UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 30,July 31, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-21764
PERRY ELLIS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
| Florida | 59-1162998 | |
(State or other jurisdiction of Incorporation or Organization) | (I.R.S. Employer
|
3000 N.W. 107 Avenue Miami, Florida | 33172 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (305) 592-2830
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No ¨
The number of shares outstanding of the registrant’s common stock is 9,500,9249,558,086 (as of June 8,September 7, 2005).
PERRY ELLIS INTERNATIONAL, INC.
INDEX
| PAGE | ||
| PART I: FINANCIAL INFORMATION | ||
| Item 1: | ||
Consolidated Balance Sheets (Unaudited) as of | 1 | |
| 2 | ||
| 3 | ||
| 4 | ||
| Item 2: | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |
| Item 3: | ||
| Item 4: | ||
| 23 | ||
| PART II: OTHER INFORMATION | 24 | |
| Item 4: | ||
| 24 | ||
| Item 6: | ||
| 24 | ||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share data)
| April 30, 2005 | January 31, 2005 | |||||
| ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | 4,760 | $ | 5,398 | ||
Accounts receivable, net | 176,517 | 134,918 | ||||
Inventories, net | 158,437 | 115,321 | ||||
Deferred income taxes | 13,134 | 12,564 | ||||
Prepaid income taxes | 691 | 2,354 | ||||
Other current assets | 5,615 | 7,748 | ||||
Total current assets | 359,154 | 278,303 | ||||
Property and equipment, net | 63,311 | 48,978 | ||||
Intangible assets, net | 177,174 | 160,885 | ||||
Deferred income taxes | 7,329 | 10,216 | ||||
Other assets | 13,715 | 16,578 | ||||
TOTAL | $ | 620,683 | $ | 514,960 | ||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||
Current Liabilities: | ||||||
Accounts payable | $ | 44,091 | $ | 47,492 | ||
Accrued expenses and other liabilities | 25,852 | 17,032 | ||||
Accrued interest payable | 1,802 | 4,800 | ||||
Current portion - real estate mortgage | 143 | 140 | ||||
Unearned revenues | 1,138 | 1,036 | ||||
Total current liabilities | 73,026 | 70,500 | ||||
Senior subordinated notes payable, net | 148,790 | 151,518 | ||||
Senior secured notes payable, net | 57,925 | 58,828 | ||||
Senior credit facility | 107,912 | 10,771 | ||||
Real estate mortgage | 11,356 | 11,393 | ||||
Lease payable long term | 698 | 381 | ||||
Deferred pension obligation | 15,597 | 15,617 | ||||
Total long-term liabilities | 342,278 | 248,508 | ||||
Total liabilities | 415,304 | 319,008 | ||||
Minority Interest | 1,627 | 1,384 | ||||
Stockholders’ Equity: | ||||||
Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding | — | — | ||||
Common stock $.01 par value; 100,000,000 shares authorized; 9,488,993 shares issued and outstanding as of April 30, 2005 and 9,460,444 shares issued and outstanding as of January 31, 2005 | 95 | 95 | ||||
Additional paid-in-capital | 87,956 | 87,544 | ||||
Retained earnings | 115,188 | 106,297 | ||||
Accumulated other comprehensive income | 513 | 632 | ||||
Total stockholders’ equity | 203,752 | 194,568 | ||||
TOTAL | $ | 620,683 | $ | 514,960 | ||
See Notes to Unaudited Consolidated Financial Statements
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands, except per share data)
| Three Months Ended April 30, | ||||||
| 2005 | 2004 | |||||
Revenues | ||||||
Net sales | $ | 220,394 | $ | 192,104 | ||
Royalty income | 5,206 | 5,315 | ||||
Total revenues | 225,600 | 197,419 | ||||
Cost of sales | 152,673 | 134,616 | ||||
Gross profit | 72,927 | 62,803 | ||||
Operating expenses | ||||||
Selling, general and administrative expenses | 51,088 | 44,873 | ||||
Depreciation and amortization | 2,240 | 1,505 | ||||
Total operating expenses | 53,328 | 46,378 | ||||
Operating income | 19,599 | 16,425 | ||||
Interest expense | 5,370 | 3,445 | ||||
Income before minority interest and income taxes | 14,229 | 12,980 | ||||
Minority interest | 243 | 59 | ||||
Income taxes | 5,095 | 4,716 | ||||
Net income | $ | 8,891 | $ | 8,205 | ||
Net income per share | ||||||
Basic | $ | 0.94 | $ | 0.97 | ||
Diluted | $ | 0.89 | $ | 0.89 | ||
Weighted average number of shares outstanding | ||||||
Basic | 9,465 | 8,476 | ||||
Diluted | 10,000 | 9,187 | ||||
| July 31, 2005 | January 31, 2005 | ||||||
| ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 9,819 | $ | 5,398 | |||
Accounts receivable, net | 122,006 | 134,918 | |||||
Inventories, net | 166,278 | 115,321 | |||||
Deferred income taxes | 11,577 | 12,564 | |||||
Prepaid income taxes | 1,300 | 2,354 | |||||
Other current assets | 8,642 | 7,748 | |||||
Total current assets | 319,622 | 278,303 | |||||
Property and equipment, net | 60,333 | 48,978 | |||||
Intangible assets, net | 171,612 | 160,885 | |||||
Deferred income taxes | 8,068 | 10,216 | |||||
Other | 13,206 | 16,578 | |||||
TOTAL | $ | 572,841 | $ | 514,960 | |||
| LIABILITIES & STOCKHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 45,498 | $ | 47,492 | |||
Accrued expenses and other liabilities | 20,836 | 17,032 | |||||
Accrued interest payable | 6,314 | 4,800 | |||||
Current portion of real estate mortgage | 145 | 140 | |||||
Unearned revenues | 1,029 | 1,036 | |||||
Total current liabilities | 73,822 | 70,500 | |||||
Senior subordinated notes payable | 148,831 | 151,518 | |||||
Senior secured notes payable | 57,685 | 58,828 | |||||
Senior credit facility | 61,589 | 10,771 | |||||
Real estate mortgage | 11,320 | 11,393 | |||||
Lease payable long term | 613 | 381 | |||||
Deferred pension obligation | 15,572 | 15,617 | |||||
Total long-term liabilities | 295,610 | 248,508 | |||||
Total liabilities | 369,432 | 319,008 | |||||
Minority Interest | 1,752 | 1,384 | |||||
Stockholders’ Equity: | |||||||
Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding | — | — | |||||
Common stock $.01 par value; 100,000,000 shares authorized; 9,550,322 shares issued and outstanding as of July 31, 2005 and 9,460,444 shares issued and outstanding as of January 31, 2005 | 96 | 95 | |||||
Additional paid-in-capital | 88,980 | 87,544 | |||||
Retained earnings | 112,784 | 106,297 | |||||
Accumulated other comprehensive income (loss) | (203 | ) | 632 | ||||
Total stockholders’ equity | 201,657 | 194,568 | |||||
TOTAL | $ | 572,841 | $ | 514,960 | |||
See Notes to Unaudited Consolidated Financial Statements
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except per share data)
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Revenues | ||||||||||||||
Net sales | $ | 184,298 | $ | 121,049 | $ | 404,692 | $ | 313,153 | ||||||
Royalty income | 5,686 | 5,317 | 10,892 | 10,632 | ||||||||||
Total revenues | 189,984 | 126,366 | 415,584 | 323,785 | ||||||||||
Cost of sales | 136,146 | 88,499 | 288,819 | 223,115 | ||||||||||
Gross profit | 53,838 | 37,867 | 126,765 | 100,670 | ||||||||||
Operating expenses | ||||||||||||||
Selling, general and administrative expenses | 50,017 | 36,528 | 101,106 | 81,401 | ||||||||||
Depreciation and amortization | 2,223 | 1,534 | 4,463 | 3,039 | ||||||||||
Total operating expenses | 52,240 | 38,062 | 105,569 | 84,440 | ||||||||||
Operating income (loss) | 1,598 | (195 | ) | 21,196 | 16,230 | |||||||||
Interest expense | 5,411 | 3,756 | 10,781 | 7,201 | ||||||||||
(Loss) income before minority interest and income taxes | (3,813 | ) | (3,951 | ) | 10,415 | 9,029 | ||||||||
Minority interest | 125 | 95 | 368 | 154 | ||||||||||
Income tax (benefit) provision | (1,534 | ) | (1,403 | ) | 3,560 | 3,313 | ||||||||
Net (loss) income | $ | (2,404 | ) | $ | (2,643 | ) | $ | 6,487 | $ | 5,562 | ||||
Net (loss) income per share | ||||||||||||||
Basic | $ | (0.25 | ) | $ | (0.29 | ) | $ | 0.68 | $ | 0.63 | ||||
Diluted | $ | (0.25 | ) | $ | (0.29 | ) | $ | 0.65 | $ | 0.59 | ||||
Weighted average number of shares outstanding | ||||||||||||||
Basic | 9,512 | 9,126 | 9,489 | 8,787 | ||||||||||
Diluted | 9,512 | 9,126 | 10,013 | 9,466 | ||||||||||
See Notes to Unaudited Consolidated Financial Statements
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
| Three Months Ended April 30, | Six Months Ended July 31, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 8,891 | $ | 8,205 | $ | 6,487 | $ | 5,562 | ||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
Depreciation | 2,040 | 1,280 | ||||||||||||||
Provision for bad debt | 63 | 198 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 4,132 | 2,606 | ||||||||||||||
Provisions for bad debt | 500 | 641 | ||||||||||||||
Tax benefit from exercise of stock options | 114 | 304 | 323 | 379 | ||||||||||||
Amortization of debt issue costs | 226 | 279 | 452 | 564 | ||||||||||||
Amortization of note discount | 50 | 50 | ||||||||||||||
Amortization of bond discount | 142 | 101 | ||||||||||||||
Deferred income taxes | 2,286 | 4,842 | 3,101 | 3,078 | ||||||||||||
Minority interest | 243 | 59 | 368 | 154 | ||||||||||||
Other | (20 | ) | 10 | |||||||||||||
Loss on disposal of assets | 170 | — | ||||||||||||||
Changes in operating assets and liabilities (net of effects of acquisition transaction): | ||||||||||||||||
Accounts receivable, net | (10,163 | ) | (41,215 | ) | 43,911 | 16,600 | ||||||||||
Inventories, net | (6,760 | ) | 21,398 | (11,801 | ) | 32,455 | ||||||||||
Other current assets and prepaid income taxes | 1,043 | 2,475 | (2,593 | ) | 1,683 | |||||||||||
Other assets | 166 | 216 | 158 | (101 | ) | |||||||||||
Accounts payable, accrued expenses and other | (3,734 | ) | (4,021 | ) | (5,742 | ) | (8,426 | ) | ||||||||
Accrued interest payable | (2,998 | ) | (2,292 | ) | 1,514 | 640 | ||||||||||
Unearned revenues | 102 | 185 | (7 | ) | 41 | |||||||||||
Net cash used in operating activities | (8,451 | ) | (8,027 | ) | ||||||||||||
Net cash provided by operating activities | 41,115 | 55,977 | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Purchase of property and equipment | (2,597 | ) | (2,126 | ) | (6,617 | ) | (5,979 | ) | ||||||||
Payment for acquired business, net of cash acquired | (86,888 | ) | — | |||||||||||||
Payment on purchase of intangible assets | — | (3,565 | ) | |||||||||||||
Payment for acquired businesses, net of cash acquired | (79,823 | ) | — | |||||||||||||
Net cash used in investing activities | (89,485 | ) | (2,126 | ) | (86,440 | ) | (9,544 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from stock issuance | — | 21,159 | ||||||||||||||
Borrowings from senior credit facility | 166,518 | 77,201 | 191,428 | 80,237 | ||||||||||||
Payments on senior credit facility | (69,377 | ) | (60,096 | ) | (140,610 | ) | (114,952 | ) | ||||||||
Payments on termination of swap agreements | (1,210 | ) | — | |||||||||||||
Payments on real estate mortgage | (34 | ) | — | (68 | ) | — | ||||||||||
Other financing activities | 12 | — | ||||||||||||||
Payments on capital leases | (73 | ) | — | |||||||||||||
Proceeds from exercise of stock options | 298 | 574 | 1,114 | 819 | ||||||||||||
Net cash provided by financing activities | 97,417 | 17,679 | ||||||||||||||
Net cash provided by (used in) financing activities | 50,581 | (12,737 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (119 | ) | — | (835 | ) | 19 | ||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (638 | ) | 7,526 | |||||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 4,421 | 33,715 | ||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 5,398 | 1,011 | 5,398 | 1,011 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 4,760 | $ | 8,537 | $ | 9,819 | $ | 34,726 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 8,368 | $ | 5,709 | $ | 9,125 | $ | 7,160 | ||||||||
Income taxes | $ | 908 | $ | 117 | $ | 1,592 | $ | 120 | ||||||||
NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||||||||||
Retirement of treasury shares | $ | — | $ | 933 | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP. These consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2005. Certain amounts in the prior period have been reclassified to conform to the current period’s presentation.
TheIn our opinion, the information presented reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.
2. INVENTORIES
Inventories are stated at the lower of cost (moving average(average cost) or market. Cost principally consists of the purchase price, customs duties, freight, insurance and commissions to buying agents. Inventory levels at April 30, 2005 increased because of the acquisition of Tropical Sportswear Int’l Corporation (see note 12).
Inventories consisted of the following as of:
| (in thousands) | (in thousands) | |||||||||||
| April 30, 2005 | January 31, 2005 | July 31, 2005 | January 31, 2005 | |||||||||
Finished goods | $ | 143,738 | $ | 113,104 | $ | 157,489 | $ | 113,104 | ||||
Raw materials and in process | 14,699 | 2,217 | 8,789 | 2,217 | ||||||||
Total | $ | 158,437 | $ | 115,321 | $ | 166,278 | $ | 115,321 | ||||
3. LETTER OF CREDIT FACILITIES
Borrowings and availability under letter of credit facilities consist of the following as of:
| (in thousands) | ||||||||
| April 30, 2005 | January 31, 2005 | |||||||
Total letter of credit facilities | $ | 122,980 | $ | 93,026 | ||||
Outstanding letters of credit | (47,615 | ) | (72,210 | ) | ||||
Total credit available | $ | 75,365 | $ | 20,816 | ||||
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. 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 are as follows:
| ||
| ||
| ||
| ||
|
| (in thousands) | ||||||||
| July 31, 2005 | January 31, 2005 | |||||||
Total letter of credit facilities | $ | 173,416 | $ | 93,026 | ||||
Outstanding letters of credit | (50,236 | ) | (72,210 | ) | ||||
Total credit available | $ | 123,180 | $ | 20,816 | ||||
5. INTANGIBLE ASSETS
Intangible assets primarily represent costs capitalized in connection with the acquisitions of brand names and license rights. Under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” identifiable intangible assets with an indefinite useful life are not amortized but are tested for impairment annually as of February 1st of each year. As a result of this evaluation, it was determined that there was no impairment of recorded intangible assets as of February 1, 2005.
6. LONG-LIVED ASSETS
Management reviews long-lived 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.
7.4. ADVERTISING AND RELATED COSTS
The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $6.2$3.5 million and $7.2$3.5 million for the three months ended April 30,July 31, 2005 and 2004, respectively, and $9.7 million and $10.7 million for the six months ended July 31, 2005 and 2004, respectively, and are included in selling, general and administrative expenses.
8.5. ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has chosen to account for stock-based compensation to employees and non-employee members of the Board using the intrinsic value method prescribed by Accounting Principles Board Opinion
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(“APB”) No. 25,Accounting for Stock Issued to Employees, and related interpretations. As required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure”Disclosure,” the Company presents certain pro forma and other disclosures related to stock-based compensation plans as if compensation cost for options granted had been determined in accordance with the fair value provisions of SFAS No. 123 as follows:
(in thousands, except per share data) Three Months Ended April 30, | ||||||
| 2005 | 2004 | |||||
Net income as reported | $ | 8,891 | $ | 8,205 | ||
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 | 258 | 224 | ||||
Pro forma net income | $ | 8,633 | $ | 7,981 | ||
Pro forma net income per share: | ||||||
Basic | $ | 0.91 | $ | 0.94 | ||
Diluted | $ | 0.86 | $ | 0.87 | ||
| (in thousands, except per share data) | ||||||||||||||
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Net (loss) income as reported | $ | (2,404 | ) | $ | (2,643 | ) | $ | 6,487 | $ | 5,562 | ||||
Add : Total stock based employee compensation expense included in reported net income | — | — | — | — | ||||||||||
Deduct : Total stock based employee compensation expense not included in reported net income | 277 | 232 | 535 | 456 | ||||||||||
Pro forma net (loss) income | $ | (2,681 | ) | $ | (2,875 | ) | $ | 5,952 | $ | 5,106 | ||||
Pro forma net (loss) income per share: | ||||||||||||||
Basic | $ | (0.28 | ) | $ | (0.32 | ) | $ | 0.63 | $ | 0.58 | ||||
Diluted | $ | (0.28 | ) | $ | (0.32 | ) | $ | 0.59 | $ | 0.54 | ||||
Weighted Average Number of Shares Outstanding | ||||||||||||||
Basic | 9,512 | 9,126 | 9,489 | 8,787 | ||||||||||
Diluted | 9,512 | 9,126 | 10,013 | 9,466 | ||||||||||
9.6. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average shares of outstanding common stock. The calculation of diluted net (loss) income per share is similar to basic earnings per share except that the denominator includes potentially dilutive common stock. The potentially dilutive common stock included in the Company’s computation of diluted net (loss) income per share includes the effects of the stock options as determined using the treasury stock method.
The following table sets forth the computation of basic and diluted net (loss) income per share:
| (in thousands, except per share data) Three Months Ended April 30, | ||||||
| 2005 | 2004 | |||||
Numerator: | ||||||
Net income | $ | 8,891 | $ | 8,205 | ||
Denominator: | ||||||
Basic income per share - weighted average shares | 9,465 | 8,476 | ||||
Dilutive effect: stock options | 535 | 711 | ||||
Diluted income per share - weighted average shares | 10,000 | 9,187 | ||||
Basic income per share | $ | 0.94 | $ | 0.97 | ||
Diluted income per share | $ | 0.89 | $ | 0.89 | ||
Antidilutive effect: stock options (1) | 209 | — | ||||
| (in thousands, except per share data) | ||||||||||||||
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Numerator: | ||||||||||||||
Net (loss) income | $ | (2,404 | ) | $ | (2,643 | ) | $ | 6,487 | $ | 5,562 | ||||
Denominator: | ||||||||||||||
Basic weighted average shares | 9,512 | 9,126 | 9,489 | 8,787 | ||||||||||
Dilutive effect: stock options | — | — | 524 | 679 | ||||||||||
Diluted weighted average shares | 9,512 | 9,126 | 10,013 | 9,466 | ||||||||||
Basic (loss) income per share | $ | (0.25 | ) | $ | (0.29 | ) | $ | 0.68 | $ | 0.63 | ||||
Diluted (loss) income per share | $ | (0.25 | ) | $ | (0.29 | ) | $ | 0.65 | $ | 0.59 | ||||
Antidilutive effect: stock options (1) | 1,422 | 1,522 | 202 | 135 | ||||||||||
| (1) | Represents stock options to purchase shares of common stock that were not included in computing diluted income per share because their effects were antidilutive for the respective periods. |
10.PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income is comprised of net incomeoperating results and the effect of foreign currency translation.translation reflected in stockholders’ equity. Comprehensive (loss) income was $8.8($3.1) million and $8.2($2.6) million for the three months ended April 30,July 31, 2005 and 2004, respectively and $5.7 million and $5.6 million for the six months ended July 31, 2005 and 2004, respectively.
11.8. SEGMENT INFORMATION
In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,”ourthe Company’s principal business segments are grouped into the generation of revenues from sale of products and royalties from licensing activity. These segments are identified and managed by the Company based on the products and services offered by each. The product segment derives its revenues from the design, importation and distribution of apparel to various retail channels, which include department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate incentive market, as well as clubs, and independent retailers in the United States, Puerto Rico and Canada. The licensing segment derives its revenues from royalties associated with the licensing of its trademarks to third parties, principally Perry Ellis®, Jantzen®, John Henry®, Manhattan®, Munsingwear® and MunsingwearFarah®. Trademark costs have been allocated among the segments where the brands are shared. Shared selling, general and administrative expenses are allocated amongst the segments based upon department utilization rates.
| (in thousands) | ||||||||||||||||||||
(in thousands) Three Months Ended April 30, | Three Months Ended July 31, | Six Months Ended July 31, | ||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||
Revenues: | ||||||||||||||||||||
Product | $ | 220,394 | $ | 192,104 | $ | 184,298 | $ | 121,049 | $ | 404,692 | $ | 313,153 | ||||||||
Licensing | 5,206 | 5,315 | 5,686 | 5,317 | 10,892 | 10,632 | ||||||||||||||
Total Revenues | $ | 225,600 | $ | 197,419 | $ | 189,984 | $ | 126,366 | $ | 415,584 | $ | 323,785 | ||||||||
Operating Income: | ||||||||||||||||||||
Operating Income (Loss): | ||||||||||||||||||||
Product | $ | 17,137 | $ | 13,662 | $ | (1,616 | ) | $ | (3,659 | ) | $ | 15,520 | $ | 10,003 | ||||||
Licensing | 2,462 | 2,763 | 3,214 | 3,464 | 5,676 | 6,227 | ||||||||||||||
Total Operating Income | $ | 19,599 | $ | 16,425 | ||||||||||||||||
Total Operating Income (Loss) | $ | 1,598 | $ | (195 | ) | $ | 21,196 | $ | 16,230 | |||||||||||
| (in thousands) | ||||||
| July 31, 2005 | January 31, 2005 | |||||
Identifiable Assets: | ||||||
Product | $ | 402,489 | $ | 363,317 | ||
Licensing | 146,651 | 139,198 | ||||
Corporate | 23,701 | 12,445 | ||||
Total Identifiable Assets | $ | 572,841 | $ | 514,960 | ||
12.9. TROPICAL SPORTSWEAR INT’L CORPORATION ACQUISITION
On February 26, 2005, the Company consummated the acquisition (the “Tropical acquisition”) of certain domestic operating assets of Tropical Sportswear Int’l Corporation (“Tropical”TSI”), as well as the outstanding capital stock of Tropical’sTSI’s U.K. subsidiary, pursuant to Section 363 of the U.S. Bankruptcy Code, which will be primarily included in the product segment.
The aggregate purchase price wasis approximately $90.4$83.3 million, which represents the sum of (i) $88.5$80.7 million paid in cash, and (ii) estimated acquisition costs of $1.9$2.6 million. The original purchase price was $88.5 million, in cash paid at closing remains
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
subject to adjustment based on a final valuation of the closing date accounts receivable and inventory purchased by the Company. Once final, such adjustments are expectedIn July 2005, a settlement was reached on this valuation and approximately $7.8 million was refunded to reduce, as applicable, total acquisition costs.the Company.
The following table summarizes the preliminaryrevised estimated fair values of the assets acquired and liabilities assumed atafter the dateapplication of acquisition.the final valuation. Purchase accounting adjustments include fair value adjustments and the allocation of the excess of fair value over purchase price as required under SFAS 141.
| (in thousands) | (in thousands) | |||||||
Total purchase price | ||||||||
Cash consideration paid | $ | 88,500 | $ | 80,695 | ||||
Total purchase price | 88,500 | 80,695 | ||||||
Total direct merger costs | 1,853 | 2,594 | ||||||
Total adjusted purchase price | $ | 90,353 | $ | 83,289 | ||||
The total allocation of the purchase price is as follows: | ||||||||
Cash | $ | 503 | $ | 503 | ||||
Accounts receivable | 31,499 | 31,499 | ||||||
Inventory | 36,356 | 39,156 | ||||||
Other current assets | 209 | 209 | ||||||
Property, plant and equipment | 13,776 | |||||||
Property and equipment | 9,040 | |||||||
Trademarks | 16,289 | 10,728 | ||||||
Accounts payable | (1,635 | ) | (1,635 | ) | ||||
Accrued expenses | (6,276 | ) | (5,843 | ) | ||||
Capital leases | (305 | ) | (305 | ) | ||||
Deferred taxes | (63 | ) | (63 | ) | ||||
Fair value of net assets acquired | $ | 90,353 | $ | 83,289 | ||||
13.10. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below, gives effect to the Tropical acquisition, as if it occurred as of the beginning of the first quarter of fiscal 2006 and 2005. For the firstsecond quarter of fiscal 2006, Tropical’sthe post acquisition results of Tropical’s business are reflected in the Company’s income statement for the two months ended April 30,results of operations as of March 1, 2005, and pro forma results for the one month ended February 28, 2005 were included.are included below. Pro forma firstsecond quarter fiscal 2005 results for Tropical were derived from Tropical’sTSI’s previously reported results for the three and six months ended March 31,June 30, 2004.
| (in thousands, except per share data) | ||||||||||||||||||||
Three Months April 30, 2005 | Three Months April 30, 2004 | Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||
(in thousands, data) | (in thousands, data) | 2005 | 2004 | 2005 | 2004 | |||||||||||||||
Total revenues | $ | 244,423 | $ | 288,345 | $ | 189,984 | $ | 199,120 | $ | 434,407 | $ | 487,465 | ||||||||
Net income | $ | 8,130 | $ | 10,804 | ||||||||||||||||
Net (loss) income | $ | (2,404 | ) | $ | (8,397 | ) | $ | 5,726 | $ | 2,407 | ||||||||||
Net income per share | ||||||||||||||||||||
Net (loss) income per share | ||||||||||||||||||||
Basic | $ | 0.86 | $ | 1.27 | $ | (0.25 | ) | $ | (0.92 | ) | $ | 0.60 | $ | 0.27 | ||||||
Diluted | $ | 0.81 | $ | 1.18 | $ | (0.25 | ) | $ | (0.92 | ) | $ | 0.57 | $ | 0.25 | ||||||
Weighted Average Number of Shares: | ||||||||||||||||||||
Basic | 9,465 | 8,476 | 9,512 | 9,126 | 9,489 | 8,787 | ||||||||||||||
Diluted | 10,000 | 9,187 | 9,512 | 9,126 | 10,013 | 9,466 | ||||||||||||||
14.PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11. BENEFIT PLANSPLAN
The Company sponsors a qualified pension plan. The following table provides the components of net benefit cost for the planplans during the first quarter of fiscal 2006three and 2005:six months ended July 31, 2005 and 2004, respectively:
| Three Months Ended April 30, | (in thousands) | |||||||||||||||||||||||
| 2005 | 2004 | Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||||||
| (in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||
Service cost | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Interest cost | 745 | 742 | 745 | 743 | 1,490 | 1,486 | ||||||||||||||||||
Expected return on plan assets | (845 | ) | (864 | ) | (845 | ) | (864 | ) | (1,690 | ) | (1,727 | ) | ||||||||||||
Amortization of net gain | (27 | ) | (27 | ) | (54 | ) | ||||||||||||||||||
Net periodic benefit cost | $ | (100 | ) | $ | (149 | ) | $ | (100 | ) | $ | (148 | ) | $ | (200 | ) | $ | (295 | ) | ||||||
As of July 31, 2005, no contributions had been made to the plan. The Company expects no contributionscontributed $1.5 million to the pension plan during August 2005; no further contributions are anticipated for fiscal 2006.
15.12. DERIVATIVES FINANCIAL INSTRUMENTS
The Company has entered into derivative financial instruments in order to manage the overall borrowing costs associated with its senior subordinatedsecured notes and senior subordinated notes. As of July 31, 2005, the only derivatives outstanding related to the senior secured notes.
Derivatives on $57 million senior secured notes payable
At April 30,July 31, 2005, the Company had an interest rate swap and option (the “$57 million Swap Agreement”) for an aggregate notional amount of $57 million in order to manage the overall borrowing costs associated with its 9 1/2% senior secured notes. The $57 million Swap Agreement is scheduled to terminate on March 15, 2009. The $57 million Swap Agreement is a fair value hedge as it has been designated against the 9 1/2% senior secured notes carrying a fixed rate of interest and effectively converts such notes to variable rate debt. The $57 million Swap Agreement is reflected at fair value in the Company’s consolidated balance sheet with a corresponding offset to the designated item. The $57 million Swap Agreement is scheduled to terminate on March 15, 2009. The fair value of the $57 million Swap Agreement recorded on the Company’s Consolidated Balance Sheetconsolidated balance sheet was $1.7$1.4 million as of April 30,July 31, 2005 and $2.7 million as of January 31, 2005.
At April 30,July 31, 2005, the Company also had an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57 million associated with the 9 1/2% senior secured notes. The $57 million Cap Agreement is scheduled to terminate on March 15, 2009. The $57 million Cap Agreement caps the interest rate on the senior secured notes at 10%. The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in a $50,000$18,000 decrease and $100,000 decrease$31,000 increase of recorded interest expense on the consolidated statementstatements of incomeoperations for the three and six months ended April 30,July 31, 2005, respectively, and a $300,000 and $200,000 increase of recorded interest expense on the consolidated statements of operations for the three and six months ended July 31, 2004. The fair value of the $57 million Cap Agreement recorded on the Company’s consolidated balance sheet was ($700,000)667,000) as of April 30,July 31, 2005 and ($600,000)636,000) as of January 31, 2005.
The Company also had an interest rate floor agreement (the “$57 million Floor Agreement”) for an aggregate notional amount of $57 million associated with the 9 1/2% senior secured notes. The $57 million Floor Agreement expired on March 15, 2005. The $57 million Floor Agreement did not qualify for hedge accounting treatment under SFAS No. 133, resulting in a $0$40,000 and $100,000 decrease of recorded interest expense on the consolidated statement of incomeoperations for the three and six months April 30, 2005 andended July 31, 2004, respectively. The $57 million Floor Agreement had no impact on interest expense for Fiscal 2006. The fair value of the $57 million Floor Agreement recorded on the Company’s consolidated balance sheet was $0.0$0 as of January 31, 2005.
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivatives on $150 million senior subordinated notes payable
In conjunction with the Company’s fiscal 2004 offering of $150 million of 8 7/8% senior subordinated notes due September 15, 2013, the Company entered into interest rate swap agreements (the “$150 million Swap Agreement”) with Merrill Lynch & Co., Inc. (“Merrill”) and Wachovia Bank N. A. (“Wachovia”) each with a notional amount of $75 million for an aggregate notional amount of $150 million in order to manage the overall borrowing costs associated with the new senior subordinated notes. The $150 million Swap Agreement was scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, the Company was entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 7/8% and was obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period through September 15, 2013.
On April 29, 2005, the Company terminated its $75 million notional amount swap agreement with Wachovia. In connection with the termination, the Company paid $495,000. The termination payment was comprised of the fair market value of the swap in the amount of $578,000 less accrued interest of $83,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.
On May 2, 2005, the Company terminated its $75 million notional amount swap agreement with Merrill. In connection with the termination, the Company paid $540,000. The termination payment was comprised of the fair market value of the swap in the amount of $632,000 less accrued interest of $92,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.
The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $1.5 million as of January 31, 2005.
Other
The Company does not currently have a significant exposure to foreign exchange risk and accordingly, has not entered into any transactions to hedge against those risks.
16.13. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
Perry Ellis International, Inc. and several of its subsidiaries have fully and unconditionally guaranteed the senior secured notes and senior subordinated notes on a joint and several basis. As such, the following consolidating condensed financial statements, which present, in separate columns: Perry Ellis, the guarantors on a combined basis and the non-guarantors on a combined basis are required to be presented. Additional columns present eliminating adjustments and consolidated totals as of April 30,July 31, 2005 and January 31, 2005, and for the three and six months ended April 30,July 31, 2005 and 2004. The Company has not presented separate financial statements and other disclosures concerning the combined guarantors because management has determined that such information is not material to investors.
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS (UNAUDITED)
AS OF APRIL 30,JULY 31, 2005
(amounts in thousands)thousands, except share data)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | (446 | ) | $ | 2,932 | $ | 2,274 | $ | — | $ | 4,760 | $ | (300 | ) | $ | 6,957 | $ | 3,162 | $ | — | $ | 9,819 | ||||||||||||||
Accounts receivable, net | 420 | 173,104 | 2,993 | — | 176,517 | 426 | 118,945 | 2,635 | — | 122,006 | ||||||||||||||||||||||||||
Intercompany Receivable - Guarantors | 54,079 | 281,535 | 549 | (336,163 | ) | — | ||||||||||||||||||||||||||||||
Intercompany Receivable - Non Guarantors | 434 | 15,632 | — | (16,066 | ) | — | ||||||||||||||||||||||||||||||
Intercompany receivable—Guarantors | 178,434 | 410,390 | 1,033 | (589,857 | ) | — | ||||||||||||||||||||||||||||||
Intercompany receivable—Non Guarantors | 438 | 14,210 | 60 | (14,708 | ) | — | ||||||||||||||||||||||||||||||
Inventories, net | — | 156,711 | 1,726 | — | 158,437 | — | 164,991 | 1,287 | — | 166,278 | ||||||||||||||||||||||||||
Other current assets | 2,879 | 16,652 | (1,159 | ) | 1,068 | 19,440 | 6,026 | 16,215 | (1,771 | ) | 1,049 | 21,519 | ||||||||||||||||||||||||
Total current assets | 57,366 | 646,566 | 6,383 | (351,161 | ) | 359,154 | 185,024 | 731,708 | 6,406 | (603,516 | ) | 319,622 | ||||||||||||||||||||||||
Property and equipment, net | 13,584 | 49,472 | 255 | — | 63,311 | 12,829 | 47,254 | 250 | — | 60,333 | ||||||||||||||||||||||||||
Intangible assets, net | — | 156,118 | 21,056 | — | 177,174 | — | 150,556 | 21,056 | — | 171,612 | ||||||||||||||||||||||||||
Investment in subsidiaries | 299,270 | — | — | (299,270 | ) | — | 206,541 | — | — | (206,541 | ) | — | ||||||||||||||||||||||||
Other | 4,747 | 17,365 | — | (1,068 | ) | 21,044 | 4,719 | 17,555 | 49 | (1,049 | ) | 21,274 | ||||||||||||||||||||||||
TOTAL | $ | 374,967 | $ | 869,521 | $ | 27,694 | $ | (651,499 | ) | $ | 620,683 | $ | 409,113 | $ | 947,073 | $ | 27,761 | $ | (811,106 | ) | $ | 572,841 | ||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||||||
Accounts payable and accrued expenses | $ | 7,163 | $ | 64,580 | $ | 1,283 | $ | — | $ | 73,026 | ||||||||||||||||||||||||||
Intercompany Payable - Parent | (22,102 | ) | 447,197 | 17,978 | (443,073 | ) | — | |||||||||||||||||||||||||||||
Accounts payable, accrued expenses and other current liabilities | $ | 12,241 | $ | 60,828 | $ | 753 | $ | — | $ | 73,822 | ||||||||||||||||||||||||||
Intercompany payable—Parent | 9,090 | 669,939 | 17,098 | (696,127 | ) | — | ||||||||||||||||||||||||||||||
Total current liabilities | (14,939 | ) | 511,777 | 19,261 | (443,073 | ) | 73,026 | 21,331 | 730,767 | 17,851 | (696,127 | ) | 73,822 | |||||||||||||||||||||||
Notes payable and senior credit facility | 185,500 | 140,483 | — | — | 325,983 | 185,541 | 93,884 | — | — | 279,425 | ||||||||||||||||||||||||||
Other long term liabilities | 654 | 15,434 | 207 | — | 16,295 | 584 | 15,419 | 182 | — | 16,185 | ||||||||||||||||||||||||||
Total long-term liabilities | 186,154 | 155,917 | 207 | — | 342,278 | 186,125 | 109,303 | 182 | — | 295,610 | ||||||||||||||||||||||||||
Total liabilities | 171,215 | 667,694 | 19,468 | (443,073 | ) | 415,304 | 207,456 | 840,070 | 18,033 | (696,127 | ) | 369,432 | ||||||||||||||||||||||||
Minority Interest | — | — | 1,627 | — | 1,627 | — | — | 1,752 | — | 1,752 | ||||||||||||||||||||||||||
Stockholders’ equity | 203,752 | 201,827 | 6,599 | (208,426 | ) | 203,752 | 201,657 | 107,003 | 7,976 | (114,979 | ) | 201,657 | ||||||||||||||||||||||||
TOTAL | $ | 374,967 | $ | 869,521 | $ | 27,694 | $ | (651,499 | ) | $ | 620,683 | $ | 409,113 | $ | 947,073 | $ | 27,761 | $ | (811,106 | ) | $ | 572,841 | ||||||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
AS OF JANUARY 31, 2005
(amounts in thousands)thousands, except share data)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | (818 | ) | $ | 3,585 | $ | 2,631 | $ | — | $ | 5,398 | $ | (818 | ) | $ | 3,585 | $ | 2,631 | $ | — | $ | 5,398 | ||||||||||||||
Accounts receivable, net | (218 | ) | 132,882 | 2,254 | — | 134,918 | (218 | ) | 132,882 | 2,254 | — | 134,918 | ||||||||||||||||||||||||
Intercompany Receivable - Guarantors | 50,742 | 219,222 | 602 | (270,566 | ) | — | ||||||||||||||||||||||||||||||
Intercompany Receivable - Non Guarantors | 429 | 16,995 | — | (17,424 | ) | — | ||||||||||||||||||||||||||||||
Intercompany receivable—Guarantors | 50,742 | 219,222 | 602 | (270,566 | ) | — | ||||||||||||||||||||||||||||||
Intercompany receivable—Non Guarantors | 429 | 16,995 | — | (17,424 | ) | — | ||||||||||||||||||||||||||||||
Inventories, net | — | 114,088 | 1,233 | — | 115,321 | — | 114,088 | 1,233 | — | 115,321 | ||||||||||||||||||||||||||
Other current assets | 5,520 | 16,866 | (807 | ) | 1,087 | 22,666 | 5,520 | 16,866 | (807 | ) | 1,087 | 22,666 | ||||||||||||||||||||||||
Total current assets | 55,655 | 503,638 | 5,913 | (286,903 | ) | 278,303 | 55,655 | 503,638 | 5,913 | (286,903 | ) | 278,303 | ||||||||||||||||||||||||
Property and equipment, net | 1,566 | 47,132 | 280 | — | 48,978 | 1,566 | 47,132 | 280 | — | 48,978 | ||||||||||||||||||||||||||
Intangible assets, net | — | 139,829 | 21,056 | — | 160,885 | — | 139,829 | 21,056 | — | 160,885 | ||||||||||||||||||||||||||
Investment in subsidiaries | 200,037 | — | — | (200,037 | ) | — | 200,037 | — | — | (200,037 | ) | — | ||||||||||||||||||||||||
Other | 6,395 | 21,486 | — | (1,087 | ) | 26,794 | 6,395 | 21,486 | — | (1,087 | ) | 26,794 | ||||||||||||||||||||||||
TOTAL | $ | 263,653 | $ | 712,085 | $ | 27,249 | $ | (488,027 | ) | $ | 514,960 | $ | 263,653 | $ | 712,085 | $ | 27,249 | $ | (488,027 | ) | $ | 514,960 | ||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||||||||||||||||
Accounts payable and accrued expenses | $ | 6,987 | $ | 56,922 | $ | 6,591 | $ | — | $ | 70,500 | ||||||||||||||||||||||||||
Intercompany Payable - Parent | (39,711 | ) | 404,623 | 13,804 | (378,716 | ) | — | |||||||||||||||||||||||||||||
Accounts payable, accrued expenses and other current liabilities | $ | 6,987 | $ | 56,922 | $ | 6,591 | $ | — | $ | 70,500 | ||||||||||||||||||||||||||
Intercompany payable—Parent | (39,711 | ) | 404,623 | 13,804 | (378,716 | ) | — | |||||||||||||||||||||||||||||
Total current liabilities | (32,724 | ) | 461,545 | 20,395 | (378,716 | ) | 70,500 | (32,724 | ) | 461,545 | 20,395 | (378,716 | ) | 70,500 | ||||||||||||||||||||||
Notes payable and senior credit facility | 101,518 | 130,992 | — | — | 232,510 | 101,518 | 130,992 | — | — | 232,510 | ||||||||||||||||||||||||||
Other long term liabilities | 291 | 15,481 | 226 | — | 15,998 | 291 | 15,481 | 226 | — | 15,998 | ||||||||||||||||||||||||||
Total long-term liabilities | 101,809 | 146,473 | 226 | — | 248,508 | 101,809 | 146,473 | 226 | — | 248,508 | ||||||||||||||||||||||||||
Total liabilities | 69,085 | 608,018 | 20,621 | (378,716 | ) | 319,008 | 69,085 | 608,018 | 20,621 | (378,716 | ) | 319,008 | ||||||||||||||||||||||||
Minority Interest | — | — | 1,384 | — | 1,384 | — | — | 1,384 | — | 1,384 | ||||||||||||||||||||||||||
Stockholders’ equity | 194,568 | 104,067 | 5,244 | (109,311 | ) | 194,568 | 194,568 | 104,067 | 5,244 | (109,311 | ) | 194,568 | ||||||||||||||||||||||||
TOTAL | $ | 263,653 | $ | 712,085 | $ | 27,249 | $ | (488,027 | ) | $ | 514,960 | $ | 263,653 | $ | 712,085 | $ | 27,249 | $ | (488,027 | ) | $ | 514,960 | ||||||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FOR THE THREE MONTHS ENDED APRIL 30, 2005
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||
Revenue | $ | — | $ | 221,573 | $ | 4,027 | $ | — | $ | 225,600 | |||||||
Gross profit | — | 69,483 | 3,444 | — | 72,927 | ||||||||||||
Operating income | — | 17,116 | 2,483 | — | 19,599 | ||||||||||||
Interest, minority interest and income taxes | (11 | ) | 9,668 | 1,051 | — | 10,708 | |||||||||||
Equity in earnings of subsidiaries, net | 8,880 | — | — | (8,880 | ) | — | |||||||||||
Net income | 8,891 | 7,448 | 1,432 | (8,880 | ) | 8,891 | |||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOMEOPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 2004JULY 31, 2005
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||||||||||||
Revenue | $ | — | $ | 194,976 | $ | 2,443 | $ | — | $ | 197,419 | $ | — | $ | 185,953 | $ | 4,031 | $ | — | $ | 189,984 | |||||||||||||||
Gross profit | (10 | ) | 60,004 | 2,809 | — | 62,803 | — | 50,481 | 3,357 | — | 53,838 | ||||||||||||||||||||||||
Operating income | 1 | 14,942 | 1,482 | — | 16,425 | ||||||||||||||||||||||||||||||
Operating income (loss) | 1 | (796 | ) | 2,393 | — | 1,598 | |||||||||||||||||||||||||||||
Interest, minority interest and income taxes | 1 | 7,792 | 427 | — | 8,220 | 29 | 2,819 | 1,154 | — | 4,002 | |||||||||||||||||||||||||
Equity in earnings of subsidiaries, net | 8,205 | — | — | (8,205 | ) | — | |||||||||||||||||||||||||||||
Net income | 8,205 | 7,150 | 1,055 | (8,205 | ) | 8,205 | |||||||||||||||||||||||||||||
Equity in earnings (loss) of subsidiaries, net | (2,376 | ) | — | — | 2,376 | — | |||||||||||||||||||||||||||||
Net income (loss) | (2,404 | ) | (3,615 | ) | 1,239 | 2,376 | (2,404 | ) | |||||||||||||||||||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWSOPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED APRIL 30, 2005JULY 31, 2004
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities | $ | 13,557 | $ | (21,587 | ) | $ | (303 | ) | $ | (118 | ) | $ | (8,451 | ) | ||||||
Net cash used in investing activities | (100,437 | ) | 10,929 | 23 | — | (89,485 | ) | |||||||||||||
Net cash provided by financing activities | 87,371 | 10,046 | — | — | 97,417 | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (119 | ) | (41 | ) | (77 | ) | 118 | (119 | ) | |||||||||||
Net decrease (increase) in cash and cash equivalents | 372 | (653 | ) | (357 | ) | — | (638 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | (818 | ) | 3,585 | 2,631 | — | 5,398 | ||||||||||||||
Cash and cash equivalents at end of period | (446 | ) | 2,932 | 2,274 | — | 4,760 | ||||||||||||||
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Revenue | $ | — | $ | 123,588 | $ | 2,778 | $ | — | $ | 126,366 | ||||||||
Gross profit | 10 | 36,260 | 1,597 | — | 37,867 | |||||||||||||
Operating income (loss) | 1 | (1,656 | ) | 1,460 | — | (195 | ) | |||||||||||
Interest, minority interest and income taxes | 1 | 1,586 | 861 | — | 2,448 | |||||||||||||
Equity in earnings (loss) of subsidiaries, net | (2,643 | ) | — | — | 2,643 | — | ||||||||||||
Net income (loss) | (2,643 | ) | (3,242 | ) | 599 | 2,643 | (2,643 | ) | ||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JULY 31, 2005
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||
Revenue | $ | — | $ | 407,526 | $ | 8,058 | $ | — | $ | 415,584 | ||||||
Gross profit | — | 119,964 | 6,801 | — | 126,765 | |||||||||||
Operating income | 1 | 16,319 | 4,876 | — | 21,196 | |||||||||||
Interest, minority interest and income taxes | 18 | 12,486 | 2,205 | — | 14,709 | |||||||||||
Equity in earnings of subsidiaries, net | 6,504 | — | — | (6,504 | ) | — | ||||||||||
Net income | 6,487 | 3,833 | 2,671 | (6,504 | ) | 6,487 | ||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JULY 31, 2004
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||
Revenue | $ | — | $ | 318,564 | $ | 5,221 | $ | — | $ | 323,785 | ||||||
Gross profit | — | 96,264 | 4,406 | — | 100,670 | |||||||||||
Operating income | 2 | 13,286 | 2,942 | — | 16,230 | |||||||||||
Interest, minority interest and income taxes | 2 | 9,378 | 1,288 | — | 10,668 | |||||||||||
Equity in earnings of subsidiaries, net | 5,562 | — | — | (5,562 | ) | — | ||||||||||
Net income | 5,562 | 3,908 | 1,654 | (5,562 | ) | 5,562 | ||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREESIX MONTHS ENDED APRIL 30, 2004JULY 31, 2005
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (2,084 | ) | $ | (14,512 | ) | $ | 8,569 | $ | — | $ | (8,027 | ) | $ | (75,069 | ) | $ | 116,576 | $ | 444 | $ | (836 | ) | $ | 41,115 | |||||||||||||
Net cash used in investing activities | (3 | ) | (1,993 | ) | (130 | ) | — | (2,126 | ) | |||||||||||||||||||||||||||||
Net cash provided by financing activities | 574 | 17,105 | — | — | 17,679 | |||||||||||||||||||||||||||||||||
Net cash provided by (used in) investing activities | (10,485 | ) | (75,981 | ) | 26 | — | (86,440 | ) | ||||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | 86,907 | (36,326 | ) | — | — | 50,581 | ||||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | — | — | — | (835 | ) | (897 | ) | 61 | 836 | (835 | ) | |||||||||||||||||||||||||
Net decrease (increase) in cash and cash equivalents | (1,513 | ) | 600 | 8,439 | — | 7,526 | ||||||||||||||||||||||||||||||||
Net increase in cash and cash equivalents | 518 | 3,372 | 531 | — | 4,421 | |||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | (237 | ) | (600 | ) | 1,848 | — | 1,011 | (818 | ) | 3,585 | 2,631 | — | 5,398 | |||||||||||||||||||||||||
Cash and cash equivalents at end of period | (1,750 | ) | — | 10,287 | — | 8,537 | (300 | ) | 6,957 | 3,162 | — | 9,819 | ||||||||||||||||||||||||||
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JULY 31, 2004
(amounts in thousands)
| Parent Only | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities | $ | (23,774 | ) | $ | 58,018 | $ | 21,606 | $ | 127 | $ | 55,977 | |||||||||
Net cash provided by (used in) investing activities | (948 | ) | 12,616 | (21,212 | ) | — | (9,544 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 21,978 | (34,715 | ) | — | — | (12,737 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 19 | (3 | ) | 130 | (127 | ) | 19 | |||||||||||||
Net (decrease) increase in cash and cash equivalents | (2,725 | ) | 35,916 | 524 | — | 33,715 | ||||||||||||||
Cash and cash equivalents at beginning of period | (237 | ) | (600 | ) | 1,848 | — | 1,011 | |||||||||||||
Cash and cash equivalents at end of period | (2,962 | ) | 35,316 | 2,372 | — | 34,726 | ||||||||||||||
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Item 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. References in this report to the Tropical acquisition“Tropical acquisition” refer to our acquisition of certain domestic operating assets of Tropical Sportswear Int’l Corporation (“TSI”), as well as the outstanding capital stock of its United Kingdom subsidiary that was completed in February 2005. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 31, 2005.
Forward – Forward—Looking Statements
We caution readers that this report includes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,” and similar words or phrases or corporate terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control.
Some of the factors that could affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are set forth in various places in this report. These factors include:
You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.
Critical Accounting Policies
Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2005 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by Accounting Principles Generally Accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas we use judgment in are the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment on long-lived assets, which are our trademarks, the carrying value of our deferred tax accounts, and the calculation of our pension obligation.
Revenue Recognition. Sales are recognized at the time legal title to the product passes to the customer, generally FOB Perry Ellis’ distribution facilities, net of trade allowances and a provision for estimated returns and other allowances. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. We believe that our revenue recognition policies conform to Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements.
Accounts Receivable. We maintain an allowance for doubtful accounts receivables and an allowance for estimated trade discounts, co-op advertising, allowances provided to retail customers to flow goods through the retail channel, and losses resulting from the inability of our retail customers to make required payments considering historical and anticipated trends.
Inventories. Our inventories are valued at the lower of cost or market value. We evaluate all of our inventory style-size-color stock keeping units, or SKUs, to determine excess or slow-moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, we estimate their market value or net sales value based on current realization trends. If the projected net sales value is less than cost, on an individual SKU basis, we provide an allowancea write down to reflect the lower value of that inventory. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.
Intangible Assets. We have, at the present time, only one class of indefinite lived assets, trademarks. We review our intangible assets with indefinite useful lives for possible impairments on an annual basis in
accordance with SFAS No. 142 and perform impairment testing as of February 1st of each year by among other things, obtaining independent third party valuations. We evaluate the “fair value” of our identifiable intangible assets for purposes of recognition and measurement of impairment losses. Evaluating indefinite useful life assets for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of our operations and other factors. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected.
Deferred Taxes. We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized based on the differences between financial statement and tax basis of assets and liabilities using
presently enacted tax rates. A valuation allowance is recorded, if required, to reduce deferred tax assets to that portion which is expected to more likely than not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax asset may not be recoverable.
Retirement-Related Benefits. The pension obligations related to our defined benefit pension plans are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate, expected return of plan assets, future compensation increases, and other factors, which are updated on an annual basis. Management is required to consider current market conditions, including changes in interest rates, in making these assumptions. Actual results that differ from the assumptions are accumulated and amortized over future periods, and therefore, generally affect the recognized pension expense or benefit and our pension obligation in future periods. The fair value of plan assets is based on the performance of the financial markets, particularly the equity markets. Therefore, the market value of the plan assets can change dramatically in a relatively short period of time. Additionally, the measurement of the plan’s benefit obligation is highly sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plan’s estimated accumulated benefit obligation could exceed the fair value of the plan assets and therefore, we would be required to establish an additional minimum liability, which would result in a reduction in shareholder’s equity for the amount of the shortfall. For fiscal 2005, we did not record an additional minimum pension liability calculatedwas not required under the provisions of SFAS No. 87.
Results of Operations
The following is a discussion of the results of operations for the firstthree and six months periods in the second quarter of the fiscal year ending January 31, 2006 (“fiscal 2006”) compared with the firstthree and six months periods in the second quarter of the fiscal year ended January 31, 2005 (“fiscal 2005”).
Results of Operations – First Quarter of fiscal 2006Operations—three and six months ended July 31, 2005 compared with First Quarter of Fiscal 2005.to three and six months ended July 31, 2004.
Net sales. Net sales infor the first quarter of fiscal 2006three months ended July 31, 2005 were $220.4 million,$184.3, an increase of $28.3 million,$63.3, or 14.7%52.3%, from $192.1$121.0 million infor the first quarter of fiscal 2005.three months ended July 31, 2004. The increase in net sales is primarily attributable to approximately $45$66.0 million generated by the Tropical business and a slight increase in our men’s wholesale business of which approximately $50.0 million is attributed to the Tropical business, offset by the partially planned reduction in our swimwear business of approximately $17$2.7 million.
Net sales for the six months ended July 31, 2005 were $404.7 million, an increase of $91.5 million, or 29.2%, from $313.2 million for the six months ended July 31, 2004. The increase in net sales is primarily attributable to approximately $111.2 million generated by our men’s wholesale business of which approximately $94.0 million is attributed to the Tropical business, offset by the partially planned reduction in our swimwear business of approximately $19.7 million.
Royalty income. Royalty income for the first quarterthree months ended July 31, 2005 was $5.7 million, an increase of fiscal 2006 was $5.2 million, a decrease of $0.1$0.4 million, or 1.9%7.5%, from $5.3 million for the first quarterthree months ended July 31, 2004. Royalty income for the six months ended July 31, 2005 was $10.9 million, an increase of fiscal 2005.$0.3 million, or 2.8%, from $10.6 million for the six months ended July 31, 2004. The decreaseincrease in royalty income was principally due to the addition of new licensing agreements, as well as, increased royalty income from existing licenses, partially offset by the termination of our active and women’s wear licenses partially offset by increases in our other licenses.
Gross profit.Gross profit was $72.9$53.8 million infor the first quarter of fiscal 2006,three months ended July 31, 2005, as compared to $62.8$37.9 million infor the first quarter of fiscal 2005,three months ended July 31, 2004, an increase of 16.1%42.0%. As a percentage of total revenue, grossGross profit margins were 32.3% inwas $126.8 million for the first quarter of fiscal 2006six months ended July 31, 2005, as compared to 31.8% in the first quarter$100.7 million for six months ended July 31, 2004, an increase of fiscal 2005.25.9%. The increase in gross profit during the first quarter of fiscal 2006three and six months ended July 31, 2005, as compared to the first quarter of fiscal 2005
three and six months ended July 31, 2004 was primarily attributed to the gross profit of the Tropical and men’s wholesale business in the amountamounts of approximately $13$18.0 million and $31.0 million, respectively, offset by a decline in the gross profit dollars in our swimwear business due to lower sales levels.
As a percentage of total revenue, gross profit margins were 28.3% for the three months ended July 31, 2005, as compared to 30.0% for the three months ended July 31, 2004, a decrease of 1.7%. As a percentage of total revenue, gross profit margins were 30.5% for the six months ended July 31, 2005, as compared to 31.1% for the six months ended July 31, 2004, a decrease of 0.6%. Approximately 1.0% and 0.4% of the three and six month decline in gross profit margins as a percentage of total revenues is due to a decline in royalty income as a percentage of our total revenues (due to the Tropical acquisition) with the balance due to decreased wholesale gross profit as described below.
Wholesale gross profit margins (which exclude the impact of royalty income) were 30.7% indecreased slightly for the first quarter of fiscal 2006,three months ended July 31, 2005 to 26.1%, as compared to 29.9% in26.9% for the first quarterthree months ended July 31, 2004. The wholesale gross profit margin percentage decreased slightly for the six months ended July 31, 2005, to 28.6%, as compared to 28.8% for the six months ended July 31, 2004. As described above, this slight decrease came as a result of fiscalthe addition of the lower margin sales of the domestic Tropical business and slightly higher menswear allowances for the spring 2005 with this improvement primarily attributable to higher swimwear business gross margins.
Selling, general and administrative expenses. Selling, general and administrative expenses duringfor the first quarters of fiscal 2006three months ended July 31, 2005, were $51.1$50.0 million, an increase of $6.2$13.5 million, or 13.8%37.0%, from $44.9$36.5 million infor the first quarter of fiscal 2005.three months ended July 31, 2004. As a percentage of total revenues, selling, general and administrative expenses were essentially flat at 22.7% in26.3% for the first quarters of fiscal 2006 and 2005.three months ended July 31, 2005, as compared to 28.9% for the three months ended July 31, 2004. The increase in selling, general and administrative expenses is primarily attributable to additional expenses incurred by our acquisition of the Tropical business offset by planned reductions in othertight expense management and the movement of some selling, general and administrative expenses.expenses that were initially planned in the first half of the year into the second half.
Selling, general and administrative expenses for the six months ended July 31, 2005, were $101.1 million, an increase of $19.7 million, or 24.2%, from $81.4 million for the six months ended July 31, 2004. As a percentage of total revenues, selling, general and administrative expenses were 24.3% for the six months ended July 31, 2005, as compared to 25.1% for the six months ended July 31, 2004. The increase in selling, general and administrative expenses is primarily attributable to additional expenses incurred by our acquisition of the Tropical business offset by tight expense management and the movement of some selling, general and administrative expenses that were initially planned in the first half of the year into the second half.
Depreciation and amortization. Depreciation and amortization duringfor the first quarter of fiscal 2006three months ended July 31, 2005 was $2.2 million, an increase of $0.7 million, or 46.7%47.0%, from $1.5 million infor the first quarterthree months ended July 31, 2004. Depreciation and amortization for the six months ended July 31, 2005, was $4.5 million, an increase of fiscal 2005.$1.5 million, or 50%, from $3.0 million for the six months ended July 31, 2004. The increase is due to depreciation expense fromas a result of the Tropical additionsacquisition in the amount of $0.3$0.2 million and $0.5 million for three and six months ended July 31, 2005, respectively, and an increase in property and equipment purchased during fiscal 2006.
Interest expense. Interest expense infor the first quarter of fiscal 2006three months ended July 31, 2005, was $5.4 million, an increase of $2.0$1.6 million, or 58.8%42.1%, from $3.4$3.8 million infor the first quarterthree months ended July 31, 2004. Interest expense for the six months ended July 31, 2005, was $10.8 million, an increase of fiscal 2005.$3.6 million, or 50.0%, from $7.2 million for the six months ended July 31, 2004. The overall increase in interest expense is primarily attributable to the fundingincreased indebtedness as a result of the acquisition of the Tropical business through additional borrowings under our senior credit facility and the impact of our elimination of the interest rate swaps on our senior subordinated notes. We ended the second quarter of Fiscal 2005 with no borrowings on our senior credit facility, due to the use of proceeds from our stock offering to pay down borrowings, compared to a balance of $61.6 million for the second quarter of Fiscal 2006, thus resulting in the amount of $88.5 million.higher interest expense. Additionally, the Prime and LIBOR rates in the first and second quarter of fiscal 2006 were higher than the Prime and LIBOR rates in the first and second quarter of fiscal 2005. Interest expense is expected to increase due to the termination of the swap agreements.
Income taxes. Income taxes intax benefit for the first quarter of fiscal 2006 were $5.1three months ended July 31, 2005, was $1.5 million, a $0.4$0.1 million decrease as compared to $1.4 million for the three months ended July 31, 2004. For the three months ended July 31, 2005, our effective tax rate was 39.5% as compared to 35.5% for the three months ended July 31, 2004. Income tax provision for the six months ended July 31, 2005, was $3.6 million, a $0.3 million increase as compared to $4.7$3.3 million for the first quarter of fiscal 2005.six months ended July 31, 2004. For the first quarter of fiscal 2006,six months ended July 31, 2005, our effective tax rate was 35.9%34.6% as compared to 36.3% in36.7% for the first quarter of fiscal 2005.six months ended July 31, 2004. The primary decrease in the effective tax rate was due to a lower tax rate experienced by our United Kingdom subsidiary, acquired in the Tropical acquisition.
Net income (loss). The net loss for the three months ended July 31, 2005 was $2.4 million, a decrease of $0.2 million, or 7.7%, as compared to the net loss of $2.6 million for the three months ended July 31, 2004. Net income infor the first quarter of fiscal 2006six months ended July 31, 2005, was $8.9$6.5 million, an increase of $0.7$0.9 million, or 8.5%16.1%, as compared to net income of $8.2$5.6 million for the six months ended July 31, 2004. The changes in the first quarter of fiscal 2005. The increase in net income wasoperating results were due to the changesitems described above.
Liquidity and Capital Resources
We rely primarily upon cash flow from operations and borrowings under our senior credit facility and letter of credit facilities to finance our operations acquisitions and capital expenditures.expansion. We believe that as a result of the growth in our business, our working capital requirements willmay increase. As of April 30,July 31, 2005, our total working capital was $286.1$245.8 million as compared to $207.8 million as of January 31, 2005, primarily as a result of the Tropical acquisition.2005. We believe that our cash flows from operations and available borrowings under our senior credit facility and letter of credit facilities are sufficient to meet our working capital needs.needs for the foreseeable future.
Net cash used inprovided by operating activities was $8.5$41.1 million infor the first quarter of fiscal 2006six months ended July 31, 2005, as compared to $8.0cash provided by operating activities of $56.0 million infor the first quartersix months ended July 31, 2004. The decrease of fiscal 2005. The increase of $0.5$14.9 million in the level of cash used inprovided by operating activities infor the first quarter of 2006six months ended July 31, 2005, as compared to the first quarter of 2005six months ended July 31, 2004, is primarily attributable to an increase in inventory due to the acceleration of receipts during the second quarter in order to avoid potential product embargoes during the last half of the year and a decrease in the use of cash related to accounts receivable, accounts payable and accrued expenses, partially offset by the use of cash related to inventoriesan increase in net income and higher net income.
Net cash used in investing activities was $89.5$86.4 million for the six months ended July 31, 2005, as compared to cash used in investing activities of $9.5 million for the first quarter of fiscal 2006, whichsix months ended July 31, 2004. The increase is primarily reflectsdue to the purchase of Tropical in the amount of $86.9$79.8 million and additions to property and equipment in the amount of $2.6$6.6 million, as compared to net cash used for the six months ended July 31, 2004, for the purchase of intangibles, property and equipment in the amount of $9.5 million.
Net cash provided by financing activities for the six months ended July 31, 2005, was $50.6 million, as compared to net cash used in financing activities for the first quartersix months ended July 31, 2004 of fiscal$12.7 million. The net cash provided during Fiscal 2006, was $97.4 million, which primarily reflects the net proceeds from our senior credit facility of $97.1$50.8 million, which were used primarily for the Tropical Acquisition,acquisition, as well as proceeds from the exercise of employee stock options of $0.3$1.1 million, offset by the payments of $1.2 million in connection with the termination of the swap agreements. The net cash used during Fiscal 2005, primarily reflects the net proceeds from our stock offering of $21.2 million as well as proceeds from the exercise of employee stock options of $0.8 million, offset by the net payments made on our senior credit facility of $34.7 million.
The Tropical Sportswear Acquisition
On February 26, 2005, we acquired certain domestic operating assets of Tropical and its subsidiaries and Tropical’sTSI, as well as the outstanding capital stock of TSI’s United Kingdom subsidiary for $88.5 million, subject to a downward adjustment for Tropical’s accounts receivable and inventories at closing.$80.7 million. In addition, acquisition costscost amounted to approximately $1.9$2.6 million, thus bringing the aggregate purchase price to $90.4$83.3 million. The acquisition was funded from our senior credit facility.
Tropical wasis a leading designer, marketer and distributor of men’s branded and private label bottoms to all channels of distribution. With the Tropical acquisition, we believe we have become one of the largest suppliers of men’s bottoms in the United States, added significant revenues, further strengthened and balanced our product mix, and added to our portfolio of brands. The Tropical acquisition also provides us with a state-of-the-art distribution facility in Tampa, Florida and a strong platform to expand our existing brands into Europe as a result of the acquired United Kingdom subsidiary.
Senior Credit Facility
On February 26, 2005, we amended our senior credit facility with Wachovia Bank, National Association (formerly Congress Financial Corporation, Florida). The following were the significant amendments to the facility: (i) the line was increased to $175 million from $110 million; (ii) eligible factored receivables in the borrowing base calculation was increased to $50 million from $30 million; (iii) the inventory borrowing limit was increased to $90 million from $60 million; (iv) Tropical’s United Kingdom subsidiary was added as a borrower and a guarantor; (v) the sublimit for letters of credit was increased to $60 million from $30 million, and (vi)(v) the amount of letter of credit facilities permitted outside of the facility was increased to $110 million from $60 million.
The following is a description of the terms of the senior credit facility, as amended, and does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the senior credit facility.
Certain Covenants. The senior credit facility contains certain covenants, which, among other things, requires us to maintain a minimum EBITDA if availability falls below a certain minimum. It may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We believe we are currently in compliance with all of our covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under theour indentures and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Borrowing Base. Borrowings under the senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of our eligible factored accounts receivables up to $50.0 million plus (c) the lesser of (i) the inventory loan limit of $90 million, or (ii) the lesser of (A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (as defined in the senior credit facility) of eligible inventory, or (2) the loan limit; and in each case minus (x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (z) licensing reserves for which we are the licensee of certain branded products.
Interest. Interest on the principal balance under the senior credit facility accrues, at our option, at either (a) our bank prime lending rate with adjustments depending upon our quarterly average excess availability plus excess cash or leverage ratio or (b) 2.0%1.60% above the rate quoted by our bank as the average Eurodollar Rate (“Eurodollar”) for 1-, 2-, 3- and 6-month Eurodollar deposits with 20 to 25 basis point adjustments depending upon our quarterly average excess availability plus excess cash and leverage ratio at the time of borrowing.
Security. As security for the indebtedness under the senior credit facility, we granted the lenders a first priority security interest in substantially all of our existing and future assets other than our trademark portfolio existing as of March 2002, including, without limitation, accounts receivable, inventory deposit accounts, general
intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries. Lenders under the senior credit facility have a second priority security interest in our trademark portfolio as of March 2002 and a first priority lien on the rest of our trademarks.
Letter of Credit Facilities
As of April 30,July 31, 2005, we maintained fourseven U.S. dollar letter of credit facilities totaling $120.0$170 million, one letter of credit facility totaling $3.1 million utilized by our Canadian joint venture and one letter of credit facility totaling $3.0$0.4 million utilized by our Canadian joint venture.United Kingdom subsidiary. Each letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets. As of AprilJuly 31, 2005, there was $75.4$123.2 million available under existing letter of credit facilities. We anticipate entering into letter of credit facilities with additional lenders in the near future which will provide us with additional availability under our letter of credit facilities in order to meet our future business needs.
$57 Million Senior Secured Notes Payable
In fiscal 2003, we issued $57 million 9 1/2% senior secured notes due March 15, 2009. The proceeds of the offering were used to finance the Jantzen acquisition, to reduce the amount of outstanding debt under the previous senior credit facility and as additional working capital. The proceeds to us were $55.6 million yielding an effective interest rate of 9.74% after deduction of discounts. We entered into certain derivative hedging transactions described in “Item 3: Quantitative and Qualitative Disclosures about Market Risks” in order to manage the overall debt service costs related to these senior secured notes.
The senior secured notes are secured by a first priority security interest granted in our existing portfolio of trademarks and licenses as of March 2002. The senior secured notes are senior secured obligations of ours and rankpari passuin right of payment with all of our existing and future senior indebtedness. The senior secured notes are effectively senior to all of our unsecured indebtedness to the extent of the value of the assets securing the senior secured notes.
Certain Covenants. The indenture governing the senior secured notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We believe we are currently in compliance
with all of the covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under our senior credit facility, letter of credit facilities, real estate mortgage and the indenture relating to our senior subordinated notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
$150 million Senior Subordinated Notes Payable
In fiscal 2004, we issued $150 million 8 7/8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 1/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%.
Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We believe we are currently in compliance with all of the covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities, real estate mortgage and the indenture relating to our senior secured notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Real Estate Mortgage
In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami, Florida and partially refinanced the acquisition of the facility with an $11.6 million mortgage. The real estate mortgage contains certain covenants. We believe we are currently in compliance with all of our covenants under the real estate mortgage. We could be materially harmed if we violate any covenants because the lender under the real estate 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.
Off-Balance Sheet Arrangements
We are not a party to any “off-balance sheet arrangements” as defined by applicable SEC rules.
Effects of Inflation and Foreign Currency Fluctuations
We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and six months ended April 30,July 31, 2005.
Item 3: Quantitative and Qualitative Disclosures about Market Risks
| Item 3: | Quantitative and Qualitative Disclosures about Market Risks |
The market risk inherent in the Company’sour financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates. The Company managesWe manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company’sOur policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate fluctuations. The Company doesWe do not enter into derivative financial contracts for trading or other speculative purposes except for as discussed below.
Derivatives on $57 million senior secured notes payable
At April 30,July 31, 2005, the Companywe had an interest rate swap and option (the “$57 million Swap Agreement”) for an aggregate notional amount of $57 million in order to manage the overall borrowing costs associated with itsour 9 1/2% senior secured notes. The $57 million Swap Agreement is scheduled to terminate on March 15, 2009. The $57 million Swap Agreement is a fair value hedge as it has been designated against the 9 1/2% senior secured notes carrying a fixed rate of interest and effectively converts such notes to variable rate debt. The $57 million Swap Agreement is reflected at fair value in the Company’sour consolidated balance sheet with a corresponding offset to the designated item. The $57 million Swap Agreement is scheduled to terminate on March 15, 2009. The fair value of the $57 million Swap Agreement recorded on the Company’s Consolidated Balance Sheetin our consolidated balance sheet was $1.7$1.4 million as of April 30,July 31, 2005 and $2.7 million as of January 31, 2005.
At April 30,July 31, 2005, the Companywe also had an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57 million associated with the 9 1/2% senior secured notes. The $57 million Cap Agreement is scheduled to terminate on March 15, 2009. The $57 million Cap Agreement caps the interest rate on the senior secured notes at 10%. The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in a $ 50,000$18,000 decrease and $100,000 decrease$31,000 increase of recorded interest expense on the consolidated statementstatements of incomeoperations for the three and six months ended April 30,July 31, 2005, respectively, and a $300,000 and $200,000 increase of recorded interest expense on the consolidated statements of operations for the three and six months ended July 31, 2004. The fair value of the $57 million Cap Agreement recorded on the Company’s consolidated balance sheet was ($700,000)667,000) as of April 30,July 31, 2005 and ($600,000)636,000) as of January 31, 2005.
The CompanyWe also had an interest rate floor agreement (the “$57 million Floor Agreement”) for an aggregate notional amount of $57 million associated with the 9 1/2% senior secured notes. The $57 million Floor Agreement expired on March 15, 2005. Under the $57 million Floor Agreement, the Company was liable for the difference between the three-month LIBOR rate and 1.50% for all rate resets in which the LIBOR was below 1.50%. When the LIBOR was equal to or greater than 1.50%, the Company made no payments under the $57 million Floor Agreement. The $57 million Floor Agreement did not qualify for hedge accounting treatment under
SFAS No. 133, resulting in a $0.0$40,000 and $100,000 decrease of recorded interest expense on the consolidated statement of incomeoperations for the three and six months April 30, 2005 andended July 31, 2004, respectively. The $57 million Floor Agreement had no impact on interest expense for Fiscal 2006. The fair value of the $57 million Floor Agreement recorded on the Company’s consolidated balance sheet was $0.0$0 as of January 31, 2005.
Derivatives on $150 million senior subordinated notes payable
In conjunction with the Company’sour fiscal 2004 offering of $150 million of 8 7/8% senior subordinated notes due September 15, 2013, the Companywe entered into interest rate swap agreements (the “$150 million Swap Agreement”) with Merrill Lynch & Co., Inc. (“Merrill”) and Wachovia Bank N. A. (“Wachovia”) each with a notional amount of $75 million for an aggregate notional amount of $150 million in order to manage the overall borrowing costs associated with the new senior subordinated notes. The $150 million Swap Agreement was scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, we were entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 7/8% and were obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period through September 15, 2013.
On April 29, 2005, the Companywe terminated itsthe $75 million notional amount swap agreement with Wachovia. In connection with the termination, the Companywe paid $495,000. The termination payment was comprised of the fair market value of the swap in the amount of $578,000 less accrued interest of $83,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.
On May 2, 2005, the Companywe terminated itsthe $75 million notional amount swap agreement with Merrill. In connection with the termination, the Companywe paid $540,000. The termination payment was comprised of the fair market value of the swap in the amount of $632,000 less accrued interest of $92,000.
The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.
The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $1.5 million as of January 31, 2005.
Other
Our currentWe do not currently have a significant exposure to foreign exchange risk is not significant and accordingly, we have not entered into any transactions to hedge against those risks.
Item 4: Controls and Procedures
| Item 4: | Controls and Procedures |
As of the end of the period covered by this Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting during the quarter ended April 30,July 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
(a) The annual meeting of shareholders was held on Tuesday, June 7, 2005.
(b) The following individuals were elected directors until the 2008 Annual Meeting of Shareholders and until their successors are duly elected and qualified.
| FOR | WITHHELD | |||
Ronald L. Buch | 8,360,288 | 927,598 | ||
Salomon Hanono | 7,217,408 | 2,070,478 |
The term of office of each of the following directors continued after the meeting:
George Feldenkreis | Joseph P. Lacher | |
Oscar Feldenkreis | Leonard Miller | |
Gary Dix | ||
(c) The shareholders also voted upon these additional proposals at the meeting.
1) The shareholders approved the adoption of the 2005 Long Term Incentive Compensation Plan.
FOR | AGAINST | ABSTAIN | Not Voted | |||
5,202,834 | 2,526,635 | 6,802 | 1,551,615 |
2) The shareholders approved the adoption of the 2005 Management Incentive Compensation Plan.
FOR | AGAINST | ABSTAIN | Not Voted | |||
8,979,118 | 300,663 | 8,105 | — |
3) The shareholders ratified the appointment by the Audit Committee of Perry Ellis’ board of directors of Deloitte & Touche LLP to serve as Perry Ellis’ independent auditors for the fiscal year ending January 31, 2006.
FOR | AGAINST | ABSTAIN | Not Voted | |||
9,205,590 | 80,506 | 1,790 | — |
| ITEM 6. | Exhibits |
(a) Index to Exhibits
| Exhibit Number | Description | |
| 10.77 | Perry Ellis International, Inc. Fiscal 2006 Management Incentive Plan | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 1350. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 1350. | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Perry Ellis International, Inc. | ||||
| Date: | By: | / | ||
| George Pita, Chief Financial Officer | ||||
Exhibit Index
| Exhibit Number | Description | |
| 10.77 | Perry Ellis International, Inc. Fiscal 2006 Management Incentive Plan | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 1350. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 1350. | |
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