warehouse
and distribution facility.
Senior Credit Facility
In October 2002, the Company entered into a new senior credit facility
with a group of financial institutions. The senior credit facility provides the
Company with a revolving credit line up to an aggregate amount of $60.0 million.
The following is a description of the terms of the new senior credit facility,
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.
Certain Covenants. The senior credit facility contains certain
covenants, which require us to maintain a minimum EBITDA and which restrict the
payment of dividends. The Company is currently in compliance with all its
covenants under the senior credit facility.
Borrowing Base. Borrowings under the senior credit facility are limited
under its terms to a borrowing base calculation, which generally restricts the
outstanding balances to the sum of a) 85.0% of eligible receivables plus b)
85.0% of our eligible factored accounts receivables up to $5.0 million plus c)
the lesser of the inventory loan limit or the lesser of 65.0% of eligible
finished goods inventory or 85% of the net recovery percentage (such net
recovery percentage being 62%) of eligible inventory or the loan limit minus d)
35% of the amount of outstanding letters of credit for
23
eligible inventory, e) the full amount of all other outstanding letters of
credit issued pursuant to the senior credit facility which are not fully secured
by cash collateral, and f) licensing reserves for which the Company is the
licensee of certain branded products.
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 quarterly average
excess availability plus excess cash or leverage ratio b) 2.00% above the rate
quoted by the Company' s bank as the average Eurodollar Rate ("Eurodollar") for
1, 2, 3 and 6-month Eurodollar deposits with 1/4 point adjustments depending
upon the Company's quarterly average excess availability plus excess cash and
leverage ratio at the time of borrowing.
Security. As security for the indebtedness under the senior credit
facility, the Company granted the lenders a first priority security interest in
substantially all of the Company's existing and future assets other than its
existing trademark portfolio, 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.
Letter of Credit Facility
As of October 31, 2002, the Company maintained four US dollar letter of
credit facilities totaling $57.0 million and one Canadian dollar letter of
credit facility totaling $2.4 million utilized by the Company `s Canadian joint
venture. Each letter of credit is secured primarily by the consignment of
merchandise in transit under that letter of credit and certain subordinated
liens or the Company's assets. As of October 31, 2002, there was $30.1 million
available under existing letter of credit facilities.
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 previous 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.
24
Real Estate Financing
The Company occupied its main administrative office, warehouse and
distribution facility under a synthetic operating lease for a 240,000 square
foot facility in Miami, Florida. The lease, as amended, expired on June 30,
2002, and required a final payment at termination of $14.5 million.
On June 30, 2002, the Company made the required payment under the
synthetic lease and partially refinanced the acquisition of the facility with an
$11.6 million mortgage. The mortgage has customary covenants and as of October
31, 2002, the Company is in compliance with these covenants.
On September 13, 2002, the Company purchased a distribution center in
Seneca, South Carolina for $2.5 million in cash. The Company had secured the
option to purchase the facility as part of the March 2002 Jantzen acquisition.
Contractual Obligations and Commercial Commitments
The following tables illustrate our contractual obligations and commercial
commitments as of October 31, 2002 and include the effects of the transactions
and amendments discussed above that occurred during the third quarter ended
October 31, 2002.
Payments Due by Period
----------------------------------------------------------------------------------------
Less than
Contractual Obligations Total 1 year 1-3 years 4-5 years After 5 years
----------------------- --------------- --------------- ------------- --------------- ---------------
Senior subordinated notes $ 100,000,000 $ - $ - $ 100,000,000 $ -
=============== =============== ============= =============== ===============
Senior secured notes $ 57,000,000 $ - $ - $ - $ 57,000,000
=============== =============== ============= =============== ===============
Real estate mortgage $ 11,600,000 $ 170,896 $ 307,025 $ 11,122,079
=============== =============== ============= =============== ===============
Operating leases $ 9,907,724 $ 2,039,164 $ 3,272,034 $ 3,123,117 $ 1,473,409
=============== =============== ============= =============== ===============
Total contractual cash obligations $ 178,507,724 $ 2,039,164 $ 3,442,930 $ 103,430,142 $ 69,595,488
=============== =============== ============= =============== ===============
Amount of Commitment Expiration Per Period
---------------------------------------------------------------------
Less than
Other Commercial Commitments Total 1 year 1-3 years 4-5 years After 5 years
---------------------------- --------------- --------------- ------------- --------------- ---------------
Letter of credit $ 29,260,088 $ 29,260,088 $ - $ - $ -
=============== =============== ============= =============== ===============
Stand by letters of credit $ 2,750,000 $ - $ - $ 2,750,000 $ -
=============== =============== ============= =============== ===============
Total commercial commitments $ 32,010,088 $ 29,260,088 $ - $ 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 and
nine months ended October 31, 2002.
25
Item 3: Quantitative and Qualitative Disclosures about Market Risks
The market risk inherent in our financial statements represents the
potential changes in the fair value, earnings or cash flows arising from changes
in interest rates 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 1/4 % senior subordinated notes due
April 1, 2006. The August Swap Agreement was subsequently modified through a
basis swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is entitled to receive semi-annual interest payments on October 1,
and April 1, at a fixed rate of 12 1/4% and is obligated to make semi-annual
interest payments on October 1, and April 1, at a floating rate based on the
6-month LIBOR rate plus 715 basis points for the 18 months period October 1,
2001 through March 31, 2003 (per October Swap Agreement); and 3-month LIBOR rate
plus 750 basis point for the period April 1, 2003 through April 1, 2006 (per the
August Swap Agreement). The Swap Agreement has optional call provisions with
trigger dates of April 1, 2003, April 1, 2004 and April 1, 2005, which contain
certain premium requirements in the event the call is exercised.
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 ($0.6)
million and $2.2 million, respectively, as of October 31, 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 $0.2 million
increase in interest expense for the three months ended October 2002 of fiscal
2003 and an increase of $0.4 million in interest expense for the nine months
ended October 2002 of fiscal 2003 on the Statement of Operations for the three
and nine months ended October 31, 2002 of fiscal 2003.
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 $5.6
million and ($0.8) million, respectively, as of October 31, 2002.
26
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.
Item 4: Internal Controls
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial
officer, after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on
October 16, 2002, have concluded that, as of such date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
and procedures subsequent October 16, 2002, the date of their last evaluation,
nor were there any significant deficiencies or material weaknesses in the
Company's internal controls. As a result, no corrective actions were required or
undertaken.
27
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) Index to Exhibits
Exhibit
Number Description
------ -----------
10.40 Loan and Security Agreement dated as of October 1, 2002
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
(b) Reports on Form 8-K:
None
28
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 13, 2002
By: /s/ Timothy B. Page
----------------------------------------
Timothy B. Page, Chief Financial Officer
29
Certification
I, George Feldenkreis, certify that:
1) I have reviewed the Registrant's Form 10-Q quarterly report for the period
ended October 31, 2002 (the "Re port").
2) Based on my knowledge, the Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the Report.
3) Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in the Report.
4) The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant `s auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in the internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ George Feldenkreis
-------------------------------------------
Name: George Feldenkreis
Title: Chairman and Chief Executive Officer
(Chief Executive Officer)
30
Certification
I, Timothy B. Page, certify that:
1) I have reviewed the Report.
2) Based on my knowledge, the Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the Report.
3) Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in the Report.
4) The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant' s ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in the internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy B. Page
--------------------------------
Name: Timothy B. Page
Title: Chief Financial Officer
(Chief Financial Officer)
31
Exhibit Index
Exhibit
Number Description
10.40 Loan and Security Agreement dated as of October 1, 2002
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act