UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 20032004
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
For the transition period from to .
Commission File number 0-21764
Perry Ellis International, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Florida | 59-1162998 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
3000 N.W. 107th Avenue Miami, Florida | 33172 | |
(Address of Principal Executive Offices) | (Zip Code) |
(305) 592-2830
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2). Yesx No ¨ No x
The number of shares outstanding of the Registrant’s Common Stock is 6,425,641 (as of March 11, 2003).
The aggregate market value of the voting stock held by non-affiliates of the Registrantregistrant is approximately $38,923,108$124,696,201 (as of July 31, 2002)2003).
The number of shares outstanding of the registrant’s Common Stock is 8,469,998 (as of April 6, 2004).
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
Portions of the Company’s Proxy Statement for the 20032004 Annual Meeting—Part III
Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. References in this report to the Jantzen acquisition refer to our acquisition of the Jantzen swimwear business from subsidiaries of VF Corporation in March 2002. References in this report to the Salant acquisition refer to our pending acquisition by merger of Salant Corporation pursuant to a definitive merger agreement entered into in FebruaryJune 2003. References in this report to annual financial data for Perry Ellis refer to fiscal years ending January 31. This Form 10-K contains trademarks held by us and those of third parties.
General information about Perry Ellis can be found atwww.perryellis.comwww.pery.com. Perry Ellis makes itsWe make our annual report on Form 10-K, quarterly reports on Form 10-Q, current report on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 available free of charge on its web site,our website, as soon as reasonably practicable after they are electronically filed with the SEC.
FORWARD-LOOKING STATEMENTS
We caution readers that this report and the portions of the proxy statement incorporated by reference into this report include “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,” and similar words or phrases. TheseWe have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. statements, many of which are beyond our control.
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 and in the portions of the proxy statement incorporated by reference, including under the headingheadings Item 1 “Business – Certain Risks,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. These factors include:
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You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.
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PART I
Item 1. Business
Overview
Perry Ellis isWe are one of the leading apparel companies in the United States. We control a leading designer, marketerportfolio of major men’s and licensorwomen’s brands, some of a broad line of high quality men’s sportswear, including casualwhich were established over 100 years ago. We design, source, market and dress casual shirts, golf sportswear, sweaters, dress casual pantslicense our products nationally and shorts, jeans wear, active wearinternationally at multiple price points and swimwear toacross all major levels of retail distribution. During fiscal 2003, with the Jantzen acquisition, Perry Ellis began designing and marketing women’s swimwear under the Jantzen® and Southpoint®distribution at more than 20,000 doors. Our portfolio of highly recognized brands women’s and junior’s swimwear under the Tommy Hilfiger® brand, and women’s and junior’s swimwear, men’s and junior’s competitive swimwear, swimwear accessories and apparel under the Nike® brand.
Perry Ellis owns or licenses the brand names under which most of its products are sold. These brand names includeincludes Perry Ellis® and Perry Ellis America®, which we believe together generate over $1 billion in annual retail sales, Axis®, Tricots St. Raphael®, Jantzen®, John Henry®, Manhattan®, PING® and Mondo di Marco® for dress casual wear, Cubavera®, the Havanera®, Havana Shirt Co.®™, Natural Issue®, Munsingwear® and, Grand Slam® for casual sportswear, Perry Ellis America, Original Penguin®, and Natural Issue for jeans wear, PING, Perry Ellis and Munsingwear for golf sportswear, Pro PlayerManhattan® and Perry Ellis America for active wear, NAUTICA. We also (i) license the Nike® for selected product lines for sale to corporate purchasers and Jantzen, Southpoint, Nike and Tommy Hilfiger® brands for swimwear and swimwear accessories.accessories, (ii) are the worldwide master licensee for PING® golf apparel, (iii) license the Ocean Pacific® brand for certain men’s sportswear categories and (iv) license the NAUTICA® brand for our corporate wear business.
Perry Ellis’We distribute our products primarily to wholesale customers that represent all major levels of retail distribution channels include regional, national and internationalincluding department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass (i.e., golf related), specialty storesshops, the corporate incentive market, as well as clubs and corporate wear distributors throughoutindependent retailers in the United States Puerto Rico and Canada. Perry Ellis’Our largest customers include Federated Department Stores, Inc., Dillard’s Inc., The May Department Stores Company, Wal-Mart Stores, J.C.Inc., J. C. Penney Company, Inc., Kohl’s Corporation, and Sears, Roebuck & Co. We also operate 38 retail stores located primarily in upscale retail outlet malls across the United States. In addition, we leverage our design, sourcing and Co., Mervyn’s,logistics expertise by offering a limited number of private label programs to retailers. In order to maximize the worldwide exposure of our brands and K-Mart Corporation.generate high margin royalty income, we license our brands through approximately 56 domestic and approximately 79 international license agreements.
Perry Ellis also licenses its trademark portfolio domesticallyOur wholesale business, which is comprised of men’s sportswear and internationallywomen’s and men’s swimwear and swimwear accessories, accounted for 96% of our total revenues in fiscal 2004, and our licensing business accounted for 4% of our total revenues in fiscal 2004. We have traditionally focused on the men’s sportswear market, which represented approximately 86.7% of our total wholesale revenues in fiscal 2004, while our women’s and men’s swimwear market represented approximately 13.3% of our total wholesale revenues in fiscal 2004.
Our licensing business is a significant contributor to our operating income. We license the brands we own to third parties for apparelthe manufacturing and marketing of various other products that Perry Ellis doesin distribution channels in which we do not selldistribute those brands, including men’s and women’s footwear, and men’s suits, underwear, loungewear, active wear, outerwear, fragrances, eyewear and accessories. In addition, to generating additional sourceswe license our brands internationally for the manufacturing and marketing of revenue for Perry Ellis, theseproducts that we offer domestically such as Jantzen sportswear. These licensing arrangements raise the overall awareness of our brands without requiring us to make capital investments or incur additional operating expenses.
In June 2003, we acquired Salant, a leading designer, marketer and distributor of brand name and private label menswear products and the largest licensee of the Perry Ellis’Ellis brand. With the Salant acquisition we have consolidated control of the Perry Ellis brand, added significant revenues and earnings, solidified our balance sheet, further diversified our product offerings and customer base, and added to our portfolio of brands. As a result of this acquisition, we also assumed operation of 39 retail outlet stores, of which four have since been closed closed.
We employ a three-dimensional strategy in the design, sourcing, marketing and licensing of our products that focuses on diversity of brands, products and distribution channels. Through this strategy, we provide our products to a broad range of customers, which reduces our reliance on any single distribution channel, customer, or demographic group and minimizes competition among our brands.
Perry Ellis has built its broadDiversity of Brands.We maintain a portfolio of 18 highly recognized brands through selective acquisitionsthat we either own or license. We are focused on brands that appeal to fashion conscious consumers across all income levels. We design, source, market and license most of our products on a brand-by-brand basis targeting distinct consumer demographic and lifestyle profiles. We also market the Natural Issue, John Henry and the establishmentHavanera Co. brands, which appeal to the middle-income consumer. In addition, we market brands that appeal to women through our Jantzen family of its own brands over its 36-year operating history. In recent years, through acquisition of brands and internal growth, Perry Ellis has experienced significant overall growth. From Perry Ellis’ initial public offering in 1993 to fiscal 2003, Perry Ellis has experienced a compound annual revenue growth rate of 22.3%. In order to continue to grow, Perry Ellis selectively evaluates a number of acquisition candidates each year.swimwear products.
Through its “familyDiversity of brands” marketing strategy,Product Categories.We design and market apparel in a broad range of men’s product categories and a few women’s product categories, which increases the stability of our business. Our menswear offerings include casual sportswear, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, swimwear and swim accessories, activewear, and leather accessories. Our womenswear offerings include swimwear, sportswear and accessories. We believe that our product diversity decreases our dependence on any one product or fashion trend and has contributed substantially to our growth.
Diversity of Distribution Channels.We market our products through all major levels of retail distribution, which allows us to reach a broad range of consumers in the United States and Canada. We distribute through department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate incentive market, as well as clubs and other independent retailers in the United States and Canada. We entered the corporate wear market in 2001, where we provide corporate clients with high quality customized products. Our products are distributed through more than 20,000 doors at some of the nation’s leading retailers, including Federated, Dillard’s, May Department Stores, Wal-Mart, J. C. Penney, Kohl’s, Sears, and Nordstrom.
The following table illustrates the diversity of the brands and products we produce and market and their respective distribution channels:
Product Category | ||||||||||||||
Distribution | Casual | Dress Casual | Jeans Wear | Golf | Active Sports | Swimwear | Youth Lifestyle | |||||||
Upscale Department Stores | Tricots St. Raphael Original Penguin | Axis Mondo di Marco | PING Collection | Redsand Original Penguin | ||||||||||
Department Stores | Cubavera Grand Slam | Perry Ellis Axis | Perry Ellis America | Grand Slam | Jantzen Tommy Hilfiger Nike | Redsand | ||||||||
National and Regional Chain Stores | Natural Issue the Havanera Co. Munsingwear Ocean Pacific Jantzen | John Henry Axist | Natural Issue | Penguin Sport Munsingwear | Pro Player | Jantzen Nike Southpoint | ||||||||
Mass Merchants | Private Label | Manhattan | Private Label | |||||||||||
Green Grass (1) | Munsingwear | Perry Ellis | PING Collection | |||||||||||
Corporate | NAUTICA Cubavera | Perry Ellis | PING Collection | |||||||||||
Specialty Stores | Tricots St. Raphael | Axis | Jantzen Tommy Hilfiger Nike | Redsand |
(1) | This channel includes high-end and specialty golf shops and resorts. |
We were incorporated in Florida in April 1967 and changed our name from Supreme International Corporation to Perry Ellis seeks to developInternational, Inc. on June 18, 1999. Our principal executive offices are located at 3000 N.W. 107th Avenue, Miami, Florida 33172, and enhance a distinct brand name, styling and pricing strategy for each product category within each distribution channel and target consumer. Perry Ellis markets its brands to a wide range of segments, targeting consumers in specific age, income and lifestyle categories. Perry Ellis also produces goods sold under private label programs for various retail customers. Branded product and private label sales accounted for 75.0% and 25.0% of Perry Ellis’ fiscal 2003 net sales, respectively, compared to 63.0% and 37.0% of fiscal 2002 net sales, respectively.our telephone number is (305) 592-2830.
Perry Ellis believesOur Competitive Strengths
We believe that itsour competitive strengths position it wellus to capitalize on several trends that have affected the apparel sectorindustry in recent years. These trends include include:
Perry Ellis primarily contracts for the manufacture of its products through a worldwide network of quality manufacturers. Perry Ellis currently uses approximately 130 independent suppliers, located in the Far East, other parts of Asia, Africa and South and Central America. Perry Ellis believesWe believe that its extensive sourcing experience enables it to obtain quality products on a cost-effective basis.
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Recent Developments
Jantzen Acquisition
In March 2002, Perry Ellis completed the Jantzen acquisition, which was the acquisition of certain assets of Jantzen, Inc., a recognized innovator in swimwear since 1910, from subsidiaries of VF Corporation. The purchase price of the Jantzen acquisition was approximately $24.0 million, excluding transaction fees. The Jantzen brand has a history of over 90 years and its products are sold in upscale department stores, national and regional chain stores, mass merchants and specialty shops. The acquisition was financed with a portion of the proceeds from a $57.0 million offering of 9½% senior secured notes due 2009 described below.
The Jantzen assets Perry Ellis acquired consisted primarily of trademarks and trade names, license agreements, certain equipment, other items of personal property, showroom leases and a limited amount of inventory relating to the 2003 season. Perry Ellis also acquired the license for the Tommy Hilfiger brand for women’s and junior’s swimwear and the Nike brand for women’s and junior’s swimwear, men’s and junior’s competitive swimwear, swimwear accessories and apparel. Perry Ellis plans on building on Jantzen’s reputation for high-quality swimwear. The Jantzen acquisition has added to Perry Ellis’ strong portfolio of brands, allowed Perry Ellis to broaden its product line into new product categories, such as women’s swimwear and sportswear and increased Perry Ellis’ licensing revenues.
Secured Notes Offering
On March 22, 2002, Perry Ellis completed a private offering of $57.0 million 9½% senior secured notes due 2009. Approximately $24.0 million of the net proceeds of this offering was used to finance the Jantzen acquisition, with the remainder of the net proceeds being used to reduce the amount of outstanding debt under Perry Ellis’ senior credit facility and as additional working capital. The senior secured notes are secured by a first priority security interest granted in Perry Ellis’ portfolio of trademarks and licenses as of the closing date of the Jantzen acquisition, including the trademarks, licenses and all income, royalties and other payments acquired in the Jantzen acquisition. The senior secured notes are senior secured obligations of Perry Ellis and rankpari passuin right of payment with all of its existing and future senior indebtedness.
The Salant Acquisition
On February 3, 2003, Perry Ellis entered into a merger agreement with Salant Corporation, Perry Ellis’s largest licensee, which provides for the merger of a wholly owned Perry Ellis subsidiary with Salant. If the merger is completed, Salant will become a wholly owned subsidiary of Perry Ellis. Salant paid $5.7 million in royalties and $2.7 million in advertising contribution to Perry Ellis in fiscal 2003. The merger is subject to customary closing conditions. Perry Ellis expects to close the merger before the end of its second fiscal quarter if all of the conditions to the merger are satisfied.
The aggregate merger consideration to be paid by Perry Ellis is $91.0 million, and it is expected to be comprised of approximately $52.0 million in cash and approximately $39.0 million worth of newly issued Perry Ellis common stock. Salant shareholders will receive approximately $9.37 per share in value comprised of at least $5.35 per share in cash and not more than $4.02 per share of Perry Ellis common stock. The precise fraction of a share of Perry Ellis common stock that Perry Ellis will issue in the merger for each Salant share will be determined based on the average closing price of the Perry Ellis common stock for the 20-day period ending three trading days before the anticipated merger closing date. The maximum number of shares of Perry Ellis common stock, however, that may be issued in the Salant acquisition is limited to 3,250,000.
The cash portion of the merger consideration will be funded from Perry Ellis’ existing cash reserves and through borrowings under its senior credit facility. Perry Ellis obtained a commitment from the lead senior lender in its existing senior credit facility to increase the facility from $60.0 million to $110.0 million, with a $30.0 million sub-limit for letters of credit.
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Salant licenses the Perry Ellis brand from Perry Ellis for men’s sportswear, dress shirts, dress pants and leather accessories and derived approximately $164.3 million or 65.2% of its revenues for the fiscal year ended December 28, 2002 from the sale of Perry Ellis products. The remaining approximately $87.7 million of Salant’s fiscal 2002 revenue is made up of Salant’s owned brands such as Axis® for active wear and Tricots St. Raphael® for sweaters, sales under license agreements for use of the JNCO® and Ocean Pacific® brands, as well as several private label programs. The Axis and Tricots St. Raphael brands are both sold at upscale retailers. Salant also operates 40 leased retail outlet stores around the country.
If the Salant acquisition is completed, Perry Ellis will be positioned to enter the men’s collection market for sportswear, dress shirts and dress pants and the leather accessories market. With the acquisition, Perry Ellis will also begin to design, market and license products under the Axis and Tricots St. Raphael brands, and under the JNCO trademark for menswear. Furthermore, Perry Ellis will begin marketing menswear under the Ocean Pacific brands as a licensee, if the written consent of Ocean Pacific Apparel Corp. is obtained.
Perry Ellis believes the Salant acquisition will allow the company to exercise greater control of the Perry Ellis brands’ major product categories, add significant revenue and earnings growth, strengthen Perry Ellis’ management team and enhance the company’s efforts to build a stronger domestic and international licensing business. In addition, Perry Ellis believes that the Salant acquisition will also provide the company with two well-recognized brands, Axis and Tricots St. Raphael, to further strengthen its brand portfolio.
Competitive Strengths
Perry Ellis believes that it haswe have the following competitive advantagesstrengths in itsour industry:
Portfolio of Familynationally and internationally recognized brands. We currently own or license a portfolio of Brands. Perry Ellis owns18 brands, which enjoy high recognition within their respective consumer segments. We believe that these brands have built a loyal following of fashion-conscious consumers and markets eight majorretailers who desire high quality, well-designed products. We license the Nike, Tommy Hilfiger, PING, NAUTICA and Ocean Pacific brands, Perry Ellis, Jantzen, Natural Issue, Munsingwear, Grand Slam, John Henry, Manhattan, and Cubavera with a totalwhich we believe are highly recognizable brands within their various product categories. We also license 14 of over 41 sub-brands (such as Perry Ellis Portfolio, Perry Ellis America, Southpoint, Original Penguin® and Havanera). If the Salant acquisition is completed, Perry Ellis will have greater control of the Perry Ellis brand and also own and market the Axis and Tricots St. Raphael brands. Perry Ellis also designs, sources and markets four other majorour brands (PING, NAUTICA, Nike and Tommy Hilfiger), which it licenses under existing agreements with various expiration dates and renewal options. Perry Ellis also licenses its brands and sub-licenses the PING brand to licenseesthird parties for products in distribution channels in which we do not market those brands. We believe that it does not sell directly to retailers. These brands enjoy national and international recognition in their respective sectors of the market and have a loyal consumer and retailer following. Brandbrand recognition is critical in the apparel industry, where strong brand names help define consumer preferences and drive upscaleselling space at retailers.
Diversified product offering and distribution model. We market a diverse array of products under our numerous brands at multiple price points and across multiple levels of retail distribution. Our menswear offerings include casual sportswear, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, swimwear and swim accessories, activewear and leather accessories. Our womenswear offerings include swimwear, sportswear and swim accessories. Our products are distributed through more than 20,000 doors at department stores, national and regional chain store floor space allocation.stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate incentive market and independent retailers in the United States and Canada. Our diversified product offerings and distribution model reduce our reliance on any one product, demographic group, merchandise preference or distribution channel and minimizes competition among our brands.
Strong Retailer Relationships.relationships with our retailers Perry Ellis believes its. We believe that our established relationships with retailers at all distribution levels give it the opportunityallow us to maximize the selling space dedicated to itsour products, monitor itsour brand presentation and merchandising selection, and introduce new brands and products. Perry Ellis hasBecause of our quality brands and products, dedication to customer service, design expertise and sourcing capabilities, we have developed and maintained long-standing relationships with itsour largest customers, which includeincluding Dillard’s (more than 25 years), May Department Stores (more than 25 years), J.C. Penney (more than 2325 years), Sears (25 years), Federated Department Stores (16 years), Wal-Mart (14 years), and Kohl’s (10 years),.
Strong licensing capabilities and Sears (20 years)relationships. Perry Ellis believes that it has maintained these relationshipsWe license many of the brands we own, and, as a result, of the quality brand names it offers its customers, innovative organic brand development, private label products and its dedication to customer service. Management, in conjunction with Perry Ellis’ staff of sales people and commissioned agents, meets with its major customers frequently to review product offerings, establish and monitor sales plans, and design joint advertising and promotional campaigns. Perry Ellis believes its reliable delivery times, consistent product quality and quick response to fashion trends and inventory demands allow it to meet its retailers’ current requirements. In addition, Perry Ellis’ global sourcing network, design expertise, advanced systems and technology, and warehousing facilities enhance its ability to meet the changing and increasing needs of its retailers and mitigates channel volatility. If the Salant acquisition is completed, Perry Ellis intends to capitalize on Salant’s strong relationship with upscale retail customers, with whom Perry Ellis does not currently do significant business. In addition, Perry Ellis believes that the Salant acquisition will also allow Perry Ellis to further diversify its customer base so that no customer will account for more than 10% of Perry Ellis’ annual net sales.
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Strong Licensing Capabilities and Relationships. Perry Ellis hashave gained significant experience in identifying potential licensing opportunities and hasopportunities. We have established relationships with many active licensees by actively licensing theand believe these relationships provide opportunities to grow our revenues and earnings. Our brands it owns. Perry Ellis’ brands haveare solidly positioned it in more retailersretail outlets at all major levels of retail distribution giving them strongand have increased our exposure nationally and internationally thereby making Perry Ellis’ brands more attractive to licensees. Perry Ellis believesinternationally. We believe that itsour broad portfolio of brands also appeals to licensees because it gives themlicensees the opportunity to sell itstheir products into many different retail distribution channels. For example, a manufacturer of men’s accessories might license the Natural IssueCubavera brand to sell to nationalenter the department storesstore channel or license the Munsingwear brand to target mass merchants. Further,the national and regional chain stores. By licensing our owned brands, we offer consumers a complete product assortment by aligning its strengthsbrand. We also coordinate our marketing efforts with those of its licensees, Perry Ellis has been able to raise brand awareness, enhance its sourcing capabilities,thereby maximizing exposure for our brands and plan its marketing campaigns to maximizeour return on investment. Perry Ellis believes that its licensing expertise, which is supported by an experienced and dedicated staff, will allow it to continue marketing its brands to apparel and accessory producers effectively. Perry Ellis has already begun to bring its licensing experience and expertise to its Jantzen brand and expects to position it among the key players in the swimwear and sportswear market.
World-Wide Low-Cost Sourcing CapabilitiesSophisticated global low-cost sourcing capabilities. Perry Ellis’ global network of suppliers enables it to purchase apparelWe have sourced our products at competitive cost without sacrificing quality, while at the same time reacting quickly to its retailers’ needs and maximizing production flexibility. Perry Ellis developed this expertise through more than 35 years of experience in purchasing its products from suppliers around the world. No individual supplier in fiscal 2003 accountedglobally for more than 10.0%36 years and employ sophisticated logistics and supply chain management systems to maintain maximum flexibility. Our network of itsworldwide sourcing partners enables us to meet our customers’ needs in an efficient and high quality manner without relying on any one vendor, factory, or country. In fiscal 2004, based on the total sourcing needs. Perry Ellis does not have long-term contractual arrangements with anydollar value, we sourced our products from Asia (72%), Central and South America (14%), the Middle East (6%) and other areas of its suppliers, thereby affording it greater flexibility in making purchasing decisions with its vendor base. Perry Ellis currently maintainsthe world (8%). We maintain a staff of experienced sourcing professionals principally locatedin five offices in China (including Hong Kong), as well as in the United States, South Korea China, and Taiwan. With the global network of nineOur sourcing offices closely monitor our suppliers and provide strict quality assurance offices, Perry Ellis is ableanalyses that allow us to closely monitor its suppliers andconsistently maintain strictour high quality standards for the foreseeable future. Byour customers. We have a compliance department that works closely with our quality assurance staff to ensure that our sourcing itspartners comply with Company-mandated and country-specific labor and employment regulations. We believe that sourcing our products Perry Ellis manages itsoverseas allows us to manage our inventories more effectively and does not incuravoid incurring the costs of maintaining and operating production facilities. Because of our sourcing experience, capabilities and relationships, we believe that we are well positioned to take advantage of the 2005 elimination of all textile and apparel quotas for member countries of the World Trade Organization.
Design Expertiseexpertise and Advanced Technology.advanced technology Perry Ellis’ in-house. We maintain a staff consists of 45 senior93 designers, merchandisers and merchandisers,artists who are supported by a staff of 42 other41 design professionals. Together, theyprofessionals, including assistant designers, technical designers, graphic artists and production assistants. Our in-house design staff designs substantially all of Perry Ellis’our products utilizing state-of-the-artusing advanced computer-aided design technology. The use of this technology that minimizes the time-consumingtime-intensive and costly production of actual sewn samplesprototypes prior to customer approval. It also allows Perry Ellis to create custom-designedIn addition, this technology provides our customers with products meeting thethat have been custom designed for their specific needs of its customers and facilitates a quick response to changingmeet current fashion trends. Perry Ellis’ computer-aidedWe employ advanced fabric and design system is upgraded on an ongoing basistechnologies to allow itensure a proper fit and outstanding performance when we create our women’s and men’s swimwear. We regularly upgrade our computer technology to enhance itsour design technology, instantaneously share its designscapabilities, facilitate communication with itsour global suppliers globally,and customers on a real-time basis, react quickerfaster to new product developments by competitors and meet changes in consumer trends.customer needs.
Capacity for Growth. Perry Ellis is leveraging its recent investments in infrastructure and its skilled personnel to accommodate future internal growth and selected acquisitions. Perry Ellis owns its corporate office facility in Miami, Florida, which includes 70,000 square feet of office space, and 160,000 square feet of warehouse space, and owns three acres of vacant land adjacent to it. Perry Ellis also leases three warehouse facilities in Miami, Florida totaling approximately 103,000 square feet to handle the overflow of bulk shipments and its specialty and PING operations. In addition, in connection with the Jantzen acquisition Perry Ellis acquired 350,000 square feet of warehouse space in Seneca, South Carolina, which sits on 35 acres of land. Perry Ellis believesWe recently launched PerrySolutions, a software system that these facilities, along with two third-party warehouse facilities in California, its four showrooms in New York with 25,400 square feet, and the 45,200 square feet of leased space housing Jantzenenables our sales and design offices in Portland, Oregon are sufficient to accommodate current operations and additional personnel. If the Salant acquisition is completed, Perry Ellis will acquire an additional 360,000 square foot distribution warehouse in Winnsboro, South Carolina and 136,000 square feet of leased office, design and showroom space primarily in New York, New York.
In June 2002, Perry Ellis installed the Essentus Vision Suite ERP system in its Jantzen division. In December 2002, this system was rolled out to the remaining Perry Ellis businesses. Perry Ellis will use this
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systemplanners to manage customer orders, inventoriesour retail customers’ inventory at the SKU level. This system helps maximize sales of our products thereby increasing inventory turns for retailers, which in turn reduces our product returns and controlmarkdowns, and increases our profitability. We also use PerrySolutions during the supply chain process. Based onassortment planning process to allocate the latest technology,correct quantities for the Essentus Vision Suiteinitial rollout of products replaced legacy systems that were in some cases more than 20 years old. Implementation of this new system is part of Perry Ellis’ commitment to upgrading its corporate infrastructure to position Perry Ellis for future growth.product at retail.
Proven Abilityability to Integrate Acquisitionsintegrate acquisitions. Since 1993, we have been successful in selectively acquiring, managing, developing and positioning 18 highly recognized brands within our business, including Munsingwear (1996), Perry Ellis (1999), John Henry (1999), Manhattan (1999) and Jantzen (2002). We believe our experience has selectively acquired and integrated eight major brands, which currently have over 41 sub-brands. In assessing acquisition candidates, Perry Ellis selectively targets brands that it believes are under-performing and can be revitalized using Perry Ellis’ competitive strengths. To date Perry Ellis’ most significant brand purchases have been its acquisitionsprepared us for the integration of the Munsingwear family of brands in 1996, the Perry Ellis, John Henry and Manhattan brands in 1999, and the Jantzen brand in 2002.Salant business.
As part of an extensive integration process for each brand, Perry Ellis has:we have:
repositioned the |
Perry Ellis believes that because of its existing infrastructure and experience with integrating brands it can successfully integrate additional brands into its family of brands, revitalizing them consistent with its competitive strengths.different distribution channels to address the needs in those channels,
Experienced Management Teammanagement team. Perry Ellis’Our senior management team each averages nearly 25more than 26 years of experience in the apparel industry. Among other attributes, Perry Ellis’ management teamindustry and has significantextensive experience in developinggrowing and revitalizingrejuvenating brands, structuring licensing agreements, and dealing effectivelybuilding strong relationships with retailers, the tradeglobal suppliers and the financial community.retailers. In addition, George Feldenkreis, our chairman and chief executive officer, and Oscar Feldenkreis, our president and chief operating officer, have expressed their commitment to us by maintaining a significant ownership stake in our company.
Our Business Strategy
Perry Ellis’ “familyOur strategy is to continue to pursue our three-dimensional approach by developing and enhancing our portfolio of brands”brands, increasing the scope of our product offerings and expanding distribution for our brands, while continuing our focus on growth and profitability through the execution of the following strategies:
Continue to strengthen the competitive position and recognition of our brands. We intend to continue enhancing the recognition of our brands by aggressively marketing approach is designedour brands to developboth consumers and retailers. We have made a strategic decision to focus on branded apparel and to reduce our private label business. As a result of this shift in our business strategy and our acquisition and development of certain brands, our branded apparel business has increased as a percentage of net sales from 75% for fiscal 2003 to 91% for fiscal 2004. We manage each brand individually, developing a distinct brand and marketing strategy for eachevery product category within eachand distribution channel. For example, Perry Ellis’ golf sportswear designs for the mass market distribution channel are sold under the Munsingwear Penguin Sport brand, for department stores under the Grand Slam brand, and for higher end retailers, golf shops and resorts under the PING brand. By differentiating Perry Ellis’ brandsWe will continue to participate in this manner, Perry Ellis can better satisfy the needs of each type of retailer by offering brands tailored to their specific distribution channel while not saturating its retail market. In addition, Perry Ellis believes that this strategy helps insulate it from changing retail patterns, allows it to maintain the integrity of each distribution channel, and helps prevent brand erosion.
Perry Ellis’ objective is to develop and enhance its brands by:
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Controlling strong brands allows Perry Ellis to increase its retail base, license these brands to third parties, develop sub-brands and grow internationally.
To achieve this objective, Perry Ellis has adopted a strategy based on the following elements:
Increase Brand Name Recognition. Perry Ellis intends to enhance recognition of its brand names by promoting its brands at the retailer and consumer levels. As part of this effort, Perry Ellis conducts cooperative advertising in print and broadcast media, as well as market directly to consumers through billboards, event sponsorships, celebrity sponsorships, special event advertisements and advertisements in which various retailers feature its products in their advertisements. Perry Ellis also engages in direct consumer advertising in select markets by securing highly visible billboards and events, sponsorships, and advertising in periodicals such as Men’s Health, Maxim and Gentleman’s Quarterly in association with specific regional or national events. Perry Ellis is continuing Jantzen’s emphasis in print advertisements for its swimwear products in influential fashion magazines such asselected periodicals. In Style, Glamour and Vogue and intendsaddition, we will continue to sponsor selected athletes and celebrities in the future. Perry Ellis believes these campaigns will serve to further enhance and broaden its customer base. Licensing Perry Ellis’ brands to third parties also serves to improve brand recognition by providing increased consumer exposure. Perry Ellis also hashave a strong presence at trade-shows,trade shows, such as “M.A.G.I.C.” in Las Vegas, market-weekMarket Week in New York, and golf and swim-focusedswim shows and events throughout the country. Perry Ellis also continues to maintain Web sites for each of its majorLicensing our brands to take advantage ofthird parties also enhances brand recognition by providing increased customer exposure domestically and internationally, as well as opportunities created by the Internet.for future product extensions.
Continue to diversify our product line. We intend to continue to expand the range of our product lines, thereby capitalizing on the name recognition, popularity, and discrete target customer segmentation of our major brands. For example, we are introducing a line of women’s beachwear and sportswear under the Jantzen brand. We intend to pursue expansion opportunities in young men’s sportswear, whether through licensing or direct marketing opportunities. The Salant acquisition takes us into the men’s better market and collection market for sportswear, dress shirts, bottoms and leather accessories and, through the Axis and Tricots St. Raphael brands, the better sportswear market. We intend to use Axis and Tricots St. Raphael, as well as the expertise of Salant’s sales and marketing personnel, to expand our sweater business. In addition, we will continue to seek licensing opportunities that will expand our collection of products.
Increase Distribution. Perry Ellis has increased the distribution of its existing products by expanding the number of regional and national retailers that carry its brands and gained greater penetration in the numbereach channel. We will continue to selectively pursue new ways to increase our penetration of stores in which each of these retailers sells its products. This increased exposure has broadened Perry Ellis’ established reputation at the retail and consumer levels. Perry Ellis selectively pursues newexisting channels of distribution for itsour products, focusing on maintaining the integrity of itsour products and reinforcing itsour image at existing retail stores, as well as introducing itsour products to geographic areas and consumer sectors that are presently less familiar with itsour products. Perry Ellis believes itWe will further increasealso seek to expand our business with our existing customers by offering them products that are compelling and different from those in the marketplace and by capitalizing on our relationships with them by offering them more of our products. As a result of the Salant acquisition, we have increased the number of regional and national retailers that carry itsour brands ifand entered certain upscale department stores, such as Nordstrom, which carry the Salant acquisition is completed.Axis and Tricots St. Raphael brands.
Adapt to our continually changing marketplace. We will continue to make the necessary investments and implement strategies to meet the growing needs of our customers on a timely basis in the ever-changing apparel industry. We have a history of successfully adapting our business to meet the challenges of our industry. Some examples include:
Continue To Diversify Product Line. Perry Ellis continues to broaden range of its product lines, capitalizing on the name recognition, popularity and unique target customer segmentation of each major brand. For example, with the Jantzen acquisition, Perry Ellis entered the market for women’s and men’s swimwear markets and accessories. Perry Ellis also increased its commitmentformed the basis for our planned entry into the women’s sportswear market. We believe that our design and sourcing expertise positions us to grow our revenues from these product categories substantially in the future. We intend to position Jantzen as a premiere casual resort lifestyle brand for women and men.to take advantage of36 years ago, we have focused on Hispanics, the changing demographicslargest minority group in the United StatesStates. We developed the Cubavera and the Havanera Co. brands in fiscal 2000 and 2002, respectively, to specifically target the Hispanic market and consumers that embrace the Hispanic lifestyle brands.introductionupscale Axis and Tricots St. Raphael brands, as well as greater control of upscale lines for Hispanics, Cubaveradesigning and Havanera.marketing the Perry Ellis also expanded the Natural Issue brand in the national and regional chain stores. If the Salant acquisition is completed, Perry Ellis will begin to design and market for theline of men’s collection market for sportswear, dress shirts, and dress pantsbottoms and leather accessories market.accessories. With this acquisition, we expect to leverage Salant’s relationships to sell more of our products through these upscale retailers.Adapt To Changing Marketplace. The apparel business continues to present new challenges in changing styles, customer demands and consumer tastes, getting goods to market, and reacting to the technologies employed by the retailers and imposed on suppliers. By continuing to strive for improvements in its design department Perry Ellis continues to develop new designs suited to the various lifestyles it caters to. Perry Ellis’ continuing commitment to sourcing and logistics enables it to meet the time pressures of gearing up for the new sales seasons, and reacting quickly to customer demands. Some examples of Perry Ellis’ ability to meet the challenges in its business follow:ŸIn January 2001, Perry Ellis started distribution into the corporate wear market (Advertising Specialty Industry or “ASI” market), which is geared towards selling merchandise to large corporations such as uniforms and for promotional activities. Perry Ellis diversified its internal sales structure to better service these customers and their sales channels. Perry Ellis has continued to grow the corporate wear business by licensing the NAUTICA brand for this market in fiscal 2002.ŸThe Jantzen acquisition provided Perry Ellis with its first entry into the women’s swimwear and sportswear market. This step gives Perry Ellis the opportunity to apply its design, marketing and global9
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Expand Licensing Activitiesour licensing opportunities. Since acquiringour acquisition of Munsingwear in 1996, Perry Ellis haswe have significantly expanded the licensing of itsour brands to third parties for various product categories. The acquisitions of the Perry Ellis, John Henry, Manhattan, and Jantzen brands have provided Perry Ellis, and willWe intend to continue to provide it, with significant licensing opportunities. If the Salant acquisition is completed, the addition of the Axislicense our brands to existing and Tricot St. Raphael brand names is expected to enhance these activities. Perry Ellis is using itsnew licensees as profitable opportunities arise. We will also use our brand portfolio to expand itsour licensing activities particularly with respectin womenswear and sportswear. At the international level, we will continue to product categories such as women’s wear and active wear, and to enter into historically underserved geographic areasexplore licensing opportunities where we see opportunities for the company,growth, such as Latin America, Europe and Asia. Perry Ellis is continually working with its licenseesWe will continue to strengthen their design, finished products and marketing campaigns, thereby increasing its revenues. Perry Ellis also continually reviews its possible entry into new markets and provides potential licenseesprovide our licensing partners with strong brands, design expertise and innovative marketing strategies. In addition to the revenues and brand awareness that licensing provides us, we also believe that licensing our brands benefits us by reducing the volatility of our operating income.
Pursue Strategic Acquisitions. The apparel industry has followed the consolidation trend of the retail industry as large retailers have continued to give preferences to more dependablestrategic acquisitions and flexible vendors. Perry Ellis is frequently presented with and evaluates new acquisition opportunities and intends. We intend to continue itsour strategy of making selective acquisitions to expand our portfolio of brands and add new product lines as our industry continues to follow the consolidation trend of our retailers. We will continue to internally develop new brands and expand its portfoliological extensions of brands.existing brands as opportunities in the marketplace arise. We intend to pursue acquisition opportunities in a disciplined manner as they become available and focus on products or categories that have high consumer awareness and are difficult to duplicate from a technical or logistical standpoint. Since our initial public offering in 1993, Perry Ellis haswe have acquired, or obtained licenses for, several brands, including Munsingwear, Perry Ellis, John Henry, Manhattan, Jantzen, PING, Tommy Hilfiger, Nike, NAUTICA, Mondo di Marco, Ocean Pacific, Axis, Tricots St. Raphael and NAUTICA. The Jantzen acquisition provided Perry Ellis withRedsand. We believe that our history of selectively acquiring under-marketed or under-performing brands and incorporating them into our efficient infrastructure generates a unique opportunity to apply its design, sourcing, marketing and distribution expertise to a new market with a potentially significant upside. The Salant acquisition, if completed, will give Perry Ellis greater control over the Perry Ellis brand, as well as additional brands owned and licensed by Salant.superior return on investment for our investors.
Brands
The key componentsIn fiscal 2004, approximately 91% of Perry Ellis’ brand strategy are to: (a) provide consistent high qualityour net sales were from branded products (b) distribute its brands in distinct channels of distribution, and (c) reinforce and capitalize on each brand’s image through new product development and image advertising. This strategy has enabled Perry Ellisas compared to increase its customer base, license its brands to third parties and develop sub-brands.
During fiscal 2003 approximately 75.0%when 75% of Perry Ellis’ products (byour net sales value) were sold under brands it owns or licenses from third parties. Perry Ellisbranded products. We currently owns eightown 13 and license five nationally recognized brands whose products it sourceswe source and sells to retailers and other channels. Thesesell through all major levels of retail distribution. Our owned brands include Perry Ellis, Perry Ellis America, Axis, Tricots St. Raphael, Jantzen, John Henry, Cubavera, the Havanera Co., Natural Issue, Munsingwear, Grand Slam, John Henry, Manhattan,Original Penguin and Cubavera. ThereManhattan. We have beendeveloped over 4142 sub-brands developed from these eight major brands, including the Perry Ellis Portfolio, Perry Ellis America, Southpoint, Penguin Sport and Original Penguin sub-brands. Perry EllisAxist. We also distributesdistribute the PING, Nike, Tommy Hilfiger, NAUTICA and NAUTICAOcean Pacific brands under license arrangements.
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Perry Ellis licensesWe license the Perry Ellis brand, itsour premier brand, as well as the Jantzen, John Henry, Manhattan, Natural Issue, Munsingwear and MunsingwearManhattan brands, for products that it doesin distribution channels in which we do not sellmarket directly to the retailers. Perry Ellis’In addition, we license our brands internationally for products we distribute domestically. Our depth of brand selection enables itus to target consumers across a wide range of ages, incomes and lifestyles.lifestyles, reduces our reliance on any single distribution channel, customer or demographic group, and minimizes competition among brands.
Perry Ellis.Ellis Perry Ellis. In fiscal 2000, we acquired the Perry Ellis brandand Perry Ellis America brands, which we believe together generate over $1 billion in 1999, which isannual retail sales and are associated with elegance, quality, value, comfort and innovative designs. Currently, theThe Perry Ellis brand appeals primarily to higher-income, status conscious, professional 25-40 year oldyear-old men. In fiscal 2003,As a result of the Salant acquisition, we are now designing and marketing Perry Ellis branded sportswear, dress shirts, dress pants and leather accessories for the men’s better market and collection market. We also initiated the design of Perry Ellis women’s and men’s swimwear. Perry Ellis primarily licenseslicense the Perry Ellis brand to third parties for a wide variety of apparel and non-apparel products, with Salant being its largest licensee. Therefore, Perry Ellis will be able to exercise greater control overproducts.
Axis. We acquired the Perry EllisAxis brand if the Salant acquisition is completed. Thewhen we acquired Salant. This brand is currently one ofassociated with a casual lifestyle that affords quality, value, comfort and innovative designs. The Axis brand appeals primarily to higher-income, status conscious, professional 30-50 year-old men. We sell sportswear and activewear under the better performing brands inAxis brand, which are sold primarily at upscale department stores and specialty stores. Perry Ellis products
Tricots St. Raphael. We acquired the Tricots St. Raphael brand when we acquired Salant. This brand is associated with a sophisticated dress casual lifestyle featuring quality, unique designs and fabrics. The Tricots St. Raphael brand appeals primarily to higher-income, status conscious, professional 40-60 year-old men. We sell sportswear and sweaters under the Tricots St. Raphael brand, which are sold under the “Perry Ellis” brand in collection departmentsprimarily at upscale department and under the “Perry Ellis Portfolio” brand in classification departments.specialty stores.
Jantzen and Southpoint.Southpoint Perry Ellis. We acquired the Jantzen and Southpoint brands as part of the Jantzen acquisition in fiscal 2003. The Jantzen brand has a history of over 90 years, and its products are sold in upscale department stores, national and regional chain stores, mass merchants and specialty shops. With this acquisition, Perry Ellis entered thestores. We sell men’s and women’s swimwear under the Jantzen brand, as well as women’s swimwear under the Southpoint brand. We also recently introduced men’s and accessories marketswomen’s sportswear under the Jantzen brand to capitalize on its rich history and the men’s swimwear and accessories markets.reputation for quality.
John Henry. The John Henry brand, which we originally licensed from Salant, and subsequently acquired in fiscal 2000, appeals to middle-income 25-45 year-old men. The brand is well known, is associated with quality and value, and is primarily sold in national and regional chain stores. Our John Henry product offerings form a “dress casual collection” as John Henry is considered a designer brand at national and regional chain stores.
Cubavera and the Havanera Co. We introduced the Cubavera brand in fiscal 2000 and followed with the introduction of the Havanera Co. brand in fiscal 2002. These brands appeal to Hispanic males between the ages of 25-45 and consumers who embrace Hispanic lifestyle brands. Cubavera is currently sold in major department stores as well as specialty stores around the country, while the Havanera Co. brand is sold in national chain stores.
Natural Issue. Perry EllisWe developed the Natural Issue brand in fiscal 1988 to appeal to middle-income men who are 25-55 years old.year-old men. Natural Issue’s products include dress casual shirts, sweaters and pants. Perry Ellis is expanding itsWe have expanded our pants products to include the Natural Issue Executive Khaki pants line with cotton fabric.fabric, as well as twill and corduroy fabrics. Natural Issue is primarily sold in national and regional chain stores.
Munsingwear. Perry EllisWe purchased the Munsingwear family of brands along with its associated sub-brands in fiscal 1997 to appeal to the middle-income 30-50 year-old manmen who prefersprefer classic American casual sportswear. Munsingwear and its sub-brands have over 100 years of history. Munsingwear apparel categories include golf shirts, vests, jackets,sportswear, sweaters, activewear and casual pants, thatand are primarily sold in national and regional chain stores. TheseThe sub-brands are also sold primarily to national and regional mass merchants.chain stores.
Grand Slam and Penguin Sport. Perry EllisWe purchased the Grand Slam and Penguin Sport brands as part of the Munsingwear acquisition in 1996.fiscal 1997. Grand Slam is an American heritage brand with its signature penguin icon logo and appeals to the middle-income 30-60 year-old manmen who prefers aprefer classic casual active wear.gold apparel. The Grand Slam brand is primarily sold in department stores.
The Penguin Sport brand offers a functional sportswear with a golf edge. It is associated with easy care fabrication, and its lightweight fabric makes for a comfortable fit. It offers fashionable styling at a moderate price and is sold in the national and regional chain, stores and specialty and sporting goods stores.
Original Penguin.Penguin Perry Ellis. We re-introduced the Original Penguin brand in fiscal 2003, which is a lifestyle product for the Generation X and Y consumermales who isare suburban upper middleupper-middle class, ages 18 to 35. The line offers vintage inspired golf wearsportswear that its targeted consumer’s fatherconsumers’ fathers used to wear. The product line is primarily sold at upscale department stores and upper tier specialty retail stores and includes apparel, shoes and accessory items.
John Henry.PING This. We have a worldwide apparel master license for the prestigious PING golf brand, which Perry Ellis originally licensed from the Salant, and subsequently acquired in fiscal 2000, appeals to middle income 25-45 year oldgolfers and high-income, status conscious 25-50 year-old men. The license expires in December 2004, but renews automatically based on performance levels. The brand is well known and isa well-known golf brand, which we positioned to be associated with the highest standard of quality in the golf business. Products under this brand include golf shirts, sweaters, shorts and value. Perry Ellis’ John Henry product offerings form a “dress casual collection” as John Henry is considered a designer brand at its distribution level.outerwear. The John Henry brand is sold primarily sold in national chaingolf shops and top-tier specialty and department stores.
Manhattan. Perry Ellis also acquired the Manhattan brand in fiscal 2000 from Salant. For over 100 years, Manhattan has been associated with men’s dress shirts. Perry Ellis has diversified the Manhattan brand in the
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United States to include a wider range of sportswear and classic dress-casual apparel. Perry Ellis currently offers a collection at K-Mart consisting of pants, shirts and sweaters, in a variety of styles and patterns geared towards a casual lifestyle. The brand is designed to appeal to 25-65 year old men and include shirts, pants and sweaters.
Cubavera, Havanera and Havana Shirt CoNike. In fiscal 2000, Perry Ellis introduced the Cubavera brand and introduced Havanera and the Havana Shirt Co. brands in fiscal 2002. These brands appeal to the growing Hispanic market. Cubavera is currently sold in major department stores, as well as, specialty shops around the country, while the Havanera and the Havana Shirt Co. brands are sold in national and regional chain stores.
Nike. Perry EllisWe signed a license agreement with Nike to design and market men’s, women’s, junior’s, boy’s and junior’sgirl’s swimwear, men’s and junior’s competitive swimwear, and swimwear apparel and accessories as part of the Jantzen acquisition. Swim products are sold through sporting good stores, specialty stores, team dealers and department store distribution. The license agreement expires on May 31, 2006.
PING. Perry Ellis has an apparel master license for the prestigious PING golf brand, which appeals to golfers and high-income 25-50 year-old men who are status conscious. The license had an initial term expiring in December 2003 and has been renewed until December 2004. The brand is a well-known and prestigious golf brand, which Perry Ellis positioned to be associated with the highest standard of quality in the golf business. Perry Ellis products under this brand include golf shirts, sweaters, shorts and outerwear. The brand is sold primarily in the golf shops and top-tier specialty and department stores.
Tommy Hilfiger.Hilfiger Perry Ellis. We acquired the license for the Tommy Hilfiger brand of women’s and junior’s fashion swimwear as part of the Jantzen acquisition. TheThese products are sold in upscale department stores and specialty shops.stores. The license agreement expires on December 31, 2005.
Ocean Pacific.We acquired the license for the Ocean Pacific brand men’s casual sportswear as part of the Salant acquisition. These products are sold in national and regional chain stores. The license agreement expires on December 31, 2005.
Other Brands.We also own the Manhattan, Mondo di Marco, Pro Player and Redsand brands and license the NAUTICA brand. The Manhattan and Mondo di Marco brands are associated with dress casual apparel sold primarily at mass merchants and upscale department stores, respectively. The Redsand brand is associated with a youth lifestyle and is sold primarily at specialty stores. The NAUTICA brand is licensed for our corporate wear business.
Other Markets
Private Label. In addition to itsour sales of branded products, Perry Ellis sellswe sell products to retailers for marketing as private label orfor their own store lines. In fiscal 2003, Perry Ellis2004, we sold private label products to Wal-Mart,Saks, Inc., Dillard’s, J.C. Penney, Goody’s, K-Mart, Target, Mervyn’s, MeijerCasual Male, Kmart, Wal-Mart and Sears.Meijer. Private label sales generally yield lower profitgross margins than sales of comparable branded products. Private label sales accounted for approximately 25.0%9%, 36.6%25%, and 34.0%37% of net sales during fiscal years2004, 2003, 2002 and 2001,2002, respectively. The decrease in the private label business as a percentage of Perry Ellisour net sales is a result of the additional net sales of apparel under the brands acquired in the Jantzen acquisition, and the subsequent license agreements with Nike and Tommy Hilfiger and Perry Ellis’our decision to focus itsour efforts on selling branded products which typically generate higher gross margins.products.
Corporate wear or ASI. Perry Ellis. We entered into the corporate wear business at the end of fiscal 2001. Perry EllisWe recognized thea change in the current business environment and hashave successfully provided a variety of corporations with high quality designer products. Perry EllisIn fiscal 2004, our corporate wear business accounted for 3.3% of net sales. We currently offersoffer the PING, NAUTICA, Cubavera and Perry Ellis brands in this market and sellssell primarily to corporate wear distributors.
Products and Product Design
Perry Ellis offersWe offer a broad line of high quality men’s casual sportswear, including casualdress shirts and dress casual shirts,pants, jeans wear, golf sportswear, active wear,apparel, sweaters, jackets, vests, casual and dress pants and shorts, and men’s and women’ssports apparel, swimwear and swim accessories, activewear and leather accessories. Our womenswear offerings include swimwear, sportswear and swim accessories. Substantially all itsof our products are designed by Perry Ellis’our in-house staff utilizing itsour advanced computer-aided design technology. This technology enables Perry Ellisus to produce computer-generated simulated samples that display how a particular style will look in a given color and fabric before it is actually produced. These samples can be printed on paper or directly onto fabric to accurately present the colors and patterns to a potential customer. In addition, Perry Elliswe can quickly alter the simulated sample in response to the customer’sour customers’ comments, such as change of color, print layout, collar style and trimming, pocket details and/or
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placket treatments. The use of computer-aided design technology minimizes the time-consuming and costly need to produce actual sewn samples prior to retailer approval, allows Perry Ellisus to create custom-designed products meeting the specific needs of customers and reduces a product’s time to market, from conception to the delivery of the product to customers.
In designing itsour apparel products, Perry Ellis seekswe seek to promote consumer appeal by combining functional, colorful and high quality fabrics with creative designs and graphics. Styles, color schemes and fabrics are also selected to encourage consumers to coordinate outfits and form collections, thereby encouraging multiple purchases. Perry EllisOur designers stay continuously abreast of the latest design trends, fabrics, colors, styles and consumer preferences by attending trade shows, periodically conducting market research in Europe and the United States and using outside consultants. Perry Ellis sourcersOur purchasing department also continuously seekseeks to improve the quality of theour fabrics by staying abreast ofinformed about the latest trends in fabric all over the world. In addition, Perry Elliswe actively monitorsmonitor the retail sales of itsour products to determine changes in consumer trends.
In accordance with standard industry practices for licensed products, Perry Ellis haswe have the right to approve the concepts and designs of all products produced and distributed by itsour licensees.
Perry Ellis’Our products include:
SShirtshirts. Perry Ellis offersWe offer a broad line of sport shirts, which includeincludes cotton and cotton-blend printed, yarn-dyed and solid knit shirts, cotton woven shirts, silk, cotton and rayon printed button front sport shirts, linen sport shirts, golf shirts, and embroidered knits and woven shirts. Perry Ellis’Our shirt line also includes dress shirts, dress casual shirts, brushed twill shirts, jacquard knits and yarn-dyed flannels. In addition, Perry Ellis is alsoAdditionally, we are one of the leading distributors of guayabera-style shirts in the United States. Perry Ellis marketsWe market shirts under a number of itsour own brands as well as the private labels of its retailers. Perry Ellisour retail customers. Our shirts are produced in a wide range of men’s sizes, including sizes for the big and tall men’s market. Sales of shirts accounted for approximately 57%, 65%, 74% and 74% of Perry Ellis’our net sales during fiscal years2004, 2003, 2002, and 2001,2002, respectively. The decrease of shirts as a percentage of net sales reflects the addition of swimwear, as a result of the Jantzen acquisition, and Perry Ellis’our increased focus on itsour other products.
Bottoms. Our bottoms business.
Pants. Perry Ellis’ pants linesline include a variety of styles of wool, wool-blend, linen and poly/polyester/rayon dress pants, casual pants in cotton and poly/polyester/cotton and linen/cotton walking shorts. Perry Ellis offers its pants in a wide range of men’s sizes. Perry Ellis markets its pantsWe market our bottoms as single items or as a collection to complement itsour shirt lines. Sales of pants and shortsbottoms accounted for approximately 21%, 20%21%, and 20% of Perry Ellis’our net sales during fiscal 2004, 2003, 2002 and 2001,2002, respectively.
Swimwear.Swimwear. With the Jantzen acquisition, and upon the successful addition of both the Nike and the Tommy Hilfiger licenses, Perry Elliswe entered the women’s, men’s and junior’s swimwear and accessories market. Sales of swimwear and accessories accounted for approximately 13% and 8% of net sales induring fiscal 2003.2004 and 2003, respectively.
Other Products. Perry Ellis offersWe also offer sweaters, vests, jackets, pullovers and pulloversleather accessories under itsour existing brands, as well as private label. The majority of the other products Perry Ellis sellswe sell are sweaters.sweaters and leather accessories. Other products accounted for approximately 6%9%, 6%, and 6% of net sales during each of fiscal years2004, 2003 2002 and 2001, respectively.2002.
Marketing and Distribution
Perry Ellis markets its apparel products to customers principally through the direct efforts of an in-house sales staff, independent commissioned sales representatives who work exclusively for it, and other non-exclusive independent commissioned sales representatives, who generally market other product lines as well as those of Perry Ellis. Perry Ellis also attends major industry trade shows in the fashion, golf, and corporate sales areas.
Perry Ellis also advertises to customers through print advertisements in a variety of consumer and trade magazines and newspapers and through outdoor advertising such as billboards strategically placed to be viewed
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by consumers. For example, Perry Ellis is continuing Jantzen’s emphasis in print advertisements for its swimwear products in influential fashion magazines such as In Style, Glamour and Vogue and intends to sponsor selected athletes and celebrities in the future. In order to promote its men’s sportswear at the retail level, Perry Ellis conducts cooperative advertising in print and broadcast media, which features Perry Ellis’ products in its customers’ advertisements. The cost of this cooperative advertising is shared with Perry Ellis’ customers. Perry Ellis also conducts various in-store marketing activities with its customers, such as retail events and promotions and shares in the cost of these events. These events and promotions are in great part orchestrated to coincide with high volume shopping times such as holidays (Christmas and Thanksgiving) and Father’s Day. In addition to event promotion, Perry Ellis places perennial displays and signs of its products in retail establishments.
Perry Ellis makes use of direct consumer advertising in selected markets featuring the Perry Ellis, Natural Issue, John Henry, Grand Slam and Munsingwear brand names through the placement of highly visible billboards, sponsorships, and special event advertising. Perry Ellis also maintains informational Web sites featuring its brands. Perry Ellis creates and implements editorial and public relations strategies designed to heighten the visibility of its brands. All these activities are coordinated around each brand in an integrated marketing approach.
The following table sets forth the principal brand names for Perry Ellis’ product categories at the different levels of retail distribution:
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Perry Ellis believes that customer service is a key factor in successfully marketing its apparel products and providing its customers with a high level of customer service. Perry Ellis coordinates efforts with customers to develop products meeting their specific needs using its design expertise and computer-aided design technology. Utilizing its well-developed sourcing capabilities, Perry Ellis strives to produce and deliver products to its customers on a timely basis.
Perry Ellis’ in-house sales staff is responsible for customer follow-up and support, including monitoring prompt order fulfillment and timely delivery. Perry Ellis utilizes an Electronic Data Interchange, or EDI, system for
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certain customers in order to provide advance-shipping notices, process orders and conduct billing operations. In addition, certain customers use the EDI system to communicate their weekly inventory requirements per store to Perry Ellis electronically. Perry Ellis then fills these orders either by shipping directly to the individual stores or by sending shipments, individually packaged and bar coded by store, to a centralized customer distribution center.
Perry Ellis makes use of a number of software packages that enable it to track retail sales by store by stock keeping units or SKUs. Combined with software that provides demographic mapping data, Perry Ellis can develop specific micro-market plans for its customers that provide the customer with enhanced returns on Perry Ellis’ various product lines.
Licensing Operations
For the past eight years, Perry Ellis haswe have been actively licensing the brands it owns. The licensing of Perry Ellis’we own, and sublicensing the brands we license, to third parties for various product categories is onecategories. Licensing enhances the images of its strategies. The licensing of Perry Ellis’our brands enhances their image by widening the range, product offerings and distribution of these products sold under our brands without requiring Perry Ellisus to make significant capital investments or incur significantadditional operating expenses. As a result of this strategy, Perry Ellis haswe have gained significant experience in identifying potential licensing opportunities and hashave established strong relationships with many active licensees. Perry Ellis’Our licensing operation is also a significant contributor to Perry Ellis’ profitability.our operating income.
Perry Ellis is currentlyAs of April 6, 2004, we were the licensor ofin approximately 111135 license agreements, 56 domestic and 79 international, with 100 licensees, 40 domestic and 60 international, for various products including footwear, sportswear, dress shirts and bottoms, underwear, loungewear, outerwear, underwear, active wear, women’s sportswear,activewear, neckwear, fragrances, eyewear and loungewear. Salesaccessories. Wholesale sales of licensed products by Perry Ellis’our licensees (including Salant) were approximately $576$434.0 million, $534$576.0 million, and $516$534.0 million in fiscal years2004, 2003, and 2002, and 2001, respectively. Perry EllisWe received royalties from these sales of approximately $21.7 million, $28.8 million, $26.7 million and $25.8$26.7 million in fiscal years2004, 2003, and 2002, and 2001, respectively. With the Salant acquisition, Perry Ellis believes that while itsWhile our royalties will initially declinedeclined as a result of owningthe Salant its largest licensee, in the long term,acquisition, we believe that our long-term licensing opportunities will continue to grow domestically and internationally. See our audited Consolidated Financial Statements and the related notes in this report.
Although the Perry Ellis brand has international recognition, Perry Elliswe still perceivesperceive the brand to be under-penetrated in international markets such as Europe and Asia. Perry Ellis isWe are actively pursuing obtainingattempting to obtain licenses for various products bearing the Perry Ellis brand intoin these under-performing international markets. Perry Ellis believesWe believe that itsour brand and licensing experience will enable itus to capitalize on these international opportunities and that the Salant acquisition will assist itus in this endeavor. In addition, the Jantzen brand has a history in excess of 90 years and Perry Ellis believeswe believe that the Jantzen brandbrand’s history of over 90 years will enable itallow us to take advantage of many domestic and international licensing opportunities.
To maintain a brand’s image, Perry Elliswe closely monitors itsmonitor our licensees and approvesapprove all licensed products. In evaluating a prospective licensee, Perry Ellis considerswe consider the candidate’s experience, financial stability, manufacturing performance and marketing ability. Perry EllisWe also evaluatesevaluate the marketability and compatibility of the proposed products with itsour other products. Perry EllisWe regularly monitorsmonitor product design, development, merchandising and marketing of licensees, and schedulesschedule meetings throughout the year with licensees to ensure quality, uniformity and consistency with Perry Ellis’our products. Perry EllisWe also gives itsgive our licensees a view of itsour products and fashion collections and itsour expectations of where its products should be positioned in the marketplace. In addition to approving, in advance, all of Perry Ellis’our licensees’ products, Perry Elliswe also approvesapprove their advertising, promotional and packaging materials.
As part of Perry Ellis’our licensing strategy, Perry Ellis workswe work with itsour licensees to further enhance the development, image, and sales of their products. Perry Ellis offersWe offer licensees marketing support, and itsour relationships with retailers help the licensees generate higher revenues and become more profitable.revenues.
Perry Ellis’Our license agreements generally extend for a period of three to five years with options to renew prior to expiration for an additional multi-year period based onupon a licensee meeting certain performance criteria.
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The typical agreement requires that the licensee pay Perry Ellisus the greater of a royalty based on a percentage of the licenseeslicensee’s net sales of the licensed products or a guaranteed minimum royalty that typically increases over the term of the agreement. Generally, licensees are required to contribute to Perry Ellisus additional monies for advertising and promotion of the licensed products in their covered territory.
Marketing, Distribution and Customers
We market our apparel products to customers principally through the direct efforts of our in-house sales staff, independent commissioned sales representatives who work exclusively for us, and other non-exclusive independent commissioned sales representatives who generally market other product lines as well as ours. We also attend major industry trade shows in the fashion, golf, and corporate sales areas.
We own a chain of 38 retail outlet stores, 35 of which were acquired as part of the Salant acquisition, through which we sell Perry Ellis sellsproducts directly to the public. These retail stores are generally located in upscale retail outlet malls.
We believe that customer service is a key factor in successfully marketing our apparel products. We coordinate efforts with customers to develop products meeting their specific needs using our design expertise and computer-aided design technology. Utilizing our sourcing capabilities, we strive to produce and deliver products to our customers on a timely basis.
Our in-house sales staff is responsible for customer follow-up and support, including monitoring prompt order fulfillment and timely delivery. We utilize an Electronic Data Interchange, or EDI, system for certain customers in order to provide advance-shipping notices, process orders and conduct billing operations. In addition, certain customers use the EDI system to communicate their weekly inventory requirements per store to us. We then fill these orders either by shipping directly to the individual stores or by sending shipments, individually packaged and bar coded by store, to a centralized customer distribution center.
We recently launched PerrySolutions, a software system that enables our sales planners to manage our retail customers’ inventory at the SKU level. This system helps maximize the sales of our products thereby increasing inventory turns for the retailer, which in turn reduces our product returns and markdowns and increases our profitability. By using software that provides demographic mapping data, we can develop specific micro-market plans for our customers that provide them with enhanced returns on our various product lines.
We sell merchandise to a broad spectrum of retailers, including national and regional chain, stores, upscale department, stores, mass marketmerchants and specialty stores. Perry Ellis’Our largest customers include Federated, May Department Stores, Dillard’s, Wal-Mart, J.C. Penney, Kohl’s, and Sears. We have developed and maintained long-standing relationships with these customers, including Dillard’s (more than 25 years), May Department Stores (more than 25 years), J.C. Penney (more than 25 years), Sears (25 years), Federated (16 years), Wal-Mart (14 years) and Mervyn’s. Kohl’s (10 years).
Net sales to Perry Ellis’our five largest customers accounted for approximately 40%39%, 47%40%, and 42%47% of net sales in fiscal years2004, 2003, 2002 and 2001,2002, respectively. For fiscal 2004, net sales to Kohl’s accounted for approximately 10% of our net sales. For fiscal 2003, net sales to Wal-Mart accounted for approximately 11% of total net sales. For fiscal 2002, net sales to Target Corp. accounted for approximately 12%, of net sales, while net sales to J.C.J. C. Penney and Wal-Mart accounted for approximately 11%. For fiscal 2001, sales to Wal-Mart accounted for approximately 14% of total net sales and sales to J.C. Penneyeach accounted for approximately 11% of net sales. No other single customer accounted for more than 10% of net sales during such fiscal years.
Advertising and Promotions
We advertise to customers through print advertisements in a variety of consumer and trade magazines and newspapers and through outdoor advertising such as billboards strategically placed to be viewed by consumers. For example, we are continuing Jantzen’s emphasis on print advertisements for our swimwear products in influential magazines such as Sports Illustrated, In Style, Glamour and Vogue and intend to sponsor selected athletes and celebrities in the future. In order to promote our men’s sportswear at the retail level, we participate in cooperative advertising in print and broadcast media, which features our products in our customers’ advertisements. The cost of this cooperative advertising is shared with our customers. We also conduct various in-store marketing activities with our customers, such as retail events and promotions, the costs of which are shared by our customers. These events and promotions are in great part orchestrated to coincide with high volume shopping times such as holidays (Christmas and Thanksgiving) and Father’s Day. In addition to event promotion, we place perennial displays and signs of our products in retail establishments.
We use direct consumer advertising in selected markets featuring the Perry Ellis, Cubavera, the Havanera Co., John Henry, Natural Issue, Munsingwear and Grand Slam brand names through the placement of highly visible billboards, sponsorships and special event advertising. We also maintain informational websites featuring our brands. We create and implement editorial and public relations strategies designed to heighten the visibility of our brands. All of these activities are coordinated around each brand in an integrated marketing approach.
Seasonality and Backlog
Perry Ellis’Our products have historically been geared towards lighter weight apparel generally worn during the spring and summer months. Perry Ellis believesWe believe that this seasonality has been reduced with theour introduction of fall, winter and holiday merchandise. The Jantzen swimwear business, however, is highly seasonal in nature, with the vast majority of itsour sales occurring in Perry Ellis’our first and fourth quarter. Perry Ellis’ higher priced products generally tend to be less sensitive to economic conditions and weather conditions. While the variation in Perry Ellis’ sales on a quarterly basis has narrowed somewhat, seasonality can be affected by a variety of factors, including the mix of advance and fill-in orders, the amount of sales to different distribution levels, and overall product mix between traditional and fashion merchandise.
Perry EllisWe generally receivesreceive orders from itsour retailers approximately five to seven months prior to shipment. For approximately 80.0%80% of our sales, Perry Ellis haswe have orders from itsour retailers before it placeswe place orders with itsour suppliers. A summary of the order and delivery cycle for Perry Ellis’our four primary selling seasons, excluding swimwear, is illustrated below:
Merchandise Season | Advance Order Period | Delivery Period to Retailers | ||
Spring | July to September | January to March | ||
Summer | October to December | April and May | ||
Fall | January to March | June to September | ||
Holiday | April to June | October and November |
Sales and receivables are recorded when inventory is shipped, with payment terms generally 30 to 75 days from the date of shipment. Perry Ellis’shipped. Our backlog of orders includes confirmed and unconfirmed orders, which Perry Ellis believes,we believe, based on industry practice and past experience, will be confirmed. As of March 2, 2003, Perry Ellis’April 1, 2004, the backlog for orders of orders for itsour products, all of which are expected to be shipped during fiscal 2004,2005, was approximately $129.7$221.7 million, as compared to approximately $112.6$129.7 million as of March 2, 2002.2003, which was prior to the Salant acquisition.
The amount of unfilled orders at a point in time is affected by a number of factors, including the mix of product, the timing of the receipt and processing of customer orders and the scheduling of the sourcing and shipping of the product, which in most cases depends on the desires of the customer. Backlog is also affected by on-going trends among customers to reduce the lead-time on their orders. Since the fall of 2001, Perry Ellis’our customers have been more cautious of their inventory levels and have delayed placing orders and re-orders compared to Perry Ellis’our previous experience. Due to these factors a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments.
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Supply of Products and Quality Control
Perry EllisWe currently usesuse independent contract manufacturers to supply the substantial majority of the products it sells. Nearly 70%we sell. Of the total dollar value of Perry Ellis’sourced products in fiscal 2004, 72%, 14%, 6% and 8% were sourced from suppliers are located in the Far East, 23% inAsia, South and Central America, and 6% in the Middle East. Perry Ellis’ largest independent contract manufacturer supplied less than 4%East and other areas of Perry Ellis’ purchased product during fiscal 2003. Perry Ellis believesthe world, respectively. We believe that the use of numerous independent contract manufacturers allows itus to maximize production flexibility, while avoiding significant capital expenditures, work-in-process inventory build-ups and the costs of maintaining and operating production facilities. Perry Ellis hasWe have had relationships with some suppliers for as long as 30 years, however, none of these relationships are formal or require either party to either purchase or supply any fixed quantity of product. While Perry Ellis believes it is unlikely, and has never been a factor in the past, it is possible that in times of tight market supply, the absence of formal supply agreements may impair Perry Ellis’ ability to secure a reliable source of product supply.
The vast majority of Perry Ellis’ non-Jantzenour non-swimwear products are purchased as “full packages”,packages,” where Perry Ellis placeswe place an order with the supplier and the supplier purchases all the raw materials, assembles the garments and ships them to Perry Ellis’our distribution facilities or third party facilities. For the Jantzensome of our swimwear business, which includes the Jantzen, Southpoint, Nike and Tommy Hilfiger Nike and Southpoint brands, Perry Ellis purchaseswe purchase fabric from domestic and international suppliers. Purchased fabrics areThe purchased fabric is primarily cut in the United States. The cut fabric is matched with various trim components and shipped to off-shore sewing contractors located primarily in Mexico and the Caribbean Basin enabling Perry Ellisus to utilize exemptions under “807” customs regulations, which provide that certain articles assembled abroad from United States components are exempt from United States duties on the value of those components. This process is generally referred to as CMT (cut, make and trim) and differs from “full package” sourcing in that Perry Ellis,we, not the supplier, purchasespurchase and ownsown the fabric and trim components. Perry Ellis plans to ultimately shiftWe are, however, shifting the production of the Jantzenour swimwear business to the “full package” sourcing model.model and anticipate that in the future the vast majority of our purchases will be “full packages.” Finished goods are generally shipped to either Perry Ellis’ Miami, Florida or Seneca, South Carolinaour distribution facilities or to third-party warehouses in California for repackaging and distribution to customers.
Perry Ellis maintainsWe maintain a staff of experienced sourcing professionals in five offices in Beijing, Shanghai and Guangzhou China Seoul,(including Hong Kong), as well as the United States, South Korea and Taipei, Taiwan to source itsTaiwan. This staff sources our products in over 30 countries worldwide, to monitor itsmonitors our suppliers’ purchases of raw material, and to monitormonitors production at contract manufacturing facilities in order to ensure quality control and timely delivery. Perry EllisWe also operatesoperate through independent agents based in Thailand, Vietnam, Indonesia, Philippines,Asia and United Arab Emirates. Perry Ellisthe Middle East. Our personnel based in itsour Miami, Florida office perform similar functions with respect to itsour suppliers in Central America. Perry Ellis conductsWe conduct inspections of samples of each product prior to cutting by contractors during the manufacturing process and prior to shipment. Perry EllisWe also hashave full-time quality assurance inspectors in Latin America and the Dominican Republic, Honduras, El Salvador, Guatemala,Caribbean and in each of itsour overseas offices.
In order to assist with timely delivery of finished goods, Perry Ellis functions as its own customs broker. Perry Ellis prepares its own customs documentation and arranges for any inspections or other clearance procedures with the United States Customs Service. Perry Ellis is a member of the United States Customs Automated Interface program. This membership permits Perry Ellis to clear its goods through United States Customs electronically and generally reduces the necessary clearance time to a matter of hours rather than days.
Perry EllisWe also generally facilitatesfacilitate and aids itsaid our foreign contractors in obtaining raw materials. Otherwise, the foreign contractors
purchase the raw material in accordance with Perry Ellis’our specifications. Raw materials, which are in most instances made and/or colored especially for Perry Ellis,us, consist principally of piece goods and yarn and are purchasedspecified by Perry Ellisus from a number of foreign and domestic textile mills and converters.
Perry Ellis isWe are committed to ethical sourcing standards and requires itsrequire our independent contractors to comply with itsour code of conduct. Perry Ellis monitorsWe monitor compliance by itsour foreign contract manufacturers with applicable laws and regulations relating to, for example, the payment of wages, working conditions and the environment. As part of Perry Ellis’our compliance program, Perry Elliswe routinely performsperform audits of itsour contract manufacturers and requiresrequire corrective action when appropriate.
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Import and Import Restrictions
Perry Ellis’ transactionsOur relationship with itsour foreign suppliers abroad are subjectsubjects us to the risks of doing business abroad. Imports into the United StatesAs a result of our suppliers, in some instances, being at great geographic distances from us, our transportation costs are affected by, among other things, the cost of transportation of the productsincreased and the imposition oflonger lead times are required, which reduces our flexibility. Our finished goods are also subject to import duties, quotas and other restrictions. The countries that Perry Ellis sources itswe source our products from may, from time to time, impose new quotas, duties, tariffs, or other restrictions or adjust prevailing quotas,quota, duty or tariff levels, which could affect Perry Ellis’our ability to import products at the current or increased levels. Perry EllisOther risks in doing business with foreign suppliers include political or economic instability, any significant fluctuations in the value of the dollar against foreign currencies, terrorist activities, and restrictions on the transfer of funds. Although we have not been affected in a material way by any of the foregoing factors, we cannot predict the likelihood or frequency of any such events occurring.occurring and any material disruption may have an adverse affect on our business.
Perry Ellis’In order to assist with the timely delivery of finished goods, we function as our own customs broker for a majority of our deliveries. We prepare our own customs documentation and arrange for any inspections or other clearance procedures with the United States Customs Service. We are a member of the United States Customs Automated Interface program. This membership permits us to clear our goods through United States Customs electronically and generally reduces the necessary clearance time to a matter of hours rather than days.
Import and Import Restrictions
Our import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries including China, Indonesia and Korea. These agreements impose quotas on the amount and type of goods that can be imported into the United States from these countries. Such agreements also allow the United States to impose, at any time, restraints on the importation of categories of products that, under the terms of the agreements, are not subject to specified limits. Perry Ellis’Most of our imported products are also subject to United States customs duties and other charges.
Perry Ellis monitorsWe monitor duty, tariff, and quota-related developments and continually seeksseek to minimize itsour potential exposure to quota-related risks through, among other measures, geographical diversification of itsour contract manufacturers, the maintenance of overseas offices, allocation of overseas production to product categories where more quota is available and shifts of production among countries and manufacturers.
In addition toUnder the factors outlined above, Perry Ellis’ import operations may be adversely affected by political or economic instability resulting in the disruption of trade from exporting countries, any significant fluctuations in the valueterms of the dollar against foreign currenciesWorld Trade Organization Agreement on Textiles and restrictions onClothing, WTO members have agreed to remove all quotas by January 1, 2005. Because of our sourcing experience, capabilities and relationships, we believe we are well-positioned to take advantage of the transferelimination of funds.quotas by 2005.
Competition
The retail apparel industry is highly competitive and fragmented. Perry Ellis’Our competitors include numerous apparel designers, manufacturers, importers, and licensors, and itsour own customers’ private label programs, many of which are larger and have greater financial and marketing resources than it. Perry Ellis believeswe have available to us. We believe that the principal competitive factors in the industry are: (1) brands,brand name and brand identity, (2) timeliness, reliability and quality of services provided, (3) market share and visibility, (4) price, and fashion, and (5) the ability to anticipate customer and consumer demands and maintain appeal of products to customers.
Perry Ellis strivesWe strive to focus on these points and hashave proven to have theour ability to anticipate and respond quickly to customer demands with its brand names andour brands, range of products and itsour ability to operate within the industry’s production and delivery constrains. Perry Ellis believesconstraints. We believe that itsour continued dedication to customer service, product assortment and quality control, as well as itsour aggressive pursuit of licensing and acquisition opportunities, directly addresses the competitive factors in all market segments. Perry EllisOur established brand namesbrands and relationships with retailers hashave resulted in a loyal following of customers.
Perry Ellis considers
We understand that the level of competition and the nature of itsour competitors variesvary by product segment. In particular, in the mass market channel, manufacturers constitute Perry Ellis’our main competitors in this less expensive segment of the market, while high profile domestic and foreign designers and licensors account for itsour main competitors in the more upscale segment of the market. Although Perry Ellis haswe have been able to compete successfully to date, there can be no assurance that significant new competitors will not develop in the future.
Trademarks
Most of Perry Ellis’Our material trademarks are registered with the United States Patent and Trademark Office and in other countries. Perry Ellis regards itsWe regard our trademarks and other proprietary rights as valuable assets whichthat are critical in the marketing of its products. Perry Ellisour products, and, therefore, we vigorously protects itsprotect our trademarks against infringements.
Perry Ellis may be subject to claims and suits against it, and may be initiator of claims and suits against others, in the ordinary course of its business, including claims arising from the use of its trademarks.
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Employees
At January 31, 2003, Perry EllisAs of April 6, 2004, we had approximately 6691,398 employees compared to approximately 471576 employees as of April 6, 2003. Other than some of our employees at January 31, 2002. Noneour Winnsboro, South Carolina distribution facility, none of Perry Ellis’our employees are subject to collective bargaining agreements, however, inagreements. In fiscal 2003, however, a labor organization attempted to organize certain employees of one of Perry Ellis’our subsidiaries in itsat our Miami, Florida facility. A National Labor Relations Board-supervised election was held on September 9, 2002, as a result of which a2002. A majority of the employees votingat our Miami distribution center who voted cast their ballotballots against unionization. The labor organization filed objections to the election, and, after a lengthy review process, the National Labor Relations Board ordered another election be held on May 30, 2003. At the May 30, 2003 election, a majority of the employees who voted cast their ballots against unionization. The labor organization filed objections to this second election, which objections are pending before the National Labor Relations Board. Perry Ellis considers itsWe consider our employee relations to be satisfactory.
Certain Risks
Our business faces certain risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected.
We rely on a few key customers, and the loss of any one key customer would substantially reduce our revenues.
We derive a significant amount of our revenues from a few major customers. A significant decrease in business from or loss of any of our major customers could harm our financial condition by causing a significant decline in revenues attributable to such customers.
Net sales to our five largest customers totaled approximately 39%, 40%, and 47% of net sales during fiscal 2004, fiscal 2003, and fiscal 2002, respectively. Our five largest customers are J. C. Penney, Kohl’s, Federated, May, and Sears. For fiscal 2004, Kohl’s represented 10% of our net sales. Net sales to Wal-Mart accounted for approximately 11% of net sales during fiscal 2003. Net sales to Target Corporation, Wal-Mart, and J. C. Penney accounted for approximately 12%, 11% and 11% of net sales during fiscal 2002, respectively. No other single customer accounted for more than 10% of our net sales during these fiscal years.
Although we have long-standing relationships with many of our customers, we do not have long-term contracts with any of them and purchases generally occur on an order-by-order basis. We believe that purchasing decisions are generally made independently by individual department stores within a company controlled group. There has been a trend, however, toward more centralized purchasing decisions. As such decisions become more centralized, the risk to us of such concentration increases. If our customers were to curtail or cease their purchase orders with us, our revenues could significantly decrease and our financial condition could be significantly harmed.
We may not be able to anticipate consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers and result in a significant decrease in net sales.
Our failure to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect acceptance of our products by retailers and consumers and may result in a significant decrease in net sales or leave us with a substantial amount of unsold inventory. We believe that our success depends on our ability to anticipate, identify and respond to changing fashion trends in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We may not be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future. In addition, any new products or brands that we introduce may not be
successfully received by retailers and consumers. Due to the fact that we began marketing women’s apparel with the acquisition of the Jantzen swimwear business in fiscal 2003, we may be more subject to additional changes in fashion trends as women’s fashion trends have historically changed more rapidly than men’s. If our products are not successfully received by retailers and consumers and we are left with a substantial amount of unsold inventory, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow-moving inventory. If this occurs, our business, financial condition, results of operations and prospects may be harmed.
Our business could be negatively impacted by the financial instability of our customers.
During the past several years, various retailers, including some of our customers, have experienced significant difficulties, including bankruptcies, liquidations, consolidation of ownership, and increased centralization of buying decisions. For example, Kmart Corporation and Casual Male Corp. filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. These and other financial problems of some of our customers increase the risk of extending credit to these retailers. Consistent with industry practices, we sell products primarily on open account after completing an appropriate credit review. A significant adverse change in a customer or its financial position could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer’s receivables or limit our ability to collect amounts related to previous purchases by that customer, all of which could harm our business, financial condition and results of operation by causing a significant decline in revenues attributable to such customers.
We are dependent upon the revenues generated by our licensing alliances and the loss or inability to renew certain licenses could reduce our royalty income or net sales and consequently reduce our net income.
A portion of our net income is derived from licensing income received from our licensing partners. The interruption of the business of several of our licensing partners at any one time could adversely affect our royalty income and net income. Licensing income accounted for $21.7 million or 4.3% of total revenues for fiscal 2004.
We currently license the PING, Nike, Tommy Hilfiger, NAUTICA and Ocean Pacific brands from third parties. These licenses vary in length of term, renewal conditions and royalty obligations. The average term of these licenses is three to five years with automatic renewals depending upon whether we achieve certain targeted sales goals. We may not be able to renew or extend any of these licenses, on favorable terms, if at all. If we are unable to renew or extend any of these licenses, we could experience a decrease in net sales.
We may face challenges integrating Salant, which may negatively impact our business.
We will need to integrate Salant’s business into our operations in order to achieve the anticipated benefits of the Salant acquisition. We may face challenges in consolidating functions and integrating management procedures, personnel and operations in an efficient and effective manner which may negatively impact our business. Some of these challenges include increased demands on management related to the significant increase in the size and diversity of our business after the Salant acquisition, is completed, Perry Ellis will have approximately 1,400 employees.the diversion of management’s attention to implement our strategies for the Salant business, the retention and integration of key Salant employees, analyzing aspects of Salant’s business that are to be kept separate and distinct from our other businesses, and difficulties in assimilating Salant’s corporate culture and practices into ours.
We may not have uncovered all the risks associated with the Salant acquisition or any future acquisitions and a significant liability may arise after closing.
There may be additional risks that we failed to discover in the course of performing our due diligence investigations related to the Salant acquisition and any future acquisitions which could result in significant liabilities arising after the consummation of such transactions. In connection with the Salant acquisition, we assumed all of Salant’s liabilities, whether pre-existing or contingent, as a matter of law. Moreover, as in the Salant acquisition, to the extent we acquire all of the capital stock of potential future sellers, we will assume all of the seller’s liabilities as a matter of law. As is customary in transactions similar to the Salant acquisition, the merger agreement did not provide for our indemnification against any of Salant’s liabilities should they arise or become known to us after the closing. Such liabilities could include those arising from the trademarks, employee benefits and pension contribution obligations of a prior owner, accounting and financial reporting matters, tax matters and noncompliance with applicable federal, state or local environmental requirements by prior owners for which we, as a successor owner, may potentially be responsible. While we tried to minimize these risks by conducting such due diligence, including trademark, employee benefits and environmental reviews, that we deemed appropriate under the circumstances, we may not have identified all existing or potential risks. Any significant liability that may arise may harm our business, financial condition, results of operations and prospects by requiring us to expend significant funds to satisfy such liability.
We need significant working capital to fund our operations, a substantial portion of which is financed, and our inability to continue to finance such working capital could affect our marketing and sales efforts because our ability to purchase inventory would be curtailed.
We need significant working capital to purchase inventory and are often required to post letters of credit when placing an order with one of our foreign manufacturers. We meet our working capital needs through our operating cash flow, our senior credit facility and letter of credit facilities. If we are unable to extend or renew either our senior credit facility or letter of credit facilities on satisfactory terms or in the event borrowings thereunder were unavailable to us as a result of any noncompliance with any covenants contained therein, our ability to purchase inventory would be curtailed or eliminated, which would significantly affect our marketing and sales efforts, thus harming our business.
We have a significant amount of debt, which could have important negative consequences to us, including making it difficult for us to satisfy all of our obligations in the event we experience financial difficulties.
We have a significant amount of debt. As of March 31, 2004, we had $265.7 million of debt outstanding (excluding amounts outstanding under our letter of credit facilities).
Our substantial indebtedness could have important consequences to you, including:
Our ability to pay interest on our indebtedness and to satisfy our other debt obligations will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is, to a large extent, dependent on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our indebtedness or to meet our other obligations, we will need to refinance our existing debt, obtain additional financing or sell assets. We cannot assure you that our business will generate cash flow, or that we will be able to obtain funding, sufficient to satisfy our debt service requirements.
To service our existing and future debt, we will require a significant amount of cash, which may not be available to us.
Our ability to make payments on or refinance our debt will depend largely upon our future operating performance and cash flow. Our future operating performance and cash flow are subject to many factors, including general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to pay the interest and principal on our debt or to fund our other liquidity needs. If we are unable to generate cash to meet our debt service requirements, we may have to renegotiate or refinance the terms of our debt. We cannot assure you that we will be able to renegotiate or refinance any of our debt on commercially reasonable terms or at all. In addition, prior to the repayment of our senior subordinated notes, we will be required to repay or refinance our senior credit facility and, perhaps, any other debt we incur. Any new debt we incur may have a shorter maturity than our existing debt. Payment of such debt will reduce the amount of funds available to us to make payments on our existing debt.
If we are unable to refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as selling certain assets to meet our debt service obligations or using cash, if available, that would have been used for other business purposes.
These options may not be feasible or may be inadequate, and may also adversely affect our operations or the implementation of our business plan. Our senior credit facility and the indentures governing our senior secured notes and the senior subordinated notes may restrict, or market or business conditions may limit, our ability to do some of these things. Non-payment or other non-compliance with our senior credit facility, the indentures governing our senior secured notes and senior subordinated notes or the instruments governing our other debt could result in an event of default under our other instruments governing our debt.
Our swimwear business has not been profitable.
We acquired the Jantzen swimwear business in March 2002, which business has not yet been profitable. Our future results may be adversely impacted if this business remains unprofitable.
Our swimwear business is highly seasonal in nature and revenue and profitability can be adversely affected by climate and other factors.
The vast majority of swimwear shipments to our customers occur in our first and fourth quarters. Adverse weather, temporary disruptions in the supply chain and other factors that result in reduced or delayed shipments to customers could impact the profitability of the swimwear business, which in turn may negatively impact our consolidated net income.
We operate in a highly competitive and fragmented industry and our failure to successfully compete could result in a loss of one or more significant customers.
The retail apparel industry is highly competitive and fragmented. Our competitors include numerous apparel designers, manufacturers, importers and licensors, many of which have greater financial and marketing resources than us. We believe that the principal competitive factors in the apparel industry are:
The level of competition and the nature of our competitors varies by product segment with low-margin, mass-market manufacturers being our main competitors in the less expensive segment of the market and U.S. and foreign designers and licensors competing with us in the more upscale segment of the market. If we do not maintain our brand names and identities and continue to provide high quality and reliable services on a timely basis at competitive prices, we may not be able to continue to compete in our industry. If we are unable to compete successfully, we could lose one or more of our significant customers which, if not replaced, could negatively impact our sales and financial performance.
We depend on certain key personnel the loss of which could negatively impact our ability to manage our business.
Our future success depends to a significant extent on retaining the services of certain executive officers and directors, in particular George Feldenkreis, our chairman of the board and chief executive officer, and Oscar Feldenkreis, our president and chief operating officer. They are each party to an employment agreement, which was renewed in December 2002 for an additional two-year period expiring in May 2005. The loss of the services of either George Feldenkreis or Oscar Feldenkreis, or any other key member of management, could have a material adverse effect on our ability to manage our business. Our continued success is dependent upon our ability to attract and retain qualified management, administrative and sales personnel to support our future growth. Our inability to do so may have a significant negative impact on our ability to manage our business.
Item 2. Properties
Perry Ellis’ mainWe own our principal executive and administrative offices,office, warehouse and distribution facility, arewhich is located in a 230,000 square foot facility in Miami, Florida which Perry Ellis owns.Florida. This facility is encumbered by aan $11.6 million mortgage. For purposes of potential future expansion, Perry Ellis ownswe own approximately three acres of land adjacent to itsthis facility.
On September 13, 2002, Perry Ellis purchased a 350,000 square foot distribution center in Seneca, South Carolina for $2.5 million cash. Perry Ellis had secured the option to purchase the facility as part of the Jantzen acquisition.
Perry Ellis leasesWe lease three warehouse facilities in Miami, totaling approximately 103,000 square feet, to handle the overflow of bulk shipmentswhich house distribution and its specialty and PING operations.administrative functions. These facilities are leased on a month-to-month basis from Perry Ellis’our chairman and chief executive officer.
Perry Ellis leases fourWe own a 345,000 square foot distribution center in Seneca, South Carolina, and in Winnsboro, South Carolina, we own a 380,000 square foot distribution facility.
We lease several locations in New York City, totaling approximately 25,40097,000 square feet, with leases expiring from August 2005 to December 2012. These locations are used for office, design, and showroom space.
Perry Ellis leasesWe lease 45,200 square feet for office space used by Perry Ellis’ Jantzenour swimwear business in Portland, Oregon, pursuant to a lease expiring in December 2004.
In order to monitor production of Perry Ellisour products in the Far East, Perry Ellis maintainswe maintain offices in South Korea and China (including Hong Kong) and also leaseslease offices jointly with GFX, Corporation,Inc., a company controlled by Perry Ellis’George Feldenkreis, our chairman and chief executive officer, in Beijing, China and Taipei, Taiwan.
Salant currently owns a 360,000 square foot distribution facility and leases an additional 26,000 square feet of distribution space in Winnsboro, South Carolina. SalantWe also leases approximately 136,000 square feet of combined office, design and showroom space primarily in New York, New York. Salant also operates 40operate 38 retail outlet stores, comprising approximately 104,00094,500 square feet of selling space, all of which are leased. If the Salant acquisition is completed, Perry Ellis will also own or assume the leases for all of Salant’s facilities.
Item 3. Legal Proceedings
Perry Ellis is subject to claims and suits against it, and is the initiator of claims and suits against others in the ordinary course of business, including claims arising from the use of its trademarks. Perry Ellis does not believe that the resolution of any pending claims will have a material adverse affect on its business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity and Related StockholderShareholder Matters
(a) | Market Information |
Perry Ellis’Our common stock has been listed for trading on the Nasdaq National Market under the symbol “PERY” since June 1999. Prior to that date, theour trading symbol was “SUPI” under itsbased upon our former name, Supreme International Corporation. The following table sets forth, for the periods indicated, the range of high and low per share bids of Perry Ellisour common stock as reported by the Nasdaq National Market. Such quotation representsquotations represent inter-dealer prices, without retail mark-up, markdownmark-down or commission and may not necessarily represent actual transactions.
Fiscal Year 2002 | High | Low | ||||||||||
High | Low | |||||||||||
Fiscal Year 2003 | ||||||||||||
First Quarter | $ | 7.38 | $ | 5.69 | $ | 12.25 | $ | 6.65 | ||||
Second Quarter |
| 9.00 |
| 6.26 | 17.85 | 11.50 | ||||||
Third Quarter |
| 8.60 |
| 5.11 | 15.00 | 9.40 | ||||||
Fourth Quarter |
| 9.50 |
| 5.30 | 17.80 | 11.65 | ||||||
Fiscal Year 2003 | ||||||||||||
Fiscal Year 2004 | ||||||||||||
First Quarter | $ | 12.25 | $ | 6.65 | 20.94 | 17.54 | ||||||
Second Quarter |
| 17.85 |
| 11.50 | 23.96 | 18.25 | ||||||
Third Quarter |
| 15.00 |
| 9.40 | 29.73 | 22.41 | ||||||
Fourth Quarter |
| 17.80 |
| 11.65 | 27.92 | 22.24 |
(b) | Holders |
As of March 7, 2003,April 6, 2004, there were approximately 52276 shareholders of record of Perry Ellisour common stock. Perry Ellis believesWe believe the number of beneficial owners of itsour common stock is in excess of 1,100.
(c) | Dividends |
Perry Ellis hasWe have not paid any cash dividends since itsour inception and doesdo not contemplate doing so in the near future. Payment of cash dividends is prohibited under Perry Ellis’our senior credit facility and indentures governing itsour senior secured notes and senior subordinated notes. See Notes 15 and 1614 through 17 to the consolidated financial statements of Perry Ellis included in Item 8 of this Report. Any future decision regarding payment of cash dividends will depend on Perry Ellis’our earnings and financial position and such other factors, as Perry Ellis’our board of directors deems relevant.
(d) | Securities Authorized for Issuance |
The section under the heading “Executive Compensation” entitled “Equity Compensation Plan Information for Fiscal 2003”2004” in the Company’s proxy statement for the 20032004 annual meeting of shareholders is incorporated herein by reference.
For additional information concerning the Company’s capitalization please see Note 21,23, “Stock Options and Warrants” of the Notes to the Consolidated Financial Statements included in Item 8.
20
Item 6. Selected Financial Data
Summary Historical Financial Information
(Dollars in thousands, except for per share data)
The following selected financial data is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements of Perry Ellis and related Notes thereto included in Item 8 of this Report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Certain amounts in prior fiscal years have been reclassified to conform to the 20032004 presentation.
Fiscal Year Ended January 31, | ||||||||||||||||||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | ||||||||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||
Fiscal Year Ended January 31, | 2000 | 2001 | 2002 | 2003 | 2004 | |||||||||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 219,966 |
| $ | 227,732 |
| $ | 258,888 |
| $ | 251,310 |
| $ | 277,028 |
| $ | 227,732 | $ | 258,888 | $ | 251,310 | $ | 277,028 | $ | 484,198 | |||||||||||||||
Net royalty income |
| 3,057 |
|
| 22,840 |
|
| 25,790 |
|
| 26,681 |
|
| 28,813 |
| 22,840 | 25,790 | 26,681 | 28,813 | 21,718 | ||||||||||||||||||||
Total revenues |
| 224,404 |
|
| 250,572 |
|
| 284,678 |
|
| 277,991 |
|
| 305,841 |
| 250,572 | 284,678 | 277,991 | 305,841 | 505,916 | ||||||||||||||||||||
Cost of sales |
| 166,198 |
|
| 171,413 |
|
| 200,884 |
|
| 191,601 |
|
| 205,001 |
| 171,413 | 200,884 | 191,601 | 205,001 | 336,422 | ||||||||||||||||||||
Gross profit |
| 58,206 |
|
| 79,159 |
|
| 83,794 |
|
| 86,390 |
|
| 100,840 |
| 79,159 | 83,794 | 86,390 | 100,840 | 169,494 | ||||||||||||||||||||
Selling, general and administrative expenses |
| 38,097 |
|
| 42,663 |
|
| 49,408 |
|
| 55,447 |
|
| 63,850 |
| 42,663 | 49,408 | 55,447 | 63,850 | 119,659 | ||||||||||||||||||||
Depreciation and amortization |
| 2,161 |
|
| 5,181 |
|
| 6,130 |
|
| 6,662 |
|
| 3,583 |
| 5,181 | 6,130 | 6,662 | 3,583 | 5,043 | ||||||||||||||||||||
Operating income |
| 16,567 |
|
| 31,315 |
|
| 28,255 |
|
| 24,281 |
|
| 33,407 |
| 31,315 | 28,256 | 24,281 | 33,407 | 44,792 | ||||||||||||||||||||
Costs on early extinguishment of debt | — | — | — | — | 7,317 | |||||||||||||||||||||||||||||||||||
Interest expense |
| 3,494 |
|
| 13,905 |
|
| 15,766 |
|
| 13,550 |
|
| 15,795 |
| 13,905 | 15,766 | 13,550 | 15,795 | 16,414 | ||||||||||||||||||||
Income before minority interest and income tax provision |
| 13,073 |
|
| 17,410 |
|
| 12,489 |
|
| 10,731 |
|
| 17,612 |
| 17,410 | 12,490 | 10,731 | 17,612 | 21,061 | ||||||||||||||||||||
Minority interest |
| — |
|
| — |
|
| — |
|
| 83 |
|
| 89 |
| — | — | 83 | 89 | 214 | ||||||||||||||||||||
Income taxes |
| 4,491 |
|
| 6,530 |
|
| 4,663 |
|
| 4,040 |
|
| 6,726 |
| 6,530 | 4,663 | 4,040 | 6,726 | 7,695 | ||||||||||||||||||||
Net income | $ | 8,582 |
| $ | 10,880 |
| $ | 7,826 |
| $ | 6,608 |
| $ | 10,797 |
| $ | 10,880 | $ | 7,827 | $ | 6,608 | $ | 10,797 | $ | 13,152 | |||||||||||||||
Net income per share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 1.29 |
| $ | 1.62 |
| $ | 1.17 |
| $ | 1.01 |
| $ | 1.69 |
| $ | 1.62 | $ | 1.17 | $ | 1.01 | $ | 1.69 | $ | 1.71 | |||||||||||||||
Diluted | $ | 1.27 |
| $ | 1.59 |
| $ | 1.16 |
| $ | 1.01 |
| $ | 1.65 |
| $ | 1.59 | $ | 1.16 | $ | 1.01 | $ | 1.65 | $ | 1.59 | |||||||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||||||||||||||||||||||
Basic |
| 6,674 |
|
| 6,726 |
|
| 6,689 |
|
| 6,517 |
|
| 6,387 |
| 6,726 | 6,689 | 6,517 | 6,387 | 7,683 | ||||||||||||||||||||
Diluted |
| 6,770 |
|
| 6,857 |
|
| 6,745 |
|
| 6,535 |
|
| 6,550 |
| 6,857 | 6,745 | 6,535 | 6,550 | 8,296 | ||||||||||||||||||||
Other Financial Data and Ratios: | ||||||||||||||||||||||||||||||||||||||||
EBITDA (a) | $ | 18,728 |
| $ | 36,496 |
| $ | 34,385 |
| $ | 30,860 |
| $ | 36,901 |
| $ | 36,496 | $ | 34,385 | $ | 30,860 | $ | 36,901 | $ | 49,621 | |||||||||||||||
Cash flows from operations |
| 14,341 |
|
| 14,047 |
|
| (2,112 | ) |
| 22,375 |
|
| (16,795 | ) | 14,047 | (2,112 | ) | 22,375 | (16,795 | ) | (11,313 | ) | |||||||||||||||||
Cash flows from investing |
| (10,240 | ) |
| (104,091 | ) |
| (5,434 | ) |
| (3,021 | ) |
| (47,349 | ) | (104,091 | ) | (5,434 | ) | (3,021 | ) | (47,349 | ) | (44,887 | ) | |||||||||||||||
Cash flows from financing |
| (4,938 | ) |
| 90,097 |
|
| 7,665 |
|
| (18,319 | ) |
| 67,479 |
| 90,097 | 7,665 | (18,319 | ) | 67,479 | 52,409 | |||||||||||||||||||
Capital expenditures |
| 4,005 |
|
| 2,332 |
|
| 2,712 |
|
| 2,922 |
|
| 22,076 |
| 2,332 | 2,712 | 2,922 | 22,077 | 8,673 | ||||||||||||||||||||
Balance Sheet Data (at year end): | ||||||||||||||||||||||||||||||||||||||||
Working capital | $ | 71,300 |
| $ | 70,651 |
| $ | 88,879 |
| $ | 60,932 |
| $ | 119,898 |
| 70,651 | 88,879 | 60,932 | 119,898 | 192,930 | ||||||||||||||||||||
Total assets |
| 108,958 |
|
| 224,873 |
|
| 243,113 |
|
| 234,061 |
|
| 331,237 |
| 224,873 | 243,113 | 234,061 | 331,237 | 480,400 | ||||||||||||||||||||
Total debt (b) |
| 33,511 |
|
| 128,270 |
|
| 137,066 |
|
| 120,828 |
|
| 194,432 |
| 128,270 | 137,066 | 120,828 | 194,432 | 257,158 | ||||||||||||||||||||
Total stockholders’ equity |
| 64,946 |
|
| 76,020 |
|
| 82,879 |
|
| 87,204 |
|
| 99,402 |
| 76,020 | 82,879 | 87,204 | 99,402 | 150,882 |
a) | EBITDA represents net income before taking into consideration interest expense, |
21
a measure of liquidity. We believe that EBITDA |
Fiscal Year Ended January 31, | |||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||
(In thousands) | |||||||||||||||
Net income | $ | 8,582 | $ | 10,880 | $ | 7,826 | $ | 6,608 | $ | 10,797 | |||||
Depreciation and amortization |
| 2,161 |
| 5,181 |
| 6,130 |
| 6,662 |
| 3,583 | |||||
Interest expense |
| 3,494 |
| 13,905 |
| 15,766 |
| 13,550 |
| 15,795 | |||||
Income taxes |
| 4,491 |
| 6,530 |
| 4,663 |
| 4,040 |
| 6,726 | |||||
EBITDA | $ | 18,728 | $ | 36,496 | $ | 34,385 | $ | 30,860 | $ | 36,901 | |||||
Fiscal Year Ended January 31, (In thousands) | |||||||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | |||||||||||
Net income | $ | 10,880 | $ | 7,827 | $ | 6,608 | $ | 10,797 | $ | 13,152 | |||||
Depreciation & amortization | 5,181 | 6,130 | 6,662 | 3,583 | 5,043 | ||||||||||
Interest expense | 13,905 | 15,766 | 13,550 | 15,795 | 16,414 | ||||||||||
Income taxes | 6,530 | 4,663 | 4,040 | 6,726 | 7,695 | ||||||||||
Costs on early extinguishment of debt | 7,317 | ||||||||||||||
EBITDA | $ | 36,496 | $ | 34,386 | $ | 30,860 | $ | 36,901 | $ | 49,621 | |||||
b) | Total debt includes balances outstanding under Perry Ellis’ senior credit facility, senior secured notes, senior subordinated notes, and real estate mortgage. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Perry EllisWe began operations in 1967 as Supreme International Corporation and initially focused itsour efforts on marketing guayabera shirts, and other men’s apparel products targeted at the Hispanic market in Florida and Puerto Rico. Over time Perry Elliswe expanded itsour product line to offer a variety of men’s sport shirts. In 1988, Perry Elliswe developed the Natural Issue brand and completed itsour initial public offering in 1993. In 1996, Perry Elliswe began an expansion strategy through the acquisition of brands including the Munsingwear family of brands in 1996, the John Henry and Manhattan brands from Salant in 1999 and the Perry Ellis brand in 1999. Following the Perry Ellis acquisition, the companywe changed itsour name from Supreme International Corporation to Perry Ellis International, Inc. to better reflect the name recognition that the brand provided. In 2002, Perry Elliswe acquired the Jantzen brand and in FebruaryJune 2003 Perry Ellis entered into a definitive agreement to acquirewe acquired Salant, Perry Ellis’our largest licensee, by merger thereby giving Perry Ellisus greater control of the Perry Ellis brand, as well as adding other brands owned by Salant.
Perry EllisWe believe we are one of the leading apparel companies in the United States. We control a portfolio of major men’s and women’s brands, some of which were established over 100 years ago. We design, source, market and license our products nationally and internationally at multiple price points and across all major levels of retail distribution at more than 20,000 doors. The levels of retail distribution include department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate incentive market and independent retailers in the United States and Canada. Our largest customers include Federated, Dillard’s, May Department Stores, Wal-Mart, J.C. Penney, Kohl’s, and Sears. We also operate 38 retail stores located primarily in upscale retail outlet malls across the United States. In addition, we leverage our design, sourcing and logistics expertise by offering a limited number of private label programs to retailers. In order to maximize the worldwide exposure of our brands and generate high margin royalty income, we license our brands through approximately 56 domestic and approximately 79 international license agreements. Our licensing business is nowa significant contributor to our operating income.
In fiscal 2004, we experienced a 65.4% increase in total revenue and a 21.8% increase in net income. These increases were primarily due to our acquisition of Salant and organic growth offset by a decrease in royalty income. The record net income results we realized in fiscal 2004 came despite the fact that our swimwear business performed at levels below our expectations.
Our wholesale business, which is comprised of men’s sportswear and women’s and men’s swimwear and swimwear accessories, accounted for 96% of our total revenues in fiscal 2004, and our licensing business accounted for 4% of our total revenues in fiscal 2004. We have traditionally focused on the men’s sportswear market, which represented approximately 86.7% of our total wholesale revenues in fiscal 2004, while the women’s and men’s swimwear market represented approximately 13.3% of our total wholesale revenues in fiscal 2004.
In June 2003, we acquired Salant, a leading designer, marketer and licensordistributor of a broad linebrand name and private label menswear products and the largest licensee of high quality men’s sportswear, including casual and dress casual shirts, golf sportswear, sweaters, dress casual pants and shorts, jeans wear, active wear and swimwear to all levels of retail distribution. During fiscal 2003, with the Jantzen acquisition, Perry Ellis began designing and marketing women’s swimwear under the Jantzen and Southpoint brands, women’s and junior’s swimwear under the Tommy Hilfiger brand, and women’s and junior’s swimwear, men’s and junior’s competitive swimwear, swimwear accessories and apparel under the Nike brand.
Perry Ellis owns or licenses the brand names under which most of its products are sold. These brand names include Perry Ellis, John Henry, Manhattan, PING and Mondo di Marco for dress casual wear, Cubavera, Havenera, Havana Shirt Co., Natural Issue, Munsingwear and Grand Slam for casual sportswear, Perry Ellis America and Natural Issue for jeans wear, PING, Perry Ellis and Munsingwear for golf sportswear, Pro Player and Perry Ellis America for active wear, NAUTICA for selected product lines for sale to corporate purchasers and Jantzen, Southpoint, Nike and Tommy Hilfiger brands for swimwear and swimwear accessories.
If With the Salant acquisition is completed,we have consolidated control of the Perry Ellis will be positionedbrand, added significant revenues and earnings, solidified our balance sheet, further diversified our product offerings and customer base, and added to enter the men’s collection market for sportswear, dress shirts and dress pants and the leather accessories market. With the acquisition, Perry Ellis will begin to design, market and license products under the Axis and Tricots St. Raphael brands, and under the JNCO trademark for menswear. Furthermore, Perry Ellis will begin marketing menswear under the Ocean Pacific brands as a licensee, if the written consentour portfolio of Ocean Pacific is obtained.
Perry Ellis also licenses its trademark portfolio domestically and internationally to third parties for apparel and various other products that Perry Ellis does not sell including men’s and women’s footwear and men’s suits,
22
underwear, loungewear, outerwear, fragrances and accessories. In addition to generating additional sources of revenue for Perry Ellis, these licensing arrangements raise the overall awareness of Perry Ellis’ brands.
In addition to its sales of branded products, Perry Ellis sells products to retailers for marketing as private label or own store lines. In fiscal 2003, Perry Ellis sold private label products to Wal-Mart, J.C. Penney, Goody’s, K-Mart, Target, Mervyn’s, Meijer and Sears Roebuck. Private label sales generally yield lower profit margins than sales of comparable branded products. Private label sales accounted for approximately 25.0%, 37.0%, 34.0% of net sales during fiscal years 2003, 2002 and 2001, respectively. The decrease in the private label business as a percentage of Perry Ellis net sales is As a result of this acquisition, we also assumed operation of 39 retail outlet stores, of which we have since closed four. The Salant business represented approximately $165 million of the additional$200 million in total revenue growth we experienced in fiscal 2004.
Our products have historically been geared towards lighter weight apparel generally worn during the spring and summer months. We believe that this seasonality has been reduced with our introduction of fall, winter, and holiday merchandise. Our swimwear business, however, is highly seasonal in nature, with the significant majority of its sales occurring in our first and fourth quarters. Our higher-priced products generally tend to be less sensitive to either economic or weather conditions. Seasonality can be affected by a variety of apparel underfactors, including the brands acquired inmix of advance and fill-in orders, the Jantzen acquisitionamount of sales to different distribution channels, and overall product mix among traditional merchandise, fashion merchandise and swimwear. We expect that revenues for our second quarter will typically be lower than our other quarters due to the subsequent license agreements with Nike and Tommy Hilfiger and Perry Ellis’ decision to focus its efforts on selling branded products.impact of seasonal sales.
Through its “family of brands” marketing strategy, Perry Ellis seeks to develop and enhance a distinct brand name, styling and pricing strategy for each product category within each distribution channel and target consumer. Perry Ellis markets its brands to a wide range of segments, targeting consumers in specific age, income and lifestyle categories.
Perry Ellis primarily contracts for the manufacture of its products through a worldwide network of quality manufacturers. Perry Ellis currently uses approximately 130 independent suppliers, located in the Far East, other parts of Asia, Africa and South and Central America. Perry Ellis believesWe believe that its extensive sourcing experience enables it to obtain quality products on a cost effective basis.
Perry Ellis believes that its competitive strengths positions it well to capitalize on several trends that have affected the apparel sector in recent years. These trends include the consolidation of the department and chain store sectors into a smaller number of stronger retailers, which represent some of Perry Ellis’ most important customers, the increased reliance of retailers on reliable suppliers with design expertise and advanced systems and technology, and the continued importance of strong brands as a source of product differentiation.
In recent years, through acquisition of brands and internal growth, Perry Ellis has experienced significant overall growth. From Perry Ellis’ initial public offering in 1993 to fiscal 2003, Perry Ellis has experienced a compound annual revenue growth rate of 22.3% and a compound annual growth rate of 17.7% in net income.
Perry Ellis believes that itsour future growth will come as a result of itsour continued emphasis on itsour existing brands,brands; new and expanded product lines, the expectedlines; increases in itsour sales of bottoms, sweaters, swimwear and accessories,accessories; domestic and international licensing businesses,licensing; multi-brand development for the fast-growing Hispanic marketmarket; and through selective acquisitions and opportunities that fit strategically with Perry Ellis’our business model. Perry Ellis’Our expected future growth in these areas may be offset somewhat by a decreased focus on private label business.
The terrorist attacks of September 11, 2001 and subsequent increasesIn the past few years, the general decline in unemployment and reducedthe U.S. economy has resulted in lower consumer spendingspending. Retailers have clearly had a negative impact on the United States economy. Retailers responded to the general sense of economic uncertaintyweakness by delaying the placement of orders, reducing orders, and implementing aggressive price discounting and aggressive promotional activities. Many retailers, including some of Perry Ellis’our customers, have prioritized their own private label products or have instituted competitive internet-based global bidding processes for their private label business that, in some cases, are designed to effectively reduce margins to a level that are no longer attractive to Perry Ellis.us. In addition, during the past several years various retailers, including customerssome of Perry Ellis,our customers, have experienced significant difficulties including bankruptcies, liquidations and reorganizations. All of these factors have materially adversely affected the apparel industry. Furthermore, the geopolitical situation has and may continue to adversely affectaffected the U.S. economy and consequently the apparel industry. Perry Ellis believesWe believe, however, that these negative conditions will continuethe current U.S. economy has improved in recent months. This improvement has led to the improved results of our customers. We believe that the improved economy and the resulting increase in demand for apparel should benefit us for the foreseeable future and it expects to closely monitor the situation.future.
23
Recent Developments
In February 2003, Perry Ellis entered into a merger agreement with Salant Corporation, Perry Ellis’s largest licensee, which provides for the merger of a wholly owned Perry Ellis subsidiary with Salant. If the merger is complete, Salant will become a wholly owned subsidiary of Perry Ellis. The aggregate merger consideration to be paid by Perry Ellis is $91.0 million, comprised of approximately $52.0 million in cash and approximately $39.0 million worth of newly issued Perry Ellis common stock. Salant shareholders will receive approximately $9.37 per share in value comprised of at least $5.35 per share in cash and not more than $4.02 per share of Perry Ellis common stock. The maximum number of shares of Perry Ellis common stock, however, that may be issued in the merger is limited to 3,250,000. Perry Ellis expects the transactions costs and related change of control and severance provisions to be approximately $10.0 million. The merger is subject to customary closing conditions. Perry Ellis expects to close the merger before the end of its second fiscal quarter if all of the conditions to the merger are satisfied.
The cash portion of the merger consideration will be funded from Perry Ellis’ existing cash reserves and through borrowings under its senior credit facility. Perry Ellis obtained a commitment from the lead senior lender in its the existing senior credit facility to increase the facility from $60.0 million to $110.0 million, with a $30.0 million sub limit for letters of credit.
Salant licenses the Perry Ellis brand from Perry Ellis for men’s sportswear, dress shirts, dress bottoms and accessories and derived approximately $164.3 million or 65.2% of its fiscal 2002 revenues from the sale of Perry Ellis products. Salant is Perry Ellis’ largest licensee of Perry Ellis branded apparel and paid $5.7 million in royalties and $2.7 million in advertising contribution in fiscal 2003. The remaining $87.7 million of Salant’s fiscal 2002 revenue is made up of Salant’s owned brands, Axis and Tricots St. Raphael, sales under license agreements for use of the JNCO and Ocean Pacific brands, as well as, several private label programs. Perry Ellis expects that if the acquisition is completed it will be accretive to earnings, will add significant revenue, and strengthen Perry Ellis’ balance sheet. In addition, Perry Ellis believes that while royalties will initially decline as a result of owning Salant, in the long term, licensing opportunities will continue to grow domestically and internationally.
Perry Ellis believes that this acquisition will allow the company to exercise greater control of the Perry Ellis brand’s major product categories, more effectively rationalize distribution channels of Perry Ellis sub-brands and enhance the company’s efforts to build a stronger domestic and international licensing business. In addition, Perry Ellis believes that the Salant acquisition will provide it with two well-recognized brands, Axis and Tricots St. Raphael targeted at upscale department stores.
Recent Accounting Pronouncements
In April 2001,See Notes to the Consolidated Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 01-09, “AccountingStatements in “Item 8. Financial Statements and Supplementary Data” 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 only impacted Perry Ellis’ revenue and expense classifications by $2,738,000 and $1,724,000 in fiscal 2001 and fiscal 2002 and have no effect on reported income.recent accounting pronouncements.
Beginning in the first quarter of fiscal 2003, Perry Ellis 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 Perry Ellis’ operating income, net income or the financial position, 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
24
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 Perry Ellis’ financial position or results of operations.
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 was for fiscal years beginning after December 15, 2001. Perry Ellis adopted SFAS No. 142 for its fiscal year beginning February 1, 2002.
In accordance with SFAS No. 142, Perry Ellis 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. On an as adjusted basis, basic and diluted earnings per share for the years ended January 31, 2001, 2002 and 2003, respectively, are adjusted to exclude amounts no longer being amortized under the provisions of SFAS No. 142.
2001 | 2002 | 2003 | |||||||
Net income: | |||||||||
Reported net income | $ | 7,826,004 | $ | 6,607,942 | $ | 10,796,285 | |||
Intangible amortization |
| 2,478,396 |
| 2,719,938 |
| — | |||
Adjusted net income | $ | 10,304,400 | $ | 9,327,880 | $ | 10,796,285 | |||
Basic earnings per share: | |||||||||
Reported basic earnings per share |
| 1.17 |
| 1.01 |
| 1.69 | |||
Intangible amortization |
| 0.37 |
| 0.42 |
| — | |||
Adjusted basic earnings per share | $ | 1.54 | $ | 1.43 | $ | 1.69 | |||
Diluted earnings per share: | |||||||||
Reported diluted earnings per share |
| 1.16 |
| 1.01 |
| 1.65 | |||
Intangible amortization |
| 0.37 |
| 0.42 |
| — | |||
Adjusted diluted basic earnings per share | $ | 1.53 | $ | 1.43 | $ | 1.65 | |||
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 was for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a significant effect on Perry Ellis’ financial position or the results of operation.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections,” which all but eliminates the presentation in income statements of debt extinguishments as extraordinary items. SFAS No. 145 will be effective for fiscal years
25
beginning after May 15, 2002. Perry Ellis expects to implement SFAS No. 145 at the beginning of fiscal 2004. SFAS No. 145 is not expected to have a significant effect on Perry Ellis’ financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” 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 No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. SFAS No. 146 is not expected to have a significant effect on Perry Ellis’ financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others- an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No.45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. However, the disclosure requirements in FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Perry Ellis is not a party to any agreement in which it is a guarantor of indebtedness of others. Accordingly, adoption of this pronouncement did not have an impact on Perry Ellis’ consolidated financial statements.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS No. 148”). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No.148 amends the disclosure requirements of SFAS No.123, Accounting for Stock-Based Compensation, to require disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ended after December 15, 2002 and for interim financial statements beginning after December 15, 2002. The adoption of the disclosure provisions of SFAS No. 148 is not expected to have a significant effect on Perry Ellis’ financial position of results of operations.
Had compensation cost for options granted been determined in accordance with the fair value provisions of SFAS No. 123, our net income and net income per share would have been reduced to the pro forma amounts presented below for the years ended January 31:
2001 | 2002 | 2003 | |||||||
Net income as reported | $ | 7,826,004 | $ | 6,607,942 | $ | 10,796,285 | |||
Deduct: Total stock based employee compensation expense included in reported net income, net |
| 747,355 |
| 422,464 |
| 251,953 | |||
Pro forma net income | $ | 7,078,649 | $ | 6,185,478 | $ | 10,544,332 | |||
Pro forma net income per share: | |||||||||
Basic | $ | 1.08 | $ | 0.95 | $ | 1.65 | |||
Diluted | $ | 1.05 | $ | 0.95 | $ | 1.61 | |||
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51” (“FIN No. 46”). FIN No. 46 addresses consolidation by business enterprises of variable interest entities (formerly special purpose entities or SPEs). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investor’s that do not provide sufficient financial resources for the entity to support its activities. The objective of FIN No. 46 is not to restrict the use of
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variable interest entities but to improve financial reporting by companies involved with variable interest entities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. Perry Ellis is required to adopt the provisions of FIN No. 46 immediately for variable interests in variable interest entities created after January 31, 2003, and in the quarter ending April 30, 2003 for variable interests in variable interest entities created before February 1, 2003. However, certain of the disclosure requirements apply to financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Perry Ellis does not have any Variable Interest Entities as defined in FIN No. 46. Accordingly, the Company has determined that it is not reasonable possible that it will be required to consolidate or disclose information about a variable interest entity upon the adoption of FIN No. 46.
Critical Accounting Policies
SeveralIncluded in the footnotes to the consolidated financial statements in this report is a summary of Perry Ellis’all significant accounting policies involve significant judgmentsused in the preparation of our consolidated financial statements. We follow the accounting methods and uncertainties. Thepractices as required by Accounting Principles Generally Accepted in the United States of America (“GAAP”). In particular, our critical accounting policies withand areas we use judgment in are the greatest effect on Perry Ellis’ resultsareas of operation and financial position includerevenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, and the impairment of long-lived assets including trademarks.that are our trademarks, the recoverability of deferred tax assets and the measurement of retirement related benefits.
Revenue Recognition. Sales are recognized at the time legal title to the product passes to the customer, generally FOB Perry Ellis’ distribution facilities, net of trade allowances and a provision for estimated returns and other allowances. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. Perry Ellis believesWe believe that itsour revenue recognition policies conform to Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements.
Accounts Receivable. Perry Ellis maintainsWe maintain an allowance for doubtful accounts receivables for estimated trade discounts, co-op advertising, allowances provided to retail customers to flow goods through the retail channel, and losses resulting from the inability of itsour retail customers to make required payments considering historical and anticipated trends. Judgment is critical because some retail customers are currently operating in bankruptcy or have experienced financial difficulties. Additional allowances might be required if their financial condition were to worsen.
Inventories. Perry Ellis’Our inventories are valued at the lower of cost or market value. Perry Ellis evaluatesWe evaluate all of itsour inventory style-size-color stock keeping units, or SKUs, to determine excess or slow-moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, Perry Ellis estimateswe estimate their market value or net sales value based on current realization trends. If the projected net sales value is less than cost, on an individual SKU basis, Perry Ellis provideswe provide an allowance to reflect the lower value of that inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.
Intangible Assets. Perry Ellis reviews itsWe have, at the present time, only one class of indefinite lived assets, trademarks. We review our intangible assets with indefinite useful lives for possible impairmentimpairments on an annual basis in accordance with SFAS No. 142. Similarly, Perry Ellis continues to142 and perform impairment testing as of February 1st of each year. We evaluate its under-performing brandsthe “fair value” of our identifiable intangible assets for
purposes of recognition and business units. Assumptionsmeasurement of impairment losses. Evaluating indefinite useful life assets for impairment involves certain judgments and estimates, used inincluding the evaluationinterpretation of impairment may affect the carrying valuecurrent economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of long-lived assets, which could result in impairment charges in future periods.our operations and other factors. If Perry Elliswe incorrectly anticipatesanticipate these trends or unexpected events occur, Perry Ellis’our results of operations could be materially affected. Management reviews intangible
Deferred Taxes. We account for income taxes under the liability method. Deferred tax assets for possible impairment whenever events or circumstances indicateand liabilities are recognized based on the differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to that portion which is expected to more likely than not be realized. The ultimate realization of the carrying amountdeferred tax asset is dependent upon the generation of anfuture taxable income during the periods prior to the expiration of the related net operating losses. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax asset may not be recoverable. If there
Retirement-Related Benefits. The pension obligations related to our defined benefit pension plans are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate, expected return of plan assets, future compensation increases, and other factors, which are updated on an annual basis. Management is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and withoutrequired to consider current market conditions, including changes in interest charges) expected to resultrates, in making these assumptions. Actual results that differ from the useassumptions are accumulated and amortized over future periods, and therefore, generally affect the recognized pension expense or benefit and our pension obligation in future periods. The fair value of plan assets is based on the performance of the assetfinancial markets, particularly the equity markets. The equity markets can be, and its eventual disposition. If these cash flows are less thanrecently have been, very volatile. Therefore, the carryingmarket value of the plan assets can change dramatically in a relatively short period of time. Additionally, the measurement of the plan’s benefit obligation is highly sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plan’s estimated accumulated benefit obligation could exceed the fair value of the plan assets and therefore, we would be required to establish an additional minimum liability, which would result in a reduction in shareholder’s equity for the amount of the asset,shortfall. For fiscal 2004, we did not record an impairment loss is recognized to reduceadditional minimum pension liability calculated under the asset to its estimated fair value. Preparationprovisions of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning future conditions.SFAS No. 87.
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Items Affecting Comparability of Fiscal 2002 PeriodPeriods
Adoption of SFAS No. 142142.. As disclosed in Note 2 to the Consolidated Financial Statements, Perry Elliswe adopted SFAS No. 142,“Goodwill and Other Intangible Assets,” as of February 1, 2002. Under the provisions of SFAS No. 142, goodwill iscertain intangibles are 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.
Adoption of EITF Issue No. 01-0901-09.. As disclosed in Note 2 to the Consolidated Financial Statements, Perry Elliswe adopted EITF Issue No. 01-09, “Accounting“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s ProductsProducts),” as of February 1, 2002. The provisions of EITF No. 01-09, relatesrelate 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 revenuerevenues 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. Perry Ellis previously reported net sales for fiscal 2001 and 2002 were reduced by $2,738,000 and $1,724,000 respectively to conform to the new accounting standard. The adoption of this new accounting standard had no impact on Perry Ellis’our income before minority interest and income taxes, net income or financial position.
Acquistions.We completed the Salant acquisition on June 2003, which contributed $164.8 million to our revenue growth
Our Results of Operations for Fiscal 2004
The following table sets forth, for the periods indicated, selected items in Perry Ellis’our consolidated statements of income expressed as a percentage of total revenues:
Fiscal Year Ended January 31, | |||||||||
2001 | 2002 | 2003 | |||||||
Net sales | 90.9 | % | 90.4 | % | 90.6 | % | |||
Royalty income | 9.1 | % | 9.6 | % | 9.4 | % | |||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 70.6 | % | 68.9 | % | 67.0 | % | |||
Gross profit | 29.4 | % | 31.1 | % | 33.0 | % | |||
Selling, general and administrative expenses | 17.4 | % | 19.9 | % | 20.9 | % | |||
Depreciation and amortization | 2.2 | % | 2.4 | % | 1.1 | % | |||
Operating income | 9.9 | % | 8.7 | % | 11.0 | % | |||
Interest expense | 5.5 | % | 4.9 | % | 5.2 | % | |||
Income before minority interest and income taxes | 4.4 | % | 3.9 | % | 5.8 | % | |||
Minority interest | — |
| — |
| — |
| |||
Income tax provision | 1.6 | % | 1.5 | % | 2.2 | % | |||
Net Income | 2.8 | % | 2.4 | % | 3.5 | % | |||
Fiscal Year Ended January 31 | 2002 | 2003 | 2004 | ||||||
Net Sales | 90.4 | % | 90.6 | % | 95.7 | % | |||
Royalty Income | 9.6 | % | 9.4 | % | 4.3 | % | |||
Total Revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of Sales | 68.9 | % | 67.0 | % | 66.5 | % | |||
Gross Profit | 31.1 | % | 33.0 | % | 33.5 | % | |||
Selling, general and administrative expenses | 19.9 | % | 20.9 | % | 23.7 | % | |||
Depreciation and amortization | 2.4 | % | 1.1 | % | 1.0 | % | |||
Operating Income | 8.8 | % | 11.0 | % | 8.8 | % | |||
Costs on early extinguishment of debt | 0.0 | % | 0.0 | % | 1.4 | % | |||
Interest Expense | 4.9 | % | 5.2 | % | 3.2 | % | |||
Income before minority interest and income taxes | 3.9 | % | 5.8 | % | 4.2 | % | |||
Minority interest | — | — | — | ||||||
Income tax provision | 1.5 | % | 2.2 | % | 1.5 | % | |||
Net Income | 2.4 | % | 3.6 | % | 2.7 | % | |||
Fiscal YearThe following is a discussion of the results of operations for the fiscal year ended January 31, 2004 (“fiscal 2004”) as compared with the fiscal year ended January 31, 2003 (“fiscal 2003”).
Our Fiscal 2004 Results as compared to our Fiscal Year 2002 (“fiscal 2002”)2003 Results
Total revenues. Total revenues consist of net sales and royalty income. Total revenues for fiscal 2004 were $505.9 million, which is an increase of $200.1, or 65.4%, from $305.8 for fiscal 2003. The increase was due mainly to an increase of approximately $164.8 million in net sales generated by the Salant business, which we acquired in the Salant acquisition in June 2003, an increase of $38.9 million in net sales generated by our swimwear business, and a $3.5 million increase in net sales in our other men’s sportswear business, which includes all of our businesses other than our Salant business and swimwear business. This increase was offset in part by a decrease in royalty income of $7.1 million described below.
Net sales. Net sales in fiscal 2004 were $484.2 million, an increase of $207.2 million, or 74.8%, from $277.0 million in fiscal 2003. The increase in net sales is primarily attributable to the increases in net sales generated by the Salant business, by our swimwear business, and other men’s sportswear business.
Royalty income. Royalty income in fiscal 2004 was $21.7 million, a decrease of $7.1 million, or 24.6%, from $28.8 million in fiscal 2003. The decrease in royalty income for fiscal 2004 was due to two reasons. First, the loss of $3.5 million in royalty income we previously received from Salant. We acquired Salant in June 2003. For the fiscal years 2001 through 2003 Salant was our largest licensee, and its results are now recognized in our net sales. Second, the decrease in royalty income was also attributable to the decreases in royalty income from certain of the licensees of the Perry Ellis and John Henry brands. Royalty income is derived from agreements entered into by us with our licensees, which average three years in length. The vast majority of our license agreements require licensees to pay us a royalty, based on net sales and require licensees to pay a guaranteed minimum royalty. Approximately 67% of our royalty income was attributable to guaranteed minimum royalties with the balance attributable to royalty income in excess of the guaranteed minimums for each of fiscal 2004 and 2003.
Cost of sales. Cost of sales in fiscal 2004 were $336.4, an increase of $131.4 million, or 64.1%, from $205.0 million in fiscal 2003. The increase is primarily due to the increase in net sales described above.
As a percentage of revenues, cost of sales decreased from 67.0% in fiscal 2003 to 66.5% in fiscal 2004. Two factors contributed to this change. First royalty income, which has virtually no cost of sales associated with it decreased, which drove the average cost of sales as a percentage of total revenues up. Second, primarily as a result of the impact high margin sales from the Salant acquisition our cost of sales as a percentage of net sales (sales excluding royalty income) in fiscal 2004 was 69.5% as compared to 74% in fiscal 2003.
Gross profit.Gross profit was $169.5 million in fiscal 2004, as compared to $100.8 million, an increase of 68.1%. The increase in gross profit in fiscal 2004 as compared to fiscal 2003 was primarily attributed to the impact of our acquisition of Salant for the 7.5-month period after June 19, 2003. Additionally, we experienced growth in gross profit dollars in our other wholesale business. These increases were offset by a $7.1 million decrease in royalty income. As a percentage of total revenue gross profit margins were
33.5% in fiscal 2004 as compared to 33.0% in fiscal 2003. The decrease in royalty income mentioned earlier adversely impacted the overall gross profit margin percent; however, that decrease was offset by an improvement in our gross margin percent in our wholesale business (that is cost of sales divided by net sales). The wholesale gross profit margin percent improved in fiscal 2004 to 30.5% as compared to 26% in fiscal 2003. This improvement came as a result of the impact of sales from the Salant acquisition and from the Company’s continued success in realigning its business to higher margin branded business as compared to private label sales. Branded sales accounted for 91% of net sales in fiscal 2004 as compared to 75% in fiscal 2003.
The gross profit percentage for branded label sales typically is 3% to 5% higher than our private label sales depending on customer and product mix. Our gross profit percentage may not be comparable to others in our industry, because our gross profit includes royalty income and others in the apparel industry may not have such income.
Selling, general and administrative expenses. Selling, general and administrative expenses in fiscal 2004 were $119.7 million, an increase of $55.8 million, or 87.4%, from $63.9 million in fiscal 2003. As a percentage of total revenues, selling, general and administrative expenses were 23.7% in fiscal 2004 as compared to 20.9% in fiscal 2003. The increase in selling, general and administrative costs is primarily attributable to the additional $37.2 million in expenses incurred by our Salant business and an additional $10.9 million from our swimwear business. The increase in these costs is also attributable to an increase in expenses we incurred supporting our organic growth, and an increase in advertising, marketing and design to support our existing brands, such as Perry Ellis, Cubavera, the Havanera Co., and Original Penguin.
Depreciation and amortization. Depreciation and amortization in fiscal 2004 was $5.0 million, an increase of $1.5 million, or 40.7%, from $3.5 million in fiscal 2003. The increase is due to the increase in property and equipment purchased in fiscal 2004 and a full year of depreciation from the purchase of the main administrative office, warehouse and distribution facility in Miami and the Seneca distribution center. As of January 31, 2004, we owned approximately $36.8 million of property, plant and equipment as compared to $31.0 million of property, plant and equipment as of January 31, 2003.
Costs on early extinguishment of debt. As a result of redeeming our $100 million in senior subordinated notes in fiscal 2004, which were scheduled to mature in April 2006, our costs on early extinguishment of debt in fiscal 2004 was $7.3 million. The costs on early extinguishment of debt include the call premium we paid and other associated redemption costs.
Interest expense. Interest expense in fiscal 2004 was $16.4 million, an increase of $.6 million, or 3.9%, from $15.8 million in fiscal 2003 The increase is mainly due to higher average debt balances, including the $150.0 million senior subordinated notes issued in September 2003, offset by the impact of certain derivative hedging transactions.
As of January 31, 2004, we had $257.1 million in long-term debt as compared to $194.4 million as of January 31, 2003. The increase in long-term debt is a direct result of the long-term debt we incurred in connection with the Salant acquisition. In addition, we had an additional $11.8 million outstanding under our senior credit facility as compared to the prior fiscal year, which resulted in higher interest expense. The interest expense on higher outstanding debt was offset in part by the impact of certain derivative hedging transactions described in “Item 3: Quantitative and Qualitative Disclosures about Market Risks.”
Income taxes. Income taxes in fiscal 2004 were $7.7 million, a $1.0 million increase as compared to $6.7 million for fiscal 2003. For fiscal 2004, our effective tax rate was 36.5% as compared to 38.2% in fiscal 2003.
Net income. Net income in fiscal 2004 was $13.1 million, an increase of $2.3 million, or 21.8%, as compared to net income of $10.8 million in fiscal 2003. The increase in net income was due to the changes described above.
Our Fiscal 2003 Results as compared to our Fiscal 2002 Results
Total revenues. Total revenues consist of net sales and royalty income. Total revenues increased $27.8 million, or 10.0%, to $305.8 million in fiscal 2003 from $278.0 million in the prior year. The increase was due predominately to an increase of $23.3$25.3 million in net sales related to the sales generated by the Jantzen swimwear business and an increase in royalty income of $2.1 million.
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Net sales. Net sales increased $25.7 million, or 10.2%, to $277.0 million in fiscal 2003 from $251.3 million in the comparable period last year. The increase in net sales is primarily attributable to the net sales generated by the Jantzen swimwear business. Net sales of non-swimwear men’s apparel remained relatively unchanged for the fiscal year.
Royalty income. Royalty income was $28.8 million in fiscal 2003, a $2.1 million, or 7.9% increase over the prior year amount of $26.7 million. Royalty income is derived from agreements entered into by us with our licensees which average three years in length. The vast majority of our license agreements require licensees to pay us a royalty, based on net sales and require licensees to pay a guaranteed minimum royalty. Approximately 67% and 76% of our royalty income was attributable to guaranteed minimums
royalties with the balance attributable to royalty income in excess of the guaranteed minimums for fiscal 2003 and 2002, respectively. The increase in royalty income was mainly due to increases in royalty income in excess of guaranteed minimums for certain licensees of the Perry Ellis brand, including Salant, having strong results despite a slowdown in overall retail sales and the addition of royalty income generated from the Jantzen brands. The decrease in guaranteed minimums as a percentage of total royalty income was mainly due to increases in royalty income in excess of guaranteed minimums for certain licenses of the Perry Ellis brand, and royalty income from the Jantzen brands.
Cost of sales. Cost of sales for fiscal 2003 of $205.0 million was $13.4 million, or 7.0% higher than the prior year amount of $191.6 million due mainly to the increase in net sales as described above. As a percent of revenues, cost of sales decreased from 68.9% in fiscal 2002 to 67.0% in fiscal 2003, due primarily to a change in Perry Ellis’our sales mix between private label and branded label sales. Cost of sales includes only costs relating to sale of product and excludes costs relating to royalty income which are immaterial. Gross profit was $100.8 million in fiscal 2003, or 33.0% of revenues, as compared to $86.4 million, or 31.1% of revenues, in the prior year. We increased focus on branded label sales, which accounted for 75.0% of our net sales in fiscal 2003 compared to 70.1% in fiscal 2002, contributed to greater gross margins because branded label sales typically generate higher gross margins. Our gross margin percentage for branded label sales typically are 3% to 5% higher than our gross margin percentage for private label sales depending on customer and product mix. Our gross profit percentage may not be comparable to others in the industry, because we include royalty income in gross profit and others in the apparel industry may not.
Selling, general and administrative expensesexpenses.. Selling, general and administrative expenses were $63.9 million in fiscal 2003 as compared to $55.4 million in the prior year, an increase of $8.5 million, or 15.2%. As a percent of total revenues, selling, general and administrative expenses increased from 19.9% in fiscal 2002 to 20.9% in fiscal 2003. The increase was due primarily to the addition ofadditional $10.4 million in expenses incurred by the Jantzen operations, offset by a decrease of $2.0 million in March of 2002,expenses incurred by our European Operations while the selling, general and administrative expenses relating to itsour other businesses remained relatively unchanged.
Depreciation and amortizationamortization.. Depreciation and amortization expense in fiscal 2003 was $3.6 million or 1.1% of revenues as compared to $6.7 million or 2.4% of revenues in fiscal 2002. 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 expenseexpense.. Interest expense in fiscal 2003 was $15.8 million as compared to $13.6 million in the prior year. The increase is primarily attributable to the $57 million 9½%our senior secured notes, due 2009 which Perry Elliswe sold to finance the Jantzen acquisition, to pay down borrowings under the senior credit facility and asto use as additional working capital offset by lower interest rates and the positive impact of certain derivative hedging transactions described herein. Perry Ellis anticipates that interest expense will increase in fiscal 2004 as a result of the Salant acquisition.
Income taxestaxes.. Income taxes in fiscal 2003 were $6.7 million, a $2.7 million increase as compared to $4.0 million in fiscal 2002. The increase was due primarily to an increase in pretax income. The effective tax rates for fiscal years 2003 and 2002 were 38.2% and 37.9%, respectively.
Net incomeincome.. Fiscal 2003 net income increased $4.2 million, or 63.4%, to $10.8 million from the prior year, primarily as a result of the increase in net sales and licensing revenueof $25.7 million, royalty income of $2.1 million and the improvement in gross margin.margin of $14.4 million.
Fiscal Year 2002 as compared to Fiscal Year 2001 (“fiscal 2001”)
Total revenues. Total revenues consist of net sales and royalty income. Total revenue decreased $6.7 million or 2.3% to $278.0 million in fiscal 2002 from $284.7 million in the prior year. The decrease was due to decrease in net sales of $8.6 million and an increase in royalty income of $0.9 million as described below.
Net sales. Net sales decreased $7.6 million or 2.9% to $251.3 million in fiscal 2002 from $258.9 million in the comparable period last year. This may be attributed to three factors: First, shipments to K-Mart Corporation
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were lower in fiscal 2002 due to K-Mart’s financial difficulties during the year and its bankruptcy filing in January 2002. Second, Perry Ellis experienced a short-term delay in receipt of some orders, which it previously planned to ship in late January 2002, because a Miami-based bank, which was a source of letter of credit financing for Perry Ellis, was forced into receivership. Perry Ellis has since been able to obtain adequate letter of credit facilities with other financial institutions. Third, general economic conditions, which adversely impacted retail sales, resulted in lower than expected sell through and reorder rates from retailers.
Royalty income. Royalty income was $26.7 million in fiscal year 2002, a $0.9 million or 3.5% increase over the prior year amount of $25.8 million. The increase was mainly due to certain licensees in its Perry Ellis brand that had strong performance and to a one-time accelerated payment for early termination of a licensing agreement.
Cost of sales. Cost of sales for fiscal 2002 of $191.6 million was $9.3 million, or 4.6% lower than the prior year amount of $200.9 million due mainly to the decrease in net sales as described above. As a percent of revenues, cost of sales decreased from 70.6% in fiscal 2001 to 68.9% in fiscal 2002, due primarily to a change in Perry Ellis’ sales mix between private label and branded label sales. Gross profit was $86.4 million in fiscal 2002 or 31.1% of revenues as compared to $83.8 million or 29.4% of revenues in the prior year.
Selling, general and administrative expenses. Selling, general and administrative expenses were $55.4 million in fiscal 2002 as compared to $49.4 million in the prior year, an increase of $6.0 million or 12.2%. As a percent of total revenues, selling, general and administrative expenses increased from 17.4% in fiscal year 2001 to 19.9% in fiscal 2002. The increase was due primarily to a charge taken of $1.4 million for the K-Mart bankruptcy, accounting for a consolidation of a new Canadian joint venture in January 2002 and expenses incurred by Perry Ellis’ newly formed European subsidiary.
Depreciation and amortization expenses. Depreciation and amortization expense in fiscal 2002 was $6.7 million or 2.4% of revenues as compared to $6.1 million or 2.2% of revenues in fiscal 2001. The increase of $0.6 million in fiscal 2002 as compared to the prior year was due primarily to a full year effect of amortization of the Pro Player and Mondo di Marco trademarks acquired in fiscal 2001.
Interest expense. Interest expense in fiscal 2002 was $13.6 million as compared to $15.8 million in the prior year. The decrease is primarily attributable to the decrease in borrowings under the senior credit facility, favorable interest rates and the recognition of $0.7 million in income derived from an interest rate derivative agreement entered into by Perry Ellis during the third quarter of the fiscal year ended January 31, 2002.
Income taxes. Income taxes in fiscal 2002 were $4.0 million, a $0.7 million decrease as compared to $4.7 million in fiscal 2001. The decrease was due primarily to a decrease in pretax income. The effective tax rates for fiscal 2002 and 2001 were 37.9% and 37.6%, respectively.
Net income. Net income for fiscal 2002 decreased $1.2 million or 15.4% from the prior year, primarily as a result of the decrease in net sales and increase in selling, general and administrative expenses.
Our Liquidity and Capital Resources
Perry Ellis reliesWe rely primarily upon cash flow from operations and borrowings under itsour senior credit facility and letter of credit facilities to finance our operations and expansion. We believe that as a result of the growth in our business, our working capital requirements will increase. As of January 31, 2004, our total working capital was $192.9 million as compared to $119.9 million as of January 31, 2003. We believe that our cash flows from operations and borrowings under our senior credit facility and letter of credit facilities are sufficient to meet our working capital needs for the foreseeable future.
Net cash used in operating activities was $11.3 million in fiscal 2004 as compared to cash used in operating activities of $16.8 million in fiscal 2003 and $22.4 million provided by operations in fiscal 2002. The decrease of $5.5 million in the level of cash used in operating activities in fiscal 2004 as compared to fiscal 2003 is primarily attributable to an decrease in the use of cash related to accounts receivable, inventory, accounts payable and accrued expenses, and higher net income. Net cash used in operating activities was $16.8 million in fiscal 2003, as compared to $22.4 million provided by operations in fiscal 2002. The difference was due to an increase in accounts receivable of $29.4 million, and an increase in inventory of $3.7 million in fiscal 2003 offset in part by higher earnings. Accounts receivable increased due to our acquisition of Salant, organic growth and a greater concentration of shipments occuring in the last month of the fiscal year. Inventory increased by $1.9 million over the prior year due to the timing of receipts of goods at January 31, 20022004 and levels of replenishment of inventory.
Net cash provided by operations in fiscal year 2002 was $22.4 million as compared to $2.1 million used in operations in fiscal 2001. The difference is primarily attributable to a decrease in accounts receivables of
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$7.0 million since the beginning of the year due to increased cash collection and lower sales in January 2002. In fiscal 2001, net cash used in operatinginvesting activities was $2.1$44.9 million in fiscal 2004, which primarily due to a decrease inreflects the cash portion of the acquisition of Salant for $34.5 million, net income of $3.1 million, combined with comparative increases in accounts receivablecash acquired, purchases of property and inventoriesequipment of $13.2$8.7 million and $7.6 million, respectively.the purchase of the Redsand trademark for $1.8 million.
In fiscal 2003, net cash used in investing activities was $47.3 million, principally due to the Jantzen acquisition and purchases of property and equipment. In addition, in fiscal 2002, net cash2003, we used in investing activities was $3.1$22.1 million principally due to purchasesfor the purchase of property, plant and equipment. Net cash used in investing activities for fiscal 2001equipment, which included the $14.5 million contingent rental payment that was $5.4 million, mainly due torequired by the acquisitionstermination of the Pro Playersynthetic lease and Mondo di Marco brands and $2.7$2.5 million in purchasesfor the purchase of property and equipment.the Seneca distribution center.
In fiscal 2003, netNet cash provided by financing activities in fiscal 2004 was $52.4 million, which primarily reflects the net proceeds from our senior credit facility of $11.8 million, net proceeds from our offering of our 8 7/8% senior subordinated notes of $146.8 million, proceeds from the exercise of employee stock options of $2.1 million, offset by payments to redeem our 12¼% senior subordinated notes of $107.3 million, which included a redemption premium, and purchases of treasury stock of $1.0 million.
Net cash provided by financing activities in fiscal 2003 was $67.5 million, was due mainlywhich reflects the net proceeds from our offering of the senior secured notes of $55.6 million, the proceeds from the exercise of employee stock options of $1.3 million, proceeds from the real estate mortgage of $11.6 million on our main administrative office, warehouse and distribution facility, offset by net repayments under our senior credit facility of $1.2 million, and scheduled payments made under theon our 12¼% senior subordinated notes of $2.2 million. The net increase in borrowings under the senior credit facility resulted primarily from the senior credit facility being paid off from the proceeds of the offering of the senior secured notes. In fiscal 2002, net cash used in financing activities of $18.3 million was due mainly to payments made under the senior credit facility of $16.1 million and purchase of treasury stock of $2.2 million. The net decrease in borrowings under the senior credit facility resulted primarily from lower accounts receivable and lower levels of inventories. In fiscal 2001, net cash provided by financing activities was $7.7 million resulting from the net increased borrowings of $8.6 million under the senior credit facility offset by the purchases of treasury stock of $1.0 million. This net increase in borrowings under the senior credit facility in fiscal 2001 resulted from $19.9 million in borrowings primarily due to the increases in accounts receivables and inventories, offset by the $11.3 million repayment of the term loan portion of the senior credit facility.
If theThe Salant acquisition is completed, theAcquisition
On June 19, 2003, we acquired Salant Corporation, which was our largest licensee. The aggregate merger consideration to be paid by Perry Ellis is $91.0us was approximately $90.9 million, comprised of approximately $52.0$51.9 million in cash, and approximately $39.0$35.6 million worth of our newly issued Perry Ellis common stock. If the average closing price of the Perry Ellis common stock for the 20-day period ending three trading days before the anticipatedand approximately $3.4 million in merger closing date is less than $12.00, the cash portion of the merger consideration will increase by the amount of any deficiency. Perry Ellis expects the transaction costs to be approximately $10.0 million.costs. The cash portion of the merger consideration will bewas funded from Perry Ellis’ existingSalant’s available cash reserves and through borrowings under its existingour senior credit facility, which is expected to be increased to $110.0facility.
Salant licensed the Perry Ellis brand from us for men’s sportswear, dress shirts, dress bottoms and accessories and derived approximately $164.3 million, or 65% of its fiscal 2002 revenues, from the sale of Perry Ellis products. Salant was our largest licensee of Perry Ellis branded apparel. The remaining $87.7 million of Salant’s fiscal 2002 revenue were made up of Salant’s owned brands such as described below.Axis® and Tricots St. Raphael®, sales under license agreements for use of the JNCO® and Ocean Pacific® brands, as well as several private label programs.
Senior Credit Facility
In October 2002, Perry Ellis entered into a newOur amended senior credit facility with Congress Financial Corporation (Florida), as agent for a groupsyndicate of financial institutions. The senior credit facility provided Perry Ellislenders, provides us with a revolving credit linefacility of up to an aggregate amount of $60.0$110.0 million. The senior credit facility expires in September 2005 and the indebtedness thereunder ranks ahead of the 8 7/8% senior subordinated notes. On February 23, 2004, we increased our availability under the senior credit facility to $130.0 million until June 7, 2004.
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. In anticipation of the Salant acquisition, Perry Ellis received a commitment from a senior lender in its existing senior credit facility to increase the senior credit facility to $110.0 million with a sub limit of $30.0 million for letters of credit. It is anticipated that the terms and conditions of this amended credit facility will mirror the terms outlined below but, in the case of certain covenants, the amounts will increase to reflect the increase in the facility.
Certain Covenants. The senior credit facility containcontains certain covenants, which, among other things, requires Perry Ellisus to maintain a minimum EBITDA if availability falls below a certain minimum. It may restrict our ability and which restricts the paymentability of dividends. Perry Ellis isour subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We believe we are currently in compliance with all of itsour covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under the indentures and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
BorrowingsBorrowing Base. Borrowings under the senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of Perry Ellis’our eligible factored accounts receivablereceivables up to $5$20.0 million plus (c) the lesser of (i) the inventory loan limit,
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or (ii) the lesser of
(A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (such net recovery percentage being 62.0%)(as defined in the senior credit facility) of eligible inventory, or (2) the loan limitlimit; and in each case minus (d) 35%(x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (e)(y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (f)(z) licensing reserves for which Perry Ellis iswe are the licensee of certain branded products.
Interest. Interest on the principal balance under the senior credit facility accrues, at Perry Ellis’our option, at either (a) Perry Ellis’ bank’sour bank prime lending rate with adjustments depending upon the Company’sour quarterly average excess availability plus excess cash or leverage ratio or (b) 2.00% above the rate quoted by Perry Ellis’our bank as the average Eurodollar Rate (“Eurodollar”) for the 1,2,31-, 2-, 3- and 6 month6-month Eurodollar deposits with ¼%one-quarter percentage point adjustments depending upon Perry Ellis’our quarterly average excess availability plus excess cash and leverage ratio at the time of borrowing.
Security. As security for the indebtedness under the senior credit facility, Perry Elliswe granted the lenders a first priority security interest in substantially all of itsour existing and future assets other than itsour trademark portfolio existing trademark portfolio,as of March 2002, including, without limitation, accounts receivable, inventory deposit accounts, general intangibles, equipment and equipment.capital stock or membership interests, as the case may be, of certain subsidiaries. Lenders under the senior credit facility have a second priority security interest in Perry Ellis’our trademark portfolio as of March 2002 and a first priority lien on the rest of our trademarks.
Letter of Credit Facilities
Perry Ellis’ maintains threeAs of January 31, 2004, we maintained four U.S. dollar letter of credit facilities totaling $52.0$90.0 million and one letter of credit facility totaling $2.5$2.8 million utilized by Perry Ellis’our 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 on Perry Ellis’ assets.our assets, including but not limited to the capital stock or membership interests, as the case may be, of certain of our subsidiaries. As of January 31, 2003,2004, there was $22.5$30.8 million available under then existing letter of credit facilities.
Senior Secured Notes
OnIn March 22,of 2002 Perry Ellis completed a private offering ofwe issued $57.0 million 9½% senior secured notes due March 15, 2009. The proceeds of the private offering were used to finance the Jantzen acquisition, to reduce the amount of outstanding debt under the previous senior credit facility and as additional working capital. The proceeds to Perry Ellisus were $55,589,250$55.6 million yielding an effective interest rate of 9.74% after deduction of discounts. We entered into certain derivative hedging transaction described in “Item 7A: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior secured notes.
The senior secured notes are secured by a first priority security interest granted in Perry Ellis’our existing portfolio of trademarks and licenses as of the closing date of the Jantzen acquisition, including the trademarks, licenses and all income, royalties and other payments acquired in the Jantzen acquisition. The senior secured notes are senior secured obligations of Perry Ellisours and rankpari passuin right of payment with all of itsour existing and future senior indebtedness.Theindebtedness. The senior secured notes are effectively senior to all of our unsecured indebtedness of Perry Ellis to the extent of the value of the assets securing the senior secured notes.
Certain Covenants. The indenture governing the senior secured notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We believe we are currently in compliance with all of the covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under our senior credit facility, letter of credit facilities, mortgage and the indenture relating to our senior subordinated notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
12¼% Senior Subordinated Notes
Perry EllisWe issued $100.0 million 12¼% senior subordinated notes on April 6, 1999, the proceeds of which were used to acquire the Perry Ellis, John Henry and Manhattan brands and to pay down the outstanding balance of the senior credit facility at that time. The notes were scheduled to mature on April 1, 2006 and bearbore interest at the rate of 12 ¼%12¼% payable on April 1 and October 1 in each year. The proceeds to Perry Ellisus were $98,852,000$98.9 million yielding an effective interest rate of 12.39% after deduction of discounts. We entered into certain derivative hedging transaction described in “Item 7A: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior subordinated notes. In November 2002, Perry Elliswe repurchased $2.2 million of the 12 ¼% senior subordinated notes. On October 15, 2003, we redeemed the $100 million of 12¼% senior subordinated notes that were scheduled to mature on April 1, 2006 for approximately $107.3 million.
8 7/8% Senior Subordinated Notes
We issued $150 million 8 7/8% senior subordinated notes on September 22, 2003, the proceeds of which were used to redeem the 12¼% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The notes mature on September 15, 2013 and bear interest at the rate of 8 7/8% payable semiannually on March 15 and September 15 of each year. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%. We entered into certain derivative hedging transactions described in “Item 7A: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior subordinated notes.
Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We believe we are currently in compliance with all of the covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities, mortgage and the indenture relating to our senior secured notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Real Estate Financing
Perry EllisWe occupied itsour main administrative office, warehouse and distribution facility under a synthetic operating lease for a 230,000 square foot facility in Miami, Florida. Perry Ellis’ syntheticThe lease, as amended, expired on June 30, 2002, and required a final payment at termination of $14.5 million.
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On June 30, 2002, Perry Elliswe made the required payment under the synthetic operating lease and partially refinanced the acquisition of the facility with an $11.6 million conventional mortgage. The mortgage contains certain covenants. We believe we are currently in compliance with all of our covenants under the mortgage. We could be materially harmed if we violate any covenants because the lender under the mortgage could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and indentures relating to our senior secured notes and senior subordinated notes resulting in all our of debt obligations becoming immediately due and payable.
On September 13, 2002, Perry Elliswe purchased a distribution center in Seneca, South Carolina for $2.5 million in cash. Perry EllisWe had exercisedsecured the option to purchase the facility as part of the March 2002 Jantzen acquisition.
Contractual Obligations and Commercial Commitments
The following tables illustrate Perry Ellis’our contractual obligations and commercial commitments as of January 31, 20032004 and include the effects of the transactions and amendments discussed above.above that occurred during the year ended January 31, 2004.
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 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 | $ | 11,328,470 | $ | 2,028,697 | $ | 4,023,036 | $ | 3,700,383 | $ | 1,576,354 | |||||
Total contractual cash obligations | $ | 179,928,470 | $ | 2,028,697 | $ | 4,193,932 | $ | 104,007,408 | $ | 69,698,433 | |||||
Amount of Commitment Expiration Per Period | |||||||||||||||
Other Commercial Commitments | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||
Letter of credit | $ | 31,966,591 | $ | 31,966,591 | $ | — | $ | — | $ | — | |||||
Stand by letters of credit | $ | 2,750,000 | $ | — | $ | — | $ | 2,750,000 | $ | — | |||||
Total commercial commitments | $ | 34,716,591 | $ | 31,966,591 | $ | — | $ | 2,750,000 | $ | — | |||||
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||
Senior subordinated notes | $ | 150,000,000 | $ | — | $ | — | $ | — | $ | 150,000,000 | |||||
Senior secured notes | $ | 57,000,000 | $ | — | $ | — | $ | — | $ | 57,000,000 | |||||
Senior credit facility | $ | 34,714,584 | $ | 34,714,584 | |||||||||||
Real estate mortgage | $ | 11,600,000 | $ | 32,977 | $ | 285,985 | $ | 329,613 | $ | 10,951,426 | |||||
Operating leases | $ | 53,954,499 | $ | 7,725,750 | $ | 14,763,884 | $ | 11,834,183 | $ | 19,630,682 | |||||
Total contractual obligations | $ | 307,269,083 | $ | 7,758,727 | $ | 49,764,453 | $ | 12,163,796 | $ | 237,582,108 | |||||
Amount of Commitment Expiration Per Period | |||||||||||||||
Other Commercial Commitments | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||
Letters of credit | $ | 52,903,719 | $ | 52,903,719 | $ | — | $ | — | $ | — | |||||
Stand by letters of credit | $ | 9,073,000 | $ | — | $ | — | $ | 9,073,000 | |||||||
Total commercial commitments | $ | 61,976,719 | $ | 52,903,719 | $ | — | $ | — | $ | 9,073,000 | |||||
Total contractural obligations and other commercial commitments | $ | 369,245,802 | $ | 60,662,446 | $ | 49,764,453 | $ | 12,163,796 | $ | 246,655,108 | |||||
Capital expenditures for Perry Ellis for fiscal 2003 totaled $22.1 million and consisted primarily of Perry Ellis’ purchase of its headquarter facility in Miami, Florida for $14.5 million, its purchase of its Seneca, South Carolina facility for $2.5 million, and the acquisition purchases of office equipment, leasehold improvement and computer software for approximately $5.1 million. Capital expenditures of $2.9 million for fiscal year 2002 consisted primarily of purchases of office equipment, leasehold improvements and computer software.
Perry Ellis’ managementManagement believes that the combination of the borrowing availability under itsthe amended senior credit facility, letter of credit facilities, and funds anticipated to be generated from operating activities, will be sufficient to meet itsour operating and capital needs in the foreseeable future.
Off-Balance Sheet Arrangements
We are not a party to any “off-balance sheet arrangements”, as defined by applicable SEC rules.
Derivatives Financial Instruments
Perry Ellis adopted FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, effective February 1, 2001. SFAS No. 133 requires that all derivative financial instruments such as interest rate swap contracts and foreign exchange contracts, beare 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 No. 133 did not have a material effect on Perry Ellis’ financial statements.
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Perry Ellis has entered intoSee “Item 7A – Quantitative and Qualitative Disclosures About Market Risks” for further discussion about derivative financial instruments in order to manage the overall borrowing costs associated with its senior subordinate notes. At January 31, 2003, Perry Ellis had an interest rate swap agreement with a notional amount of $40.0 million dollars maturing on April 1, 2006. The swap is a fair value hedge as it has been designated against the senior subordinate notes carrying a fixed rate of interest and converts such notes to variable rate debt. The hedge qualifies for short-cut accounting and accordingly, the interest rate swap contracts are reflected at fair value in Perry Ellis’ 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 January 31, 2003, Perry Ellis 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. 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 Perry Ellis’ consolidated balance sheet with the offset being recognized in income for the current period. Interest expense for the fiscal year January 31, 2003 increased by approximately $0.35 million and decreased by $0.7 million for the fiscal year ended January 31, 2002, as a result of the recognition of these derivatives.
At January 31, 2003, Perry Ellis had an interest rate swap and option agreements for an aggregate notional amount of $57.0 million in order to minimize the debt servicing costs associated with the senior secured notes. The swap agreement is scheduled to terminate on March 15, 2009. The swap 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 Perry Ellis’ 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.
In December 2002, Perry Ellis entered into an interest rate floor agreement (the “December Floor Agreement”) for an aggregate notional amount of $57.0 million. The December Swap Agreement is scheduled to terminate on March 15, 2005. Under the December Floor Agreement, Perry Ellis must pay the difference between the three-month LIBOR rate and 1.50% for all rate resets in which the LIBOR is below 1.50%. When the LIBOR is equal to or greater than 1.50%, the company makes no payments under the Floor.instruments.
Effects of Inflation and Foreign Currency Fluctuations
Perry Ellis doesWe do not believe that inflation or foreign currency fluctuations significantly affected itsour financial position and results of operations as of and for the fiscal year ended January 31, 2003.2004.
Forward Looking Statements
Except for the historical information contained herein, this Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward looking statements that involve a number of risks and uncertainties, including the risks described elsewhere in this report and detailed from time to time in Perry Ellis’ filings with the Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in Perry Ellis’the Company’s 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. Perry EllisThe Company manages this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Perry Ellis’The Company’s policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate and foreign currency fluctuations. Perry Ellisrate. The Company does not enter into derivative financial contracts for trading or other speculative purposes except for as discussed below.
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In August 2001, Perry Ellisthe Company entered into an interest rate swap, option and interest rate cap agreements (the “August“$40 million 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 12¼% 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, Perry Ellis is entitled to receive semi-annual interest payments on October 1, and April 1, at a fixed rate of 12¼% and is obligated to make semi-annual interest payments on October 1, and April 1, at a floating rate based on the 6-month LIBOR rate plus 715 basis points for the 18 months period October 1, 2001 through March 31, 2003 (per October Swap Agreement); and 3-month LIBOR rate plus 750 basis point for the period April 1, 2003 through April 1, 2006 (per the August Swap Agreement). The Swap Agreement has optional call provisions with trigger dates of April 1, 2003, April 1, 2004 and April 1, 2005, which contain certain premium requirements in the event the call is exercised.
The fair value of the August 2001 swap and the option contract$40 million Swap Agreement recorded on Perry Ellis’the Company’s Consolidated Balance Sheet was ($0.2) million and $1.9 million respectively, as of January 31, 2002 and 2003, respectively. The2003. In conjunction with the $40 million Swap Agreement, the Company also entered into an interest rate cap and basis swap that did not qualify for hedge accounting treatment under the SFAS No. 133, resulting in $0.7$0.2 million reductionincrease of recorded interest expense on the Consolidated Statement of OperationsIncome for the fiscal year ended January 31, 20022004 and $0.35 million increase of recorded interest expense for the year ended January 31, 2003.
In August 2003, the Company terminated the $40 million Swap Agreement and received approximately $1.9 million, which is included as a component of interest income.
In conjunction with the March 2002 offering of the$57.0 million of 9½% senior secured notes due March 15, 2009, Perry Ellisthe Company entered into interest rate swap and option agreements (the “$57 million Swap Agreement”) for an aggregate notional amount of $57.0 million in order to minimize the debt servicing costs associated with the 9½% senior secured notes (the “Marchnotes. The $57 million Swap Agreement”). The swap agreementAgreement is scheduled to terminate on March 15, 2009. Under the swap agreement, Perry Ellis$57 million Swap Agreement, the Company is entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 9½% and is obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the three monththree-month LIBOR rate plus 369 basis points for the period from March 22, 2002 through March 15, 2009. The swap agreement$57 million 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$57 million Swap Agreement is a fair value hedge as it has been designated against the 9½% 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 Perry Ellis’the Company’s consolidated balance sheet.sheet with a corresponding offset to the designated item. The fair value of the March$57 million Swap Agreement recorded on the Perry Ellis’Company’s Consolidated Balance Sheet was $5.0 million and $4.4 million as of January 31, 2003.2003 and 2004, respectively.
In December 2002, Perry Ellisthe Company entered into an interest rate floor agreement (the “December“$57 million Floor Agreement”) for an aggregate notional amount of $57.0 million.million associated with the 9½% senior secured notes. The December Swap$57 million Floor Agreement is scheduled to terminate on March 15, 2005. Under the December$57 million Floor Agreement, Perry Ellisthe Company must pay the difference between the three-month LIBOR rate and 1.50% for all rate resets in which the LIBOR is below 1.50%. When the LIBOR is equal to or greater than 1.50%, Perry Ellisthe Company makes no payments under the Floor.
The December$57 million Floor Agreement did not qualify for hedge accounting treatment under the SFAS No. 133, resulting in $0.2 million and $0.1 million increase of recorded interest expense inon the Consolidated Statement of OperationsIncome for the fiscal years ended January 31, 2003 and 2004, respectively. The fair value of the $57 million Floor Agreement recorded on the Company’s Consolidated Balance Sheet was ($0.2) and ($0.1) million as of January 31, 2003 and 2004, respectively.
In April 2003, the Company entered into an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57.0 million associated with the senior secured notes. The $57 million Cap Agreement is scheduled to terminate on March 15, 2009. The $57 million Cap Agreement caps the interest rate on the senior secured notes at 10%.
The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in $0.3 million increase of recorded interest expense on the consolidated statement of income for the fiscal year ended January 31, 2003.2004. The fair value of the December Floor$57 million Cap Agreement recorded on Perry Ellis’ Consolidated Balance Sheetthe Company’s consolidated balance sheet was ($0.2)0.3) million as of January 31, 2003.2004.
In conjunction with the Company’s September 2003 offering of $150.0 million of 8 7/8% senior subordinated notes due September 15, 2013, the Company entered into interest rate swap agreements (the “$150 million Swap Agreement”) for an aggregate notional amount of $150.0 million in order to minimize the debt servicing costs associated with the new senior subordinated notes. The $150 million Swap Agreement is scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, the Company is entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 7/8% and is obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period from September 22, 2003 through September 15, 2013. The $150 million Swap Agreement has optional call provisions with trigger dates of September 15, 2008, September 15, 2009, September 15, 2010 and September 15, 2011, which contain premium requirements in the event the call is exercised.
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The $150 million Swap Agreement is a fair value hedge as it has been designated against the 8 7/8% 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 our consolidated balance sheet with a corresponding offset to the designated item. The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $0.5 million as of January 31, 2004.
The table below provides information about Perry Ellis’derivativethe Company’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations.obligations
Expected Maturity Date
Fiscal Years Ended January 31,
(In Millions)
2004 | 2005 | 2006 | 2007 | Thereafter | Total | Fair Value At 1/31/03 | ||||||||||||||||||||||
Long-term Liabilities: | ||||||||||||||||||||||||||||
Senior Subordinated Notes | $ | 0.0 |
| $ | 0.0 |
| $ | 100.0 |
|
| N/A |
|
| N/A |
| $ | 100.0 |
| $ | 102.5 |
| |||||||
Fixed Interest Rate |
| 12.25 | % |
| 12.25 | % |
| 12.25 | % |
| N/A |
|
| N/A |
|
| 12.25 | % | ||||||||||
Senior Secured Notes | $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 57.0 |
| $ | 57.0 |
| $ | 58.4 |
| |||||||
Fixed Interest Rate |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % | ||||||||||
Real Estate Mortgage | $ | 0.0 |
| $ | 0.1 |
| $ | 0.1 |
| $ | 0.2 |
| $ | 11.2 |
| $ | 11.6 |
| $ | 11.6 |
| |||||||
Fixed Interest Rate |
| 7.12 | % |
| 7.12 | % |
| 7.12 | % |
| 7.12 | % |
| 7.12 | % |
| 7.12 | % | ||||||||||
Senior Credit Facility | $ | 22.9 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
| $ | 22.9 |
| $ | 22.9 |
| |||||||
Average Variable Interest Rate |
| 3.75 | %(C) |
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| 3.75 | % | ||||||||||
Interest Rate Derivatives: | ||||||||||||||||||||||||||||
August 2001 Swap Agreement | $ | 0.0 |
| $ | 0.0 |
| $ | 40.0 |
|
| N/A |
|
| N/A |
| $ | 40.0 |
| $ | 1.9 | (D) | |||||||
Average Pay Rate |
| 8.79 | %(A) |
| 8.85 | % |
| 8.85 | % |
| N/A |
|
| N/A |
| |||||||||||||
Average Receive Rate |
| 12.25 | % |
| 12.25 | % |
| 12.25 | % |
| N/A |
|
| N/A |
| |||||||||||||
March 2002 Swap Agreement | $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 0.0 |
| $ | 57.0 |
| $ | 57.0 |
| $ | 5.0 | (D) | |||||||
Average Pay Rate |
| 5.04 | %(B) |
| 5.04 | % |
| 5.04 | % |
| 5.04 | % |
| 5.04 | % | |||||||||||||
Average Receive Rate |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % |
| 9.50 | % |
2004 | 2005 | 2006 | 2007 | Thereafter | Total | Fair Value At 1/31/04 | ||||||||||||||||||||||
Long-term Liabilities: | ||||||||||||||||||||||||||||
Senior Subordinated Notes | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 150.0 | $ | 150.0 | $ | 159.8 | ||||||||||||||
Fixed Interest Rate | 8.88 | % | 8.88 | % | 8.88 | % | 8.88 | % | 8.88 | % | 8.88 | % | ||||||||||||||||
Senior Secured Notes | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 57.0 | $ | 57.0 | $ | 61.6 | ||||||||||||||
Fixed Interest Rate | 9.50 | % | 9.50 | % | 9.50 | % | 9.50 | % | 9.50 | % | 9.50 | % | ||||||||||||||||
Real Estate Mortgage | $ | 0.0 | $ | 0.1 | $ | 0.1 | $ | 0.2 | $ | 11.2 | $ | 11.6 | $ | 11.6 | ||||||||||||||
Fixed Interest Rate | 7.12 | % | 7.12 | % | 7.12 | % | 7.12 | % | 7.12 | % | 7.12 | % | ||||||||||||||||
Senior Credit Facility | $ | 34.7 | N/A | N/A | N/A | N/A | $ | 34.7 | $ | 34.7 | ||||||||||||||||||
Average Variable Interest Rate | 3.75 | %(C) | N/A | N/A | N/A | N/A | 3.75 | % | ||||||||||||||||||||
Interest Rate Derivatives: | ||||||||||||||||||||||||||||
$150 million 2003 Swap Agreement | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 150.0 | $ | 150.0 | $ | 0.5 | (D) | |||||||||||||
Average Pay Rate | 5.15 | %(A) | 5.15 | % | 5.15 | % | 5.15 | % | 5.15 | % | ||||||||||||||||||
Average Receive Rate | 8.88 | % | 8.88 | % | 8.88 | % | 8.88 | % | 8.88 | % | ||||||||||||||||||
$57 million 2002 Swap Agreement | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 0.0 | $ | 57.0 | $ | 57.0 | $ | 4.4 | (D) | |||||||||||||
Average Pay Rate | 4.82 | %(B) | 4.82 | % | 4.82 | % | 4.82 | % | 4.82 | % | ||||||||||||||||||
Average Receive Rate | 9.50 | % | 9.50 | % | 9.50 | % | 9.50 | % | 9.50 | % |
(A) |
(B) |
(C) | Senior credit facility has a variable rate of interest of either 1) the published prime lending rate or 2) Eurodollar rate with adjustments of both rates based on meeting certain financial conditions. |
(D) |
Item 8. Financial Statements And Supplementary Data
See pages F-1 through F-35F-40 appearing at the end of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
36Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
No changes in our internal controls over financial reporting occured during the quarter ended January 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning Perry Ellis’Information regarding our directors and executive officers required by this item is included in our Proxy Statement relating to our 2004 Annual Meeting under the captions “Election of Directors” and “Management” and is incorporated herein by reference.
Information regarding our audit committee financial expert required by this item is included in our Proxy Statement relating to our 2004 Annual Meeting under the caption “Meetings and Committees of the Board of Directors” and is incorporated herein by reference.
Information regarding compliance with Section 16 of the Securities Exchange Act of 1934 required by this item will be set forthis included in Perry Ellis’ definitiveour 2004 Proxy Statement relating to be filed within 120 days afterour 2004 Annual Meeting under the end of the fiscal year covered by this Form 10-K,caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference from Perry Ellis’ Proxy Statement.reference.
We have adopted a Code of Ethics that applies to all of our directors, officers, and employees. The Code of Ethics is posted on our website atwww.pery.com. Amendments to, and waivers granted under, our Code of Ethics, if any, will be posted to our website as well.
Item 11. Executive Compensation
The informationInformation required by this item will be set forthis included in the Company’s definitiveour 2004 Proxy Statement to be filed within 120 days afterunder the endcaptions “Executive Compensation”, “Summary Compensation Table”, “Option Grants in Last Fiscal year”, “Stock Option Held at End of the fiscal year covered by this Form 10-K,Fiscal 2003”, “Compensation of Directors”, “Employment Agreements”, and “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by reference from Perry Ellis’ Proxy Statement.reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The informationInformation required by this item will be set forthis included in the Company’s definitiveour 2004 Proxy Statement to be filed within 120 days afterunder the endcaption “Security Ownership of the fiscal year covered by this Form 10-K,Certain Beneficial Owners and Management” and “Equity Compensation Plan Information for Fiscal 2004” and is incorporated herein by reference from Perry Ellis’ Proxy Statement.reference.
Item 13. Certain Relationships Andand Related Transactions
The informationInformation required by this item will be set forthis included in the Company’s definitiveour 2004 Proxy Statement to be filed within 120 days afterunder the end of the fiscal year covered by this Form 10-K,captions “Certain Relationships and Related Transactions” and is incorporated herein by reference from Perry Ellis’ Proxy Statement.reference.
Item 14. Internal ControlsPrincipal Accounting Fees and Services
An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures within 90 days ofInformation required by this report was carried out by the Companyitem is included in our 2004 Proxy Statement under the supervisioncaption “Principal Accountant Fees and with the participation of the Company’s management, including the Chief Executive OfficerServices” and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosedis incorporated herein by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.reference.
Subsequent to the date of the most recent evaluation of the Company’s internal controls, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
37
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) | Documents filed as part of this report |
(1) | Consolidated Financial Statements. |
The following Consolidated Financial Statements of Perry Ellis International, Inc. and subsidiaries are included in Part II, Item 8:
Page | ||
Independent Auditors’ Report | F-2 | |
Consolidated Balance Sheets as of January 31, | F-3 | |
Consolidated Statements of Income for each of the three years in the period ended January 31, | F-4 | |
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended January 31, | F-5 | |
Consolidated Statements of Cash Flows for each of the three years in the period ended January 31, | F-6 | |
Notes to Consolidated Financial Statements | F-7 |
(2) | Consolidated Financial Statement Schedule |
All schedules for which provision is made inrequired by applicable regulations of the Securities and Exchange Commission regulations are either not required under the related instructions, are inapplicable or the required information havehas been included in the Consolidated Financial Statements and therefore such schedules have been omitted.
(3) | Exhibits |
Exhibit No | Description of Exhibit | |
3.1 | Registrant’s Amended and Restated Articles of Incorporation(5) | |
3.2 | Registrant’s Amended and Restated Bylaws(1) | |
4.1 | Form of Common Stock Certificate(1) | |
4.2 | Indenture dated April 6, 1999 between the Company (“State Street”), as amended(6) | |
4.5 | Specimen Forms of 12 | |
4.6 | Indenture dated March 22, 2002 between the | |
4.8 | Pledge and Security Agreement dated March 22, 2002 by and among the | |
4.9 | Specimen Forms of | |
| Indenture dated September 22, 2003 between the Registrant and U.S. Bank Trust National Association (“U.S. Bank”)(16) | |
4.11 | Specimen Forms of 8 7/8% Senior Subordinated Notes Due September 15, 2013 (16) | |
10.3 | Form of Indemnification Agreement between the | |
10.9 | 1993 Stock Option Plan(1)(2) | |
10.10 | Directors Stock Option | |
10.17 | Amendment to Business Lease between George Feldenkreis and the to office facilities(3) | |
10.20 | Profit Sharing Plan(2)(3) | |
10.21 | Amended and Restated Employment Agreement between the Registrant and George Feldenkreis(2)(3) | |
10.22 | Amended and Restated Employment Agreement between the Registrant and Oscar Feldenkreis(2)(3) | |
10.24 | Lease Agreement [Land] dated as of August 28, 1997 between SUP Joint Venture, as Lessor and the Registrant, as Lessee(4) |
38
10.25 |
| |
| Lease Agreement [Building] dated as of August 28, 1997 between SUP Joint Venture, as Lessor and the Registrant, as Lessee(4) | |
10.34 | Employment agreement between Allan Zwerner and the | |
|
| |
| Incentive Stock Option Plan(2)(7) | |
10.37 | Asset Purchase Agreement dated as of March 15, 2002 by and among the | |
10.38 | Fifth Amendment dated March 14, 2002 to Amended and Restated Loan and Security Agreement dated March 26, 1999(9) | |
10.39 | Fourth Amendment to Master Agreement dated March 14, 2002, by and among the | |
10.40 | Loan and Security Agreement dated as of October 1, 2002 (the “Senior Credit Facility”) (11) | |
10.41 | Agreement and Plan of Merger, dated February 3, 2003, by and among the | |
10.42 | Letter Agreement, dated February 3, 2003, among Michael J. Setola, Salant and the | |
10.43 | Letter Agreement, dated February 3, 2003, among | |
10.44 | 2002 Stock Option Plan(10) | |
|
| |
| Amendment No. 1 to the Senior Credit Facility (15) | |
10.58 | Amendment No. 2 to the Senior Credit Facility (16) | |
10.59 | Amendment No. 3 to the Senior Credit Facility (17) | |
10.60 | Amendment No. 4 to the Senior Credit Facility (17) | |
10.61 | Employment agreement between Timothy B. Page and the Registrant (2)(17) | |
21.1 | Subsidiaries of the Registrant (17) | |
23.1 | Consent of Deloitte & Touche LLP, | |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended (17) | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended (17) | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act | |
| Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act |
(1) | Previously filed as an Exhibit of the same number to the Registrant’s Registration Statement on Form S-1 (File No. 33-60750) and incorporated herein by reference. |
(2) | Management Contract or Compensation Plan. |
(3) | Previously filed as an Exhibit of the same number to the Registrant’s Registration Statement on Form S-1 (File No. 33-96304) and incorporated herein by |
(4) | Previously filed as an Exhibit of the same number to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 1998 and incorporated herein by reference. |
(5) | Previously filed as an Exhibit to the Registrant’s Proxy Statement for its 1998 Annual Meeting and incorporated herein by reference. |
(6) | Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-4 (File No. 33-78427) and incorporated herein by reference. |
(7) | Previously filed as an Exhibit to the Registrant’s Proxy Statement for its 2000 Annual Meeting and incorporated herein by reference. |
(8) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated March 22, 2002, as amended, and incorporated herein by reference. |
(9) | Previously filed as an Exhibit of the same number to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2002 and incorporated herein by reference. |
(10) | Previously filed as an Annex to the Registrant’s Proxy Statement for its 2002 Annual Meeting and incorporated herein by reference. |
(11) | Previously filed as an Exhibit of the same number to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2002, as amended and incorporated herein by reference. |
(12) | Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated February 5, 2003 as amended, and incorporated herein by reference. |
(13) | Previously filed as an Exhibit of the same number to the Registrant’s Annual Report on Form 10-K for the year ended January 31, 2003 and incorporated herein by reference. |
(14) | Previously filed as an Exhibit to Salant Corporation’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001 and incorporated herein by reference. |
(15) | Previously filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003 and incorporated herein by reference. |
(16) | Previously filed as filed as an Exhibit to the Registrant’s Registration Statement on Form S-4 (File No.33-110616) and incorporated herein by reference. |
(17) | Filed herewith. |
39
(b) | Reports on Form 8-K |
The Company did not file anyfiled a Current ReportsReport on Form 8-K, with respect to Items 7 and 12, dated November 19, 2003, during the three months ended January 31, 2003.2004.
(c) | Item 601 Exhibits |
The exhibits required by Item 601 of Regulation S-K are set forth in (a)(3) above.
(d) | Financial Statement Schedules |
The financial statement schedules required by Regulation S-K are set forth in (a)(2) above.
40
SIGNATURES
Pursuant to the requirementrequirements of Section 13 or 15(d) 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.
PERRY ELLIS INTERNATIONAL, INC. | ||||||||
Dated: | By: | /S/ GEORGE FELDENKREIS | ||||||
George Feldenkreis Chairman of the Board and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Name and Signature | Title | Date | ||
/ George Feldenkreis | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
| ||
/ Oscar Feldenkreis | President, Chief Operating Officer and Director |
| ||
/ Timothy B. Page | Chief Financial Officer (Principal Financial Officer) |
| ||
/ Anthony J. Macaione | Senior Vice President /Controller (Principal Accounting Officer) |
| ||
/ Marc Balmuth | Director |
| ||
/ Ronald Buch | Director |
| ||
/ Gary Dix | Director |
| ||
/ Salomon Hanono | Director |
| ||
/ Joseph P. Lacher | Director |
| ||
/ Leonard Miller | Director |
| ||
|
|
|
41
Certification
I, George Feldenkreis, certify that:
1) I have reviewed the registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003 (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 are 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 annual 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 Report (the “Evaluation Date”); and
c) presented in the 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 Report whether 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.
| ||
|
42
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 are 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 annual 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 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 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.
| ||
|
43
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
F-2 | ||
Consolidated Balance Sheets as of January 31, | F-3 | |
F-4 | ||
F-5 | ||
F-6 | ||
F-7 |
F-1
To the Board of Directors and Stockholders of Perry Ellis International, Inc.:
We have audited the consolidated balance sheets of Perry Ellis International, Inc. and subsidiaries (the “Company”) as of January 31, 20032004 and 2002,2003, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended January 31, 2003.2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 20032004 and 2002,2003, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 20032004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, in the year ended January 31, 2003, the Company changed its method of accounting for intangible assets to conform to Statement of Financial Accounting Standard No. 142.142 “Goodwill and Other Intangible Assets.”
/s/ DELOITTEDELOITTE & TOUCHETOUCHE LLP
Certified Public Accountants
Miami, Florida
March 5, 2003
F-2April16, 2004
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of JanuaryAS OF JANUARY 31,
2002 | 2003 | 2003 | 2004 | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,303,978 |
| $ | 4,683,177 |
| $ | 4,683,177 | $ | 1,011,220 | ||||||
Accounts receivable, net |
| 50,370,245 |
|
| 79,489,739 |
| 79,489,739 | 115,677,930 | ||||||||
Inventories, net |
| 45,409,047 |
|
| 51,306,474 |
| 51,306,474 | 110,909,571 | ||||||||
Deferred income taxes |
| 2,384,316 |
|
| 2,957,765 |
| 2,957,765 | 9,621,411 | ||||||||
Prepaid income taxes |
| — |
|
| 3,361,650 |
| 3,361,650 | 5,002,043 | ||||||||
Other current assets |
| 1,886,163 |
|
| 4,104,767 |
| 4,104,767 | 6,417,675 | ||||||||
Total current assets |
| 101,353,749 |
|
| 145,903,572 |
| 145,903,572 | 248,639,850 | ||||||||
Property and equipment, net |
| 10,897,334 |
|
| 31,048,876 |
| 31,048,876 | 39,092,579 | ||||||||
Intangible assets, net |
| 117,938,894 |
|
| 142,186,062 |
| 142,186,062 | 152,265,790 | ||||||||
Deferred income tax | — | 28,590,552 | ||||||||||||||
Other |
| 3,870,703 |
|
| 12,098,835 |
| 12,098,835 | 11,811,384 | ||||||||
TOTAL | $ | 234,060,680 |
| $ | 331,237,345 |
| $ | 331,237,345 | $ | 480,400,155 | ||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 5,966,368 |
| $ | 12,820,168 |
| $ | 12,820,168 | $ | 31,644,178 | ||||||
Accrued expenses |
| 3,259,602 |
|
| 5,058,748 |
| 5,058,748 | 16,350,105 | ||||||||
Income taxes payable |
| 1,381,551 |
|
| — |
| ||||||||||
Accrued interest payable |
| 3,808,997 |
|
| 4,674,929 |
| 4,674,929 | 3,740,488 | ||||||||
Current portion—senior credit facility |
| 21,756,094 |
|
| — |
| ||||||||||
Unearned revenues |
| 1,838,929 |
|
| 1,994,554 |
| 1,994,554 | 983,984 | ||||||||
Other current liabilities |
| 2,410,583 |
|
| 1,457,422 |
| 1,457,422 | 2,990,909 | ||||||||
Total current liabilities |
| 40,422,124 |
|
| 26,005,821 |
| 26,005,821 | 55,709,664 | ||||||||
Senior subordinated notes payable, net |
| 99,071,515 |
|
| 99,180,580 |
| ||||||||||
Senior secured notes payable, net |
| — |
|
| 60,729,796 |
| ||||||||||
Senior subordinated notes payable | 99,180,580 | 150,454,235 | ||||||||||||||
Senior secured notes payable | 60,729,796 | 60,389,322 | ||||||||||||||
Senior credit facility |
| — |
|
| 22,922,287 |
| 22,922,287 | 34,714,584 | ||||||||
Real estate mortgage |
| — |
|
| 11,600,000 |
| 11,600,000 | 11,600,000 | ||||||||
Deferred pension obligation | — | 15,733,784 | ||||||||||||||
Deferred income tax |
| 6,749,832 |
|
| 10,694,595 |
| 10,694,595 | — | ||||||||
Total long-term liabilities |
| 105,821,347 |
|
| 205,127,258 |
| 205,127,258 | 272,891,925 | ||||||||
Total liabilities |
| 146,243,471 |
|
| 231,133,079 |
| 231,133,079 | 328,601,589 | ||||||||
Minority Interest |
| 613,671 |
|
| 702,480 |
| 702,480 | 916,761 | ||||||||
Stockholders’ Equity: | ||||||||||||||||
Preferred stock $.01 par value; 1,000,000 shares authorized; |
| — |
|
| — |
| ||||||||||
Common stock $.01 par value; 30,000,000 shares authorized; 6,337,440 shares issued and 6,285,940 shares outstanding as of January 31, 2002 and 6,425,641 shares issued and outstanding as of January 31, 2003 |
| 63,374 |
|
| 64,257 |
| ||||||||||
Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding | — | — | ||||||||||||||
Common stock $.01 par value; 100,000,000 shares authorized; 6,425,641 shares issued and outstanding as of January, 31 2003 and 8,470,700 shares issued and 8,435,013 shares outstanding as of January 31, 2004 | 64,257 | 84,708 | ||||||||||||||
Additional paid-in-capital |
| 26,286,040 |
|
| 27,198,094 |
| 27,198,094 | 66,073,881 | ||||||||
Retained earnings |
| 61,386,244 |
|
| 72,182,529 |
| 72,182,529 | 85,334,665 | ||||||||
Accumulated other comprehensive income |
| (121,753 | ) |
| (43,094 | ) | ||||||||||
Accumulated other comprehensive income(loss) | (43,094 | ) | 321,844 | |||||||||||||
Total |
| 87,613,905 |
|
| 99,401,786 |
| 99,401,786 | 151,815,098 | ||||||||
Treasury stock at cost; 51,500 shares as of January 31, 2002 |
| (410,367 | ) |
| — |
| ||||||||||
Treasury Stock at cost; 35,687 shares as of January 31, 2004 | — | (933,293 | ) | |||||||||||||
Total stockholders’ equity |
| 87,203,538 |
|
| 99,401,786 |
| 99,401,786 | 150,881,805 | ||||||||
TOTAL | $ | 234,060,680 |
| $ | 331,237,345 |
| $ | 331,237,345 | $ | 480,400,155 | ||||||
See notes to consolidated financial statements.
F-3statements
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended JanuaryFOR THE YEARS ENDED JANUARY 31,
2001 | 2002 | 2003 | |||||||
Revenues | |||||||||
Net sales | $ | 258,888,480 | $ | 251,310,159 | $ | 277,027,795 | |||
Royalty income |
| 25,789,975 |
| 26,680,987 |
| 28,812,955 | |||
Total revenues |
| 284,678,455 |
| 277,991,146 |
| 305,840,750 | |||
Cost of sales |
| 200,883,860 |
| 191,601,211 |
| 205,000,956 | |||
Gross profit |
| 83,794,595 |
| 86,389,935 |
| 100,839,794 | |||
Operating expenses | |||||||||
Selling, general and administrative expenses |
| 49,408,767 |
| 55,446,854 |
| 63,850,180 | |||
Depreciation and amortization |
| 6,130,708 |
| 6,662,158 |
| 3,582,850 | |||
Total operating expenses |
| 55,539,475 |
| 62,109,012 |
| 67,433,030 | |||
Operating income |
| 28,255,120 |
| 24,280,923 |
| 33,406,764 | |||
Interest expense |
| 15,766,461 |
| 13,549,746 |
| 15,795,347 | |||
Income before minority interest and income taxes |
| 12,488,659 |
| 10,731,177 |
| 17,611,417 | |||
Minority interest |
| — |
| 83,240 |
| 88,809 | |||
Income taxes |
| 4,662,655 |
| 4,039,995 |
| 6,726,323 | |||
Net income | $ | 7,826,004 | $ | 6,607,942 | $ | 10,796,285 | |||
Net income per share | |||||||||
Basic | $ | 1.17 | $ | 1.01 | $ | 1.69 | |||
Diluted | $ | 1.16 | $ | 1.01 | $ | 1.65 | |||
Weighted average number of shares outstanding | |||||||||
Basic |
| 6,689,476 |
| 6,516,807 |
| 6,387,459 | |||
Diluted |
| 6,745,441 |
| 6,534,749 |
| 6,550,126 |
2002 | 2003 | 2004 | |||||||
Revenues | |||||||||
Net sales | $ | 251,310,159 | $ | 277,027,795 | $ | 484,197,918 | |||
Royalty income | 26,680,987 | 28,812,955 | 21,717,751 | ||||||
Total revenues | 277,991,146 | 305,840,750 | 505,915,669 | ||||||
Cost of sales | 191,601,211 | 205,000,956 | 336,421,881 | ||||||
Gross profit | 86,389,935 | 100,839,794 | 169,493,788 | ||||||
Operating expenses | |||||||||
Selling, general and administrative expenses | 55,446,854 | 63,850,180 | 119,658,924 | ||||||
Depreciation and amortization | 6,662,158 | 3,582,850 | 5,043,003 | ||||||
Total operating expenses | 62,109,012 | 67,433,030 | 124,701,927 | ||||||
Operating income | 24,280,923 | 33,406,764 | 44,791,861 | ||||||
Costs on early extinguishment of debt | — | — | 7,317,000 | ||||||
Interest expense | 13,549,746 | 15,795,347 | 16,413,531 | ||||||
Income before minority interest and income taxes | 10,731,177 | 17,611,417 | 21,061,330 | ||||||
Minority interest | 83,240 | 88,809 | 214,281 | ||||||
Income tax provision | 4,039,995 | 6,726,323 | 7,694,913 | ||||||
Net income | $ | 6,607,942 | $ | 10,796,285 | $ | 13,152,136 | |||
Net income per share: | |||||||||
Basic | $ | 1.01 | $ | 1.69 | $ | 1.71 | |||
Diluted | $ | 1.01 | $ | 1.65 | $ | 1.59 | |||
Weighted average number of shares outstanding: | |||||||||
Basic | 6,516,807 | 6,387,459 | 7,683,442 | ||||||
Diluted | 6,534,749 | 6,550,126 | 8,296,153 |
See notes to consolidated financial statements.
F-4statements
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For Each of the Three Years Ended JanuaryFOR EACH OF THE THREE YEARS ENDED JANUARY 31
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Comprehensive Income | Retained Earnings | |||||||||||||||||||||||||
Shares | Amount | Total | ||||||||||||||||||||||||||||
BALANCE, JANUARY 31, 2000 | 6,731,874 |
| $ | 67,318 |
| $ | 29,000,655 |
| $ | — |
| $ | — |
| $ | — |
| $ | 46,952,298 | $ | 76,020,271 |
| ||||||||
Exercise of stock options | 7,500 |
|
| 75 |
|
| 57,425 |
|
| — |
|
| — |
|
| — |
|
| — |
| 57,500 |
| ||||||||
Exercise of warrants | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
| ||||||||
Net income | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7,826,004 |
| 7,826,004 |
| ||||||||
Tax benefit for exercise of non-qualified stock options | — |
|
| — |
|
| 5,327 |
|
| — |
|
| — |
|
| — |
|
| — |
| 5,327 |
| ||||||||
Purchase of treasury stock | (160,000 | ) |
| — |
|
| — |
|
| (1,029,919 | ) |
| — |
|
| — |
|
| — |
| (1,029,919 | ) | ||||||||
BALANCE, JANUARY 31, 2001 | 6,579,374 |
|
| 67,393 |
|
| 29,063,407 |
|
| (1,029,919 | ) |
| — |
|
| — |
|
| 54,778,302 |
| 82,879,183 |
| ||||||||
Exercise of stock options | 2,666 |
|
| 27 |
|
| 15,395 |
|
| — |
|
| — |
|
| — |
|
| — |
| 15,422 |
| ||||||||
Net income | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,607,942 |
|
| 6,607,942 |
| 6,607,942 |
| ||||||||
Foreign currency translation adjustment | — |
|
| — |
|
| — |
|
| — |
|
| (121,753 | ) |
| (121,753 | ) |
| — |
| (121,753 | ) | ||||||||
Comprehensive income (loss) | $ | 6,486,189 |
| |||||||||||||||||||||||||||
Purchase of treasury stock | (296,100 | ) |
| — |
|
| — |
|
| (2,177,256 | ) |
| — |
|
| — |
| (2,177,256 | ) | |||||||||||
Retirement of treasury stock | — |
|
| (4,046 | ) |
| (2,792,762 | ) |
| 2,796,808 |
|
| — |
|
| — |
| — |
| |||||||||||
BALANCE, JANUARY 31, 2002 | 6,285,940 |
|
| 63,374 |
|
| 26,286,040 |
|
| (410,367 | ) |
| (121,753 | ) |
| 61,386,244 |
| 87,203,538 |
| |||||||||||
Exercise of stock options | 139,701 |
|
| 1,397 |
|
| 1,321,907 |
|
| — |
|
| — |
|
| — |
| 1,323,304 |
| |||||||||||
Net income | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,796,285 |
|
| 10,796,285 |
| 10,796,285 |
| ||||||||
Foreign currency translation adjustment | — |
|
| — |
|
| — |
|
| — |
|
| 78,659 |
|
| 78,659 |
|
| — |
| 78,659 |
| ||||||||
Comprehensive income (loss) | $ | 10,874,944 |
| |||||||||||||||||||||||||||
Retirement of treasury stock | — |
|
| (514 | ) |
| (409,853 | ) |
| 410,367 |
|
| — |
|
| — |
| — |
| |||||||||||
BALANCE, JANUARY 31, 2003 | 6,425,641 |
| $ | 64,257 |
| $ | 27,198,094 |
| $ | 0 |
| ($ | 43,094 | ) | $ | 72,182,529 | $ | 99,401,786 |
| |||||||||||
COMMON STOCK | ADDITIONAL CAPITAL | TREASURY STOCK | ACCUMULATED INCOME | COMPREHENSIVE INCOME | RETAINED EARNINGS | TOTAL | ||||||||||||||||||||||||
SHARES | AMOUNT | |||||||||||||||||||||||||||||
BALANCE, JANUARY 31, 2001 | 6,579,374 | $ | 67,393 | $ | 29,063,407 | $ | (1,029,919 | ) | — | — | $ | 54,778,302 | $ | 82,879,183 | ||||||||||||||||
Exercise of stock options | 2,666 | 27 | 15,395 | — | — | — | — | 15,422 | ||||||||||||||||||||||
Net income | — | — | — | — | — | $ | 6,607,942 | 6,607,942 | 6,607,942 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | $ | (121,753 | ) | (121,753 | ) | — | (121,753 | ) | ||||||||||||||||||
Comprehensive income | $ | 6,486,189 | ||||||||||||||||||||||||||||
Purchase of treasury stock | (296,100 | ) | — | — | (2,177,256 | ) | — | — | (2,177,256 | ) | ||||||||||||||||||||
Retirement of treasury stock | — | (4,046 | ) | (2,792,762 | ) | 2,796,808 | — | — | — | |||||||||||||||||||||
BALANCE, JANUARY 31, 2002 | 6,285,940 | $ | 63,374 | $ | 26,286,040 | $ | (410,367 | ) | $ | (121,753 | ) | $ | 61,386,244 | $ | 87,203,538 | |||||||||||||||
Exercise of stock options | 139,701 | 1,397 | 1,321,907 | — | — | — | 1,323,304 | |||||||||||||||||||||||
Net income | — | — | — | — | — | 10,796,285 | 10,796,285 | 10,796,285 | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 78,659 | 78,659 | — | 78,659 | ||||||||||||||||||||||
Comprehensive income | $ | 10,874,944 | ||||||||||||||||||||||||||||
Retirement of treasury stock | — | (514 | ) | (409,853 | ) | 410,367 | — | — | — | |||||||||||||||||||||
BALANCE, JANUARY 31, 2003 | 6,425,641 | $ | 64,257 | $ | 27,198,094 | $ | 0 | $ | (43,094 | ) | $ | 72,182,529 | $ | 99,401,786 | ||||||||||||||||
Exercise of stock options | 211,271 | 2,113 | 2,051,987 | — | — | — | 2,054,100 | |||||||||||||||||||||||
Net income | — | — | — | — | — | 13,152,136 | 13,152,136 | 13,152,136 | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 364,938 | 364,938 | — | 364,938 | ||||||||||||||||||||||
Comprehensive income | $ | 13,517,074 | ||||||||||||||||||||||||||||
Tax benefit for exercise of non-qualified stock options | — | — | 1,287,427 | — | — | — | 1,287,427 | |||||||||||||||||||||||
Issuance of stock for acquisition | 1,833,788 | 18,338 | 35,536,373 | — | — | 35,554,711 | ||||||||||||||||||||||||
Purchase of treasury stock | (35,687 | ) | — | (933,293 | ) | — | — | (933,293 | ) | |||||||||||||||||||||
BALANCE, JANUARY 31, 2004 | 8,435,013 | $ | 84,708 | $ | 66,073,881 | $ | (933,293 | ) | $ | 321,844 | $ | 85,334,665 | $ | 150,881,805 | ||||||||||||||||
See notes to consolidated financial statements.
F-5
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended JanuaryFOR THE YEARS ENDED JANUARY 31,
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | |||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||||||
Net income | $ | 7,826,004 |
| $ | 6,607,942 |
| $ | 10,796,285 |
| $ | 6,607,942 | $ | 10,796,285 | $ | 13,152,136 | |||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||||||
Depreciation and amortization |
| 5,521,762 |
|
| 6,190,801 |
|
| 2,783,205 |
| 6,190,801 | 2,783,205 | 3,954,495 | ||||||||||||
Provision for bad debts |
| 330,435 |
|
| 1,575,000 |
|
| 280,620 |
| 1,575,000 | 280,620 | 856,697 | ||||||||||||
Amortization of debt issue cost |
| 608,946 |
|
| 614,347 |
|
| 918,628 |
| |||||||||||||||
Tax benefit from exercise of stock options | — | — | 1,287,427 | |||||||||||||||||||||
Amortization of debt issue costs | 614,347 | 918,628 | 1,165,310 | |||||||||||||||||||||
Amortization of bond discount |
| 164,000 |
|
| 164,000 |
|
| 348,741 |
| 164,000 | 348,741 | 324,540 | ||||||||||||
Deferred income taxes |
| 2,098,295 |
|
| 1,386,240 |
|
| 3,371,314 |
| 1,386,240 | 3,371,314 | 7,604,601 | ||||||||||||
Costs on early extinguishment of debt | — | — | 7,317,000 | |||||||||||||||||||||
Minority interest |
| — |
|
| 83,240 |
|
| 88,809 |
| 83,240 | 88,809 | 214,281 | ||||||||||||
Other |
| 67,234 |
|
| (64,250 | ) |
| 78,659 |
| (64,250 | ) | 78,659 | 244,845 | |||||||||||
Changes in operating assets and liabilities (net of effects of acquisition transaction): | ||||||||||||||||||||||||
Accounts receivable, net |
| (13,174,087 | ) |
| 7,048,510 |
|
| (29,400,114 | ) | 7,048,510 | (29,400,114 | ) | (23,284,888 | ) | ||||||||||
Inventories |
| (7,579,495 | ) |
| (1,528,619 | ) |
| (3,706,285 | ) | |||||||||||||||
Inventories, net | (1,528,619 | ) | (3,706,285 | ) | (14,569,097 | ) | ||||||||||||||||||
Other current assets and prepaid income taxes |
| 1,728,313 |
|
| 586,446 |
|
| (5,692,025 | ) | 586,446 | (5,692,025 | ) | (2,570,301 | ) | ||||||||||
Other assets |
| (265,952 | ) |
| (701,044 | ) |
| (2,046,398 | ) | (701,044 | ) | (2,046,398 | ) | 2,912,290 | ||||||||||
Accounts payable and accrued expenses |
| 603,704 |
|
| (1,160,561 | ) |
| 6,695,881 |
| (1,160,561 | ) | 6,695,881 | (9,510,854 | ) | ||||||||||
Income taxes payable |
| — |
|
| 1,385,210 |
|
| (1,381,551 | ) | 1,385,210 | (1,381,551 | ) | — | |||||||||||
Accrued interest payable |
| (194,796 | ) |
| (604,768 | ) |
| 865,932 |
| (604,768 | ) | 865,932 | (934,441 | ) | ||||||||||
Other current liabilities and unearned revenues |
| 153,951 |
|
| 792,354 |
|
| (797,536 | ) | 792,354 | (797,536 | ) | 522,917 | |||||||||||
Net cash (used in) provided by operating activities |
| (2,111,686 | ) |
| 22,374,848 |
|
| (16,795,835 | ) | 22,374,848 | (16,795,835 | ) | (11,313,042 | ) | ||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||||||
Purchase of property and equipment |
| (2,711,741 | ) |
| (2,921,930 | ) |
| (22,076,974 | ) | (2,921,930 | ) | (22,076,974 | ) | (8,673,206 | ) | |||||||||
Payment on purchase of intangible assets |
| (3,472,001 | ) |
| (98,928 | ) |
| (187,701 | ) | |||||||||||||||
Proceeds from sale of trademark |
| 750,000 |
|
| — |
|
| — |
| |||||||||||||||
Payment for acquired businesses |
| — |
|
| — |
|
| (25,084,374 | ) | |||||||||||||||
Purchase of intangible assets | (98,928 | ) | (187,701 | ) | (1,760,723 | ) | ||||||||||||||||||
Payment for acquired businesses, net of cash acquired | — | (25,084,374 | ) | (34,453,289 | ) | |||||||||||||||||||
Net cash used in investing activities |
| (5,433,742 | ) |
| (3,020,858 | ) |
| (47,349,049 | ) | |||||||||||||||
Net cash used in investing activities: | (3,020,858 | ) | (47,349,049 | ) | (44,887,218 | ) | ||||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||||||
Net borrowings (repayments) under term loan |
| (11,250,000 | ) |
| — |
|
| — |
| |||||||||||||||
Net (payments) borrowings from senior credit facility |
| 19,881,630 |
|
| (16,157,032 | ) |
| 1,166,193 |
| |||||||||||||||
Net payments on senior subordinated notes |
| — |
|
| — |
|
| (2,199,492 | ) | |||||||||||||||
Net proceeds from senior secured notes |
| — |
|
| — |
|
| 55,589,250 |
| |||||||||||||||
Net proceeds from real estate mortgage |
| — |
|
| — |
|
| 11,600,000 |
| |||||||||||||||
Tax benefit for exercise of non-qualified stock options |
| 5,327 |
|
| — |
|
| — |
| |||||||||||||||
Borrowings (payments) from senior credit facility | (16,157,032 | ) | 1,166,193 | 11,792,297 | ||||||||||||||||||||
Payments on senior subordinated notes | — | (2,199,492 | ) | (107,317,000 | ) | |||||||||||||||||||
Proceeds from senior subordnated notes | — | — | 146,812,500 | |||||||||||||||||||||
Proceeds from senior secured notes | — | 55,589,250 | — | |||||||||||||||||||||
Proceeds from real estate mortgage | — | 11,600,000 | — | |||||||||||||||||||||
Purchase of treasury stock |
| (1,029,919 | ) |
| (2,177,256 | ) |
| — |
| (2,177,256 | ) | — | (933,293 | ) | ||||||||||
Proceeds from exercise of stock options |
| 57,500 |
|
| 15,421 |
|
| 1,323,303 |
| 15,421 | 1,323,303 | 2,054,100 | ||||||||||||
Net cash provided by (used in) financing activities |
| 7,664,538 |
|
| (18,318,867 | ) |
| 67,479,254 |
| |||||||||||||||
Net cash provided by (used in) financing activities: | (18,318,867 | ) | 67,479,254 | 52,408,604 | ||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| (75,886 | ) |
| 44,829 |
| (75,886 | ) | 44,829 | 119,699 | ||||||||||||||
NET INCREASE IN CASH |
| 119,110 |
|
| 959,238 |
|
| 3,379,199 |
| |||||||||||||||
CASH AT BEGINNING OF YEAR |
| 225,631 |
|
| 344,741 |
|
| 1,303,978 |
| |||||||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | 959,237 | 3,379,199 | (3,671,957 | ) | ||||||||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 344,741 | 1,303,978 | 4,683,177 | |||||||||||||||||||||
CASH AT END OF PERIOD | $ | 344,741 |
| $ | 1,303,979 |
| $ | 4,683,177 |
| |||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,303,978 | $ | 4,683,177 | $ | 1,011,220 | ||||||||||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||||||||||
Cash paid during the period for: | ||||||||||||||||||||||||
Interest | $ | 15,961,257 |
| $ | 14,058,640 |
| $ | 15,762,844 |
| $ | 14,058,640 | $ | 15,762,844 | $ | 16,439,092 | |||||||||
Income taxes | $ | 750,000 |
| $ | 1,608,192 |
| $ | 7,470,063 |
| $ | 1,608,192 | $ | 7,470,063 | $ | 551,976 | |||||||||
NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||||||||||||||||||
Change in fair value of mark-to-market interest rate swap/option |
| — |
| $ | (245,152 | ) | $ | 7,100,362 |
| $ | (245,152 | ) | $ | 7,100,362 | $ | (1,987,359 | ) | |||||||
Issuance of stock for acquisition | $ | — | $ | — | $ | 35,554,711 | ||||||||||||||||||
See notes to consolidated financial statements.
F-6
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended JanuaryFOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 20032004
1. General
The Company is a leading licensor, designer and marketer of a broad line of high quality men’s sportswear, including sport and dress shirts, golf sportswear, sweaters and casual dress pants and shorts, which sells to all levels of retail distribution. The Company licenses its trademark portfolio domestically and internationally for apparel and other products that it does not sell including dress sportswear, outerwear, fragrances and accessories. The Company has built a broad portfolio of brands through selective acquisitions and the establishment of its own brands over its 35-year operating history. The Company’s distribution channels include regional, national and international upscale department stores, mid-tier department stores, chain stores, mass merchants, specialty stores and corporate wear distributors as well as various retail sales stores throughout the United States, Puerto Rico and Canada.
2. Summary of Significant Accounting Policies
The following is a summary of the Company’s significant accounting policies:
PRINCIPLES OF CONSOLIDATION—CONSOLIDATION - The consolidated financial statements include the accounts of Perry Ellis International, Inc. and its wholly-owned/wholly-owned and controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The ownership interest in consolidated subsidiaries of non-controlling ownersshareholders is reflected as minority interest.
USE OF ESTIMATES—ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS—INSTRUMENTS - The carrying amounts of accounts receivable, accrued payable, accrued interest payable and accounts payable approximates fair value due to their short-term nature. The carrying amount of the senior credit facility approximates fair value due to the relatively frequent resets of its floating interest rate. As of January 31, 2003,2004, the fair value of the 12¼8 7/8 % senior subordinated notes and the 9½% senior secured notes iswas approximately $102.5$159.8 million and $58.4$61.6 million, respectively, based on quoted market prices. These estimatedSee footnote 12 and 21 for disclosure related to fair value amounts have been determined using available market information orof other appropriate valuation methodologies.financial instruments.
INVENTORIES—INVENTORIES - Inventories are stated at the lower of cost (moving average cost) or market. Cost principally consists of the purchase price, labor, customs, duties, freight, insurance and commissions to buying agents.
PROPERTY AND EQUIPMENT—EQUIPMENT - Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or estimated useful lives of the improvements. The useful lives range from three to thirty-nine years.are as follows:
Asset Class | Avg. Useful | |
Furniture, fixtures and equipment |
| |
Vehicles | 7 | |
Leasehold Improvements | 11 | |
Buildings | 39 |
F-7
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
INTANGIBLE ASSETS—ASSETS - Intangible assets primarily represent costs capitalizedincurred in connection with the acquisitionsacquisition of brand names and license rights. Intangibles areIn fiscal 2002 intangibles were amortized over their estimated useful lives. Upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets,”,” identifiable those assets were identified as intangible assets with an indefinite useful life and accordingly are no longer being amortized. The Company assesses the carrying value of intangible assets on an annual basis using estimated fair values.
DEFERRED DEBT ISSUE COSTS— - Costs were incurred in connection with financing. These costsfinancing have been capitalized and are being amortized on a straight-line basis, which approximates the interest method, over the term of the related debt instrument. Such amountsUnamortized debt issue costs are included in other long-term assets in the consolidated balance sheet.
LONG-LIVED ASSETS—ASSETS - Management reviews long-lived assets, primarily fixed assets, for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to reduce the asset to its estimated fair value. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning future conditions. There has not been any material impairment to long-lived assets in 2001, 2002, 2003 or 2003.2004.
RETIREMENT-RELATED BENEFITS – The Company accounts for its defined benefit pension plan and its nonpension post retirement benefit plans using actuarial models required by SFAS No. 87, “Employers’Accounting for Pensions”, and SFAS 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions”, respectively. These models use an attribution approach that generally spreads the individual events over the service lives of the employees in the plan. The principle underlying the required attribution approach is that employees render service over their service lives on a relatively smooth basis and therefore, the income statement effects of pensions or nonpension postretirement benefit plans are earned in, and should follow, the same pattern.
The principal components of the net periodic pension calculations are the expected long-term rate of return on plan assets, discount rate and the rate of compensation increases. The Company uses long-term historical actual return information, the mix of investments that comprise plan assets, and future estimates of long-term investment returns by reference to external sources to develop its expected return on plan assets. The discount rate assumptions used for pension and nonpension postretirement benefit plan accounting reflects the rates available on high-quality fixed income debt instruments at the Company’s fiscal year end. The rate of compensation increase is another significant assumption used in the actuarial model for pension accounting and is determined by the Company based upon its long-term plans for such increases.
ADVERTISING AND RELATED COSTS—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 $8.2 million, $7.7 million, $6.5 million and $6.5$15.6 million for the years ended January 31, 2001, 2002, 2003 and 2003, respectively.2004, respectively, and are included in selling, general and administrative expenses.
COST OF SALES –Cost of sales includes costs to acquire and produce inventory for sale. These costs include costs of purchased products, labor, inbound freight, custom duties, buying commissions, cargo insurance, customs inspection, licensed product royalty expenses, provisions for inventory shrinkage and obsolescence and product sourcing expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES –Selling expenses include costs incurred in the selling of merchandise. General and administrative expenses include costs incurred in the administration or general operations of the business. Selling, general and administrative expenses include employee and related costs, advertising, professional fees, warehouse costs, and other related selling costs.
REVENUE RECOGNITION—RECOGNITION - Sales are recognized and title transfers upon shipment, net of tradeshipment. Trade allowances and a provision for estimated returns and other allowances.allowances are recorded at the time sales are made. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. A liability for unearned revenue royalty income is recognized when licensees pay contractual obligations before being earned. The Company believes that its revenue recognition policies conform to Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements.as amended. The Company operates predominantly in North America, with over 90% of its sales in the domestic market. Two customers accounted for approximately 14% and 11% of net sales for fiscal year 2001, threeThree customers accounted for approximately 12%, 11% and 11% of net sales for fiscal year 2002, and one customer accounted for approximately 11% for fiscal 2003.2003 and one customer accounted for approximately 10% of net sales for fiscal 2004. The Company does not believe that these concentrations of sales and credit risk represent a material risk of loss with respect to its financial position as of January 31, 2003.2004.
ADVERTISING REIMBURSEMENTS – The majority of Perry Ellis’ license agreements require licensees to pay Perry Ellis an advertising reimbursement, based on a percentage of the licensee net sales. The Company records earned advertising reimbursements received from its licensees as a reduction of the related advertising costs in selling, general and administrative expenses. For the fiscal years 2002, 2003 and 2004, the Company has reduced selling, general and administrative expenses by $5.6 million, $7.4 million and $4.9 million of licensee reimbursements, respectively. Unearned advertising reimbursements result when a licensee pays required reimbursements prior to the Company incurring the advertising expense. A current liability is recorded for these unearned advertising reimbursements.
FOREIGN CURRENCY TRANSLATION—TRANSLATION – For the Company’s international operations, local currencies are generally considered their functional currencies. The Company translates assets and liabilities to their U.S. dollar equivalents at rates in effect at the balance sheet date and revenue and expenses are translated at average monthly exchange rates. Translation adjustments resulting from this process are recorded in Stockholders’ Equitystockholders’ equity as a component of Accumulated Other Comprehensive Income.accumulated other comprehensive income (loss).
INCOME TAXES—TAXES – Deferred income taxes result primarily from timing differences in the recognition of expenses for tax and financial reporting purposes and are accounted for in accordance with SFAS No. 109,Accounting for Income Taxes, which requires the liability method of computing deferred income taxes. Under the liability method, deferred taxes are adjusted for tax rate changes as they occur.
NET INCOME PER SHARE—SHARE – Basic net income per share is computed by dividing net income by the weighted average shares of outstanding common stock. The calculation of diluted net income per share is similar to basic earnings per share except that the denominator includes potentialpotentially dilutive common stock. The potentialpotentially dilutive common stock included in the Company’s computation of diluted net income per share includes the effects of the stock options and warrants as determined using the treasury stock method.
F-8
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIESThe following table sets forth the computation of basic and diluted income per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2002 | 2003 | 2004 | |||||||
Numerator: | |||||||||
Net income | $ | 6,607,942 | $ | 10,796,285 | $ | 13,152,136 | |||
Denominator: | |||||||||
Basic income per share - weighted average shares | 6,516,807 | 6,387,459 | 7,683,442 | ||||||
Dilutive effect: stock options | 17,942 | 162,667 | 612,711 | ||||||
Diluted income per share - weighted average shares | 6,534,749 | 6,550,126 | 8,296,153 | ||||||
Basic income per share | $ | 1.01 | $ | 1.69 | $ | 1.71 | |||
Diluted income per share | $ | 1.01 | $ | 1.65 | $ | 1.59 | |||
Antidilutive effect: stock options(1) | 522,076 | 128,465 | 185 | ||||||
(1) | Represents weighted average stock options to purchase shares of common stock that were not included in computing diluted earnings per share because their effects were antidilutive for the respective periods. |
ACCOUNTING FOR STOCK-BASED COMPENSATION—COMPENSATION - The Company has chosen to account for stock-based compensation to employees and non-employee members of the Board using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees, and related interpretations. As required by SFAS No. 123,Accounting for Stock-Based Compensation, the Company has presented certain pro forma and other disclosures related to stock-based compensation plans.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Compensation - Transition and Disclosure”.SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to requirerequires disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ended after December 15, 2002 and for interim financial statements beginning after December 15, 2002. The adoption of the disclosure provisions of SFAS No.148 is not expected to have a significant effect on the company’s financial position of results of operations.as follows:
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | |||||||||||||
Net income as reported | $ | 7,826,004 | $ | 6,607,942 | $ | 10,796,285 | $ | 6,607,942 | $ | 10,796,285 | $ | 13,152,136 | ||||||
Add : Total stock based employee compensation expense included in reported net income, net | — | — | — | |||||||||||||||
Deduct : Total stock based employee compensation expense not included in reported net income, net |
| 747,355 |
| 422,464 |
| 251,953 | 422,464 | 251,953 | 460,355 | |||||||||
Pro forma net income | $ | 7,078,649 | $ | 6,185,478 | $ | 10,544,332 | $ | 6,185,478 | $ | 10,544,332 | $ | 12,691,781 | ||||||
Pro forma net income per share: | ||||||||||||||||||
Basic |
| $1.08 |
| $0.95 |
| $1.65 | $ | 0.95 | $ | 1.65 | $ | 1.65 | ||||||
Diluted |
| $1.05 |
| $0.95 |
| $1.61 | $ | 0.95 | $ | 1.61 | $ | 1.53 | ||||||
RECLASSIFICATIONS—RECLASSIFICATIONS - Certain amounts in the prior years financial statements may have been reclassified to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS—PRONOUNCEMENTS - 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 only impacted Perry Ellis’ revenue and expense classifications and havehas no effect on reported income. Perry Ellis previously reported net sales and selling general and administrative expenses for fiscal 2001 and 2002 were reduced by $2,738,000 and $1,724,000 respectively to conform to the new accounting standard.
In June 1998, the FASB issued SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 138, is effective for financial statements for fiscal years beginning after June 15, 2000. The Company adopted the provisions of SFAS No. 133 effective February 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company’s financial statements.
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
F-9
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
pooling-of-interests method. SFAS No. 141 also addresses the recognition and measurement of goodwill and other intangiblesintangible assets acquired in a business combination. The Company applied the provisions of this pronouncement to the JantzenSalant acquisition.(See Note 10)
In July 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets,” which changes the accounting treatment as it applies to goodwill and other identifiable intangible assets with indefinite useful lives from an amortization method to an impairment-only approach. Under SFAS No. 142, proper accounting treatment requires annual assessment for any impairment of the carrying value of the assets based upon an estimation of the fair value of the identifiable intangible asset with an indefinite useful life, or in the case of goodwill of the reporting unit to which the goodwill pertains. Under SFAS No. 142, goodwill and identifiable intangible assets with indefinite useful lives are no longer subject to amortization. Impairment losses, if any, arising from the initial application of SFAS No. 142 are to be reported as a cumulative effect of a change in accounting principle. The effective date of this statement is for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 for its fiscal year beginning February 1, 2002.
In accordance with SFAS No. 142, the Company obtained a valuation and estimated useful life report of all its trademarks.intangible assets at adoption and annually as of February 1st. Results of this analysis indicate no material impairment in the carrying value of its trademarks upon adoption of the standardintangible assets and also indicate that the trademarksintangible assets have indefinite useful lives. Under the new pronouncement, amortization expense relating to identifiable intangible assets were approximately $3,955,000 and $4,342,000 for fiscal January 31, 2001 and 2002, respectively. Basic and dilutedThe following table indicates earnings per share adjusted for the year ended January 31, 2001 adjusted to exclude amounts no longer being amortized under the provisioneffect of SFAS No. 142 as reported below.142.
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | ||||||||||
Net income: | |||||||||||||||
Reported net income | $7,826,004 | $6,607,942 | $10,796,285 | $ | 6,607,942 | $ | 10,796,285 | $ | 13,152,136 | ||||||
Intangible amortization, net of tax | 2,478,396 | 2,719,938 | — | 2,719,938 | — | — | |||||||||
Adjusted net income | $10,304,400 | $9,327,880 | $10,796,285 | $ | 9,327,880 | $ | 10,796,285 | $ | 13,152,136 | ||||||
Basic earnings per share: | |||||||||||||||
Reported basic earnings per share | 1.17 | 1.01 | 1.69 | 1.01 | 1.69 | 1.71 | |||||||||
Intangible amortization, net of tax | 0.37 | 0.42 | — | 0.42 | — | — | |||||||||
Adjusted basic earnings per share | $1.54 | $1.43 | $1.69 | $ | 1.43 | $ | 1.69 | $ | 1.71 | ||||||
Diluted earnings per share: | |||||||||||||||
Reported diluted earnings per share | 1.16 | 1.01 | 1.65 | 1.01 | 1.65 | 1.59 | |||||||||
Intangible amortization, net of tax | 0.37 | 0.42 | — | 0.42 | — | — | |||||||||
Adjusted diluted basic earnings per share | $1.53 | $1.43 | $1.65 | $ | 1.43 | $ | 1.65 | $ | 1.59 | ||||||
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 SFAS No. 121. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30,“Reporting the Results of Operations—Reporting-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 SFAS No.144 is for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 on February 1, 2002, did not have a material effect on the financial position or the results of operationoperations of the Company.
F-10
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In April 2002, the FASB issued SFAS No. 145, ““Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections,” which all but eliminates the presentation in income statements of debt extinguishments as extraordinary items. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. Perry Ellis plans to implementadopted SFAS No. 145 atas of February 1, 2003. While the beginningadoption of fiscal 2004. SFAS No.145 isdid not expected to have a material effectimpact on Perry Ellis’the financial position or results of operations.operations of the Company, it did have an impact on the presentation of the cost on early extinguishment of debt in fiscal 2004.
In July 2002, the FASB issued SFAS No. 146, ““Accounting for Costs Associated with Exit or Disposal Activities,” 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 No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. SFAS No. 146 isdid not expected to have a material effectimpact on Perry Ellis’the financial position or results of operations.operations of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—Others- an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. However, the disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Perry Ellis is not a party to any agreement in which it is a guarantor of indebtedness of others. FIN 45 isdid not expected to have a material effect on Perry Ellis’ financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Compensation - Transition and Disclosure (SFAS 148).SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS 123, Accounting for Stock-Based Compensation, to require disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provision of SFAS No. 148 is effective for fiscal yearsyear ended after December 15, 2002 and for interim financial statements beginning after December 15, 2002 . SFAS No.148 is not expected to have a significant effect on the company’s financial position of results of operations.January 31, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation“Consolidation of Variable Interest Entities—Entities - an Interpretation of ARB No. 51”51” (“FIN 46”). In December 2003, the FASB issued a revision to FIN 46. FIN 46 addresses consolidation by business enterprises of variable interest entities (formerly special purpose entities or SPEs). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investor’sinvestors that do not provide sufficient financial resources for the entity to support its activities. The objective of FIN 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Company is required to adopt the provisionsprovision of FIN No. 46 immediately for variable interests in variable interest entities created after January 31, 2003, and in the quarter ending April 30, 20032004 for variable interests in variable interest entities created before February 1, 2003. However, certain of the disclosure requirements apply to financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Perry EllisThe Company does not have any variable interest entities as defined in FIN 46. Accordingly,46 and accordingly, the Company has determined that it iswill not reasonably possible that it will be required to consolidate or disclose information about aany variable interest entity upon the full adoption of FIN 46.
F-11
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions (a) made as part of the Derivative Implementation Group process that effectively required amendments to SFAS No. 133, (b) in connection with other Board projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of “an underlying” and the characteristics of a derivative that contain financing components. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the FASB indefinitely deferred the effective date for the classification and measurement provision of certain mandatorily redeemable non-controlling interests. For financial instruments created before May 2003 and still existing at the beginning of the interim period of adoption, transition will be accomplished by reporting the cumulative effect of a change in accounting principle. The adoption of the effective provisions of SFAS No. 150 did not have a material impact on the financial position or results of operations of the Company.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pension and Other Postretirement Benefits,” which enhanced the disclosure about pension plans and other postretirement benefit plans, but did not change the measurement or recognition principles for those plans. The statement requires additional disclosure about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The Company adopted the disclosure provisions of SFAS 132 for the year ended January 31, 2004.
3. Shares Repurchase
On July 11, 2000, the Board of Directors of the Company 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 September 17, 2003, the Board of Directors authorized the Company to repurchase shares based on the value of the funds received from the exercise of employee stock options. For fiscal year ended January 31, 2004, the Company repurchased 35,687 shares at an average price of $26.15 per share. For the fiscal year ended January 31, 2003, the Company did not repurchase any additional shares. On March 26, 2002, the Company retired 51,50051,400 shares held in the treasury. For the fiscal year ended January 31, 2002, the Company had repurchased 295,300296,100 shares at an average price of $7.37$7.35 per share. On March 2, 2001 and October 29, 2001, the Company retired 160,000 and 244,600 shares held in the treasury, respectively.
4. Accounts Receivable
Accounts receivable consist of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||||||
Trade accounts | $ | 47,778,539 |
| $ | 75,676,880 |
| $ | 75,676,880 | $ | 110,455,219 | ||||||
Royalties and other receivables |
| 4,506,696 |
|
| 5,888,000 |
| 5,888,000 | 6,033,015 | ||||||||
Total |
| 52,285,235 |
|
| 81,564,880 |
| 81,564,880 | 116,488,234 | ||||||||
Less: Allowance for doubtful accounts |
| (1,914,990 | ) |
| (2,075,141 | ) | (2,075,141 | ) | (810,304 | ) | ||||||
Total | $ | 50,370,245 |
| $ | 79,489,739 |
| $ | 79,489,739 | $ | 115,677,930 | ||||||
The activity for the allowance for doubtful account is as follows:
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | |||||||||||||||||||
Allowance for doubtful accounts | ||||||||||||||||||||||||
Beginning balance | $ | 1,014,576 |
| $ | 427,965 |
| $ | 1,914,990 |
| $ | 427,965 | $ | 1,914,990 | $ | 2,075,141 | |||||||||
Provision |
| 330,435 |
|
| 1,575,000 |
|
| 280,620 |
| 1,575,000 | 280,620 | 856,697 | ||||||||||||
Write-offs net of recoveries |
| (917,046 | ) |
| (87,975 | ) |
| (120,469 | ) | |||||||||||||||
Write-offs, net of recoveries | (87,975 | ) | (120,469 | ) | (2,121,534 | ) | ||||||||||||||||||
Ending balance | $ | 427,965 |
| $ | 1,914,990 |
| $ | 2,075,141 |
| $ | 1,914,990 | $ | 2,075,141 | $ | 810,304 | |||||||||
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our trade customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide a general allowance for other accounts based on historical collection and write-off experience. Judgment is critical because some retail customers are currently operating in bankruptcy or have experiencedexperiencing financial difficulties. If their financial condition were to worsen, additional allowances might be required.
F-12
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Inventories
Inventories consist of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||
Finished goods | $ | 39,208,717 | $ | 37,450,815 | $ | 37,450,815 | $ | 89,186,914 | ||||
Raw materials and in process |
| 1,259,194 |
| 10,166,219 | 10,166,219 | 4,413,233 | ||||||
Finished goods not yet received |
| 4,941,136 |
| 3,689,440 | 3,689,440 | 17,309,424 | ||||||
Total | $ | 45,409,047 | $ | 51,306,474 | $ | 51,306,474 | $ | 110,909,571 | ||||
The Company’s inventories are valued at the lower of cost (moving average cost) or market. Perry EllisThe Company evaluates all of its inventory style-size-color stock keeping units (SKUs) to determine excess or slow moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, we estimate their market value or net sales value based on current realizationsales trends. If the projected net sales value is less than cost, on an individual SKU basis, we provide an allowance to reflect the lower value of that inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.
6. Property and Equipment
Property and equipment consists of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||||||
Furniture, fixture and equipment | $ | 11,615,513 |
| $ | 16,722,015 |
| $ | 16,722,015 | $ | 24,816,729 | ||||||
Buildings |
| — |
|
| 12,426,585 |
| 12,426,585 | 14,295,348 | ||||||||
Vehicles |
| 167,940 |
|
| 308,839 |
| 308,839 | 321,566 | ||||||||
Leasehold improvements |
| 3,209,254 |
|
| 3,448,449 |
| 3,448,449 | 5,451,869 | ||||||||
Land |
| 1,581,702 |
|
| 6,181,702 |
| 6,181,702 | 6,440,702 | ||||||||
Total |
| 16,574,409 |
|
| 39,087,590 |
| 39,087,590 | 51,326,214 | ||||||||
Less: accumulated depreciation and amortization |
| (5,677,075 | ) |
| (8,038,714 | ) | (8,038,714 | ) | (12,233,635 | ) | ||||||
Total | $ | 10,897,334 |
| $ | 31,048,876 |
| $ | 31,048,876 | $ | 39,092,579 | ||||||
Depreciation expense relating to property and equipment amounted to approximately $1,567,000, $1,849,000, $2,280,000, and $2,279,581$3,847,000 for the fiscal years ended January 31, 2001, 2002, 2003 and 2003,2004, respectively.
7. Intangible Assets
Intangible assets consisted of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||||||
Trademarks and licenses | $ | 132,315,018 |
| $ | 156,462,840 |
| $ | 156,462,840 | $ | 166,542,568 | ||||||
Goodwill |
| 16,165 |
|
| — |
| ||||||||||
Total |
| 132,331,183 |
|
| 156,462,840 |
| ||||||||||
Less: Accumulated amortization |
| (14,392,289 | ) |
| (14,276,778 | ) | (14,276,778 | ) | (14,276,778 | ) | ||||||
Total | $ | 117,938,894 |
| $ | 142,186,062 |
| $ | 142,186,062 | $ | 152,265,790 | ||||||
Amortization expense relating to the intangible assets amounted to approximately $3,955,000 and $4,342,000 for the fiscal yearsyear ended January 31, 20012002. As of January 31, 2003, all intangible assets are indefinite useful life assets and 2002 respectively.
F-13are not subject to amortization according to SFAS No. 142.
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. Accrued Expenses
Accrued expenses consists of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||
Salaries and commissions | $ | 1,735,024 | $ | 2,783,016 | $ | 2,783,016 | $ | 4,766,849 | ||||
Royalties |
| 281,280 |
| 749,687 | 749,687 | 1,257,927 | ||||||
Buying commissions |
| 287,944 |
| 267,188 | 267,188 | 792,280 | ||||||
Other |
| 955,354 |
| 1,258,857 | 1,258,857 | 9,533,049 | ||||||
Total | $ | 3,259,602 | $ | 5,058,748 | $ | 5,058,748 | $ | 16,350,105 | ||||
Other liabilities for fiscal 2004 are principally related to liabilities acquired with the Salant transaction.
9. Other Current Liabilities
Other current liabilities consists of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||
Unearned advertising reimbursements | $ | 2,059,667 | $ | 925,520 | $ | 925,520 | $ | 931,845 | ||||
Other |
| 350,916 |
| 531,902 | 531,902 | 2,059,064 | ||||||
Total | $ | 2,410,583 | $ | 1,457,422 | $ | 1,457,422 | $ | 2,990,909 | ||||
10. JantzenSalant Acquisition
On March 22, 2002,June 19, 2003, the Company acquired Salant Corporation. The aggregate merger consideration paid by the Jantzen swimwear businessCompany was approximately $90.9 million, comprised of approximately $51.9 million in cash ($34.5 million net of cash acquired), approximately $35.6 million worth of newly issued Perry Ellis common stock and approximately $3.4 million in merger costs.
Salant licensed the Perry Ellis brand from subsidiariesthe Company for men’s sportswear, dress shirts, dress bottoms and accessories, and derived approximately $164.3 million, or 65%, of VF Corporationits 2002 revenues from the sale of Perry Ellis products. Salant was the Company’s largest licensee of Perry Ellis branded apparel. The remaining $87.7 million of Salant’s 2002 revenue was made up of sales of product under Salant’s owned brands such as Axis® and Tricots St. Raphael®, sales under license agreements for approximately $24.0 million, excluding liabilities assumed and expenses incurred related to the transaction. The acquisition was financed with a portionuse of the proceeds from a $57.0 millionJNCO® and Ocean Pacific® brands, as well as several private offering of 9½% senior secured notes, which closed simultaneously with the acquisition.
The Jantzen assets acquired consist primarily of the Jantzen trademarks and trade names, license agreements, certain equipment 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® brand for women’s swimwear and the Nike® brand for women’s and girl’s swimwear, men’s and boy’s competitive swimsuits, swim apparel, and accessories.
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.label programs.
The Jantzenfollowing table summarizes the estimated fair values of the assets acquired and liabilities assumed have been recorded at their estimatedthe date of acquisition. Purchase accounting adjustments include fair values. A final determinationvalue adjustments and the allocation of the required purchase accounting adjustments andexcess 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 theover purchase price and management’s estimate of the purchase price allocation.
F-14as required under SFAS 141.
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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(In Thousands) | ||||
Total purchase price | ||||
Market value of stock issued | $ | 35,555 | ||
Cash consideration paid | 51,906 | |||
Total purchase price | 87,711 | |||
Total direct merger costs | 3,405 | |||
Total adjusted purchase price | $ | 90,866 | ||
Historical net assets of Salant as of June 19, 2003 | $ | 67,119 | ||
Increase (decrease) in net assets to reflect estimated fair value adjustments under the purchase method of accounting: | ||||
Deferred taxes, current and long-term, net of valuation allowance | 48,554 | |||
Property, plant and equipment | (8,086 | ) | ||
Other assets | ||||
Retail stores fixtures | (3,070 | ) | ||
Deferred rental income | (456 | ) | ||
License agreements | (5,479 | ) | ||
Intangible assets, net | (7,920 | ) | ||
Deferred rental expense | 1,492 | |||
Net pension liability | (1,288 | ) | ||
Fair value of net assets acquired | $ | 90,866 | ||
11. Pro Forma Financial Information (Unaudited)
The pro forma financial information presented below, gives effect to the JantzenSalant acquisition as if it occurred as of the beginning of each of the fiscal yearyears ended January 2003.2002, 2003 and 2004. The results of the Salant acquisition are reflected in our income statement for the period from June 19, 2003, the closing date of acquisition, through January 31, 2004.
2002 | 2003 | |||||
Total Revenues | $ | 342,991 | $ | 346,331 | ||
Net Income | $ | 8,030 | $ | 13,596 | ||
Net Income per Share | ||||||
Basic | $ | 1.23 | $ | 2.13 | ||
Diluted | $ | 1.23 | $ | 2.08 | ||
2002 | 2003 | 2004 | |||||||
(in thousands) | |||||||||
Total revenues | $ | 480,258 | $ | 552,550 | $ | 603,524 | |||
Net income1 | $ | 6,747 | $ | 21,281 | $ | 16,854 | |||
Net income per share | |||||||||
Basic | $ | 0.81 | $ | 2.59 | $ | 2.01 | |||
Diluted | $ | 0.81 | $ | 2.54 | $ | 1.87 | |||
Weighted average outstanding shares: | |||||||||
Basic | |||||||||
Diluted |
1 | Net income (loss) includes $0.92 million, net of tax, of non-recurring direct merger related costs recorded by Salant during the twelve months ended January 31, 2004 |
12. 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 No. 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 No. 133 did not have a material effect on the Company financial statements.
The Company has an interest rate risk management policy with the objective of managing its interest costs. To meet this objective the Company employs hedging and derivatives strategies to limit the effects of changes in interest rates on its operating income and cash flows, and to lower its overall fixed rate interest cost on its senior subordinated notes and senior secured notes.
The Company does not acquire derivative instruments for any purpose other than cash flow and fair value hedging purposes.to manage interest rate risk. That is, the Company does not speculate using derivative instruments.
F-15
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company believes its interest rate risk management policy is generally effective. Nonetheless, the Company’s profitability may be adversely affected during particular periods as a result of changing interest rates. In addition, hedging transactions using derivative instruments involve risks such as counter-party credit risk. The counter-parties to the Company’s arrangements are lenders of the hedged debt instruments or are major financial institutions.
In August 2001, the Company entered into an interest rate swap, option and interest rate cap agreements (the “August“$40 million 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 $40 million Swap Agreement recorded on the Company’s Consolidated Balance Sheet was ($0.2) million as of January 31, 2002 and $1.9 million as of January 31, 2003. TheIn conjunction with the $40 million Swap Agreement, the Company also entered into an interest rate cap and basis swap that did not qualify for hedge accounting treatment under the SFAS No. 133, resulting in $0.7$0.2 million reductionincrease of recorded interest expense on the Consolidated Statement of Income for the fiscal year ended January 31, 20022004 and $0.35 million increase of recorded interest expense for the year ended January 31, 2003.
In August 2003, the Company terminated the $40 million Swap Agreement for approximately $1.9 million which is included as a component of interest income.
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“$57 million Swap Agreement”) for an aggregate notional amount of $57.0 million in order to minimize the debt servicing costs associated with the 9½9 1/2% senior secured notes. The March$57 million Swap Agreement is scheduled to terminate on March 15, 2009. Under the March$57 million 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$57 million 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$57 million Swap Agreement is a fair value hedge as it has been designated against the 9 1/2% senior secured notes carrying a fixed rate of interest and converts such notes to variable rate debt. The interest rate swap contracts are reflected at fair value in the company’s consolidated balance sheet.sheet with a corresponding offset to the designated item. The fair value of the March$57 million Swap Agreement recorded on the Company’s Consolidated Balance Sheet was $5.0 million and $4.4 million as of January 31, 2003.2003 and 2004, respectively.
In December 2002, the Company entered into an interest rate floor agreement (the “December“$57 million Floor Agreement”) for an aggregate notional amount of $57.0 million associated with the 9 1/2% senior secured notes. The December Swap$57 million Floor Agreement is scheduled to terminate on March 15, 2005. Under the December
$57 million Floor Agreement, the Company must pay the difference between the three-month LIBOR rate and 1.50% for all rate resets in which the LIBOR is below 1.50%. When the LIBOR is equal to or greater than 1.50%, the Company makes no payments under the Floor.
F-16
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The December$57 million Floor Agreement did not qualify for hedge accounting treatment under SFAS No. 133, resulting in $0.2 million and $0.1 million increase of recorded interest expense on the Consolidated Statement of Income for the fiscal yearyears ended January 31, 2003.2003 and 2004, respectively. The fair value of the December$57 million Floor Agreement recorded on the Company’s Consolidated Balance Sheet was ($0.2) and ($0.1) million as of January31, 2003.January 31, 2003 and 2004, respectively.
In April 2003, the Company entered into an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57.0 million associated with the senior secured notes. The $57 million Cap Agreement is scheduled to terminate on March 15, 2009. The $57 million Cap Agreement caps the interest rate on the senior secured notes at 10%.
The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in $0.3 million increase of recorded interest expense on the consolidated statement of income for the fiscal year ended January 31, 2004. The fair value of the $57 million Cap Agreement recorded on the Company’s consolidated balance sheet was ($0.3) million as of January 31, 2004.
In conjunction with the Company’s September 2003 offering of $150.0 million of 8 7/8% senior subordinated notes due September 15, 2013, the Company entered into interest rate swap agreements (the “$150 million Swap Agreement”) for an aggregate notional amount of $150.0 million in order to minimize the debt servicing costs associated with the new senior subordinated notes. The $150 million Swap Agreement is scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, the Company is entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 7/8% and is obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period from September 22, 2003 through September 15, 2013. The $150 million Swap Agreement has optional call provisions with trigger dates of September 15, 2008, September 15, 2009, September 15, 2010 and September 15, 2011, which contain premium requirements in the event the call is exercised.
The $150 million Swap Agreement is a fair value hedge as it has been designated against the 8 7/8% 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 our consolidated balance sheet with a corresponding offset to the designated item. The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $0.5 million as of January 31, 2004.
The Company does not currently have a significant exposure to foreign exchange risk and accordingly, has not entered into any transactions to hedge against those risks. See Note 2 for policy description ofon foreign currency translation.
13. Borrowings under Letter of Credit Facilities
As of January 31, 2003,2004, the Company maintained three US dollar letter of credit facilities totaling $52.0of $60.0 million, $30.0 million sublimit for letters of credit under the Company’s senior credit facility, and one letter of credit facility totaling $2.5$2.8 million utilized by the Company’s consolidated 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 on the Company’s assets. As of January 31, 2003,2004, there was $22.5$30.8 million available under existing letter of credit facilities.
Amounts outstanding under letter of credit facilities consist of the following as of January 31:
2002 | 2003 | 2003 | 2004 | |||||||||||||
Total letter of credit facilities | $ | 42,000,000 |
| $ | 54,453,386 |
| $ | 54,453,386 | $ | 92,818,489 | ||||||
Outstanding letters of credit |
| (11,035,880 | ) |
| (31,966,591 | ) | (31,966,591 | ) | (61,819,367 | ) | ||||||
Total credit available | $ | 30,964,120 |
| $ | 22,486,795 |
| $ | 22,486,795 | $ | 30,999,122 | ||||||
14. Long Term Debt-Senior Credit Facility
In October 2002,June 2003, the Company entered into a newamended its senior credit facility with Congress Financial Corporation (Florida), as agent for a groupsyndicate of financial institutions. The senior credit facility provided the Company withlenders, to provide a revolving credit linefacility of up to an aggregate amount of $60.0$110.0 million. In February 2004, the availability under the senior credit facility was increased to $130.0 million until June 2004. The senior credit facility expires in September 2005 and the indebtedness thereunder ranks ahead of the 8 7/8% senior subordinated notes.
The following is a description of the terms of the new 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. In anticipation of the Salant acquisition (Note 24), the Company received a commitment from only one senior lender in its existing senior credit facility to increase the senior credit facility to $110.0 million. It is anticipated that the terms and conditions of this amended credit facility will mirror the terms outlined below but, in the case of certain covenants, the amounts will increase to reflect the increase in the facility.
Certain Covenants. The senior credit facility contains certain covenants, which, among other things, requires the Companyus to maintain a minimum EBITDA. PaymentEBITDA if availability falls below a certain minimum. It may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends is prohibited under Perry Ellis’ senior credit facility, and indentures governing its senior secured notes and senior subordinated notes. Any future decision regarding payment of cash dividends will depend on Perry Ellis’ earnings and financial position and such other factors, as Perry Ellis’ board of directors deems relevant. Perry Ellis has not paid any cash dividends since its inception and does not contemplate doing so in the near future. The Company isthese covenants. We believe we are currently in compliance with all of itsour covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding there under, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under the indentures and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
BorrowingsBorrowing Base. Borrowings under the senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to a)the lesser of either (1) the sum of (a) 85.0% of eligible receivables b) 85%plus (b) 85.0% of our eligible factored accounts receivablereceivables up to $5$20.0 million plus c)(c) the lesser of (i) the inventory loan limit, or (ii) the lesser of 65%(A) 65.0% of eligible finished goods inventory, or 85%(B) 85.0% of the net recovery percentage (such net recovery percentage being 62%)(as defined in the senior credit facility) of eligible inventory, or (2) the loan limitlimit; and in each case minus (d) 35%(x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (e)(y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (f)(z) licensing reserves for which the Company iswe are the licensee of certain branded products.
F-17
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest. Interest on the principal balance under the senior credit facility shall accrue,accrues, at the Company’sour option, at either a) the Company’s bank’s(a) our bank prime lending rate with adjustments depending upon the Company’sour quarterly average excess availability plus excess cash or leverage ratio or (b) 2.00% above the rate quoted by the Company’sour bank as the average Eurodollar Rate (“Eurodollar”) for the 1, 2, 31-, 2-, 3- and 6 month6-month Eurodollar deposits with 1/4% one-quarter percentage point adjustments depending upon the Company’sour 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 Companywe granted the lenders a first priority security interest in substantially all of our existing and future assets other than itsour trademark portfolio existing trademark portfolio,as of March 2002, including, without limitation, accounts receivable, inventory deposit
accounts, general intangibles, equipment and equipment.capital stock or membership interests, as the case may be, of certain subsidiaries. Lenders under the senior credit facility have a second priority security interest in our trademark portfolio as of March 2002 and a first priority lien on the Company’srest of our trademarks.
15. 9 1/2% Senior Secured Notes
OnIn March 22, 2002, the Company completed a private offering ofissued $57.0 million 9 1/2% senior secured notes due March 15, 2009. The proceeds of the private offering were used to finance the Jantzen acquisition, to reduce the amount of outstanding debt under the previous senior credit facility and as additional working capital. The proceeds to Perry Ellis were $55,589,250$55.6 million yielding an effective interest rate of 9.74% after deduction of discounts. The Company entered into an interest rate swap and option agreement (the “March“$57 million Swap Agreement”) in order to minimize debt service costs on the secured senior notes. The fair valuevalues of the March$57 million Swap Agreement recorded on the Company’s Consolidated Balance Sheet waswere $5.0 million and $4.4 million as of January 31, 2003.2003 and 2004, respectively.
The senior secured notes are secured by a first priority security interest granted in the Company’s existing portfolio of trademarks and licenses as of the closing date of the Jantzen acquisition, including the trademarks, licenses and all income, royalties and other payments acquired in the Jantzen acquisition. The senior secured notes are senior secured obligations of the Company and rankpari passuin right of payment with all of its existing and future senior indebtedness.Theindebtedness. The senior secured notes are effectively senior to all unsecured indebtedness of the Company to the extent of the value of the assets securing the senior secured notes. The senior secured notes are guaranteed by certain subsidiaries of the Company.
Certain Covenants. The indenture agreementgoverning the senior secured notes contains certain covenants which requirerestrict the Company’s ability and the ability of its subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. The Company t o maintain certain financial ratios and restricts the payment of dividends. As of January 31, 2003, theis prohibited from paying cash dividends under these covenants. The Company wasbelieves it is currently in compliance with its debt covenantsall of the covenants in this indenture. The Company could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which the Company may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, letter of credit facility, mortgage and the indenture relating to the Company’s senior subordinated notes.notes resulting in all of the Company’s debt obligations becoming immediately due and payable, which the Company may not be able to satisfy.
16. 12 1/4% Senior Subordinated Notes Payable
The Company issued $100.0 million senior subordinated notes on April 6, 1999, the proceeds of which were used to acquire Perry Ellis, John Henry and Manhattan brands and to pay down the outstanding balance of the senior credit facility. The notes mature on April 1, 2006, and bear interest at the rate of 12 1/4% payable on April 1 and October 1 in each year. The proceeds to the Company were $98,852,000,$98.9 million yielding an effective interest rate of 12.39% after deduction of discounts. The Company entered into an interest rate swap, option, and interest rate cap agreements (the “August“$40 million Swap Agreement”) for an aggregate notional of $40 million in order to minimize debt service costs on the senior subordinated notes.
In November 2002, the Company repurchased $2.2 million of the 12 1/4% senior subordinated notes. On October 15, 2003, the Company redeemed the $100 million of 12 1/4% senior subordinated notes that were scheduled to mature on April 1, 2006 for approximately $107.3 million. The redemption resulted in costs on the early extinguishment of debt of $7.3 million, principally as a result of a redemption premium.
17. 8 7/8% Senior Subordinated Notes
On September 22, 2003, the Company issued $150 million 8 7/8% senior subordinated notes, the proceeds of which were used to redeem the 12 1/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The notes mature on September 15, 2013 and bear interest at the rate of 8 7/8%, payable semiannually on March 15 and September 15 of each year. The proceeds to the Company were $146.8 million yielding an effective interest rate of 9.1%. The Company entered into interest rate swap agreements (the “$150 million Swap Agreement”) in order to minimize debt service costs on the senior subordinated notes. The fair value of the August$150 million Swap Agreement recorded on the Company’s Consolidated Balance Sheet was $1.9$0.5 million as of January 31, 2003.2004.
Certain Covenants. The notes are unsecuredindenture governing the senior subordinated obligationsnotes contains certain covenants which restrict the Company’s ability and are subordinatedthe ability of its subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. The Company believes it is currently in compliance with all of the covenants in this indenture. The Company is prohibited from paying cash dividends under these covenants. The Company could be materially harmed if it violates any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which the Company may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities, mortgage and the indenture relating to the Company’s senior secured notes resulting in all of the Company’s existingdebt obligations becoming immediately due and future senior indebtedness. The notes rank equally with all of the Company’s future senior subordinated indebtedness.
The indenture agreement contains certain covenantspayable, which require the Company may not be able to maintain certain financial ratios and restricts the payment of dividends. As of January 31, 2003, the Company was in compliance with its debt covenants of the senior subordinated notes.
F-18
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIESsatisfy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Optional Redemption. The notes are redeemable at the option of the Company, as a whole or in part from time to time, at any time on or after April 1, 2003 at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued interest, if any, to the date of redemption, if redeemed during the 12-month period beginning on April 1 of the years indicated below (subject to the right of holders of record on relevant record dates to receive interest due on an interest payment date):
Year | Redemption Price | |
2003 | 106.125% | |
2004 | 103.063% | |
2005 and thereafter | 100.000% |
In addition, at any time or from time to time before April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the notes within 60 days of one or more public equity offerings with the net proceeds of such offering at a redemption price equal to 112.25% of the principal amount thereof, together with accrued interest, if any, to the date of redemption (subject to the right of holders of record on relevant record dates to receive interest due on relevant interest payment dates); provided that, after giving effect to any such redemption, at least 65% of the aggregate principal amount of the notes initially issued remains outstanding. The Company did not exercise the redemption option before April 1, 2002.
17.18. 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 January 31, 2003,2004, the Company believes it is in compliance with these covenants.
On September 13, 2002, the Company purchased a distribution center in Seneca, South Carolina for $2.5 million using our revolver. The Company exercised the option to purchase the facility as part of the March 2002 Jantzen acquisition.
18.19. Income Taxes
The income tax provision consists of the following for each of the years ended January 31:
2001 | 2002 | 2003 | ||||||||
Current Income Taxes: | ||||||||||
Federal | $ | 2,450,203 |
| $ | 2,115,199 | $ | 2,217,615 | |||
State |
| 242,627 |
|
| 300,810 |
| 379,136 | |||
Foreign |
| (128,460 | ) |
| 237,746 |
| 758,258 | |||
Total |
| 2,564,370 |
|
| 2,653,755 |
| 3,355,009 | |||
Deferred Income Taxes: | ||||||||||
Federal and State |
| 2,098,295 |
|
| 1,386,240 |
| 3,371,314 | |||
Total | $ | 4,662,665 |
| $ | 4,039,995 | $ | 6,726,323 | |||
F-19
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2002 | 2003 | 2004 | ||||||||
Current Income Taxes: | ||||||||||
Federal | $ | 2,115,199 | $ | 2,217,615 | $ | (1,140,259 | ) | |||
State | 300,810 | 379,136 | 117,074 | |||||||
Foreign | 237,746 | 758,258 | 1,113,497 | |||||||
Total | 2,653,755 | 3,355,009 | 90,312 | |||||||
Deferred Income Taxes: | ||||||||||
Federal and State | 1,386,240 | 3,371,314 | 7,604,601 | |||||||
Total | $ | 4,039,995 | $ | 6,726,323 | $ | 7,694,913 | ||||
The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for each of the years ended January 31:
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | |||||||||||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (decrease) resulting from State | ||||||||||||||||||
Increase resulting from State | ||||||||||||||||||
income taxes, net of federal income tax benefit | 2.5 | % | 2.7 | % | 2.9 | % | 2.7 | % | 2.9 | % | 1.7 | % | ||||||
Benefit of graduated rate | (0.6 | %) | (0.6 | %) | (1.0 | %) | (0.6 | )% | (1.0 | )% | (0.9 | )% | ||||||
Other | 0.6 | % | 0.8 | % | 1.3 | % | 0.8 | % | 1.3 | % | 0.7 | % | ||||||
Total | 37.5 | % | 37.9 | % | 38.2 | % | 37.9 | % | 38.2 | % | 36.5 | % | ||||||
Deferred income taxes are provided for the temporary differences between financial reporting basis and the tax basis of the Company’s assets and liabilities under SFAS No. 109. The tax effects of temporary differences as of January 31 are as follows:
2002 | 2003 | 2003 | 2004 | |||||||||||||
Deferred Tax Assets | ||||||||||||||||
Inventory | $ | 941,575 |
| $ | 1,407,770 |
| $ | 1,407,770 | $ | 3,536,318 | ||||||
Allowance for doubtful accounts |
| 723,736 |
|
| 790,269 |
| ||||||||||
Accounts receivable | 790,269 | 8,099,848 | ||||||||||||||
Accrued expenses |
| 108,348 |
|
| 109,214 |
| 109,214 | 3,777,952 | ||||||||
Unearned revenue |
| 694,894 |
|
| 759,726 |
| 759,726 | 364,074 | ||||||||
Fixed assets | — | 2,155,927 | ||||||||||||||
Net operating losses | — | 38,781,004 | ||||||||||||||
Deferred pension obligation | — | 6,187,427 | ||||||||||||||
Credits | — | 462,160 | ||||||||||||||
Other |
| 150,511 |
|
| 289,378 |
| 289,378 | 219,307 | ||||||||
Sub Total |
| 2,619,064 |
|
| 3,356,357 |
| 3,356,357 | 63,584,017 | ||||||||
Deferred Tax Liabilities | ||||||||||||||||
Fixed assets |
| (1,693,580 | ) |
| (1,850,845 | ) | (1,850,845 | ) | — | |||||||
Intangible assets |
| (5,062,408 | ) |
| (9,031,489 | ) | (9,031,489 | ) | (11,425,066 | ) | ||||||
Other |
| (228,592 | ) |
| (210,853 | ) | (210,853 | ) | (72,416 | ) | ||||||
Sub Total |
| (6,984,580 | ) |
| (11,093,187 | ) | (11,093,187 | ) | (11,497,482 | ) | ||||||
Valuation allowance | — | (13,874,572 | ) | |||||||||||||
Net deferred tax asset (liability) | ($ | 4,365,516 | ) | ($ | 7,736,830 | ) | ||||||||||
Net Deferred Tax Asset (liability) | $ | (7,736,830 | ) | $ | 38,211,963 | |||||||||||
Management believesIn connection with the Salant acquisition, the Company acquired a net deferred tax asset of approximately $53.5 million, net of a $20.3 million valuation allowance. Additionally, the acquisition of Salant caused an “ownership change” for federal income tax purposes. As a result, the use of any net operating losses existing at the date of the ownership change to offset future taxable income of the company is limited by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). As of June 19, 2003 Salant had available federal net operating losses of approximately $123 million, of which approximately $56 million will expire unutilized as a result of the annual usage limitations under Section 382. Therefore, management has determined that a valuation allowance for deferred income tax assets is not deemed necessary as the assets are not expected to be recovered. fully realized. As of January 31, 2004, approximately $18 million of the $123 million net operating losses expired. The following table reflects the expiration of the remaining net operating losses:
Fiscal Year | Amount (000’s) | ||
1/31/2005 - 1/31/2009 | 57,240 | ||
1/31/2010 - 1/31/2014 | 14,086 | ||
1/31/2015 - 1/31/2019 | 12,872 | ||
1/31/2020 - 1/31/2024 | 23,325 | ||
$ | 107,523 | ||
Deferred taxes have not been recognized on unremitted earnings of the Company’s foreign subsidiaries based on the “indefinite reversal” criteria of APB Opinion 23.
19.20. Retirement Plan
The Company has a 401(k) Profit Sharing Plan (the “Plan”) in which eligible employees may participate. Employees are eligible to participate in the Plan upon the attainment of age 21, and completion of one yearthree months of service. Participants may elect to contribute up to 15%60% of their annual compensation, notsubject to exceed amounts prescribed bymaximum statutory guidelines.limits. The Company under the provisions of the plan, and at its discretion may contribute an amount
make discretionary matching contributions equal to 50%a percentage of each participant’s eligible contribution up to 6% of the participant’s annual compensation. The percentage will be determined annually by the Board. The Company may also elect to contributemake additional profit sharing contributions on behalf of participants in amounts determined by the Board at its discretion.the end of the Plan year. The Company’s contributions to the Plan were approximately $173,000, $199,000, $328,000, and $328,000$446,000 for the fiscal years ended January 31, 2001, 2002, 2003 and 2003,2004, respectively.
F-20
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES21. Benefit Plans
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Perry Ellis sponsors two qualified pension plans as a result of the Salant acquisition that occurred in June 2003.
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the period beginning June 1, 2003, the acquisition measurement date, and ending December 31, 2003, and a statement of the funded status as of December 31, 2003. The plans were frozen and merged as of December 31, 2003.
2003 | ||||
Reconciliation of benefit obligation | ||||
Obligation at beginning of period | $ | 55,265,928 | ||
Service Cost | 244,222 | |||
Interest Cost | 1,742,354 | |||
Actuarial gain | (3,187,226 | ) | ||
Benefit payments | (1,797,204 | ) | ||
Curtailments | (1,200,040 | ) | ||
Obligation at end of period | $ | 51,068,034 | ||
Reconciliation of fair value of plan assets | ||||
Fair value of plan assets at beginning of period | $ | 37,770,984 | ||
Actual return on plan assets | 5,550,037 | |||
Employer contributions | 438,723 | |||
Benefit payments | (1,890,833 | ) | ||
Fair value of plan assets at end of period | $ | 41,868,911 | ||
Funded status as of measurement date | ||||
Funded status at December 31 | $ | (9,105,494 | ) | |
Unrecognized gain | (6,899,855 | ) | ||
Net amount recognized December 31 | (16,005,349 | ) | ||
Adjustments for contributions made from | ||||
measurement date to fiscal year end | 271,565 | |||
Net amount recognized January 31 | $ | (15,733,784 | ) | |
The following table provides the amounts recognized in the consolidated balance sheet as of January 31, 2004:
Prepaid benefit cost | $ | — | ||
Accrued benefit liability | (15,733,784 | ) | ||
Intangible asset | — | |||
Accumulated other comprehensive income | — | |||
Net amount recognized | $ | (15,733,784 | ) | |
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31, 2003:
Projected benefit obligation | $ | 51,068,034 | |
Accumulated benefit obligation | $ | 51,068,034 | |
Fair value of plan assets | $ | 41,962,540 |
The following table provides the components of net benefit cost for the plans for the fiscal year ended January 31:
2004 | ||||
Service cost | $ | 244,222 | ||
Interest cost | 1,742,354 | |||
Expected return on plan assets | 1,837,408 | |||
Net periodic benefit cost | 149,168 | |||
Curtailment gain | (1,200,040 | ) | ||
Net periodic benefit cost after curtailments and settlements | $ | (1,050,872 | ) | |
There was no amount included within other comprehensive income arising from a change in the additional minimum pension liability as of December 31, 2003.
The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants.
The assumptions used in the measurement of the Company’s benefit obligation are shown in the following table:
2003 | |||
Weighted average assumptions as of December 31 | |||
Discount rate | 6.00 | % | |
Rate of compensation increase | 4.00 | % |
The assumptions used in the measurement of the net periodic benefit cost for period ended December 31 are as follows:
2003 | |||
Weighted average assumptions for year ended December 31 | |||
Discount rate | 5.50 | % | |
Expected return on plan assets | 8.50 | % | |
Rate of compensation increase | 4.00 | % |
The pension plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category are as follows:
December 31, 2003 | |||
Equity securities | 73.41 | % | |
Debt securities | 26.59 | % | |
Total | 100.00 | % | |
The expected long-term return on assets is a blended rate based on asset mix. In general, the methodology used to determine the rate is reviewed annually, taking into consideration the respective asset allocation, historical returns on the types of assets held, and the current economic environment. The expected long-term return on assets is a blended rate based on the target asset allocation of the plan, applied principally to historical market returns and trends. For estimation purposes, the Company assumes a long-term asset mix generally consistent with the investment policy of the funded plan. Changes in the asset mix or investment policy could impact the amount of recorded pension income or expense, the funded status of the plan, and the need for future cash contributions.
The Company’s investment strategy for defined benefit plans is to utilize broadly diversified passive vehicles where appropriate, with an investment mix and risk profile consistent with plan liabilities. Periodic studies are undertaken to determine the asset mix that will meet pension obligations at a reasonable cost to the Company and are consistent with the fiduciary requirements of local pension regulations. The weighted average target allocation for our plan is 65% equity and 35% fixed income. The overall allocation may include a 10% maximum allocation to alternative strategies.
The Company expects to contribute approximately $ 0.2 million to its pension plan during fiscal 2005. Benefit payments, which include the effects of expected future service, as appropriate, are expected to be approximately $3.0 million for each of the fiscal years 2005 through 2009.
20.22. Related Party Transactions
The Company leases certain office and warehouse space owned by the Chairman of the Board of Directors and Chief Executive Officer under certain lease arrangements, most of which are month-to-month. Rent expense, including taxes, for these leases amounted to $316,000,approximately $537,000, $525,000, and $525,000$388,000 for the years ended January 31, 2001, 2002, 2003 and 2003,2004, respectively.
The Company entered into licensing agreements (the “ License“License Agreements”) with Isaco International, Inc. (“Isaco”), pursuant to which Isaco was granted the exclusive license to use the Natural Issue, Perry Ellis, John Henry and Career Club brand names in the United States and Puerto Rico to market a line of men’s underwear, hosiery and loungewear. The principal shareholder of Isaco is the father-in-law of the Company’s President and Chief Operating Officer. Royalty income earned from the License Agreements amounted to $834,000,approximately $1,230,000, $2,131,000, and $2,131,000$2,204,000 for the years ended January 31, 2001, 2002, 2003 and 2004, respectively.
In December 2003, the Company entered into an aircraft charter agreement with a third party. There is no minimum usage requirement, and the charter agreement can be terminated with 60 days notice. The third party charters the aircraft from an entity controlled by the Chief Executive Officer and the Chief Operating Officer. The Company paid the third party approximately $37,000 in fiscal 2004 under this agreement.
The Company is a party to licensing agreements with Tropi-Tracks LLC, pursuant to which Tropi-Tracks was granted an exclusive license to use the Jantzen brand name in the United States, Canada, and Mexico to market a line of men’s, women’s and junior’s casual and leisure footwear. One of the Company’s directors and the son-in-law of the Chairman of the Board and Chief Executive Officer, is a member of Tropi-Tracks. The Tropi-Tracks license agreement provides for a minimum annual guaranteed royalty of $215,000. Royalty income earned from the Tropi-Tracks license agreement amounted to approximately $81,000 and $6,000 for fiscal 2004 and 2003, respectively.
21.23. Stock Options and Warrants
Stock Options—The – In 1993, the Company adopted a 1993 Stock Option Plan (the “1993 Plan”), which was amended in 1998 and a Directors1999 to increase the number of shares reserved for issuance thereunder. The 1993 Plan authorized the Company to grant stock options (“Option” or “Options”) to purchase up to an aggregate of 1,500,000 shares of the Company’s Common Stock. In 2002, prior to the termination of the 1993 Plan in 2003, the Company adopted the 2002 Stock Option Plan (the “ Directors“2002 Plan”) (collectively,. The 2002 Plan was amended in 2003 to increase the “Stock Option Plans”), under whichnumber of shares of common stock are reserved for issuance uponthereunder. As amended, the exercise2002 Plan allows the Company to grant Options exercisable up to an aggregate of 1,500,000 shares of the options. The number of shares issuable under the Directors Plan is 150,000. The number of shares issuable under the 1993 plan is 1,500,000. TheCompany’s Common Stock. Both Stock Option Plans arewere designed to serve as an incentive for attracting and retaining qualified and competent employees, directors, consultants, and independent contractors of the Company.
The 19932002 Plan provides for the granting of both incentiveIncentive Stock Options and Nonstatutory Stock Options. An Incentive Stock Option is an option to purchase Common Stock, that meets the requirements
as set forth under Section 422 of the Internal Revenue Code of 1986, as amended (“Section 422”). A Nonstatutory Stock Option is an option to purchase Common Stock, that meets the requirements of the 2002 Plan, but does not meet the definition of an “incentive stock options and nonstatutory stock options. Incentive stock options may only be granted to employees. Only non-employee directors are eligible to receive optionsoption” under the Directors Plan. All matters relating to the DirectorsSection 422.
The 2002 Plan areis administered by athe compensation committee of the Board of Directors consisting(“Committee”), which is comprised of two or more employee directors, including selection ofnonemployee directors. The Committee determines the participants, the allotment of shares, determinationand the term of the Options. The Committee also determines the exercise price and other conditions of purchase, exceptthe Options, provided however that the per share exercise price of optionsOptions granted under the Directors Plan may not be less than the fair market value of the common stock on the date of grant.
Options can be granted under the 1993 Plan on such terms and at such prices as determined by the Board of Directors, or a committee thereof, except that the per share exercise price of incentive stock options granted under the 19932002 Plan may not be less than the fair market value of the common stock on the date of grant, and in the case of an incentive stock option granted to a 10% shareholder, the per share exercise price will not be less than 110% of such fair market value.
F-21
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the stock option activity for options issued under the 1993 Plan and the Directors2002 Plan is as follows for the years ended January 31:
Option Price Per Share | Options Exercisable | ||||||||||||||||||||||||||||||||
Number of Shares | Low | High | Weighted | Number of Shares | Weighted Average Exercise Price | Number of Shares | Option Price Per Share | Options Exercisable | |||||||||||||||||||||||||
Outstanding January 31, 2000 | 1,032,550 |
| $ | 7.67 | $ | 15.75 | $ | 10.69 | 833,459 | td0.73 | |||||||||||||||||||||||
Granted 2001 | 167,000 |
| $ | 5.13 | $ | 13.00 | $ | 8.41 | |||||||||||||||||||||||||
Exercised 2001 | (7,500 | ) | $ | 7.67 | $ | 7.67 | $ | 7.67 | |||||||||||||||||||||||||
Cancelled 2001 | (78,500 | ) | $ | 9.63 | $ | 14.25 | $ | 10.13 | |||||||||||||||||||||||||
Number of Shares | Low | High | Weighted | Number of Shares | Weighted Average Exercise Price | ||||||||||||||||||||||||||||
Outstanding January 31, 2001 | 1,113,550 |
| $ | 5.13 | $ | 15.75 | $ | 10.44 | 940,616 | td0.41 | $ | 5.13 | $ | 15.75 | $ | 10.44 | 940,616 | $ | 10.41 | ||||||||||||||
Granted 2002 | 71,667 |
| $ | 5.13 | $ | 8.85 | $ | 7.37 | 71,667 | $ | 5.13 | $ | 8.85 | $ | 7.37 | ||||||||||||||||||
Exercised 2002 | (2,666 | ) | $ | 5.13 | $ | 6.88 | $ | 5.79 | (2,666 | ) | $ | 5.13 | $ | 6.88 | $ | 5.79 | |||||||||||||||||
Cancelled 2002 | (88,750 | ) | $ | 5.13 | $ | 13.44 | $ | 10.40 | (88,750 | ) | $ | 5.13 | $ | 13.44 | $ | 10.40 | |||||||||||||||||
Outstanding January 31, 2002 | 1,093,801 |
| $ | 5.13 | $ | 13.44 | $ | 10.27 | 980,774 | $10.40 | 1,093,801 | $ | 5.13 | $ | 13.44 | $ | 10.27 | 980,774 | $ | 10.40 | |||||||||||||
Granted 2003 | 578,000 |
| $ | 7.50 | $ | 14.85 | $ | 12.83 | 578,000 | $ | 7.50 | $ | 14.85 | $ | 12.83 | ||||||||||||||||||
Exercised 2003 | (139,701 | ) | $ | 5.13 | $ | 13.50 | $ | 9.47 | (139,701 | ) | $ | 5.13 | $ | 13.50 | $ | 9.47 | |||||||||||||||||
Cancelled 2003 | (43,466 | ) | $ | 6.88 | $ | 14.20 | $ | 9.67 | 1,260,716 | $11.56 | (43,466 | ) | $ | 6.88 | $ | 14.20 | $ | 9.67 | |||||||||||||||
Outstanding January 31, 2003 | 1,488,634 |
| 1,488,634 | $ | 5.13 | $ | 14.85 | $ | 10.03 | 1,260,716 | $ | 11.56 | |||||||||||||||||||||
Granted 2004 | 202,500 | $ | 14.25 | $ | 28.51 | $ | 20.96 | ||||||||||||||||||||||||||
Exercised 2004 | (211,271 | ) | $ | 5.19 | $ | 14.85 | $ | 9.72 | |||||||||||||||||||||||||
Cancelled 2004 | (20,667 | ) | $ | 5.13 | $ | 22.96 | $ | 16.22 | 1,142,680 | $ | 12.01 | ||||||||||||||||||||||
Outstanding January 31, 2004 | 1,459,196 | ||||||||||||||||||||||||||||||||
Options Outstanding | Options Exercisable | |||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exerciseable | Weighted Average Exercise Price | |||||
$ 5.00–$7.50 | 78,084 | 8.0 | $ 5.46 | 65,000 | $ 5.28 | |||||
$ 7.51–$10.00 | 568,416 | 4.2 | $ 8.78 | 557,583 | $ 8.78 | |||||
$10.01–$12.00 | 52,934 | 6.5 | $11.15 | 27,133 | $10.75 | |||||
$12.01–$16.00 | 789,200 | 8.4 | $14.69 | 611,000 | $14.80 |
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exerciseable | Weighted Average Exercise Price | |||||||
$ 5.00 - $ 7.50 | 56,500 | 7.0 | $ | 5.34 | 51,250 | $ | 5.23 | |||||
$ 7.51 - $10.00 | 444,616 | 3.4 | $ | 8.78 | 442,033 | $ | 8.79 | |||||
$10.01 - $12.00 | 32,763 | 5.8 | $ | 11.37 | 15,114 | $ | 10.92 | |||||
$12.01 - $16.00 | 741,817 | 7.4 | $ | 14.74 | 634,283 | $ | 14.83 | |||||
$16.01 - $20.00 | 58,000 | 9.1 | $ | 18.45 | ||||||||
$20.01 - $24.00 | 104,500 | 8.8 | $ | 21.62 | ||||||||
$24.01 - $29.00 | 21,000 | 9.6 | $ | 25.67 |
As described in Note 2, we account for stock-based compensation using the provisions of APB No. 25 and related interpretations. No compensation expense has been recognized in the years ended January 31, 2001, 2002, 2003 and 20032004 as the exercise prices for the stock options granted were equal to their fair market value at the time of grant. Had compensation cost for options granted been determined in accordance with the fair value provisions of SFAS No. 123, our net income and net income per share would have been reduced to the pro forma amounts presented below for the years ended January 31:
2001 | 2002 | 2003 | |||||||
Net income as reported | $ | 7,826,004 | $ | 6,607,942 | $ | 10,796,285 | |||
Deduct : Total stock based employee compensation expense not included in reported net income, net |
| 747,355 |
| 422,464 |
| 251,953 | |||
Pro forma net income | $ | 7,078,649 | $ | 6,185,478 | $ | 10,544,332 | |||
Pro forma net income per share: | |||||||||
Basic | $ | 1.08 | $ | 0.95 | $ | 1.65 | |||
Diluted | $ | 1.05 | $ | 0.95 | $ | 1.61 | |||
F-22
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2002 | 2003 | 2004 | |||||||
Net income as reported | $ | 6,607,942 | $ | 10,796,285 | $ | 13,152,136 | |||
Add : Total stock based employee compensation expense included in reported net income, net | — | — | — | ||||||
Deduct : Total stock based employee compensation expense not included in reported net income, net | 422,464 | 251,953 | 460,355 | ||||||
Pro forma net income | $ | 6,185,478 | $ | 10,544,332 | $ | 12,691,781 | |||
Pro forma net income per share: | |||||||||
Basic | $ | 0.95 | $ | 1.65 | $ | 1.65 | |||
Diluted | $ | 0.95 | $ | 1.61 | $ | 1.53 | |||
The fair value of these options was estimated at the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions for 2001, 2002, 2003 and 2003:2004:
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | |||||||||||||
Risk free interest | 6.5 | % | 3.3 | % | 3.9 | % | 3.3 | % | 3.9 | % | 4.2 | % | ||||||
Dividend Yeild | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
Dividend Yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
Volatility factors | 67.9 | % | 67.3 | % | 68.2 | % | 67.3 | % | 68.2 | % | 65.4 | % | ||||||
Weighted average life (years) | 4.5 |
| 1.9 |
| 10.0 |
| 1.9 | 10.0 | 10.0 |
Using the Black-Scholes Option Pricing Model, the estimated weighted-average fair value per option granted in 2001, 2002, 2003 and 20032004 was $4.43, $2.75, $10.84, and $10.84,$15.96, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.
The pro forma amounts may not be representative of the future effects on reported net income and net income per share that will result from the future granting of stock options, since the pro forma compensation expense is allocated over the periods in which options become exercisable and new option awards are granted each year.
F-23
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
22.24. Segment Information
In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information” Information”,the Company’s principal segments are grouped between the generation of revenues from products and royalties. The Licensing segment derives its revenues from royalties associated from the use of its brand names, principally Perry Ellis, John Henry, Manhattan and Munsingwear. The Product segment derives its revenues from the design, import and distribution of apparel to department stores and other retail outlets, principally throughout the United States. Trademark assets and costs have been allocated among the divisions where the brands are shared.
2001 | 2002 | 2003 | 2002 | 2003 | 2004 | |||||||||||||
Revenues: | ||||||||||||||||||
Product | $ | 258,888,480 | $ | 251,310,159 | $ | 277,027,795 | $ | 251,310,159 | $ | 277,027,795 | $ | 484,197,918 | ||||||
Licensing |
| 25,789,975 |
| 26,680,987 |
| 28,812,955 | 26,680,987 | 28,812,955 | 21,717,751 | |||||||||
Total Revenues | $ | 284,678,455 | $ | 277,991,146 | $ | 305,840,750 | $ | 277,991,146 | $ | 305,840,750 | $ | 505,915,669 | ||||||
Operating Income | ||||||||||||||||||
Product | $ | 10,772,903 | $ | 7,882,648 | $ | 11,292,438 | $ | 7,882,648 | $ | 11,292,438 | $ | 30,745,323 | ||||||
Licensing |
| 17,482,217 |
| 16,398,275 |
| 22,114,326 | 16,398,275 | 22,114,326 | 14,046,538 | |||||||||
Total Operating Income | $ | 28,255,120 | $ | 24,280,923 | $ | 33,406,764 | $ | 24,280,923 | $ | 33,406,764 | $ | 44,791,861 | ||||||
Interest Expense | ||||||||||||||||||
Product | $ | 3,353,726 | $ | 1,630,120 | $ | 2,755,490 | $ | 1,630,120 | $ | 2,755,490 | $ | 6,578,305 | ||||||
Licensing |
| 12,412,735 |
| 11,919,626 |
| 13,039,857 | 11,919,626 | 13,039,857 | 9,835,226 | |||||||||
Total Interest Expense | $ | 15,766,461 | $ | 13,549,746 | $ | 15,795,347 | $ | 13,549,746 | $ | 15,795,347 | $ | 16,413,531 | ||||||
Income Tax Provision | ||||||||||||||||||
Product | $ | 2,721,285 | $ | 2,637,938 | $ | 2,416,355 | $ | 2,637,938 | $ | 2,416,355 | $ | 3,825,962 | ||||||
Licensing |
| 1,941,370 |
| 1,402,057 | $ | 4,309,968 | 1,402,057 | $ | 4,309,968 | $ | 3,868,951 | |||||||
Total Income Tax Provision | $ | 4,662,655 | $ | 4,039,995 | $ | 6,726,323 | $ | 4,039,995 | $ | 6,726,323 | $ | 7,694,913 | ||||||
Depreciation and Amortization | ||||||||||||||||||
Product | $ | 1,824,137 | $ | 2,181,229 | $ | 2,819,126 | $ | 2,181,229 | $ | 2,819,126 | $ | 4,412,087 | ||||||
Licensing |
| 4,306,571 |
| 4,480,929 |
| 763,724 | 4,480,929 | 763,724 | 630,916 | |||||||||
Total Depreciation and Amortization | $ | 6,130,708 | $ | 6,662,158 | $ | 3,582,850 | $ | 6,662,158 | $ | 3,582,850 | $ | 5,043,003 | ||||||
Identifiable Assets | ||||||||||||||||||
Product | $ | 113,454,814 | $ | 120,506,469 | $ | 187,210,967 | $ | 120,506,469 | $ | 187,210,967 | $ | 282,520,901 | ||||||
Licensing |
| 127,685,408 |
| 111,057,137 |
| 139,349,018 | 111,057,137 | 139,349,018 | 150,398,249 | |||||||||
Corporate |
| 1,972,860 |
| 2,497,074 |
| 4,677,360 | 2,497,074 | 4,677,360 | 47,481,005 | |||||||||
Total Identifiable Assets | $ | 243,113,082 | $ | 234,060,680 | $ | 331,237,345 | $ | 234,060,680 | $ | 331,237,345 | $ | 480,400,155 | ||||||
23.25. Commitments and Contingencies
The Company has licensing agreements, as licensee, for the use of certain branded and designer labels. The license agreements expire on varying dates through December 31, 2003. Total royalty payments under these license agreements amounted to $1,198,106, $1,635,239, $3,394,820, and $3,394,820$9,032,613 for the years ended January 31, 2001, 2002, 2003 and 2003,2004, respectively, and were classified as cost of sales.
The Company’s main administrative offices, warehouse and distribution facility are located in a 240,000 square foot owned facility in Miami, which was built to our specifications and completed in 1997. This facility is
F-24
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
occupied pursuant to a $11.6 million mortgage. The mortgage has customary covenants and as of January 31, 2003, Perry Ellis was in compliance with these covenants. For purposes of potential future expansion, Perry Ellis has purchased roughly three acres of land adjacent to its facility.
On September 13, 2002, Perry Ellis purchased a 279,000 square foot distribution center in Seneca, South Carolina for $2.5 million cash. Perry Ellis had secured the option to purchase the facility as part of the Jantzen acquisition.
The Company leases three warehouse facilities in Miami totaling approximately 103,000 square feet from its chairman and chief executive officer, to handle the overflow of bulk shipments and the specialty and PING operations. All leases are on a month-to-month basis.
The Company leases fourseveral locations in New York City totaling approximately 25,40097,000 square feet, with leases expiring from August 2005 to December 2012. These locations are used for officesoffice, design and showrooms.showroom space.
The Company leases a retail store in the Sawgrass Mills outlet mall in Sunrise, Florida with 3,600 square feet. This lease expires in June, 2003 with a six month renewal option. Since Perry Ellis began leasing space in the Sawgrass mall in May 2001, it has used this location as a testoperates 38 retail outlet store to sell its brands, principally Perry Ellis America.stores comprising approximately 94,500 square feet of selling space, all of which are leased.
The Company has a lease agreement for office space used by Perry Ellis’ Jantzen swimwear business in Portland, Oregon. This facility totals approximately 45,200 square feet with a lease that expires in December 2004.
In order to monitor production of Perry Ellis products in the Far East, Perry Ellis maintains offices in South Korea, Vietnam and China, and also leaseleases offices jointly with GFX Corporation, a publicly held company controlled by the Chairman of the Board and Chief Executive Officer, in Beijing, China and Taipei, Taiwan.
Minimum aggregate annual commitments for all of the Company’s non-cancelable operating lease commitments are as follows:
Year Ending January 31, |
| Amount | Amount | |||
2004 | $ | 2,028,697 | ||||
2005 |
| 2,013,161 | $ | 13,415,524 | ||
2006 |
| 2,009,875 | 7,135,796 | |||
2007 |
| 2,007,465 | 6,278,397 | |||
2008 |
| 1,692,918 | 5,889,461 | |||
2009 | 1,604,639 | |||||
Future |
| 1,567,354 | 19,630,682 | |||
Total | $ | 11,319,470 | $ | 53,954,499 | ||
Rent expense for these operating leases, including the related party rent payments discussed in Note 2022, amounted to $1,660,632, $2,526,293, $3,032,324, and $3,032,324$7,166,103 for fiscal January 31, 2001, 2002, 2003 and 2003,2004, respectively.
The Company is subject to claims and suits and is the initiator of claims and suits against others, in the ordinary course of business. The Company does not believe that the resolution of any pending claimsmatters will have a material adverse effect on its financial position, results of operations or cash flows.
F-25
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
24. Subsequent Events
Salant Acquisition
On February 3, 2003, the Company entered into a merger agreement with Salant Corporation, the Company’s largest licensee, which provides for the merger of a wholly owned Company subsidiary with Salant. If the merger is completed, Salant will become a wholly owned subsidiary of the Company.
The aggregate merger consideration to be paid by the Company is $91.0 million, comprised of approximately $52.0 million in cash and approximately $39.0 million worth of newly issued Perry Ellis common stock. Salant shareholders will receive approximately $9.37 per share in value comprised of at least $5.35 per share in cash and not more than $4.02 per share of Perry Ellis common stock. The precise fraction of a share of Perry Ellis common stock that the Company will issue in the merger for each Salant share will be determined based on the average closing price of the Perry Ellis common stock for the 20-day period ending three trading days before the anticipated merger closing date. The maximum number of shares of Perry Ellis common stock that may be issued in the Salant acquisition is limited to 3,250,000. The Company expects the transactions costs to be approximately $10.0 million.
Salant licenses the Perry Ellis brand from the Company for men’s s portswear, dress shirts, dress bottoms and accessories and derived approximately $170 million or 70% of its fiscal 2002 revenues from the sale of Perry Ellis products. Salant is the Company’s largest licensee of Perry Ellis branded apparel. The remaining $80 million of Salant’s fiscal 2002 revenue is made up of Salant’s owned brands such as Axis and Tricots St. Raphael, sales under license agreements for use of the JNCO and Ocean Pacific brands, as well as, several private label programs.
F-26
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
25.27. Summarized Quarterly Financial Data (Unaudited)
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | |||||||||||||||||||||||||||
(Dollars in thousands) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||
FISCAL YEAR ENDED JANUARY 31, 2004 | |||||||||||||||||||||||||||||||
Net Sales | $ | 101,867 | $ | 87,066 | $ | 154,955 | $ | 140,310 | $ | 484,198 | |||||||||||||||||||||
Royalty Income | 6,411 | 5,699 | 4,530 | 5,078 | 21,718 | ||||||||||||||||||||||||||
Total Revenues | 108,278 | 92,765 | 159,485 | 145,388 | 505,916 | ||||||||||||||||||||||||||
Gross Profit | 36,733 | 27,913 | 52,674 | 51,174 | 169,494 | ||||||||||||||||||||||||||
Net Income | 5,628 | (2,634 | ) | 1,673 | 8,485 | 13,152 | |||||||||||||||||||||||||
Income per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.87 | $ | (0.36 | ) | $ | 0.20 | $ | 1.00 | $ | 1.71 | ||||||||||||||||||||
Diluted | $ | 0.80 | $ | (0.36 | ) | $ | 0.18 | $ | 0.93 | $ | 1.59 | ||||||||||||||||||||
FISCAL YEAR ENDED JANUARY 31, 2003 | |||||||||||||||||||||||||||||||
Net Sales | $ | 78,619 | $ | 56,394 | $ | 63,037 | $ | 78,978 | $ | 277,028 | $ | 78,619 | $ | 56,394 | $ | 63,037 | $ | 78,978 | $ | 277,028 | |||||||||||
Royalty Income |
| 6,077 |
| 7,600 |
| 7,562 |
| 7,574 |
| 28,813 | 6,077 | 7,600 | 7,562 | 7,574 | 28,813 | ||||||||||||||||
Total Revenues |
| 84,696 |
| 63,994 |
| 70,599 |
| 86,552 |
| 305,841 | 84,696 | 63,994 | 70,599 | 86,552 | 305,841 | ||||||||||||||||
Gross Profit |
| 26,764 |
| 21,459 |
| 24,552 |
| 28,065 |
| 100,840 | 26,764 | 21,459 | 24,552 | 28,065 | 100,840 | ||||||||||||||||
Net Income |
| 4,767 |
| 2,182 |
| 1,063 |
| 2,784 |
| 10,796 | 4,767 | 2,182 | 1,063 | 2,784 | 10,797 | ||||||||||||||||
Income per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.75 | $ | 0.34 | $ | 0.17 | $ | 0.43 | $ | 1.69 | $ | 0.75 | $ | 0.34 | $ | 0.17 | $ | 0.43 | $ | 1.69 | |||||||||||
Diluted | $ | 0.75 | $ | 0.34 | $ | 0.16 | $ | 0.41 | $ | 1.65 | $ | 0.75 | $ | 0.34 | $ | 0.16 | $ | 0.41 | $ | 1.65 | |||||||||||
FISCAL YEAR ENDED JANUARY 31, 2002 | |||||||||||||||||||||||||||||||
Net Sales | $ | 80,463 | $ | 58,712 | $ | 59,957 | $ | 52,178 | $ | 251,310 | $ | 80,463 | $ | 58,712 | $ | 59,957 | $ | 52,178 | $ | 251,310 | |||||||||||
Royalty Income |
| 6,065 |
| 6,858 |
| 6,403 |
| 7,355 |
| 26,681 | 6,065 | 6,858 | 6,403 | 7,355 | 26,681 | ||||||||||||||||
Total Revenues |
| 86,528 |
| 65,570 |
| 66,360 |
| 59,533 |
| 277,991 | 86,528 | 65,570 | 66,360 | 59,533 | 277,991 | ||||||||||||||||
Gross Profit |
| 25,747 |
| 20,458 |
| 18,988 |
| 21,197 |
| 86,390 | 25,747 | 20,458 | 18,988 | 21,197 | 86,390 | ||||||||||||||||
Net Income |
| 3,198 |
| 1,486 |
| 970 |
| 954 |
| 6,608 | 3,198 | 1,486 | 970 | 954 | 6,608 | ||||||||||||||||
Income per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.49 | $ | 0.23 | $ | 0.15 | $ | 0.15 | $ | 1.01 | $ | 0.49 | $ | 0.23 | $ | 0.15 | $ | 0.15 | $ | 1.01 | |||||||||||
Diluted | $ | 0.49 | $ | 0.23 | $ | 0.15 | $ | 0.15 | $ | 1.01 | $ | 0.49 | $ | 0.23 | $ | 0.15 | $ | 0.15 | $ | 1.01 | |||||||||||
FISCAL YEAR ENDED JANUARY 31, 2001 | |||||||||||||||||||||||||||||||
Net Sales | $ | 77,530 | $ | 58,218 | $ | 63,767 | $ | 59,373 | $ | 258,888 | |||||||||||||||||||||
Royalty Income |
| 6,093 |
| 6,747 |
| 6,275 |
| 6,675 |
| 25,790 | |||||||||||||||||||||
Total Revenues |
| 83,623 |
| 64,965 |
| 70,042 |
| 66,048 |
| 284,678 | |||||||||||||||||||||
Gross Profit |
| 24,751 |
| 20,200 |
| 18,532 |
| 20,312 |
| 83,795 | |||||||||||||||||||||
Net Income |
| 3,590 |
| 1,818 |
| 351 |
| 2,067 |
| 7,826 | |||||||||||||||||||||
Income per share: | |||||||||||||||||||||||||||||||
Basic | $ | 0.53 | $ | 0.27 | $ | 0.05 | $ | 0.31 | $ | 1.17 | |||||||||||||||||||||
Diluted | $ | 0.53 | $ | 0.27 | $ | 0.05 | $ | 0.31 | $ | 1.16 |
26.28. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
The Company has senior secured debt outstanding, some of which is guaranteed by certain of the Company’s subsidiaries (the “Guarantors”). 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 January 31, 20032004 and January 31, 2002,2003, and for the three years ended January 31, 2003.2004. 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.
F-27
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of JanuaryAS OF JANUARY 31, 20032004
Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | (44,791 | ) | $ | 3,533,055 |
| $ | 1,194,913 |
| $ | — |
| $ | 4,683,177 |
| $ | (236,821 | ) | $ | (600,218 | ) | $ | 1,848,259 | $ | 1,011,220 | |||||||||||||||
Accounts receivable, net |
| 1,072,969 |
|
| 78,161,200 |
|
| 255,570 |
|
| — |
|
| 79,489,739 |
| 5,321 | 115,204,562 | 468,047 | 115,677,930 | |||||||||||||||||||||
Intercompany receivable—Guarantors |
| — |
|
| 53,636,456 |
|
| — |
|
| (53,636,456 | ) |
| — |
| |||||||||||||||||||||||||
Intercompany receivable—Non Guarantors |
| — |
|
| 582,410 |
|
| — |
|
| (582,410 | ) |
| — |
| |||||||||||||||||||||||||
Intercompany receivable - Guarantors | — | 45,867,939 | — | (45,867,939 | ) | — | ||||||||||||||||||||||||||||||||||
Intercompany receivable - Non Guarantors | — | (2,577,307 | ) | — | 2,577,307 | — | ||||||||||||||||||||||||||||||||||
Inventories, net |
| — |
|
| 50,908,167 |
|
| 398,307 |
|
| — |
|
| 51,306,474 |
| — | 110,241,878 | 667,693 | 110,909,571 | |||||||||||||||||||||
Deferred income taxes |
| — |
|
| 2,957,765 |
|
| — |
|
| — |
|
| 2,957,765 |
| — | 9,621,411 | — | 9,621,411 | |||||||||||||||||||||
Prepaid income taxes |
| — |
|
| 3,361,650 |
|
| — |
|
| — |
|
| 3,361,650 |
| — | — | — | 5,002,043 | 5,002,043 | ||||||||||||||||||||
Other current assets |
| 285,385 |
|
| 3,819,382 |
|
| — |
|
| — |
|
| 4,104,767 |
| 1,078,093 | 5,339,582 | — | 6,417,675 | |||||||||||||||||||||
Total current assets |
| 1,313,563 |
|
| 196,960,085 |
|
| 1,848,790 |
|
| (54,218,866 | ) |
| 145,903,572 |
| 846,593 | 283,097,847 | 2,983,999 | (38,288,589 | ) | 248,639,850 | |||||||||||||||||||
Property and equipment, net |
| — |
|
| 31,019,320 |
|
| 29,556 |
|
| 31,048,876 |
| 138,842 | 38,932,207 | 21,530 | 39,092,579 | ||||||||||||||||||||||||
Intangible assets, net |
| 15,490,786 |
|
| 126,695,276 |
|
| — |
|
| 142,186,062 |
| — | 152,265,790 | — | 152,265,790 | ||||||||||||||||||||||||
Investment in subsidiaries |
| 74,553,931 |
|
| — |
|
| — |
|
| (74,553,931 | ) |
| — |
| 178,660,330 | — | — | (178,660,330 | ) | — | |||||||||||||||||||
Deferred income taxes | 42,382,531 | (13,791,979 | ) | 28,590,552 | ||||||||||||||||||||||||||||||||||||
Other |
| 837,500 |
|
| 11,261,335 |
|
| — |
|
| 12,098,835 |
| 5,379,065 | 6,432,319 | — | 11,811,384 | ||||||||||||||||||||||||
TOTAL | $ | 92,195,780 |
| $ | 365,936,016 |
| $ | 1,878,346 |
| $ | (128,772,797 | ) | $ | 331,237,345 |
| $ | 185,024,830 | $ | 523,110,694 | $ | 3,005,529 | $ | (230,740,898 | ) | $ | 480,400,155 | ||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 124,806 |
| $ | 12,501,910 |
| $ | 193,452 |
| $ | — |
| $ | 12,820,168 |
| $ | 84,360 | $ | 31,088,390 | $ | 471,428 | $ | 31,644,178 | |||||||||||||||||
Accrued expenses |
| 242,248 |
|
| 4,812,742 |
|
| 3,758 |
|
| — |
|
| 5,058,748 |
| 160,770 | 16,189,335 | — | 16,350,105 | |||||||||||||||||||||
Intercompany payable—Parent |
| (5,351,406 | ) |
| 59,034,006 |
|
| 579,360 |
|
| (54,261,960 | ) |
| — |
| |||||||||||||||||||||||||
Intercompany payable - Parent | (68,685,314 | ) | 201,910,065 | 609,949 | (133,834,700 | ) | — | |||||||||||||||||||||||||||||||||
Income taxes payable |
| (151,616 | ) |
| 123,305 |
|
| 28,311 |
|
| — |
|
| — |
| (89,776 | ) | (5,209,009 | ) | 296,742 | 5,002,043 | — | ||||||||||||||||||
Accrued interest payable |
| — |
|
| 4,674,929 |
|
| — |
|
| — |
|
| 4,674,929 |
| 2,218,750 | 1,521,738 | — | — | 3,740,488 | ||||||||||||||||||||
Unearned revenues |
| 129,454 |
|
| 1,865,100 |
|
| — |
|
| — |
|
| 1,994,554 |
| — | 983,984 | — | — | 983,984 | ||||||||||||||||||||
Other current liabilities |
| — |
|
| 1,449,615 |
|
| 7,807 |
|
| — |
|
| 1,457,422 |
| — | 2,919,782 | 71,127 | — | 2,990,909 | ||||||||||||||||||||
Total current liabilities |
| (5,006,514 | ) |
| 84,461,607 |
|
| 812,688 |
|
| (54,261,960 | ) |
| 26,005,821 |
| (66,311,210 | ) | 249,404,285 | 1,449,246 | (128,832,657 | ) | 55,709,664 | ||||||||||||||||||
Senior subordinated notes payable, net |
| (2,199,492 | ) |
| 101,380,072 |
|
| — |
|
| — |
|
| 99,180,580 |
| 100,454,235 | 50,000,000 | — | 150,454,235 | |||||||||||||||||||||
Senior secured notes payable, net |
| — |
|
| 60,729,796 |
|
| — |
|
| — |
|
| 60,729,796 |
| — | 60,389,322 | — | 60,389,322 | |||||||||||||||||||||
Senior credit facility |
| — |
|
| 22,922,287 |
|
| — |
|
| — |
|
| 22,922,287 |
| — | 34,714,584 | — | 34,714,584 | |||||||||||||||||||||
Real estate mortgage |
| — |
|
| 11,600,000 |
|
| 556,922 |
|
| (556,922 | ) |
| 11,600,000 |
| — | 11,600,000 | 665,125 | (665,125 | ) | 11,600,000 | |||||||||||||||||||
Deferred income tax |
| — |
|
| 10,694,595 |
|
| — |
|
| — |
|
| 10,694,595 |
| — | 13,791,979 | (13,791,979 | ) | — | ||||||||||||||||||||
Deferred pension obligation | — | 15,733,784 | 15,733,784 | |||||||||||||||||||||||||||||||||||||
Total long-term liabilities |
| (2,199,492 | ) |
| 207,326,750 |
|
| 556,922 |
|
| (556,922 | ) |
| 205,127,258 |
| 100,454,235 | 186,229,669 | 665,125 | (14,457,104 | ) | 272,891,925 | |||||||||||||||||||
Total liabilities |
| (7,206,006 | ) |
| 291,788,357 |
|
| 1,369,610 |
|
| (54,818,882 | ) |
| 231,133,079 |
| 34,143,025 | 435,633,954 | 2,114,371 | (143,289,761 | ) | 328,601,589 | |||||||||||||||||||
Minority Interest |
| 702,449 |
|
| 31 |
|
| 702,480 |
| 916,730 | 31 | 916,761 | ||||||||||||||||||||||||||||
Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||||||
Preferred stock $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — | ||||||||||||||||||||||||
Common stock $.01 par value; 30,000,000 shares authorized; 6,425,641 shares issued and outstanding |
| 64,257 |
|
| 100 |
|
| 63 |
|
| (163 | ) |
| 64,257 |
| |||||||||||||||||||||||||
Common stock $.01 par value; 30,000,000 shares authorized; 8,470,700 shares issued and outstanding as of January 31, 2004 | 84,708 | 100 | 63 | (163 | ) | 84,708 | ||||||||||||||||||||||||||||||||||
Additional paid-in-capital |
| 27,198,094 |
|
| 27,198,094 |
| 66,073,881 | 66,073,881 | ||||||||||||||||||||||||||||||||
Contributing Capital |
| — |
|
| 3,997,338 |
|
| (3,997,338 | ) |
| — |
| — | 3,997,338 | (3,997,338 | ) | — | |||||||||||||||||||||||
Retained earnings |
| 72,182,529 |
|
| 70,252,092 |
|
| (252,553 | ) |
| (69,999,539 | ) |
| 72,182,529 |
| 85,334,665 | 83,459,663 | (219,636 | ) | (83,240,027 | ) | 85,334,665 | ||||||||||||||||||
Accumulated other comprehensive income |
| (43,094 | ) |
| (101,871 | ) |
| 58,777 |
|
| 43,094 |
|
| (43,094 | ) | 321,844 | 19,639 | 194,001 | (213,640 | ) | 321,844 | |||||||||||||||||||
Total |
| 99,401,786 |
|
| 74,147,659 |
|
| (193,713 | ) |
| (73,953,946 | ) |
| 99,401,786 |
| 151,815,098 | 87,476,740 | (25,572 | ) | (87,451,168 | ) | 151,815,098 | ||||||||||||||||||
Common stock in treasury at cost | (933,293 | ) | (933,293 | ) | ||||||||||||||||||||||||||||||||||||
Total stockholders’ equity |
| 99,401,786 |
|
| 74,147,659 |
|
| (193,713 | ) |
| (73,953,946 | ) |
| 99,401,786 |
| 150,881,805 | 87,476,740 | (25,572 | ) | (87,451,168 | ) | 150,881,805 | ||||||||||||||||||
TOTAL | $ | 92,195,780 |
| $ | 365,936,016 |
| $ | 1,878,346 |
| $ | (128,772,797 | ) | $ | 331,237,345 |
| $ | 185,024,830 | $ | 523,110,694 | $ | 3,005,529 | $ | (230,740,898 | ) | $ | 480,400,155 | ||||||||||||||
F-28
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of JanuaryAS OF JANUARY 31, 20022003
Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | — |
| $ | 124,998 |
| $ | 1,178,980 |
| $ | — |
| $ | 1,303,978 |
| $ | (44,791 | ) | $ | 3,533,055 | $ | 1,194,913 | $ | 4,683,177 | ||||||||||||||||
Accounts receivable, net |
| 793,111 |
|
| 48,978,288 |
|
| 712,804 |
|
| (113,958 | ) |
| 50,370,245 |
| 1,072,969 | 78,161,200 | 255,570 | 79,489,739 | |||||||||||||||||||||
Intercompany receivable—Guarantors |
| — |
|
| 456,813 |
|
| — |
|
| (456,813 | ) |
| — |
| |||||||||||||||||||||||||
Intercompany receivable—Non-Guarantors |
| — |
|
| 698,854 |
|
| — |
|
| (698,854 | ) |
| — |
| |||||||||||||||||||||||||
Inventories |
| — |
|
| 45,317,126 |
|
| 91,921 |
|
| — |
|
| 45,409,047 |
| |||||||||||||||||||||||||
Intercompany receivable - Guarantors | — | 53,636,456 | — | (53,636,456 | ) | — | ||||||||||||||||||||||||||||||||||
Intercompany receivable - Non Guarantors | — | 582,410 | — | (582,410 | ) | — | ||||||||||||||||||||||||||||||||||
Inventories, net | — | 50,908,167 | 398,307 | 51,306,474 | ||||||||||||||||||||||||||||||||||||
Deferred income taxes |
| — |
|
| 1,951,553 |
|
| — |
|
| 432,763 |
|
| 2,384,316 |
| — | 2,957,765 | — | 2,957,765 | |||||||||||||||||||||
Prepaid income taxes | — | 3,361,650 | — | 3,361,650 | ||||||||||||||||||||||||||||||||||||
Other current assets |
| 188,616 |
|
| 1,697,547 |
|
| — |
|
| — |
|
| 1,886,163 |
| 285,385 | 3,819,382 | — | 4,104,767 | |||||||||||||||||||||
Total current assets |
| 981,727 |
|
| 99,225,179 |
|
| 1,983,705 |
|
| (836,862 | ) |
| 101,353,749 |
| 1,313,563 | 196,960,085 | 1,848,790 | (54,218,866 | ) | 145,903,572 | |||||||||||||||||||
Property and equipment, net |
| — |
|
| 10,862,844 |
|
| 34,490 |
|
| — |
|
| 10,897,334 |
| — | 31,019,320 | 29,556 | 31,048,876 | |||||||||||||||||||||
Intangible assets, net |
| 15,568,834 |
|
| 102,370,060 |
|
| — |
|
| — |
|
| 117,938,894 |
| 15,490,786 | 126,695,276 | — | 142,186,062 | |||||||||||||||||||||
Investment in subsidiaries |
| 60,458,653 |
|
| — |
|
| — |
|
| (60,458,653 | ) |
| — |
| 74,553,931 | — | — | (74,553,931 | ) | — | |||||||||||||||||||
Other |
| 309,656 |
|
| 3,561,047 |
|
| — |
|
| — |
|
| 3,870,703 |
| 837,500 | 11,261,335 | — | 12,098,835 | |||||||||||||||||||||
TOTAL | $ | 77,318,870 |
| $ | 216,019,130 |
| $ | 2,018,195 |
| $ | (61,295,515 | ) | $ | 234,060,680 |
| $ | 92,195,780 | $ | 365,936,016 | $ | 1,878,346 | $ | (128,772,797 | ) | $ | 331,237,345 | ||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | — |
| $ | 5,908,727 |
| $ | 171,599 |
| $ | (113,958 | ) | $ | 5,966,368 |
| $ | 124,806 | $ | 12,501,910 | $ | 193,452 | $ | 12,820,168 | |||||||||||||||||
Accrued expenses |
| 325,960 |
|
| 2,903,642 |
|
| 30,000 |
|
| — |
|
| 3,259,602 |
| 242,248 | 4,812,742 | 3,758 | 5,058,748 | |||||||||||||||||||||
Intercompany payable—Parent |
| (10,461,582 | ) |
| 11,040,148 |
|
| 698,854 |
|
| (1,277,420 | ) |
| — |
| |||||||||||||||||||||||||
Intercompany payable - Parent | (5,351,406 | ) | 59,034,006 | 579,360 | (54,261,960 | ) | — | |||||||||||||||||||||||||||||||||
Income taxes payable |
| — |
|
| 2,607,686 |
|
| 160,105 |
|
| (1,386,240 | ) |
| 1,381,551 |
| (151,616 | ) | 123,305 | 28,311 | — | — | |||||||||||||||||||
Accrued interest payable |
| — |
|
| 3,808,997 |
|
| — |
|
| — |
|
| 3,808,997 |
| — | 4,674,929 | — | — | 4,674,929 | ||||||||||||||||||||
Current portion—senior credit facility |
| — |
|
| 21,819,334 |
|
| (63,240 | ) |
| — |
|
| 21,756,094 |
| |||||||||||||||||||||||||
Unearned revenues |
| 250,954 |
|
| 1,587,975 |
|
| — |
|
| — |
|
| 1,838,929 |
| 129,454 | 1,865,100 | — | — | 1,994,554 | ||||||||||||||||||||
Other current liabilities |
| — |
|
| 2,319,622 |
|
| 90,961 |
|
| — |
|
| 2,410,583 |
| — | 1,449,615 | 7,807 | — | 1,457,422 | ||||||||||||||||||||
Total current liabilities |
| (9,884,668 | ) |
| 51,996,131 |
|
| 1,088,279 |
|
| (2,777,618 | ) |
| 40,422,124 |
| (5,006,514 | ) | 84,461,607 | 812,688 | (54,261,960 | ) | 26,005,821 | ||||||||||||||||||
Senior subordinated notes payable, net |
| — |
|
| 99,071,515 |
|
| — |
|
| — |
|
| 99,071,515 |
| (2,199,492 | ) | 101,380,072 | — | 99,180,580 | ||||||||||||||||||||
Senior secured notes payable, net | — | 60,729,796 | — | 60,729,796 | ||||||||||||||||||||||||||||||||||||
Senior credit facility | — | 22,922,287 | — | 22,922,287 | ||||||||||||||||||||||||||||||||||||
Real estate mortgage | — | 11,600,000 | 556,922 | (556,922 | ) | 11,600,000 | ||||||||||||||||||||||||||||||||||
Deferred income tax |
| — |
|
| 4,930,829 |
|
| — |
|
| 1,819,003 |
|
| 6,749,832 |
| — | 10,694,595 | 10,694,595 | ||||||||||||||||||||||
Total long-term liabilities |
| — |
|
| 104,002,344 |
|
| — |
|
| 1,819,003 |
|
| 105,821,347 |
| (2,199,492 | ) | 207,326,750 | 556,922 | (556,922 | ) | 205,127,258 | ||||||||||||||||||
Total liabilities |
| (9,884,668 | ) |
| 155,998,475 |
|
| 1,088,279 |
|
| (958,615 | ) |
| 146,243,471 |
| (7,206,006 | ) | 291,788,357 | 1,369,610 | (54,818,882 | ) | 231,133,079 | ||||||||||||||||||
Minority Interest |
| — |
|
| — |
|
| 613,671 |
|
| — |
|
| 613,671 |
| 702,449 | 31 | 702,480 | ||||||||||||||||||||||
Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||||||
Preferred stock $.01 par value; 1,000,000 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 |
| |||||||||||||||||||||||||
Common stock $.01 par value; 30,000,000 shares authorized; 6,425,641 shares issued and outstanding as of January 31, 2003 | 64,257 | 100 | 63 | (163 | ) | 64,257 | ||||||||||||||||||||||||||||||||||
Additional paid-in-capital |
| 26,286,040 |
|
| — |
|
| — |
|
| 26,286,040 |
| 27,198,094 | 27,198,094 | ||||||||||||||||||||||||||
Contributing Capital | — | 3,997,338 | (3,997,338 | ) | — | |||||||||||||||||||||||||||||||||||
Retained earnings |
| 61,386,244 |
|
| 60,142,308 |
|
| (240,709 | ) |
| (59,901,599 | ) |
| 61,386,244 |
| 72,182,529 | 70,252,092 | (252,553 | ) | (69,999,539 | ) | 72,182,529 | ||||||||||||||||||
Accumulated other comprehensive income |
| (121,753 | ) |
| (121,753 | ) |
| 121,753 |
|
| (121,753 | ) | (43,094 | ) | (101,871 | ) | 58,777 | 43,094 | (43,094 | ) | ||||||||||||||||||||
Total |
| 87,613,905 |
|
| 60,020,655 |
|
| 316,245 |
|
| (60,336,900 | ) |
| 87,613,905 |
| 99,401,786 | 74,147,659 | (193,713 | ) | (73,953,946 | ) | 99,401,786 | ||||||||||||||||||
Treasury stock at cost |
| (410,367 | ) |
| — |
|
| — |
|
| — |
|
| (410,367 | ) | |||||||||||||||||||||||||
Common stock in treasury at cost | ||||||||||||||||||||||||||||||||||||||||
Total stockholders’ equity |
| 87,203,538 |
|
| 60,020,655 |
|
| 316,245 |
|
| (60,336,900 | ) |
| 87,203,538 |
| 99,401,786 | 74,147,659 | (193,713 | ) | (73,953,946 | ) | 99,401,786 | ||||||||||||||||||
TOTAL | $ | 77,318,870 |
| $ | 216,019,130 |
| $ | 2,018,195 |
| $ | (61,295,515 | ) | $ | 234,060,680 |
| $ | 92,195,780 | $ | 365,936,016 | $ | 1,878,346 | $ | (128,772,797 | ) | $ | 331,237,345 | ||||||||||||||
F-29
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Twelve Months Ended JanuaryFOR THE TWELVE MONTHS ENDED JANUARY 31, 20032004
Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||||||||
Net sales | $ | — |
| $ | 274,105,096 | $ | 2,922,699 |
| $ | — |
| $ | 277,027,795 | $ | — | $ | 479,100,686 | $ | 5,097,232 | $ | — | $ | 484,197,918 | ||||||||||||
Royalty income |
| 4,450,886 |
|
| 24,362,069 |
| — |
|
| — |
|
| 28,812,955 | — | 24,747,154 | — | (3,029,403 | ) | 21,717,751 | ||||||||||||||||
Total revenues |
| 4,450,886 |
|
| 298,467,165 |
| 2,922,699 |
|
| — |
|
| 305,840,750 | — | 503,847,840 | 5,097,232 | (3,029,403 | ) | 505,915,669 | ||||||||||||||||
Cost of sales |
| 203,199,604 |
| 1,801,352 |
|
| — |
|
| 205,000,956 | — | 336,706,134 | 2,745,150 | (3,029,403 | ) | 336,421,881 | |||||||||||||||||||
Gross profit |
| 4,450,886 |
|
| 95,267,561 |
| 1,121,347 |
|
| — |
|
| 100,839,794 | — | 167,141,706 | 2,352,082 | — | 169,493,788 | |||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses |
| 3,384,059 |
|
| 59,560,489 |
| 905,632 |
|
| — |
|
| 63,850,180 | 1,459 | 117,858,151 | 1,799,320 | — | 119,658,924 | |||||||||||||||||
Depreciation and amortization |
| 3,577,915 |
| 4,935 |
|
| — |
|
| 3,582,850 | 138,773 | 4,892,508 | 11,722 | — | 5,043,003 | ||||||||||||||||||||
Total operating expenses |
| 3,384,059 |
|
| 63,138,404 |
| 910,567 |
|
| — |
|
| 67,433,030 | 140,232 | 122,750,659 | 1,811,042 | — | 124,701,927 | |||||||||||||||||
Operating income |
| 1,066,827 |
|
| 32,129,157 |
| 210,780 |
|
| — |
|
| 33,406,764 | (140,232 | ) | 44,391,053 | 541,040 | — | 44,791,866 | ||||||||||||||||
Costs on early extinguishment of debt | — | 7,317,000 | — | — | 7,317,000 | ||||||||||||||||||||||||||||||
Interest expense |
| (63,181 | ) |
| 15,854,307 |
| 4,221 |
|
| — |
|
| 15,795,347 | 6 | 16,411,222 | 2,303 | — | 16,413,531 | |||||||||||||||||
Income before minority interest and income taxes |
| 1,130,008 |
|
| 16,274,850 |
| 206,559 |
|
| — |
|
| 17,611,417 | (140,238 | ) | 20,662,825 | 538,737 | — | 21,061,330 | ||||||||||||||||
Minority interest |
| — |
|
| — |
| 88,809 |
|
| — |
|
| 88,809 | — | — | 214,281 | — | 214,281 | |||||||||||||||||
Equity in earnings of subsidiaries, net |
| (10,097,940 | ) |
| — |
| — |
|
| 10,097,940 |
|
| — | (13,240,488 | ) | — | — | 13,240,488 | — | ||||||||||||||||
Income taxes |
| 431,663 |
|
| 6,165,065 |
| 129,595 |
|
| — |
|
| 6,726,323 | (51,886 | ) | 7,455,260 | 291,539 | — | 7,694,913 | ||||||||||||||||
Net income | $ | 10,796,285 |
| $ | 10,109,785 | $ | (11,845 | ) | $ | (10,097,940 | ) | $ | 10,796,285 | $ | 13,152,136 | $ | 13,207,565 | $ | 32,917 | $ | (13,240,488 | ) | $ | 13,152,136 | |||||||||||
F-30
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Twelve Months Ended JanuaryFOR THE TWELVE MONTHS ENDED JANUARY 31, 20022003
Parent Only | Guarantors | Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||||||
Net sales | $ | — |
| $ | 242,249,314 | $ | 9,060,845 |
| $ | — |
| $ | 251,310,159 | $ | — | $ | 274,105,096 | $ | 2,922,699 | $ | — | $ | 277,027,795 | |||||||||||||
Royalty income |
| 4,239,465 |
|
| 22,441,522 |
| — |
|
| — |
|
| 26,680,987 | 4,450,886 | 24,362,069 | — | — | 28,812,955 | ||||||||||||||||||
Total revenues |
| 4,239,465 |
|
| 264,690,836 |
| 9,060,845 |
|
| — |
|
| 277,991,146 | 4,450,886 | 298,467,165 | 2,922,699 | — | 305,840,750 | ||||||||||||||||||
Cost of sales |
| 185,475,889 |
| 6,125,322 |
|
| — |
|
| 191,601,211 | 203,199,604 | 1,801,352 | — | 205,000,956 | ||||||||||||||||||||||
Gross profit |
| 4,239,465 |
|
| 79,214,947 |
| 2,935,523 |
|
| — |
|
| 86,389,935 | 4,450,886 | 95,267,561 | 1,121,347 | — | 100,839,794 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses |
| 2,405,100 |
|
| 50,023,547 |
| 3,018,207 |
|
| — |
|
| 55,446,854 | 3,384,059 | 59,560,489 | 905,632 | — | 63,850,180 | ||||||||||||||||||
Depreciation and amortization |
| 533,583 |
|
| 5,990,778 |
| 137,797 |
|
| — |
|
| 6,662,158 | 3,577,915 | 4,935 | — | 3,582,850 | |||||||||||||||||||
Total operating expenses |
| 2,938,683 |
|
| 56,014,325 |
| 3,156,004 |
|
| — |
|
| 62,109,012 | 3,384,059 | 63,138,404 | 910,567 | — | 67,433,030 | ||||||||||||||||||
Operating income |
| 1,300,782 |
|
| 23,200,622 |
| (220,481 | ) |
| — |
|
| 24,280,923 | 1,066,827 | 32,129,157 | 210,780 | — | 33,406,764 | ||||||||||||||||||
Interest expense |
| (54,123 | ) |
| 13,603,869 |
| 13,549,746 | (63,181 | ) | 15,854,307 | 4,221 | — | 15,795,347 | |||||||||||||||||||||||
Income before minority interest and income taxes |
| 1,354,905 |
|
| 9,596,753 |
| (220,481 | ) |
| — |
|
| 10,731,177 | |||||||||||||||||||||||
Income before minority interest and income tax provision | 1,130,008 | 16,274,850 | 206,559 | — | 17,611,417 | |||||||||||||||||||||||||||||||
Minority interest | — | — | 88,809 | — | 88,809 | |||||||||||||||||||||||||||||||
Equity in earnings of subsidiaries, net |
| (5,780,095 | ) |
| — |
| 83,240 |
|
| 5,780,095 |
|
| 83,240 | (10,097,940 | ) | — | — | 10,097,940 | — | |||||||||||||||||
Income taxes |
| 527,058 |
|
| 3,575,949 |
| (63,012 | ) |
| — |
|
| 4,039,995 | 431,663 | 6,165,065 | 129,595 | — | 6,726,323 | ||||||||||||||||||
Net income | $ | 6,607,942 |
| $ | 6,020,804 | $ | (240,709 | ) | $ | (5,780,095 | ) | $ | 6,607,942 | $ | 10,796,285 | $ | 10,109,785 | $ | (11,845 | ) | $ | (10,097,940 | ) | $ | 10,796,285 | |||||||||||
F-31
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Twelve Months Ended JanuaryFOR THE TWELVE MONTHS ENDED JANUARY 31, 20012002
Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||||||||||||
Net sales | $ | — |
| $ | 258,888,480 | $ | — | $ | — |
| $ | 258,888,480 | $ | — | $ | 242,249,314 | $ | 9,060,845 | $ | — | $ | 251,310,159 | |||||||||||||
Royalty income |
| 3,751,589 |
|
| 22,038,386 |
| — |
| — |
|
| 25,789,975 | 4,239,465 | 22,441,522 | — | — | 26,680,987 | ||||||||||||||||||
Total revenues |
| 3,751,589 |
|
| 280,926,866 |
| — |
| — |
|
| 284,678,455 | 4,239,465 | 264,690,836 | 9,060,845 | — | 277,991,146 | ||||||||||||||||||
Cost of sales |
| 200,883,860 |
| — |
|
| 200,883,860 | 185,475,889 | 6,125,322 | — | 191,601,211 | ||||||||||||||||||||||||
Gross profit |
| 3,751,589 |
|
| 80,043,006 |
| — |
| — |
|
| 83,794,595 | 4,239,465 | 79,214,947 | 2,935,523 | — | 86,389,935 | ||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses |
| 2,230,190 |
|
| 47,178,577 |
| — |
|
| 49,408,767 | 2,405,100 | 50,023,547 | 3,018,207 | — | 55,446,854 | ||||||||||||||||||||
Depreciation and amortization |
| 533,588 |
|
| 5,597,120 |
| — |
|
| 6,130,708 | 533,583 | 5,990,778 | 137,797 | — | 6,662,158 | ||||||||||||||||||||
Total operating expenses |
| 2,763,778 |
|
| 52,775,697 |
| — |
| — |
|
| 55,539,475 | 2,938,683 | 56,014,325 | 3,156,004 | — | 62,109,012 | ||||||||||||||||||
Operating income |
| 987,811 |
|
| 27,267,309 |
| — |
| — |
|
| 28,255,120 | 1,300,782 | 23,200,622 | (220,481 | ) | — | 24,280,923 | |||||||||||||||||
Interest expense |
| (63,066 | ) |
| 15,829,527 |
| 15,766,461 | (54,123 | ) | 13,603,869 | 13,549,746 | ||||||||||||||||||||||||
Income before minority interest |
| 1,050,877 |
|
| 11,437,782 |
| — |
| — |
|
| 12,488,659 | |||||||||||||||||||||||
Minority interest |
| — |
|
| — |
| — |
| — |
|
| — | |||||||||||||||||||||||
Income before minority interest and income tax provision | 1,354,905 | 9,596,753 | (220,481 | ) | — | 10,731,177 | |||||||||||||||||||||||||||||
Equity in earnings of |
| (7,169,206 | ) |
| — |
| — |
| 7,169,206 |
|
| — | (5,780,095 | ) | — | 83,240 | 5,780,095 | 83,240 | |||||||||||||||||
Income taxes |
| 394,079 |
|
| 4,268,576 |
| — |
| — |
|
| 4,662,655 | 527,058 | 3,575,949 | (63,012 | ) | — | 4,039,995 | |||||||||||||||||
Net income | $ | 7,826,004 |
| $ | 7,169,206 | $ | — | $ | (7,169,206 | ) | $ | 7,826,004 | $ | 6,607,942 | $ | 6,020,804 | $ | (240,709 | ) | $ | (5,780,095 | ) | $ | 6,607,942 | |||||||||||
F-32
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Twelve Months Ended JanuaryFOR THE TWELVE MONTHS ENDED JANUARY 31, 20032004
Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 10,796,285 |
| $ | 10,109,785 |
| $ | (11,845 | ) | $ | (10,097,940 | ) | $ | 10,796,285 |
| $ | 13,152,136 | $ | 13,207,565 | $ | 32,917 | $ | (13,240,482 | ) | $ | 13,152,136 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
| — |
|
| 2,778,271 |
|
| 4,934 |
|
| — |
|
| 2,783,205 |
| 37,750 | 3,907,481 | 9,264 | — | 3,954,495 | ||||||||||||||||||||
Provision for bad debt |
| — |
|
| 280,620 |
|
| — |
|
| — |
|
| 280,620 |
| — | 856,697 | — | — | 856,697 | ||||||||||||||||||||
Tax benefit from exercise of stock options | 1,287,427 | — | — | — | 1,287,427 | |||||||||||||||||||||||||||||||||||
Amortization of debt issue cost |
| — |
|
| 918,628 |
|
| — |
|
| — |
|
| 918,628 |
| — | 1,165,310 | — | — | 1,165,310 | ||||||||||||||||||||
Amortization of bond discount |
| — |
|
| 348,741 |
|
| — |
|
| — |
|
| 348,741 |
| — | 324,540 | — | — | 324,540 | ||||||||||||||||||||
Deferred income taxes |
| — |
|
| 3,371,314 |
|
| — |
|
| — |
|
| 3,371,314 |
| — | 7,604,601 | — | — | 7,604,601 | ||||||||||||||||||||
Early extinguishment of debt | — | 7,317,000 | — | — | 7,317,000 | |||||||||||||||||||||||||||||||||||
Minority Interest |
| — |
|
| — |
|
| 88,809 |
|
| — |
|
| 88,809 |
| — | — | 214,281 | — | 214,281 | ||||||||||||||||||||
Equity in earnings of subsidiaries, net |
| (14,095,278 | ) |
| 3,997,338 |
|
| — |
|
| 10,097,940 |
|
| — |
| |||||||||||||||||||||||||
Equity in subsidiaries, net | (103,955,117 | ) | — | — | 103,955,117 | — | ||||||||||||||||||||||||||||||||||
Other |
| 78,659 |
|
| — |
|
| — |
|
| — |
|
| 78,659 |
| 364,938 | (394 | ) | (119,699 | ) | — | 244,845 | ||||||||||||||||||
Changes in operating assets and liabilities (net of effects of acquisitions): | ||||||||||||||||||||||||||||||||||||||||
Accounts receivable, net |
| 4,645,840 |
|
| (34,442,471 | ) |
| 396,517 |
|
| — |
|
| (29,400,114 | ) | (47,137,048 | ) | 114,143,683 | 423,112 | (90,714,635 | ) | (23,284,888 | ) | |||||||||||||||||
Inventories |
| — |
|
| (3,399,899 | ) |
| (306,386 | ) |
| — |
|
| (3,706,285 | ) | — | (14,299,711 | ) | (269,386 | ) | — | (14,569,097 | ) | |||||||||||||||||
Other current assets and prepaid income taxes |
| (96,769 | ) |
| (5,595,256 | ) |
| — |
|
| — |
|
| (5,692,025 | ) | (792,708 | ) | (1,777,593 | ) | — | — | (2,570,301 | ) | |||||||||||||||||
Other assets |
| (527,844 | ) |
| (1,518,554 | ) |
| — |
|
| — |
|
| (2,046,398 | ) | (899,830 | ) | 3,812,120 | — | — | 2,912,290 | |||||||||||||||||||
Accounts payable and accrued expenses |
| 225,572 |
|
| 6,474,697 |
|
| (4,388 | ) |
| — |
|
| 6,695,881 |
| (121,087 | ) | (9,511,867 | ) | 122,100 | — | (9,510,854 | ) | |||||||||||||||||
Income taxes payable |
| (151,616 | ) |
| (1,098,141 | ) |
| (131,794 | ) |
| — |
|
| (1,381,551 | ) | 141,841 | (330,271 | ) | 188,430 | — | — | |||||||||||||||||||
Accrued interest payable |
| — |
|
| 865,932 |
|
| — |
|
| — |
|
| 865,932 |
| 2,218,750 | (3,153,191 | ) | — | — | (934,441 | ) | ||||||||||||||||||
Other current liabilities and unearned revenues |
| (121,500 | ) |
| (592,882 | ) |
| (83,154 | ) |
| — |
|
| (797,536 | ) | — | 589,051 | (66,134 | ) | — | 522,917 | |||||||||||||||||||
Net cash used in operating activities |
| 753,349 |
|
| (17,501,877 | ) |
| (47,307 | ) |
| — |
|
| (16,795,835 | ) | (135,702,948 | ) | 123,855,021 | 534,915 | — | (11,313,042 | ) | ||||||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||||||||||||||||||||||
Purchase of property and equipment |
| — |
|
| (22,076,974 | ) |
| — |
|
| — |
|
| (22,076,974 | ) | (176,592 | ) | (8,495,376 | ) | (1,238 | ) | — | (8,673,206 | ) | ||||||||||||||||
Payment on purchase of intangible assets, net |
| 78,049 |
|
| (220,921 | ) |
| (44,829 | ) |
| — |
|
| (187,701 | ) | — | (1,760,723 | ) | — | — | (1,760,723 | ) | ||||||||||||||||||
Payment for acquired businesses, net of cash acquired |
| — |
|
| (25,084,374 | ) |
| — |
|
| — |
|
| (25,084,374 | ) | 35,554,711 | (70,008,000 | ) | — | — | (34,453,289 | ) | ||||||||||||||||||
Net cash used in investing activities |
| 78,049 |
|
| (47,382,269 | ) |
| (44,829 | ) |
| — |
|
| (47,349,049 | ) | |||||||||||||||||||||||||
Net cash used in investing activities: | 35,378,119 | (80,264,099 | ) | (1,238 | ) | — | (44,887,218 | ) | ||||||||||||||||||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||||||||||||||||||||||
Borrowings (payments) proceeds from senior credit facility | — | 11,792,297 | — | — | 11,792,297 | |||||||||||||||||||||||||||||||||||
Net payments on senior subordinated notes |
| (2,199,492 | ) |
| — |
|
| — |
|
| — |
|
| (2,199,492 | ) | 2,199,492 | (109,516,492 | ) | — | — | (107,317,000 | ) | ||||||||||||||||||
Net (payments) proceeds from senior credit facility |
| — |
|
| 1,102,953 |
|
| 63,240 |
|
| — |
|
| 1,166,193 |
| |||||||||||||||||||||||||
Net proceeds from senior secured notes |
| — |
|
| 55,589,250 |
|
| — |
|
| — |
|
| 55,589,250 |
| |||||||||||||||||||||||||
Net proceeds from senior subordinated notes | 96,812,500 | 50,000,000 | — | — | 146,812,500 | |||||||||||||||||||||||||||||||||||
Net proceeds from real estate mortgage |
| — |
|
| 11,600,000 |
|
| — |
|
| — |
|
| 11,600,000 |
| — | — | — | — | — | ||||||||||||||||||||
Purchase of treasury stock | (933,293 | ) | — | — | — | (933,293 | ) | |||||||||||||||||||||||||||||||||
Proceeds from exercise of stock options |
| 1,323,303 |
|
| — |
|
| — |
|
| — |
|
| 1,323,303 |
| 2,054,100 | — | — | — | 2,054,100 | ||||||||||||||||||||
Net cash provided by financing activities |
| (876,189 | ) |
| 68,292,203 |
|
| 63,240 |
|
| — |
|
| 67,479,254 |
| |||||||||||||||||||||||||
Net cash provided by financing activities: | 100,132,799 | (47,724,195 | ) | — | — | 52,408,604 | ||||||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| — |
|
| — |
|
| 44,829 |
|
| — |
|
| 44,829 |
| — | — | 119,699 | — | 119,699 | ||||||||||||||||||||
NET (DECREASE) INCREASE IN CASH |
| (44,791 | ) |
| 3,408,057 |
|
| 15,933 |
|
| — |
|
| 3,379,199 |
| (192,030 | ) | (4,133,273 | ) | 653,346 | — | (3,671,957 | ) | |||||||||||||||||
CASH AT BEGINNING OF YEAR |
| — |
|
| 124,998 |
|
| 1,178,980 |
|
| — |
|
| 1,303,978 |
| (44,791 | ) | 3,533,055 | 1,194,913 | — | 4,683,177 | |||||||||||||||||||
CASH AT END OF YEAR | $ | (44,791 | ) | $ | 3,533,055 |
| $ | 1,194,913 |
| $ | — |
| $ | 4,683,177 |
| $ | (236,821 | ) | $ | (600,218 | ) | $ | 1,848,259 | $ | — | $ | 1,011,220 | |||||||||||||
F-33
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED JANUARY 31, 2003
Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
Net income (loss) | $ | 10,796,285 | $ | 10,109,785 | $ | (11,845 | ) | $ | (10,097,940 | ) | $ | 10,796,285 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation and amortization | — | 2,778,271 | 4,934 | — | 2,783,205 | |||||||||||||||
Provision for bad debt | — | 280,620 | — | — | 280,620 | |||||||||||||||
Amortization of debt issue cost | — | 918,628 | — | — | 918,628 | |||||||||||||||
Amortization of bond discount | — | 348,741 | — | — | 348,741 | |||||||||||||||
Deferred income taxes | — | 3,371,314 | — | — | 3,371,314 | |||||||||||||||
Minority Interest | — | — | 88,809 | — | 88,809 | |||||||||||||||
Equity in earnings of subsidiaries, net | (14,095,278 | ) | 3,997,338 | 0 | 10,097,940 | — | ||||||||||||||
Other | 78,659 | — | 78,659 | |||||||||||||||||
Changes in operating assets and liabilities (net of effects of acquisitions): | ||||||||||||||||||||
Accounts receivable, net | 4,645,840 | (34,442,471 | ) | 396,517 | — | (29,400,114 | ) | |||||||||||||
Inventories | — | (3,399,899 | ) | (306,386 | ) | — | (3,706,285 | ) | ||||||||||||
Other current assets and prepaid income taxes | (96,769 | ) | (5,595,256 | ) | — | — | (5,692,025 | ) | ||||||||||||
Other assets | (527,844 | ) | (1,518,554 | ) | — | — | (2,046,398 | ) | ||||||||||||
Accounts payable and accrued expenses | 225,572 | 6,474,697 | (4,388 | ) | — | 6,695,881 | ||||||||||||||
Income taxes payable | (151,616 | ) | (1,098,141 | ) | (131,794 | ) | — | (1,381,551 | ) | |||||||||||
Accrued interest payable | — | 865,932 | — | — | 865,932 | |||||||||||||||
Other current liabilities and unearned revenues | (121,500 | ) | (592,882 | ) | (83,154 | ) | — | (797,536 | ) | |||||||||||
Net cash used in operating activities | 753,349 | (17,501,877 | ) | 47,307 | 0 | (16,795,835 | ) | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
Purchase of property and equipment | — | (22,076,974 | ) | — | — | (22,076,974 | ) | |||||||||||||
Payment on purchase of intangible assets, net | 78,049 | (220,921 | ) | (44,829 | ) | — | (187,701 | ) | ||||||||||||
Payment for acquired businesses, net of cash acquired | — | (25,084,374 | ) | — | — | (25,084,374 | ) | |||||||||||||
Net cash used in investing activities: | 78,048 | (47,382,269 | ) | (44,829 | ) | — | (47,349,049 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
Net payments on senior subordinated notes | (2,199,492 | ) | — | — | — | (2,199,492 | ) | |||||||||||||
Net (payments) proceeds from senior credit facility | — | 1,102,953 | 63,240 | — | 1,166,193 | |||||||||||||||
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 | 1,323,303 | — | — | — | 1,323,303 | |||||||||||||||
Net cash provided by financing activities: | (876,189 | ) | 68,292,203 | 63,240 | — | 67,479,254 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 44,829 | — | 44,829 | |||||||||||||||
NET (DECREASE) INCREASE IN CASH | (44,791 | ) | 3,408,057 | 15,933 | — | 3,379,199 | ||||||||||||||
CASH AT BEGINNING OF YEAR | — | 124,998 | 1,178,980 | — | 1,303,978 | |||||||||||||||
CASH AT END OF YEAR | $ | (44,791 | ) | $ | 3,533,055 | $ | 1,194,913 | $ | — | $ | 4,683,177 | |||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Twelve Months Ended JanuaryFOR THE TWELVE MONTHS ENDED JANUARY 31, 2002
Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 6,607,942 |
| $ | 6,020,804 |
| $ | (240,709 | ) | $ | (5,780,095 | ) | $ | 6,607,942 |
| $ | 6,607,942 | $ | 6,020,804 | $ | (240,709 | ) | $ | (5,780,095 | ) | $ | 6,607,942 | |||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
| 533,583 |
|
| 5,657,218 |
|
| — |
|
| — |
|
| 6,190,801 |
| 533,583 | 5,657,218 | — | 6,190,801 | |||||||||||||||||||||
Provision for bad debts |
| — |
|
| 1,575,000 |
|
| — |
|
| — |
|
| 1,575,000 |
| — | 1,575,000 | 1,575,000 | ||||||||||||||||||||||
Amortization of debt issue cost |
| — |
|
| 614,347 |
|
| — |
|
| — |
|
| 614,347 |
| — | 614,347 | — | 614,347 | |||||||||||||||||||||
Amortization of bond discount |
| — |
|
| 164,000 |
|
| — |
|
| — |
|
| 164,000 |
| — | 164,000 | — | 164,000 | |||||||||||||||||||||
Deferred income taxes |
| — |
|
| 1,386,240 |
|
| — |
|
| — |
|
| 1,386,240 |
| — | 1,386,240 | 1,386,240 | ||||||||||||||||||||||
Minority Interest |
| — |
|
| — |
|
| 83,240 |
|
| — |
|
| 83,240 |
| — | — | 83,240 | — | 83,240 | ||||||||||||||||||||
Equity in earnings of subsidiaries, net |
| (6,337,049 | ) |
| — |
|
| 556,954 |
|
| 5,780,095 |
|
| — |
| (6,337,049 | ) | — | 556,954 | 5,780,095 | — | |||||||||||||||||||
Other |
| — |
|
| (64,250 | ) |
| — |
|
| — |
|
| (64,250 | ) | (64,250 | ) | — | (64,250 | ) | ||||||||||||||||||||
Changes in operating assets and liabilities (net of effects of acquisitions): | ||||||||||||||||||||||||||||||||||||||||
Accounts receivable, net |
| 1,756,449 |
|
| 5,133,878 |
|
| 158,183 |
|
| — |
|
| 7,048,510 |
| 1,756,449 | 5,133,878 | 158,183 | 7,048,510 | |||||||||||||||||||||
Inventories |
| — |
|
| (1,760,752 | ) |
| 232,133 |
|
| — |
|
| (1,528,619 | ) | — | (1,760,752 | ) | 232,133 | — | (1,528,619 | ) | ||||||||||||||||||
Other current assets and prepaid income taxes |
| 41,912 |
|
| 478,875 |
|
| 65,659 |
|
| — |
|
| 586,446 |
| 41,912 | 478,875 | 65,659 | — | 586,446 | ||||||||||||||||||||
Other assets |
| 23,102 |
|
| (643,282 | ) |
| (80,864 | ) |
| — |
|
| (701,044 | ) | 23,102 | (643,282 | ) | (80,864 | ) | — | (701,044 | ) | |||||||||||||||||
Accounts payable and accrued expenses |
| (154,034 | ) |
| (1,279,169 | ) |
| 272,642 |
|
| — |
|
| (1,160,561 | ) | (154,034 | ) | (1,279,169 | ) | 272,642 | (1,160,561 | ) | ||||||||||||||||||
Income taxes payable |
| — |
|
| 1,221,446 |
|
| 163,764 |
|
| — |
|
| 1,385,210 |
| — | 1,221,446 | 163,764 | — | 1,385,210 | ||||||||||||||||||||
Accrued interest payable |
| — |
|
| (406,838 | ) |
| (197,930 | ) |
| — |
| �� | (604,768 | ) | — | (406,838 | ) | (197,930 | ) | — | (604,768 | ) | |||||||||||||||||
Other current liabilities and unearned revenues |
| 2,443 |
|
| 507,889 |
|
| 282,022 |
|
| — |
|
| 792,354 |
| 2,443 | 507,889 | 282,022 | — | 792,354 | ||||||||||||||||||||
Net cash provided by operating activities |
| 2,474,348 |
|
| 18,605,406 |
|
| 1,295,094 |
|
| — |
|
| 22,374,848 |
| 2,474,348 | 18,605,406 | 1,295,094 | — | 22,374,848 | ||||||||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||||||||||||||||||||||
Purchase of property and equipment |
| — |
|
| (2,887,440 | ) |
| (34,490 | ) |
| — |
|
| (2,921,930 | ) | — | (2,887,440 | ) | (34,490 | ) | — | (2,921,930 | ) | |||||||||||||||||
Payment on purchase of intangible assets, net |
| (312,513 | ) |
| 213,585 |
|
| — |
|
| — |
|
| (98,928 | ) | (312,513 | ) | 213,585 | — | — | (98,928 | ) | ||||||||||||||||||
Net cash used in investing activities |
| (312,513 | ) |
| (2,673,855 | ) |
| (34,490 | ) |
| — |
|
| (3,020,858 | ) | |||||||||||||||||||||||||
Net cash used in investing activities: | (312,513 | ) | (2,673,855 | ) | (34,490 | ) | — | (3,020,858 | ) | |||||||||||||||||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||||||||||||||||||||||
Net repayments in borrowings under term loan |
| — |
|
| (16,093,792 | ) |
| (63,240 | ) |
| — |
|
| (16,157,032 | ) | — | (16,093,792 | ) | (63,240 | ) | — | (16,157,032 | ) | |||||||||||||||||
Purchase of treasury stock |
| (2,177,256 | ) |
| — |
|
| — |
|
| — |
|
| (2,177,256 | ) | (2,177,256 | ) | — | — | — | (2,177,256 | ) | ||||||||||||||||||
Proceeds from exercise of stock options |
| 15,421 |
|
| — |
|
| — |
|
| — |
|
| 15,421 |
| 15,421 | — | — | — | 15,421 | ||||||||||||||||||||
Net cash used in financing activities |
| (2,161,835 | ) |
| (16,093,792 | ) |
| (63,240 | ) |
| — |
|
| (18,318,867 | ) | |||||||||||||||||||||||||
Net cash used in financing activities: | (2,161,835 | ) | (16,093,792 | ) | (63,240 | ) | — | (18,318,867 | ) | |||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| — |
|
| (57,503 | ) |
| (18,383 | ) |
| — |
|
| (75,886 | ) | — | (57,503 | ) | (18,383 | ) | — | (75,886 | ) | |||||||||||||||||
NET (DECREASE) INCREASE IN CASH |
| — |
|
| (219,744 | ) |
| 1,178,981 |
|
| — |
|
| 959,238 |
| — | (219,744 | ) | 1,178,981 | — | 959,238 | |||||||||||||||||||
CASH AT BEGINNING OF YEAR |
| — |
|
| 344,741 |
|
| — |
|
| — |
|
| 344,741 |
| — | 344,741 | — | — | 344,741 | ||||||||||||||||||||
CASH AT END OF YEAR | $ | — |
| $ | 124,997 |
| $ | 1,178,981 |
| $ | — |
| $ | 1,303,979 |
| $ | — | $ | 124,997 | $ | 1,178,981 | $ | — | $ | 1,303,979 | |||||||||||||||
F-34
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIESExhibit Index
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Twelve Months Ended January 31, 2001
Parent Only | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||||||
Net income (loss) | $ | 7,826,004 |
| $ | 7,169,206 |
| $ | — | $ | (7,169,206 | ) | $ | 7,826,004 |
| |||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||||||||||
Depreciation and amortization |
| 506,226 |
|
| 5,015,536 |
|
| — |
| — |
|
| 5,521,762 |
| |||||
Provision for bad debts |
| 330,435 |
|
| — |
| 330,435 |
| |||||||||||
Amortization of debt issue cost |
| 608,946 |
|
| — |
| — |
|
| 608,946 |
| ||||||||
Amortization of bond discount |
| 164,000 |
|
| — |
| — |
|
| 164,000 |
| ||||||||
Deferred income taxes |
| 2,098,295 |
|
| — |
| 2,098,295 |
| |||||||||||
Equity in earnings of subsidiaries, net |
| (7,169,206 | ) |
| — |
| 7,169,206 |
|
| — |
| ||||||||
Other |
| 67,234 |
|
| — |
| — |
|
| 67,234 |
| ||||||||
Changes in operating assets and liabilities (net of effects of acquisitions): | |||||||||||||||||||
Accounts receivable, net |
| 282,698 |
|
| (13,456,785 | ) |
| — |
| (13,174,087 | ) | ||||||||
Inventories |
| (7,579,495 | ) |
| — |
| — |
|
| (7,579,495 | ) | ||||||||
Other current assets and prepaid income taxes |
| 3,489 |
|
| 1,724,824 |
|
| — |
| — |
|
| 1,728,313 |
| |||||
Other assets |
| 117,490 |
|
| (383,442 | ) |
| — |
| — |
|
| (265,952 | ) | |||||
Accounts payable and accrued expenses |
| (25,922 | ) |
| 629,626 |
|
| — |
| 603,704 |
| ||||||||
Income taxes payable |
| — |
|
| — |
|
| — |
| — |
|
| — |
| |||||
Accrued interest payable |
| — |
|
| (194,796 | ) |
| — |
| — |
|
| (194,796 | ) | |||||
Other current liabilities and unearned revenues |
| 16,230 |
|
| 137,721 |
|
| — |
| — |
|
| 153,951 |
| |||||
Net cash provided by operating activities |
| 1,557,009 |
|
| (3,668,695 | ) |
| — |
| — |
|
| (2,111,686 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||||
Purchase of property and equipment |
| — |
|
| (2,711,741 | ) |
| — |
| — |
|
| (2,711,741 | ) | |||||
Payment on purchase of intangible assets, net |
| (589,917 | ) |
| (2,882,084 | ) |
| (3,472,001 | ) | ||||||||||
Payment for acquired business, net of cash acquired |
| — |
|
| 750,000 |
|
| — |
| — |
|
| 750,000 |
| |||||
Net cash used in investing activities |
| (589,917 | ) |
| (4,843,825 | ) |
| — |
| — |
|
| (5,433,742 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||||
Net proceeds (repayments) under term loan |
| — |
|
| (11,250,000 | ) |
| — |
| — |
|
| (11,250,000 | ) | |||||
Net (payments) proceeds from senior credit facility |
| 19,881,630 |
|
| 19,881,630 |
| |||||||||||||
Tax benefit for exercise of non-qualified stock options |
| 5,327 |
|
| — |
|
| 5,327 |
| ||||||||||
Purchase of treasury stock |
| (1,029,919 | ) |
| — |
|
| — |
| — |
|
| (1,029,919 | ) | |||||
Proceeds from exercise of stock options |
| 57,500 |
|
| — |
|
| — |
| — |
|
| 57,500 |
| |||||
Net cash used in financing activities |
| (967,092 | ) |
| 8,631,630 |
|
| — |
| — |
|
| 7,664,538 |
| |||||
NET (DECREASE) INCREASE IN CASH |
| — |
|
| 119,110 |
|
| — |
| — |
|
| 119,110 |
| |||||
CASH AT BEGINNING OF YEAR |
| — |
|
| 225,631 |
|
| — |
| — |
|
| 225,631 |
| |||||
CASH AT END OF YEAR | $ | — |
| $ | 344,741 |
| $ | — | $ | — |
| $ | 344,741 |
| |||||
F-35
Exhibit No | Description of Exhibit | |
10.59 | Amendment No. 3 to the Senior Credit Facility | |
10.60 | Amendment No. 4 to the Senior Credit Facility | |
10.61 | Employment agreement between Timothy B. Page and the Registrant | |
21.1 | Subsidiaries of Registrant | |
23.1 | Consent of Deloitte & Touche LLP | |
| Certification of Chief Executive Officer pursuant to | |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |