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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________.
Commission file number 0-21764
Perry Ellis International, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Florida 59-1162998
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3000 N.W. 107th Avenue, Miami, Florida 33172
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(Address of Principal Executive Offices) (Zip Code)
(305) 592-2830
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(Registrant's telephone number, including area code)
________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares outstanding of the registrant's Common Stock is 6,286,740
(as of April 15, 2002).
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $33,172,976 (as of April 15, 2002).
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
Portions of the Company's Proxy Statement for the 2002 Annual Meeting - Part III
Unless the context otherwise requires, all references to "Perry Ellis," the
"Company," "we," "us" or "our" include Perry Ellis International, Inc. and its
subsidiaries. References in this report to annual financial data for Perry Ellis
refer to fiscal years ending January 31. This Form 10-K contains trademarks held
by us and those of third parties.
_______________
FORWARD-LOOKING STATEMENTS
We caution readers that this report and the portions of the proxy statement
incorporated by reference into this report include "forward-looking statements"
as that term is used in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on current expectations rather than
historical facts and they are indicated by words or phrases such as
"anticipate," "estimate," "expect," "project," "believe," "intend," "envision,"
and similar words or phrases. These forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Some of the factors that would affect our financial performance, cause
actual results to differ from our estimates, or underlie such forward-looking
statements, are set forth in various places in this report and the portion of
the proxy statement incorporated by reference, including under the heading Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report. These factors include:
. general economic conditions;
. the effectiveness of our planned advertising, marketing and
promotional campaigns;
. our ability to carry out growth strategies;
. our ability to contain costs;
. our ability to integrate acquired businesses, trademarks, tradenames
and licenses into our existing organization and operations;
. our future capital needs and the ability to obtain financing;
. our ability to predict consumer preferences;
. our ability to compete;
. the termination or non-renewal of any material license agreements to
which we are a party;
. anticipated trends and conditions in our industry, including future
consolidation;
. changes in fashion trends and customer acceptance of both new designs
and newly introduced products;
. the level of consumer spending for apparel and other merchandise;
. competition among department and specialty stores;
. possible disruption in commercial activities due to terrorist activity
and armed conflict; and
. other factors set forth in this report and in our filings with the
Securities and Exchange Commission (the "Commission").
You are cautioned not to place 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.
2
PART I
Item 1. Business
Overview
We are a leading licensor, designer and marketer of a broad line of high
quality men's sportswear, including sport and dress shirts, golf sportswear,
sweaters and casual and dress pants and shorts, which we sell to all levels of
retail distribution. We license our trademark portfolio domestically and
internationally for apparel and other products that we do not sell, including
dress sportswear, outerwear, fragrances and accessories. Beginning in mid
fiscal 2003 we plan to design, license and market women's swimwear under the
Jantzen(R) and Tommy Hilfiger(R) brands, which we acquired in March 2002. We
have built a broad portfolio of brands through selective acquisitions and the
establishment of our own brands over our 35-year operating history. Our
distribution channels include regional, national and international, mass
merchants, chain stores, department stores and specialty stores throughout the
United States, Puerto Rico and Canada. Our largest customers include Wal-Mart
Stores, Inc., J.C. Penney Company, Inc., Target Corp., Mervyn's, Kohl's
Corporation and Sears Roebuck & Co. We currently use approximately 100
independent suppliers, located in the Far East, other parts of Asia, and Central
America, to source our products.
Through acquisition of brands and internal growth, we have experienced
significant overall growth in recent years. From fiscal 1997 to fiscal 2002, we
experienced a compound annual growth rate of 12.0% in revenues. In order to
continue to grow, we plan to selectively evaluate a number of acquisition
candidates each year.
We own or license the brand names under which most of our products are
sold. These brand names include Crossings(R), Cubavera(R), Havana Shirt Co.(R)
and Natural Issue(R) for casual sportswear, John Henry(R) and Manhattan(R) for
dress casual wear, Perry Ellis(R), Mondo di Marco(R) and Andrew Fezza(R) for
dress sportswear, Perry Ellis America(R) for jeans wear, PING(R) and
Munsingwear(R) for golf sportswear and Pro Player(R) and Nautica(R) for
activewear. We are positioned to enter the women's market for swimwear and
sportswear with the March 2002 acquisition of the Jantzen brands. Through our
"family of brands" marketing strategy, we seek to develop and enhance a distinct
brand name for each product category within each distribution channel. We also
produce goods sold under the private label program of our various retail
customers. We market our brands to a wide range of segments, targeting consumers
in specific age, income and ethnic groups. Currently, our products are
predominantly produced for the men's segment of the apparel industry, in which
fashion trends tend to be less volatile than in other segments. The percentage
of our net sales from branded products decreased to 63.0% in fiscal 2002 from
66.0% in fiscal 2001.
We also license our proprietary brands to third parties for the manufacture
and marketing of various products, some of which we do not sell, including dress
sportswear, outerwear, fragrances and accessories. In addition to generating
additional revenue for us, these licensing arrangements raise the overall
awareness of our brands.
We believe that our competitive strengths position us well to capitalize on
several trends that have affected the apparel sector in recent years. These
trends include the consolidation of the department and chain store sectors into
a smaller number of stronger retailers, which represent some of our most
important customers; the increased reliance of retailers on reliable suppliers
with design expertise and advanced systems and technology; and the continued
importance of strong brands as a source of product differentiation.
3
Jantzen Acquisition
On March 22, 2002, we completed the acquisition from subsidiaries of VF
Corporation of certain assets of the Jantzen swimwear business for approximately
$24.0 million, excluding fees related to the transaction. The Jantzen brands
have a history of over 90 years and its products are sold in upscale department
stores, mid-tier department stores, chain stores, mass merchants and specialty
shops. The acquisition was financed with a portion of the proceeds from a $57.0
million private offering of 9 1/2% senior secured notes due 2009, which we
closed simultaneously with the acquisition.
The Jantzen assets we acquired consist primarily of the Jantzen trademarks
and tradenames, license agreements, certain equipment, other items of personal
property, showroom leases and inventory relating to the 2003 season, which
commences on July 1, 2002. As part of this acquisition, we acquired the
licenses for the Tommy Hilfiger brand for women's swimwear. We also acquired
the license for the Nike(R) brand for women's swimwear and swimwear accessories.
However, the assignment of this license is subject to the written consent of the
licensor. We are still in the process of negotiating Nike's consent to the
assignment of its license. In the meantime, we are working closely with Jantzen
and the licensor to ensure that all of the rights and obligations under the
existing Nike license are preserved and fulfilled until such written consent is
obtained.
In connection with the Jantzen acquisition, we entered into a lease
agreement with VF Corporation to occupy Jantzen's Portland, Oregon office
facility for an initial six-month period. In addition, we entered into a lease
agreement to occupy a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period. We also have a right of first refusal
until May 2002 to purchase the Seneca distribution center facility.
We believe this acquisition opens up a new market for the Company and we
plan to build on Jantzen's reputation for high-quality swimwear. It will expand
our licensing revenues, add to our strong portfolio of brands, and allow us to
broaden our product line into new product categories, such as women's swimwear
and sportswear.
Notes Offering
On March 22, 2002, we completed a private offering of $57.0 million 9 1/2%
senior secured notes due 2009. The proceeds of the private offering were used
to fund the Jantzen acquisition, to reduce the amount of outstanding debt under
our senior credit facility and as additional working capital.
The senior secured notes are secured by a first priority security interest
granted in our existing portfolio of trademarks and licenses, including the
trademarks and licenses acquired in the Jantzen acquisition; all license
agreements with respect to these trademarks; and all income, royalties and other
payments with respect to such licenses. The senior secured notes are senior
secured obligations of Perry Ellis and rank pari passu in right of payment with
all of our existing and future senior indebtedness. The senior secured notes
are effectively senior to all unsecured indebtedness of the Company to the
extent of the value of the assets securing the notes.
Competitive Strengths
We believe that we have the following competitive advantages in our
industry:
4
Portfolio of Family of Brands. We own and distribute nine major brands
(Perry Ellis, Munsingwear, Crossings, Natural Issue, John Henry, Manhattan,
Mondo di Marco, Grand Slam and Jantzen) with a total of over 41 sub-brands (such
as Penguin Sport(R) and Career Club(R)). We also design, source and market four
other major brands (Andrew Fezza, PING, Nautica and Tommy Hilfiger), which we
license under existing agreements with various expiration dates and renewal
options. We also license the Perry Ellis, John Henry, Manhattan, Natural Issue,
Pro Player, Mondo di Marco, Munsingwear and Jantzen brands to licensees for
products that we do not sell directly to retailers. These brands enjoy national
recognition in their respective sectors of the market and we believe have a
loyal consumer and retailer following. Brand recognition is critical in the
apparel industry, where strong brand names help define consumer preferences and
drive department store floor space allocation.
Strong Retailer Relationships. We believe our established relationships
with retailers at all distribution levels give us the opportunity to maximize
the selling space dedicated to our products, monitor our brand presentation and
merchandising selection, and introduce new brands and products. We have long-
standing relationships with our largest customers, which include J.C. Penney and
Sears Roebuck (more than 22 years), Federated Department Stores (15 years), Wal-
Mart (13 years), Kohl's (9 years) and Target (8 years). We believe that we have
maintained these relationships as a result of our quality brand name products
and our dedication to customer service. Management, in conjunction with our
staff of sales people and commissioned agents, meets with our major customers
frequently to review product offerings, establish and monitor sales plans, and
design joint advertising and promotional campaigns. We believe our reliable
delivery times, consistent product quality and quick response to fashion trends
and inventory demands allow us to meet our retailers' current requirements. In
addition, our global sourcing network, design expertise, advanced systems and
technology, and warehousing facility enhance our ability to meet the changing
and increasing needs of our retailers.
Strong Licensing Capabilities and Relationships. By actively licensing the
brands we own, we have gained significant experience in identifying potential
licensing opportunities and have established relationships with many active
licensees. Our acquisition of the Perry Ellis brand during fiscal 2000
positioned us in more retail outlets with more exposure nationally and
internationally. We believe that over the past three years we have successfully
integrated new brands into our business. We believe that our broad portfolio of
brands appeals to licensees because it gives them the opportunity to sell their
products into many different retail distribution channels. For example, a
manufacturer of men's accessories might license the Natural Issue brand to sell
to national department stores or license the Munsingwear brand to target mass
merchandisers. Further, by aligning our strengths with those of our licensees,
we have been able to enhance our sourcing capabilities, and plan our marketing
campaigns on an aggregate basis to maximize return on investment. We believe
that our licensing expertise, which is supported by a dedicated staff, will
allow us to continue marketing our brands to apparel producers effectively. We
will be bringing our experience and expertise to our Jantzen brands and expect
to position them among the key players in the swimwear and sportswear market.
World-Wide Low-Cost Sourcing Capabilities. Our global network of suppliers
enables us to purchase apparel products at competitive cost without sacrificing
quality, while at the same time reacting quickly to our retailers' needs and
maximizing production flexibility. We developed this expertise through more
than 35 years of experience in purchasing our products from suppliers around the
world. No individual supplier in fiscal 2002 accounted for more than 10.0% of
our total sourcing needs. We do not have long-term arrangements with any of our
suppliers, thereby affording us greater flexibility in making purchasing
decisions with our vendor base. We currently maintain a staff of experienced
sourcing professionals, principally located in the United States, Korea, China,
and Taiwan. The Company made the decision during this past year to close its
office in Mexico and expand its Asian operations with the opening of a new
office in Shanghai, China. This decision was based on the growth of our Far
East sourcing and the better management of the Mexican and Latin American
sourcing through the Miami office. With the global network of ten sourcing and
quality assurance offices, we closely monitor our suppliers to maintain strict
quality standards and identify new sourcing opportunities. By sourcing our
products, we manage our inventories more effectively, and do not incur the costs
of maintaining and operating production facilities.
5
Design Expertise and Advanced Technology. Our in-house staff consists of
16 senior designers, who have an average of 18 years of experience, and are
supported by a staff of 20 other design professionals. Together, they design
substantially all of our products utilizing computer-aided design technology.
The use of this technology minimizes the time-consuming and costly production of
actual sewn samples prior to customer approval. It also allows us to create
custom-designed products meeting the specific needs of our customers and
facilitates a quick response to changing fashion trends. Our computer-aided
design system was recently upgraded to allow us to enhance our design technology
and instantaneously share our designs with our suppliers globally, and react
quicker to new product.
Capacity for Growth. We are leveraging our recent investments in
infrastructure and our skilled personnel to accommodate future internal growth
and selected acquisitions. Our 240,000 sq. ft. office and warehouse facility in
Miami, with approximately 170,000 sq. ft. of warehouse space, has positioned us
to increase capacity to handle current and future growth. We believe these
facilities, two third-party warehouse facilities in California, our two
showrooms in New York and other facilities we use are sufficient to accommodate
current operations and additional personnel. With the Jantzen acquisition we
entered into a lease agreement for one-year period with a 60-day option to
acquire a portion of Jantzen's Seneca, South Carolina distribution center
facility. We also own three acres of land adjacent to our facilities in Miami,
Florida, which affords us the opportunity to expand our primary warehousing and
office space when needed.
Proven Ability to Integrate Acquisitions. Since 1993, we have selectively
acquired and integrated seven major brands, which currently have over 40 sub-
brands. In assessing acquisition candidates, we selectively target brands that
we believe are under-performing and can be revitalized using our competitive
strengths. To date our most significant brand purchases have been our
acquisitions of the Munsingwear brand in fiscal 1997, the Perry Ellis, John
Henry and Manhattan brands in fiscal 2000, and the Jantzen brands in fiscal
2003. As part of an extensive integration process we:
. improved the responsiveness to market trends by applying our
design and sourcing expertise;
. communicated new positioning of the brands through various wide-
ranging marketing programs;
. continued licensing operations immediately upon acquisition
without interruption;
. solidified the management team to design and market licensing
brands;
. repositioned the brands based on our "family of brands" strategy;
. renegotiated existing contracts and developed new licensing
agreements in new segments and markets; and
. implemented the sourcing and distribution of products previously
licensed.
We believe that we can successfully integrate additional brands into our family
of brands, revitalizing them consistent with our competitive strengths.
Experienced Management Team. Our senior management team averages nearly 20
years of experience in the apparel industry. Our management team also has
significant experience in developing and revitalizing brand names, licensing
brands; has an established reputation with retailers, the trade and the
financial community; and possesses a diverse skill base, which incorporates
brand marketing, sourcing and management information systems.
6
Business Strategy
Our "family of brands" marketing approach is designed to develop a distinct
brand for each product category within each distribution channel. For example,
we sell our golf sportswear under the Munsingwear brand to mass merchants, under
the Grand Slam brand to department stores and under the PING brand to higher-end
retailers, golf shops and resorts. By differentiating our brands in this manner,
we can better satisfy the needs of each type of retailer by offering brands
tailored to its specific distribution channel. In addition, we believe that this
strategy helps insulate us from changing retail patterns, allows us to maintain
the integrity of each distribution channel and helps prevent brand erosion.
Our objective is to develop and enhance our brands by:
. carefully maintaining distinct distribution channels for each
brand;
. consistently designing, sourcing and marketing high quality
products;
. reinforcing the image of our brands and continuously promoting
them; and
. updating our styles to keep them current.
Controlling strong brands allows us to increase our retail base, license
these brands to third parties, develop sub-brands and grow internationally.
To achieve our objective, we have adopted a strategy based on the following
elements:
Increase Brand Name Recognition. We intend to enhance recognition of our
brand names by promoting our brands at the retailer and consumer levels. As part
of this effort, we conduct cooperative advertising in print and broadcast media
in which various retailers feature our products in their advertisements. We also
engage in direct consumer advertising in select markets by securing highly
visible billboards and events, sponsorships, and advertising in periodicals such
as Men's Health, Maxim and Gentleman's Quarterly in association with specific
regional or national events. We will continue the Jantzen's emphasis in print
advertisements in influential fashion magazines such as In Style, Glamour and
Cosmopolitan and intend to sponsor selected athletes and celebrities in the
future. We believe these campaigns will serve to further enhance and broaden our
customer base. Licensing our brands to third parties also serves to improve
brand recognition by providing increased consumer exposure. We have a strong
presence at trade shows, such as "MAGIC" in Las Vegas, Market Week in New York
and golf shows and events throughout the country. We also continue to maintain
web sites for each of our major brands to take advantage of opportunities
created by the Internet.
Increase Distribution. We have increased the distribution of our existing
products by expanding the number of regional and national retailers that carry
our brands and gained greater penetration in the number of stores in which each
of these retailers sells our products. This increased exposure has broadened our
established reputation at the retail and consumer levels. We selectively pursue
new channels of distribution for our products, focusing on maintaining the
integrity of our products and reinforcing our image at existing retail stores,
as well as introducing our products to geographic areas and consumer sectors
that are presently less familiar with our products.
Continue to Diversify Product Line. We continue to broaden the range of our
product lines, capitalizing on the name recognition, popularity and discrete
target customer segmentation of each major brand. For example, we expanded into
dress sportswear with the licensing of the Andrew Fezza brand and high-end golf
sportswear with the licensing of the PING brand. We also entered into the jeans
wear market with the reintroduction of the Perry Ellis America brand in
department stores and expanded the Natural Issue brand in the mid-tier
department stores and chain stores. This year, we added a new brand to the
corporate wear (Advertising Specialty Industry)
7
market with the licensing of the Nautica brand for knits, woven casual shirts,
fleece tops, outerwear and headwear. For fiscal 2003 with the acquisition of
Jantzen we have entered into a new market for the Company with women's swimwear
and sportswear.
Adapt to Changing Marketplace. The apparel business continues to present
new challenges in changing styles, customer demands and consumer tastes, getting
goods to market, and reacting to the technologies employed by the retailers and
imposed on suppliers. By continuing to strive for improvements in our design
department we continue to develop new designs suited to the various lifestyles
we cater to. Our continuing commitment to sourcing and logistics enables us to
meet the time pressures of gearing up for the new sales seasons, and reacting
quickly to customer demands. Some examples of our ability to meet the challenges
in our business follow:
. In January 2001, we started distribution into the corporate wear
market, which is geared towards selling merchandise to large
corporations as uniforms and for promotional activities. We
diversified our internal sales structure to better service these
customers and their sales channels. We have continued to grow the
corporate wear business by licensing the Nautica brand and
integrating it into our distribution flow.
. In response to increased private label programs being promoted by
some of our retail customers, we increased our branded supply
with private label goods. While these goods generally have lower
initial profit margins, they represent a steady source of supply
for the retailer and generate meaningful revenues for us.
. The Jantzen acquisition in March 2002 provides us with our first
entry into the women's swimwear and sportswear market. This step
gives us the opportunity to apply our design, marketing and
global sourcing capabilities in the women's wear market. With our
competitive strengths in the industry we expect to generate
considerable top line growth for the Jantzen brands over the
coming years.
Expand Licensing Activities. Since acquiring the Munsingwear brand in
fiscal 1997, we have significantly expanded the licensing of our brands to third
parties for various product categories. The acquisitions of the Perry Ellis,
John Henry, Manhattan, Pro Player and Mondo di Marco brands have provided us,
and will continue to provide us, with significant licensing opportunities. The
acquisition of the Jantzen brands is expected to significantly enhance these
opportunities. We are using these nationally recognized brands to expand our
licensing activities, particularly with respect to product categories such as
women's wear and activewear, and to enter into historically underserved
geographic areas for our Company, such as Latin America, Europe and Asia. We
are continually working with our licensees to strengthen their design, finished
products and marketing campaigns, thereby increasing our revenues. We also
continually review our possible entry into new markets and provide potential
licensees with strong brands, design expertise and innovative marketing
strategies.
Pursue Strategic Acquisitions. The apparel industry has followed the
consolidation trend of the retail industry as large retailers have continued to
give preferences to more dependable and flexible vendors. We are frequently
presented with and evaluate new acquisition opportunities and intend to continue
our strategy of making selective acquisitions to add new product lines and
expand our portfolio of brands. Since 1993, we have acquired, or obtained
licenses for, several brands, including Munsingwear, Perry Ellis, John Henry,
Manhattan, Crossings, PING, Andrew Fezza, Mondo di Marco, Pro Player, Nautica,
Jantzen and Tommy Hilfiger. The March 2002 acquisition of the Jantzen brands
presents the Company with an opportunity to apply its design, sourcing,
marketing and distribution expertise to a new market, which we believe has
significant upside potential for us.
8
Brands
The key components of our brand strategy are to: (a) provide consistent
high quality products, (b) distribute our brands in distinct channels of
distribution, and (c) reinforce and capitalize on each brand's image through new
product development and image advertising. This strategy has enabled us to
increase our customer base, license our brands to third parties and develop sub-
brands.
Nearly 63.0% of our products are sold under brands we own or license from
third parties. We currently own nine nationally recognized brands whose
products we source and sell to retailers and other channels. These brands
include Natural Issue, Munsingwear, Grand Slam, John Henry, Manhattan, Perry
Ellis, Perry Ellis America, Crossings and Jantzen. There have been over 41 sub-
brands developed from these nine major brands. We also distribute the PING,
Andrew Fezza, Nautica and Tommy Hilfiger brands under license arrangements.
We license Perry Ellis, our premier brand, as well as John Henry,
Manhattan, Natural Issue, Pro Player, Mondo di Marco, Career Club, Crossings,
Munsingwear and Jantzen for product categories that we do not sell directly to
the retailers. Our depth of brand selection enables us to target consumers
across a wide range of ages, incomes and lifestyles.
Perry Ellis. We acquired the Perry Ellis brand, which is associated with
elegance, quality, value, comfort and innovative designs in fiscal 2000. The
Perry Ellis brand is designed to appeal primarily to high-income, status-
conscious, professional 25-50 year-old men. We primarily license the Perry Ellis
brand to third parties for a wide variety of products.
Munsingwear. We purchased the Munsingwear brands along with its associated
sub-brands in fiscal 1997 to appeal to the middle-income 30-70 year-old men who
prefer classic casual sportswear and to sports enthusiasts. Munsingwear and its
sub-brands have over 100 years of history. Munsingwear apparel items include
golf shirts, vests, jackets and casual pants. The Munsingwear brand is
primarily sold in mid-tier department stores such as Mervyn's at retail price
points for shirts ranging from $17.99 to $24.99 and for casual pants from $19.99
to $24.99.
Some of the successful sub-brands of the Munsingwear brand include the
Munsingwear Lifestyle sub-brands for casual sportswear and the Munsingwear Golf
and Slammer sub-brands for golf sportswear. These sub-brands are sold primarily
to regional mass merchants such as Meijer Inc. at retail price points ranging
from $12.99 to $19.99.
Grand Slam and Penguin Sport. We purchased the Grand Slam and Penguin
Sport brands as part of the Munsingwear acquisition in fiscal 1997. Grand Slam,
with its signature penguin icon logo appeals to the middle-income 30-60 year-old
men who prefer a classic casual activewear. The Grand Slam brand is primarily
sold in mid-tier department stores, at retail price points for shirts ranging
from $24.99 to $34.99 and for pants from $29.99 to $39.99.
The Penguin Sport brand offers a functional sportswear design aimed at the
golf market. It is sold primarily in the mid-tier department stores such as
Kohl's and Mervyn's, as well as specialty and sporting goods stores at retail
price points ranging from $33.99 to $35.99. Grand Slam and Penguin Sport
products include golf shirts, vests, jackets, pants and shorts.
Natural Issue. We developed the Natural Issue brand in 1988 to appeal to
middle-income 25-55 year-old men. Natural Issue's products include shirts,
sweaters and pants. It is designed to suit the needs of the consumer with a
broad cross-cultural appeal. We are expanding our pants product to include the
Natural Issue Executive Khaki pant line. Natural Issue is primarily sold in the
mid-tier department stores, such as Kohl's, J.C. Penney and Mervyn's, at retail
price points for shirts ranging from $26.99 to $34.99 and for pants from $39.99
to $44.99.
John Henry. This brand, which we originally licensed and then acquired in
fiscal 2000, is designed to appeal to middle income 25-45 year-old men. Our
product offerings form a "dress casual collection." The John
9
Henry brand is primarily sold at the mid-tier department stores such as Sears
Roebuck (both in the United States and Canada) and Mervyn's at retail price
points ranging from $25.99 to $34.99.
Manhattan. We acquired the Manhattan brand in fiscal 2000. For over 100
years, the Manhattan label has been associated with men's dress shirts. We have
diversified the Manhattan brand in the United States to include a wider range of
sportswear and classic dress-casual apparel. We currently offer an exclusive
collection at K-Mart consisting of pants, shirts and sweaters, in a variety of
styles and patterns geared towards a casual lifestyle. The brand is designed to
appeal to 25-65 year-old men. The Manhattan brand is sold at retail price points
for shirts and sweaters ranging from $12.99 to $22.99 and for pants from $19.99
to $24.99.
Cubavera and Havana Shirt Co. In fiscal 2000 and 2002, we introduced the
Cubavera and the Havana Shirt Co. brands, respectively. This line of clothing
is designed to appeal to the growing tropical and Latin influences on consumers'
style and tastes. Cubavera is currently sold in major department stores such as
Federated Department Stores and May Department Stores, as well as specialty
shops, at retail price points ranging from $29.99 to $39.99. The Havana Shirt
Co. is currently sold in department stores at retail price points ranging from
$24.99 to $34.99.
Crossings. We purchased the well-known Crossings brand in fiscal 1998 and
positioned it to appeal to middle-income 35-55 year-old men. This brand was well
known in the 1980's as the premier sweater brand. We have positioned the brand
to be associated with value and quality and further expanded it to include
shirts and pants. The Crossings brand is primarily sold to upscale department
stores such as Federated Department Stores, May Department Stores and Saks, Inc.
at retail price points for shirts ranging from $19.99 to $29.99 and for pants
from $19.99 to $29.99.
Perry Ellis America. We introduced the Perry Ellis America brand for jeans
wear during fiscal 2001. The Perry Ellis America brand is designed to appeal
primarily to 18-30 year-old men, and is sold at retail price points for shirts
ranging from $19.99 to $39.99 and for pants from $37.99 to $44.99.
Pro Player. We acquired the Pro Player brand in fiscal 2001. This brand
is well recognized in the sports apparel market and appeals to 18-45 year-old
men. We license and sell this brand to third parties for a wide variety of
products and is sold at retail price points ranging from $16.99 to $22.99.
Jantzen. We acquired the Jantzen brands in March 2002. With this
acquisition we will be entering the women's swimwear and sportswear market. The
Jantzen brands have a history of over 90 years and appeal to middle-income 30-55
year-old women. The products will be sold in upscale department stores, mid-tier
department stores, chain stores and specialty shops at retail price points
ranging from $49.99 to $89.99.
PING. We have an apparel master license for the PING golf brand, which is
designed to appeal to high-income 25-50 year-old men who are status-conscious.
The license had an initial term expiring in December 2003 and has been renewed
for another year until December 2004. The brand is a well-known and prestigious
golf brand, which we positioned to be associated with the highest standard of
quality in the golf business. Our products under this brand include golf shirts,
sweaters, shorts and outerwear. The PING brand is sold primarily in the golf
shops and top-tier specialty stores at retail price points ranging from $43.99
to $99.99.
Andrew Fezza. We license the Andrew Fezza brand, under a license that
covers the United States, its territories and possessions and has an initial
term expiring in June 2003. We have an option to renew this license for an
additional five years but have not yet determined whether we will exercise such
option. Andrew Fezza is a recognized living American designer who is actively
involved with the design and marketing of the brand. We have positioned the
brand to be associated with a classic European style at a moderate price. Andrew
Fezza's products include shirts and pants. The Andrew Fezza brand is sold to
department stores such as May Department Stores, Federated Department Stores and
Saks, Inc. at retail price points for shirts ranging from $21.99 to $29.99 and
for pants from $19.99 to $34.99.
10
Tommy Hilfiger. We acquired a license for the Tommy Hilfiger brand for
women's swimwear as part of the acquisition of the Jantzen brands in March 2002.
The products will be sold in upscale department stores, chain stores and
specialty shops at retail price points ranging from $49.99 to $99.99.
Mondo di Marco. We acquired the Mondo di Marco brand in fiscal 2001. This
brand is positioned to appeal to 18-40 year-old men. The Mondo di Marco brand
is licensed to a third party and is sold primarily in up-scale department stores
at retail price points ranging from $29.99 to $69.99.
Other Markets
Private Label. In addition to our sales of branded products, we sell
products to retailers for marketing as private label or own store lines. In
fiscal 2002, we sold private label products to Target, Wal-Mart, J.C. Penney,
Goody's, K-Mart, Mervyn's, Meijer and Sears Roebuck. Private label sales
generally yield lower profit margins than sales of comparable branded products,
but they often achieve higher sales volumes. Private label sales accounted for
approximately 36.6%, 34.0% and 21.0% of net sales during fiscal 2002, 2001 and
2000, respectively.
Corporate wear. We entered into the corporate wear business at the end of
fiscal 2001. We recognized the change in the current business environment and
have begun to provide a variety of corporations with high quality designer
products. We currently offer the PING, Nautica and Perry Ellis brands in this
market. We sell primarily to corporate wear distributors at price point ranging
from $39.99 to $109.99.
Products and Product Design
We offer a broad line of high quality men's sportswear, including woven and
knit sport shirts, golf sportswear, activewear, sweaters, jackets, vests, casual
and dress pants and shorts. Substantially all our products are designed by our
in-house staff utilizing our advanced computer-aided design technology. This
technology enables us to produce computer-generated simulated samples that
display how a particular style will look in a given color and fabric before it
is actually produced. These samples can be printed on paper or directly onto
fabric to accurately present the colors and patterns to a potential customer.
In addition, we can quickly alter the simulated sample in response to the
customer's comments, such as change of color, print layout, collar style and
trimming, pocket details and/or placket treatments. The use of computer-aided
design technology minimizes the time-consuming and costly need to produce actual
sewn samples prior to retailer approval and allows us to create custom-designed
products meeting the specific needs of customers.
In designing our apparel products, we seek to promote consumer appeal by
combining functional, colorful and high quality fabrics with creative designs
and graphics. Styles, color schemes and fabrics are also selected to encourage
consumers to coordinate outfits and form collections, thereby encouraging
multiple purchases. Our designers stay continuously abreast of the latest
design trends, fabrics, colors, styles and consumer preferences by attending
trade shows and periodically conducting market research in Europe and the United
States. In addition, we actively monitor the retail sales of our products to
determine changes in consumer trends.
In accordance with standard industry practices for licensed products, we
have the right to approve the concepts and designs of all products produced and
distributed by our licensees.
Our products include:
Shirts. We offer a broad line of sport shirts, which include cotton and
cotton-blend printed, yarn-dyed and solid knit shirts, cotton woven shirts,
silk, cotton and rayon printed button front sport shirts, linen sport shirts,
golf shirts, and embroidered knits and woven shirts. Our shirt line also
includes brushed twill shirts, jacquard knits and yarn-dyed flannels. In
addition, we are also the leading distributor in the United States of Guayabera
shirts. We market shirts under a number of our own brands as well as the
private labels of our retailers. Our shirts are produced in a wide range of
men's sizes, including sizes for the big and tall men's market. Sales of
11
shirts accounted for approximately 74%, 74% and 78% of our net sales during
fiscal 2002, 2001 and 2000, respectively.
Pants. Our pants lines include a variety of styles of wool, wool-blend,
linen and poly/rayon dress pants, casual pants in cotton and poly/cotton and
linen/cotton walking shorts. We offer our pants in a wide range of men's sizes.
We market our pants as single items or as a collection to complement our shirt
lines. Sales of pants accounted for approximately 20%, 20% and 16% of our net
sales during fiscal 2002, 2001 and 2000, respectively.
Swimwear and Sportswear. With the acquisition of the Jantzen brands in
March 2002, we are entering into the women's swimwear and sportswear market in
fiscal 2003.
Other Products. We offer sweaters, vests, jackets and pullovers under our
existing brands as well as private label. The majority of the other products we
sell are sweaters, which accounted for approximately 6%, 6% and 5% of net sales
during fiscal 2002, 2001 and 2000, respectively. With the acquisition of
Jantzen, we will offer swimwear accessories beginning in fiscal 2003.
Marketing and Distribution
We market our apparel products to customers principally through the direct
efforts of an in-house sales staff, independent commissioned sales
representatives who work exclusively for us, and other non-exclusive independent
commissioned sales representatives, who generally market other product lines as
well as ours. We also attend major industry trade shows in the fashion, golf and
corporate sales areas.
We also advertise to customers through print advertisements in a variety of
consumer and trade magazines and newspapers, and through outdoor advertising
such as billboards strategically placed to be viewed by consumers. In order to
promote our men's sportswear at the retail level, we conduct cooperative
advertising in print and broadcast media, which features our products in our
customers' advertisements. The cost of this cooperative advertising is shared
with our customers. We also conduct various in-store marketing activities with
our customers, such as retail events and promotions and share in the cost of
these events. These events and promotions are in great part orchestrated to
coincide with high volume shopping times such as holidays (Christmas,
Thanksgiving and Father's Day). In addition to event promotion, we place
perennial displays and signs of our products in retail establishments.
We started direct consumer advertising in selected markets featuring the
Perry Ellis, Natural Issue, John Henry, Grand Slam and Munsingwear brand names
through the placement of highly visible billboards, sponsorships and special
event advertising. We will integrate the Jantzen brands in our advertising
campaigns. We also maintain informational web sites featuring our brands and
create and implement editorial and public relations strategies designed to
heighten the visibility of our brands. All these activities are coordinated
around each brand in an integrated marketing approach.
12
The following table sets forth the principal brand names for our product
categories at different levels of retail distribution:
- ---------------------------------------------------------------------------------------------------------------------------------
Brand Portfolio Dress Jeans Sports
Channel of Casual Casual Wear Golf Apparel
Distribution
- ---------------------------------------------------------------------------------------------------------------------------------
Upscale Department Mondo di Marco Jantzen(3)
Store PING Collection Tommy Hilfiger (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Perry Ellis America
Crossings Andrew Fezza Jantzen(3)
Department Store Cubavera Perry Ellis (1) Perry Ellis America Grand Slam Tommy Hilfiger (3)
- ---------------------------------------------------------------------------------------------------------------------------------
Natural Issue Penguin Sport Pro Player
Mid-Tier Stores Munsingwear John Henry Natural Issue Munsingwear Jantzen(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Mass Merchants Store Brands Manhattan Store Brands
- ---------------------------------------------------------------------------------------------------------------------------------
Green Grass(2) PING Collection
- ---------------------------------------------------------------------------------------------------------------------------------
Corporate Nautica Perry Ellis (1) PING Collection
- ---------------------------------------------------------------------------------------------------------------------------------
Jantzen(3)
Specialty Stores Havana Shirt Co. Tommy Hilfiger (3)
- ---------------------------------------------------------------------------------------------------------------------------------
(1) We are primarily a licensor for the Perry Ellis brand in the dress
sportswear category.
(2) This includes high-end and specialty golf shops and resorts.
(3) We acquired the Jantzen brands and a license for the Tommy Hilfiger
brand in March 2002.
We believe that customer service is a key factor in successfully marketing
our apparel products and provide our customers with a high level of customer
service. We coordinate efforts with customers to develop products meeting their
specific needs using our design expertise and computer-aided design technology.
Utilizing our well-developed sourcing capabilities, we strive to produce and
deliver products to our customers on a timely basis.
Our in-house sales staff is responsible for customer follow-up and support,
including monitoring prompt order fulfillment and timely delivery. We utilize
an Electronic Data Interchange ("EDI") system for certain customers in order to
provide advance-shipping notices, process orders and conduct billing operations.
In addition, certain customers use the EDI system to communicate their weekly
inventory requirements per store to us electronically. We then fill these
orders either by shipping directly to the individual stores or by sending
shipments, individually packaged and bar coded by store, to a centralized
customer distribution center.
13
Sources of Supply
We currently use independent contract manufacturers, all of whom are
overseas, to produce all of our products. We have approximately 100 suppliers
in countries in the Far East, other parts of Asia, Mexico and in other countries
in Central America. We believe that the use of numerous independent suppliers
allows us to maximize production flexibility while avoiding significant capital
expenditures and the costs of maintaining and operating production facilities.
We maintain offices in Beijing, Shanghai and Guangzhou, China; Seoul, South
Korea; and Taipei, Taiwan. We also operate through independent agents based in
Thailand, Pakistan, Indonesia, Philippines, United Arab Emirates and other
countries to source our products and to monitor production at contract
manufacturing facilities in order to ensure quality control and timely delivery.
Our personnel based in our Miami, Florida office, perform similar functions with
respect to our suppliers in Mexico and Central America. We conduct inspections
of samples of each product prior to cutting by contractors, during the
manufacturing process and prior to shipment. We also have full-time quality
assurance inspectors in the Dominican Republic, Honduras, El Salvador and
Guatemala and in each of our overseas offices. Finished goods are generally
shipped to our Miami, Florida facility for repackaging and distribution to
customers. In fiscal 2003, we will also begin shipments to Jantzen's Seneca,
South Carolina facility for repackaging and distribution to customers.
In order to assist with timely delivery of finished goods, we function as
our own customs broker. We prepare our own customs documentation and arrange for
any inspections or other clearance procedures with the United States Customs
Service. We are a member of the United States Customs Automated Interface
program. This membership permits us to clear our goods through United States
Customs electronically and generally reduces the necessary clearance time to a
matter of hours rather than days.
Licensing Operations
For the past seven years, we have been actively licensing the brands we
own. The licensing of our brands to third parties for various product
categories is one of our strategies. The licensing of our brands enhances their
image by widening the range and distribution of these products without requiring
us to make significant capital investments or incur significant operating
expenses. As a result of this strategy, we have gained significant experience
in identifying potential licensing opportunities and have established strong
relationships with many active licensees.
We are currently the licensor of 126 license agreements (including 13
acquired in the Jantzen acquisition), for various products including sportswear,
outerwear, underwear, activewear, women's sportswear, fragrances, loungewear and
with the acquisition of Jantzen, women's swimwear. Sales of licensed products by
our licensees were approximately $490.0 million, $577.8 million and $485.0
million in fiscal 2002, 2001 and 2000, respectively. We received royalties from
these sales of approximately $26.7 million, $25.8 million and $22.8 million in
fiscal 2002, 2001 and 2000, respectively. Excluding accelerated payments by two
licensees for early contract terminations during fiscal 2002, royalties
decreased last year due to the general economic conditions and certain licensees
experiencing a decrease in their sales volume.
To maintain a brand's image, we closely monitor our licensees and approve
all licensed products. In evaluating a prospective licensee, we consider the
candidate's experience, financial stability, manufacturing performance and
marketing ability. We also evaluate the marketability and compatibility of the
proposed products with our other products. We regularly monitor product design,
development, merchandising and marketing of licensees, and we schedule meetings
throughout the year with licensees to ensure quality, uniformity and consistency
with our products. We also give our licensees a view of our products and fashion
collections and our expectations of where our products should be positioned in
the market place. In addition to approving in advance all of our licensees'
products, we also approve their advertising, promotional and packaging
materials.
14
As part of our licensing strategy, we work with our licensees to further
enhance the development, image, and sales of their products. We offer licensees
marketing support and our relationships with retailers help them generate higher
revenues and become more profitable.
Our license agreements generally extend for a period of three to five years
with options to renew prior to expiration for an additional multi-year period.
The typical agreement requires that the licensee pay us the greater of a royalty
based on a percentage of the licensee's net sales of the licensed products or a
guaranteed minimum royalty that typically increases over the term of the
agreement. Generally, licensees are required to spend a percentage of the net
sales of licensed products for advertising and promotion of the licensed
products in their territory.
Customers
We sell merchandise to a broad spectrum of retailers, including mid-tier
department stores, upscale department stores, mass merchants and specialty
stores. Our largest customers include Target, J.C. Penney, Wal-Mart, Kohl's and
Mervyn's. Net sales to our five largest customers accounted for approximately
47%, 42% and 49% of net sales in fiscal 2002, 2001 and 2000, respectively. For
fiscal 2002, sales to Target accounted for approximately 12%, while sales to
J.C. Penney and Wal-Mart accounted for approximately 11%, each. For fiscal 2001,
sales to Wal-Mart accounted for approximately 14% of total net sales and sales
to J.C. Penney accounted for approximately 11% of net sales. For fiscal 2000,
sales to Target accounted for approximately 14% of net sales. No other single
customer accounted for more than 10% of net sales during such fiscal years.
Seasonality
Our products have historically been geared towards lighter weight apparel
generally worn during the spring and summer months. We believe that this
seasonality has been reduced with the introduction of fall, winter and holiday
merchandise. Our higher priced products generally tend to be less sensitive to
economic conditions and weather conditions. While the variation in our sales on
a quarterly basis has narrowed somewhat, seasonality can be affected by a
variety of factors, including the mix of advance and fill-in orders, the amount
of sales to different distribution levels, and overall product mix between
traditional and fashion merchandise.
We generally receive orders from our retailers approximately five to seven
months prior to shipment. For approximately 80.0% of our sales, we have orders
from our retailers before we place orders with our suppliers. A summary of the
order and delivery cycle for our four primary selling seasons is illustrated
below:
Merchandise Season Advance Order Period Delivery Period to Retailers
-------------------- ---------------------- -------------------------------
Spring July to September (1) January to March
Summer October to December April and May
Fall January to March July to September
Holiday April to June October and November
(1) The advanced order period for products under the Jantzen and Tommy Hilfiger
brands is September to November.
Sales and receivables are recorded when inventory is shipped, with payment
terms generally 30 to 75 days from the date of shipment. Our backlog of orders
include confirmed and unconfirmed orders, which we believe, based on industry
practice and past experience, will be confirmed. The amount of unfilled orders
at a point in time is affected by a number of factors, including the mix of
product, the timing of receipt and processing of customer orders, and the
scheduling of sourcing and shipping of product, which in most cases is dependent
on the desires of the customer. Backlog is also affected by on-going trend among
customers to reduce the lead-time on their orders. During the last half of
fiscal 2002, a number of customers delayed placing orders and re-orders compared
to our previous experience. As a result of these factors a comparison of
unfilled orders from period to period is not necessarily meaningful and may not
be indicative of eventual actual shipments.
15
Competition
The retail apparel industry is highly competitive and fragmented. Our
competitors include numerous apparel designers, manufacturers, importers and
licensors, many of which have greater financial and marketing resources than us.
We believe that the principal competitive factors in the industry are:
. timeliness, reliability and quality of services provided,
. market share and visibility,
. price and fashion, and
. the ability to anticipate consumer demands and maintain appeal of
products to customers.
The level of competition and the nature of our competitors varies by
product segment with low-margin, mass-market manufacturers being our main
competitors in the less expensive segment of the market and American and foreign
designers and licensors competing with us in the more upscale segment of the
market. We believe that our continued dedication to customer service, product
assortment and quality control, as well as our aggressive pursuit of licensing
and acquisition opportunities, directly address the competitive factors in all
market segments. Although we have been able to compete successfully to date,
there can be no assurance that we will continue to be able to do so in the
future.
Trademarks
Most of our material trademarks are registered with the United States
Patent and Trademark Office. We may be subject to claims and suits against us,
and may be the initiator of claims and suits against others, in the ordinary
course of our business, including claims arising from the use of our trademarks.
In international jurisdictions, there are several pending claims to our right to
use selected trademarks that we own. We do not believe that the resolution of
any pending claims in international jurisdictions will have a material adverse
affect on our business, financial condition, results of operations or cash
flows.
Employees
At January 31, 2002, we had approximately 471 full-time employees
worldwide. None of our employees are subject to collective bargaining
agreements, and we consider our employee relations to be satisfactory.
Item 2. Properties
Our administrative offices, warehouse and distribution facility are located
in a 240,000 square foot leased facility in Miami, which was built to our
specifications and completed in 1997. The facility is occupied pursuant to a
synthetic lease, which has an initial term expiring in June 2002, annual rental
payment of approximately $900,000 and a minimum contingent rental payment of
$14.5 million on June 30, 2002. We do not anticipate renewing the synthetic
lease when it matures. Instead, we anticipate replacing it with a conventional
mortgage, which will result in recognition of both an asset and related
liability on our balance sheet. For purposes of potential future expansion, we
have purchased roughly three acres of land adjacent to our facility.
We lease three warehouse facilities in Miami totaling approximately 103,000
square feet from George Feldenkreis, our Chairman and CEO, to handle the
overflow of bulk shipments and the specialty and PING operations. All leases are
on a month-to-month basis at market prices.
We lease two locations in New York City totaling approximately 8,500 square
feet each. These leases expire in December 2007 and 2012. These locations are
used for offices and showrooms.
16
We lease a retail store in the Sawgrass Mills outlet mall in Sunrise,
Florida with 11,240 square feet. This lease expires in September 2005. Since we
began leasing this facility in May 2001, we have used this location as a test
retail outlet store to sell our brands.
We have, through the acquisition of Jantzen, a lease agreement for office
space in Portland, Oregon for an initial six-month period. This facility totals
approximately 83,900 square feet. In addition, we entered into a lease for a
portion of Jantzen's Seneca, South Carolina distribution center facility for a
one-year period, commencing March 22, 2002. This facility totals approximately
279,000 square feet. The Seneca, South Carolina facility carries an option to
acquire the facility, which we can exercise within 60 days of the March 22, 2002
commencement date.
In order to monitor production of our products in the Far East, we maintain
offices in South Korea and China, and also lease offices jointly with SPX
Corporation, a publicly held company, in Beijing, China and Taipei, Taiwan.
Item 3. Legal Proceedings
The Company is subject to claims and suits against it, and is the initiator
of claims and suits against others, in the ordinary course of business,
including claims arising from the use of its trademarks. The Company does not
believe that the resolution of any pending claims will have a material adverse
affect on its business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
Our common stock has been listed for trading on the Nasdaq National Market
under the symbol "PERY" since June 1999. Prior to that date, the trading symbol
was "SUPI" under our former name Supreme International Corporation. The
following table sets forth, for the periods indicated, the range of high and low
per share of our common stock as reported by the Nasdaq National Market. Such
quotation represents inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions. The last
reported sales price per share of our common stock on April 15, 2002 was $11.95.
Fiscal Year 2001 High Low
- ---------------- ------ -------
First Quarter $11.69 $ 9.63
Second Quarter 10.25 8.25
Third Quarter 9.94 4.66
Fourth Quarter 6.25 4.50
Fiscal Year 2002
- ----------------
First Quarter $ 7.38 $ 5.69
Second Quarter 9.00 6.26
Third Quarter 8.60 5.11
Fourth Quarter 9.50 5.30
(b) Holders
As of April 15, 2002, there were approximately 52 shareholders of record of
our common stock. We believe the number of beneficial owners of our common stock
is in excess of 1,100.
(c) Dividends
We have not paid any cash dividends since our inception and do not
contemplate doing so in the near future. Payment of cash dividends is prohibited
under our senior credit facility, synthetic lease, senior secured notes and
senior subordinated notes. See Notes 12 and 13 to the consolidated financial
statements of the Company included in Item 8 of this report. Any future decision
regarding payment of cash dividends will depend on our earnings and financial
position and such other factors, as our Board of Directors deems relevant.
18
Item 6. Selected Financial Data
Summary Historical Financial Information
(Dollars in thousands, except for per share data)
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements of the
Company and related notes thereto included in Item 8 of this report and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Certain amounts in prior fiscal years have been reclassified to
conform to the current year presentation.
Fiscal Year Ended January 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002
-----------------------------------------------------------------------------
Income Statement Data:
Net sales $190,689 $221,347 $ 229,549 $261,626 $253,034
Net royalty income 4,032 3,057 22,840 25,790 26,681
-----------------------------------------------------------------------------
Total revenues 194,721 224,404 252,389 287,416 279,715
Cost of sales 145,991 166,198 171,413 200,884 191,601
-----------------------------------------------------------------------------
Gross profit 48,730 58,206 80,976 86,532 88,114
Selling, general and administrative
expenses 34,137 39,478 44,480 52,147 57,171
Depreciation and amortization 1,748 2,161 5,181 6,130 6,662
-----------------------------------------------------------------------------
Operating income 12,845 16,567 31,315 28,255 24,281
Interest expense 2,782 3,494 13,905 15,766 13,550
-----------------------------------------------------------------------------
Income before minority interest and
income tax provision 10,063 13,073 17,410 12,489 10,731
Minority interest - - - - 83
Income taxes 2,885 4,491 6,530 4,663 4,040
-----------------------------------------------------------------------------
Net income $ 7,178 $ 8,582 $ 10,880 $ 7,826 $ 6,608
=============================================================================
Net income per share:
Basic $ 1.10 $ 1.29 $ 1.62 $ 1.17 $ 1.01
Diluted $ 1.08 $ 1.27 $ 1.59 $ 1.16 $ 1.01
Weighted average number of
shares outstanding:
Basic 6,541 6,674 6,726 6,689 6,517
Diluted 6,666 6,770 6,857 6,745 6,535
Balance Sheet Data (at year end):
Working capital 66,166 71,300 70,651 88,879 60,932
Total assets 101,650 108,958 224,873 243,113 234,061
Total debt (a) 39,658 33,511 128,270 137,066 120,828
Total stockholders' equity 55,155 64,946 76,020 82,879 87,204
19
Other Financial Data and Ratios:
EBITDA (b) 14,593 18,728 36,496 34,385 30,860
Cash flows from operations (3,101) 14,341 14,047 (2,112) 22,352
Cash flows from investing (4,555) (10,240) (104,091) (5,434) (3,074)
Cash flows from financing 7,910 (4,938) 90,097 7,665 (18,319)
Capital expenditures 3,828 4,005 2,332 2,712 2,925
Ratio of earnings to fixed charges (c) 4.1x 4.2x 2.2x 1.8x 1.4x
a) Total debt includes balances outstanding under senior credit
facilities, long-term debt and current portion of long-term debt.
b) EBITDA represents net income before taking into consideration
interest expense, income tax expense, depreciation expense and
amortization expense. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and does
not represent cash flow from operations. Accordingly, do not regard
this figure as an alternative to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts,
investors and other interested parties in our industry but is not
necessarily comparable with similarly titled measures for other
companies.
c) For purposes of computing this ratio, earnings consist of earnings
before income taxes including minority interest and fixed charges.
Fixed charges consist of interest expense, amortization of deferred
debt issuance costs and the portion of rental expense of our
synthetic lease deemed representative of the interest factor.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
We generate revenues from two primary sources: sales of our products and
licensing of trademarks. The following table sets forth, for the periods
indicated, selected items in our consolidated statements of income expressed as
a percentage of total revenues:
Fiscal Year Ended January 31,
--------------------------------------------
2000 2001 2002
------ ------ ------
Net sales 91.0% 91.0% 90.5%
Royalty income 9.0% 9.0% 9.5%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of sales 67.9% 69.9% 68.5%
------ ------ ------
Gross profit 32.1% 30.1% 31.5%
Selling, general and administrative
expenses 17.6% 18.1% 20.4%
Depreciation and amortization 2.1% 2.1% 2.4%
------ ------ ------
Operating income 12.4% 9.9% 8.7%
Interest expense 5.5% 5.5% 4.9%
------ ------ ------
Income before minority interest and
income taxes 6.9% 4.4% 3.8%
Minority interest - - -
Income tax provision 2.6% 1.6% 1.4%
------ ------ ------
Net income 4.3% 2.8% 2.4%
====== ====== ======
Fiscal 2002 as Compared to Fiscal 2001
Total revenues. Total revenues consist of net sales and royalty income.
Total revenue decreased $7.7 million or 2.7% to $279.7 million in fiscal 2002
from $287.4 million in the prior year. The decrease was due to a decrease in net
sales of $8.6 million offset by an increase in royalty income of $0.9 million as
described below.
Net sales. Net sales decreased $8.6 million or 3.3% to $253.0 million in
fiscal 2002 from $261.6 million in the comparable period last year. The decrease
is primarily attributable to three factors. First, shipments to K-Mart
Corporation were lower in the fourth quarter of fiscal 2002 due to K-Mart's
financial difficulties during the year and its bankruptcy filing in January
2002. This decrease totaled approximately $3.0 million. Second, we experienced a
short-term delay in receipt of some product orders of approximately $2.0
million, which we previously planned to ship in late January, because a Miami-
based bank, which was our primary source of letter of credit financing, was
seized by federal regulators. We have since been able to obtain adequate letter
of credit facilities with other financial institutions. Third, general economic
conditions, which adversely impacted retail sales, resulted in lower than
expected sell through and reorder rates from retailers.
21
Royalty income. Royalty income was $26.7 million in fiscal 2002, a $0.9
million or 3.5% increase over the prior year amount of $25.8 million. The
increase was due to two one-time accelerated payments for early termination of
licensing agreements. Excluding accelerated payments by two licensees for early
contract terminations during fiscal 2002 totaling a net of $1.6 million,
royalties decreased by $0.7 million last year primarily due to the general
economic conditions, which resulted in certain licensees experiencing a decrease
in their sales volume.
Cost of sales. Cost of sales for fiscal 2002 of $191.6 million was $9.3
million, or 4.6% lower than the prior year amount of $200.9 million due mainly
to the decrease in net sales as described above. As a percent of revenues, cost
of sales decreased from 69.9% in fiscal 2001 to 68.5% in fiscal 2002, due
primarily to a change in our sales mix between private label and branded label
sales. Gross profit was $88.1 million in fiscal 2002 or 31.5% of revenues as
compared to $86.5 million or 30.1% of revenues in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $57.2 million in fiscal 2002, as compared to $52.1
million in the prior year, an increase of $5.1 million or 9.8%. As a percent of
total revenues, selling, general and administrative expenses increased from
18.1% in fiscal year 2001 to 20.4% in fiscal 2002. The increase was due
primarily to a charge of $1.4 million resulting from the K-Mart bankruptcy,
accounting for the consolidation of our new Canadian joint venture with expenses
of $0.9 million in fiscal 2002, expenses incurred by our newly formed European
subsidiary of $1.6 million and expenses incurred by our Sawgrass Mills outlet
store of $0.6 million.
Depreciation and amortization expenses. Depreciation and amortization
expense in fiscal 2002 was $6.7 million or 2.4% of revenues as compared to $6.1
million or 2.1% of revenues in fiscal 2001. The increase of $0.6 million in
fiscal 2002 as compared to the prior year was due primarily to a full year
effect of amortization of the Pro Player and Mondo di Marco trademarks acquired
in fiscal 2001.
Interest expense. Interest expense in fiscal 2002 was $13.6 million as
compared to $15.8 million in the prior year. The decrease is primarily
attributable to the decrease in borrowings under the senior credit facility,
favorable interest rates and the recognition of $0.7 million in income derived
from an interest rate swap agreement entered into by the Company during the
third quarter of fiscal 2002.
Income taxes. Income taxes in fiscal 2002 were $4.0 million, a $0.7 million
decrease as compared to $4.7 million in fiscal 2001. The decrease was due
primarily to a decrease in pretax income. The effective tax rates for fiscal
2001 and 2002 were 37.5% and 37.9%, respectively.
Net income. Net income for fiscal 2002 decreased $1.2 million or 15.4% from
fiscal 2001, as a result of the items discussed above.
Fiscal 2001 as Compared to Fiscal 2000
Total revenues. Total revenues consist of net sales and royalty income.
Total revenue increased $35.0 million or 13.9% to $287.4 million in fiscal 2001
from $252.4 million in fiscal 2000. The increase was due to increases in both
net sales of $32.1 million and royalty income of $3.0 million as a result of
internal growth and acquisitions.
Net sales. Net sales increased $32.1 million or 14.0% to $261.6 million in
fiscal 2001 from $229.5 million in the comparable period last year, due mainly
to private label programs with Wal-Mart and J.C. Penney. Sales from private
label products increased to 34% of the net sales mix in fiscal 2001 from 21% in
fiscal 2000. Decreases in branded sales of Natural Issue and Munsingwear during
fiscal 2001 were somewhat offset by increases in sales of PING, Grand Slam and
other brands.
Royalty income. Royalty income was $25.8 million for fiscal 2001, a $3.0
million or 12.9% increase over the prior year amount of $22.8 million. The
increase was primarily attributable to the acquisitions of the Perry
22
Ellis, John Henry and Manhattan brands, which had a full year of operations in
fiscal 2001 and only ten months of operations in the fiscal 2000.
Cost of sales. Cost of sales for fiscal 2001 of $200.9 million was $29.5
million or 17.2% higher than the prior year amount of $171.4 million due mainly
to the increase in net sales. As a percentage of revenues, cost of sales
increased from 67.9% in fiscal 2000 to 69.9% in fiscal 2001, due primarily to
our increased net sales mix attributable to private label product as well as
markdown pressures from some of our retailers. Gross profit was $86.5 million
in fiscal 2001, or 30.1% of total revenue as compared to $81.0 million, or 32.1%
of total revenue for the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $52.1 million in fiscal 2001, as compared to $44.5
million in the prior year, an increase of $7.6 million or 17.1%, due primarily
to increases in payroll, advertising and facility costs to support the increase
in revenues from internal growth and acquisitions. As a percentage of total
revenues, selling, general and administrative expenses increased from 17.7% in
fiscal 2000 to 18.1% in fiscal 2001 due mainly to a full year of activities in
licensing operations, other increases such as payroll, advertising and facility
costs to support the revenue increase, as well as startup cost for the launch of
the Perry Ellis America brand.
Depreciation and amortization expenses. Depreciation and amortization
expense for fiscal 2001 was $6.1 million or 2.1% of total revenues, as compared
to $5.2 million or 2.1% of total revenues in fiscal 2000. The increase of $0.9
million in fiscal 2001 as compared to the prior year was due to a full year of
amortization of intangible assets from the acquisitions of the Perry Ellis, John
Henry and Manhattan brands in fiscal 2001 as compared to ten months of
amortization in fiscal 2000, as well as the amortization of intangible assets
from the purchase of the Pro Player and Mondo di Marco trademarks in fiscal
2001.
Interest expense. Interest expense for fiscal 2001 was $15.8 million as
compared to $13.9 million in fiscal 2000. The increase is due to the additional
indebtedness incurred as a result of the acquisitions of the Perry Ellis, John
Henry and Manhattan brands in fiscal 2000, and to a lesser extent the effect of
floating rates increases in interest expense associated with our senior credit
facility during fiscal 2001.
Income taxes. Income taxes during fiscal 2001 were $4.7 million, a $1.8
million decrease as compared to $6.5 million in fiscal 2000. The decrease was
due primarily to a decrease in pretax income. The effective tax rates for
fiscal 2001 and 2000 were relatively consistent at 37.5% and 37.4%,
respectively.
Net income. Net income for fiscal 2001 decreased $3.1 million or 28.4% from
fiscal 2000, as a result of the items discussed above.
Liquidity and Capital Resources
We rely primarily upon cash flow from operations and borrowings under our
senior credit facility to finance operations and expansion. Net cash provided by
operating activities was $22.4 million in fiscal 2002, as compared to $2.1
million used in operations in fiscal 2001, and $14.0 million provided by
operations in fiscal 2000. The $22.4 million of cash provided by operations in
fiscal 2002 as compared to the $2.1 million used in operations in the prior year
is primarily attributable to earnings and to a decrease in accounts receivable
of $7.0 million since the beginning of the year due to increased cash
collections and lower sales in January 2002 and an increase in inventory of $1.5
million due to the timing of receipts of goods at January 31, 2002 and levels of
replenishment inventory. In fiscal 2001, net cash used in operating activities
was $2.1 million, primarily attributable to earnings and to a decrease in
accounts receivable and inventory of $13.2 million and $7.6 million,
respectively.
In fiscal 2002, net cash used in investing activities was $3.0 million,
principally due to purchases of property and equipment. Net cash used in
investing activities for fiscal 2001 was $5.4 million, mainly due to the
23
acquisitions of the Pro Player and Mondo di Marco brands, which totaled $3.5
million, net and $2.7 million in purchases of property and equipment.
In fiscal 2002, net cash used in financing activities of $18.3 million was
due mainly to payments made under our senior credit facility of $16.1 million
and purchase of treasury stock of $2.2 million. The net decrease in borrowings
under the senior credit facility resulted primarily from lower accounts
receivable and lower levels of inventories. In fiscal 2001, net cash provided
by financing activities was $7.7 million resulting from the net increased
borrowings of $8.6 million under our senior credit facility offset by the
purchases of treasury stock of $1.0 million. The net decrease in borrowings
under our senior credit facility in fiscal 2001 resulted from $19.9 million in
borrowings primarily due to the increases in accounts receivable and
inventories, offset by the $11.3 million repayment of the term loan portion of
our senior credit facility.
Capital expenditures for fiscal 2002 totaled $2.9 million and consisted
primarily of purchases of office equipment, leasehold improvements and computer
software. Capital expenditures of $2.7 million for fiscal 2001 consisted
primarily of purchases of office equipment, warehouse machinery and computer
software.
Senior Credit Facility
In March 2002, we amended our senior credit facility with our group of
banks. As amended, the senior credit facility now provides us with a revolving
credit line up to an aggregate amount of $60.0 million. This amendment was done
concurrently with the sale of $57.0 million of senior secured notes. The
indebtedness under the senior credit facility ranks pari passu with our senior
secured notes. The following is a description of the terms of the senior credit
facility, as amended, and does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the senior
credit facility. The outstanding balance under our senior credit facility was
$21.8 million on January 31, 2002.
Certain Covenants. The senior credit facility contains certain covenants
which require us to maintain certain financial ratios, a minimum net worth and
which restricts the payment of dividends. As of January 31, 2002, we were not
in compliance with a certain funded indebtedness to EBITDA financial covenant of
our senior credit facility. The senior lenders of our bank group under our
senior credit facility have waived the noncompliance of the financial covenant
in connection with the March 2002 amendment of the senior credit facility.
The senior credit facility expires on October 1, 2002 and as such the
Company has classified its senior credit facility as current in the consolidated
balance sheet as of January 31, 2002. The Company is currently in active
discussions to renew or replace its existing senior credit facility. Management
believes this discussion will be successfully completed prior to the October 1,
2002 expiration date.
Borrowings Base. Borrowings under the senior credit facility are limited
under its terms to a borrowing base calculation, which generally restricts the
outstanding balances to the sum of a) 80.0% of eligible receivables plus b)
90.0% of our eligible factored accounts receivable plus c) 60.0% of eligible
inventory minus d) the full amount of all outstanding letters of credit issued
pursuant to the senior credit facility which are not fully secured by cash
collateral and e) $9.0 million synthetic lease reserve, which must be maintained
until the expiration date of our synthetic lease in June 2002.
The maximum amount of borrowing under the senior credit facility
attributable to eligible inventory is $30.0 million.
Interest. Interest on the principal balance under the senior credit
facility shall accrue, at our option, at either a) our bank prime lending rate
with adjustments depending upon our ratio of indebtedness to EBITDA at the time
of borrowing or b) 2.75% above the rate quoted by our bank as the average London
interbank offered rate ("LIBOR") for 1, 2, 3 and 6-month Eurodollar deposits
with adjustments depending upon our ratio of indebtedness to EBIDTA at the time
of borrowing.
24
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, including, without
limitation, accounts receivable, inventory deposit accounts, general intangibles
and equipment. Lenders under the senior credit facility have a second priority
security interest in our trademarks.
Letters of Credit
As of January 31, 2002, we maintained two letter of credit facilities
totaling $42.0 million. Each letter of credit is secured by the consignment of
merchandise in transit under that letter of credit. As of January 31, 2002,
there was $31.0 million available under existing letter of credit facilities.
Subsequent to January 31, 2002, the Company added two additional letter of
credit facilities, totaling $25.0 million and reduced the availability under one
of its two existing letter of credit facilities by $5.0 million. As of April
15, 2002, the Company had four letter of credit facilities totaling $62.0
million.
Senior Secured Notes
On March 22, 2002, the Company completed a private offering of $57.0
million 9 1/2% senior secured notes due 2009. The proceeds of the private
offering were used to fund the acquisition of certain assets of Jantzen, to
reduce the amount of outstanding debt under the senior credit facility and as
additional working capital.
Synthetic Lease
The synthetic lease, as amended in March 2002, expires in June 2002 and we
have an obligation to pay $14.5 million at the termination of the term. The
synthetic lease was entered into with a group of financial institutions to
finance the acquisition and construction of our corporate headquarters. The
financial institutions assumed our obligation to purchase the facility and, in
turn, leased the facility to us. The obligations under the synthetic lease are
secured by a security interest in substantially all our existing and future
assets, whether tangible or intangible, including, without limitation, accounts
receivable, inventory deposit accounts, general intangibles, intellectual
property and equipment.
In addition to customary covenants found in secured lending agreements, the
synthetic lease also contains various restrictive financial and other covenants
including, without limitation, (a) prohibitions on the incurrence of additional
indebtedness or guarantees, (b) restrictions on the creation of additional
liens, (c) certain limitations on dividends and distributions or capital
expenditures by the Company, (d) restrictions on mergers or consolidations,
sales of assets, investments and transactions with affiliates, and (e) certain
financial maintenance tests. Such financial maintenance tests, include, among
others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a minimum
current ratio, (iii) a minimum net worth, and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, we were not in compliance with the
funded indebtedness to EBITDA financial covenant. The lessor under, and the
financial institutions which financed, the synthetic lease have waived the
noncompliance with this financial covenant.
25
Contractual Obligations and Commercial Commitments
The following tables illustrate our contractual obligations and commercial
commitments as of January 31, 2002 and include the effects of the transactions
and amendments discussed above and in Part I of this report that occurred
subsequent to January 31, 2002.
- -------------------------------------------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------------------------------------
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 year years years years
- -------------------------------------------------------------------------------------------------------------
Senior Secured Notes $100,000,000 - - $100,000,000 -
=============================================================================================================
Senior Subordinate Notes $ 57,000,000 - - - $57,000,000
=============================================================================================================
Senior Credit Facility $ 21,756,094 $21,756,094 - - -
=============================================================================================================
Operating Leases $ 24,654,724 $17,627,421 $3,268,977 $ 2,741,201 $ 1,017,125
=============================================================================================================
Total Contractual Cash
Obligations $203,410,818 $39,383,515 $3,268,977 $102,741,201 $58,017,125
=============================================================================================================
- ---------------------------------------------------------------------------------------------------
Amount of Commitment Expiration Per Period
-------------------------------------------------
Other Total
Commercial Amounts Less than 1 - 3 4 - 5 After 5
Commitments Committed 1 year years years years
- ---------------------------------------------------------------------------------------------------
Letter of Credit $11,035,880 $11,035,880 - - -
===================================================================================================
Stand by Letters of
Credit $ 8,250,000 $ 5,500,000 - $ 2,750,000 -
===================================================================================================
Total Commercial
Commitments $19,285,880 $16,535,880 - $ 2,750,000 -
===================================================================================================
Management believes that the combination of borrowing availability under
the amended senior credit facility, letter of credit facilities, and funds
anticipated to be generated from operating activities will be sufficient to meet
our operating and capital needs in the foreseeable future.
Derivatives Financial Instruments
The Company adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, effective
February 1, 2001. SFAS No. 133 requires that all derivative financial
instruments such as interest rate swap contracts and foreign exchange contracts,
be recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them. Changes in the fair value of
derivative financial instruments are either recognized in income or
shareholders' equity (as a component of comprehensive income), depending on
whether the derivative qualifies as a hedge and is being used to hedge changes
in fair value or cash flows. The adoption of SFAS No. 133 did not have a
material effect on the Company's financial statements.
26
During fiscal 2002, the Company entered into derivative financial
instruments in order to manage the overall borrowing costs associated with its
senior subordinate notes. At January 31, 2002, the Company had an interest rate
swap agreement with a notional amount of $40.0 million dollars maturing on April
1, 2006. The swap is a fair value hedge as it has been designated against the
senior subordinate notes carrying a fixed rate of interest and converts such
notes to variable rate debt. The hedge qualifies for short-cut accounting and
accordingly, the interest rate swap contracts are reflected at fair value in the
Company's consolidated balance sheet and the related portion of fixed-rate debt
being hedged adjusted for an offsetting amount with no effect on the statement
of income.
At January 31, 2002, the Company had an interest rate cap maturing on April
1, 2006 and a basis swap maturing on April 3, 2003, both with a notional amount
of $40.0 million. The interest rate cap hedges against increases in the
variable rate of interest paid on the interest rate swap and the basis swap
decreased the spread on the interest rate swap for 18 months. Neither of these
derivatives qualified for hedge accounting and accordingly, are reflected at
fair value in the Company's consolidated balance sheet with the offset being
recognized in income for the current period. Interest expense for the fiscal
year January 31, 2002 has been reduced by approximately $0.7 million as a result
of the recognition of these derivatives.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. As
such, some accounting policies have a significant impact on amounts reported in
these financial statements. A summary of those significant accounting policies
can be found in Note 1 to the consolidated financial statements. In particular,
judgment is used in areas such as determining the allowance for uncollectible
accounts receivable, provision for sales returns and allowances, inventory
valuations, and provisions for assets impairments on long-lived assets.
New Accounting Pronouncements
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products)." This issue
addresses the recognition, measurement and income statement classification of
consideration from a vendor to a customer in connection with the customer's
purchase or promotion of the vendor's products. This consensus is expected to
impact revenue and expense classifications by immaterial amounts and have no
effect on reported income. In accordance with the consensus reached, the
Company will adopt EITF Issue No. 01-9 for its fiscal year beginning February 1,
2002.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the pooling-
of-interests method. SFAS No. 141 also addresses the recognition and
measurement of goodwill and other intangibles assets acquired in a business
combination. The Company intends to apply the provisions of this pronouncement
to the Jantzen acquisition. SFAS No. 141 is not expected to have a significant
effect on the financial position or the results of operation of the Company.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting treatment as it applies to goodwill and
other identifiable intangible assets with indefinite useful lives from an
amortization method to an impairment-only approach. Under SFAS No. 142, proper
accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in the case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date of SFAS No. 142
is for fiscal years beginning after December 15, 2001. The Company has adopted
SFAS No. 142 for its fiscal year beginning February 1, 2002. In accordance with
27
SFAS No. 142, we obtained a preliminary valuation of all of our trademarks from
a third-party independent valuation firm. Based on this preliminary valuation,
we do not expect to record any significant impairment in the value of our
trademarks upon adoption of the standard.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," it retains many of
the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations---Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The effective date
of SFAS No. 144 is for fiscal years beginning after December 15, 2001. SFAS No.
144 is not expected to have a significant effect on the financial position or
the results of operation of the Company.
Forward Looking Statements
Except for the historical information contained herein, this Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains forward-looking statements that involve a number of risks
and uncertainties, including the risks described elsewhere in this report and
detailed from time to time in the Company's filings with the Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial statements represents the
potential changes in the fair value, earnings or cash flows arising from changes
in interest rates or foreign currency exchange rates. We manage this exposure
through regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. Our policy allows the use
of derivative financial instruments for identifiable market risk exposure,
including interest rate and foreign currency fluctuations. We do not enter into
derivative financial contracts for trading or other speculative purposes except
for as discussed below.
In August 2001, the Company entered into interest rate swap, option and
interest rate cap agreements (the "August Swap Agreement"), for an aggregate
notional amount of $40.0 million in order to minimize its debt servicing costs
associated with its $100.0 million of 12 1/4% senior subordinated notes due
April 1, 2006. The August Swap Agreement was subsequently modified through a
basis swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is entitled to receive semi-annual interest payments on October 1,
and April 1, at a fixed rate of 12 1/4% and is obligated to make semi-annual
interest payments on October 1, and April 1, at a floating rate based on the 6-
month LIBOR rate plus 715 basis points for the 18 months period October 1, 2001
through March 31, 2003 (per October Swap Agreement); and 3-month LIBOR rate plus
750 basis point for the period April 1, 2003 through April 1, 2006 (per the
August Swap Agreement). The Swap Agreement has optional call provisions with
trigger dates of April 1, 2003, April 1, 2004 and April 1, 2005, which contain
certain premium requirements in the event the call is exercised.
As of January 31, 2002, the fair value of the August 2001 swap and the
option contracts recorded on the Company's Consolidated Balance Sheet was
($0.08) million and ($0.16) million, respectively. The interest rate cap and
basis swap refer to, Item 7. "Management's Discussion and Analysis of Financial
Conditions," did not qualify for hedge accounting treatment under the SFAS No.
133, resulting in $0.7 million reduction of recorded interest expense on the
Statement of Operations for the fiscal year ended January 31, 2002.
As a result of our hedging and interest rate risk policies, a 25 basis
point change in interest rates would have impacted the Company's net earnings by
approximately $62,700 and $91,500 during fiscal 2002 and 2001, respectively.
28
In conjunction with the March 22, 2002 offering of $57.0 million of 9 1/2%
senior secured notes due March 15, 2009, the Company entered into interest rate
swap and option agreements for an aggregate notional amount of $57.0 million in
order to minimize the debt servicing costs associated with the notes. The swap
agreement is scheduled to terminate on March 15, 2009. Under the swap
agreement, we are entitled to receive semi-annual interest payments on September
15 and March 15 at a fixed rate of 9 1/2% and are obligated to make semi-annual
interest payments on September 15 and March 15 at a floating rate based on the
three-month LIBOR rate plus 369 basis points for the period from March 22, 2002
through March 15, 2009. The swap agreement has optional call provisions with
trigger dates of March 15, 2005, March 15, 2006 and March 15, 2007, which
contain premium requirements in the event the call is exercised.
The Company's current exposure to foreign exchange risk is not significant
and accordingly, the Company has not entered into any transactions to hedge
against those risks.
Item 8. Financial Statements And Supplementary Data
See pages F-1 through F-22 appearing at the end of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
29
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information concerning the Company's directors and executive officers
regarding compliance with Section 16 of the Securities Exchange Act of 1934
required by this item will be set forth in the Company's definitive Proxy
Statement, to be filed within 120 days after the end of the fiscal year covered
by this Form 10-K, and is incorporated by reference from the Company's Proxy
Statement.
Item 11. Executive Compensation
The information required by this item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K, and is incorporated by reference from the
Company's Proxy Statement.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The information required by this item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K, and is incorporated by reference from the
Company's Proxy Statement.
Item 13. Certain Relationships And Related Transactions
The information required by this item will be set forth in the Company's
definitive Proxy Statement, to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K, and is incorporated by reference from the
Company's Proxy Statement.
30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
(1) Consolidated Financial Statements.
The following Consolidated Financial Statements of Perry Ellis
International, Inc. and subsidiaries are included in Part II, Item
8:
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 2002 and 2001 F-3
Consolidated Statements of Income for each of the three years in the
period ended January 31, 2002 F-4
Consolidated Statements of Changes in Stockholders' Equity for each
of the three years in the period ended January 31, 2002 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended January 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
(2) Consolidated Financial Statement Schedule
All schedules for which provision is made in applicable regulations
of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information
have been included in the Consolidated Financial Statements and
therefore such schedules have been omitted.
(3) Exhibits
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Registrant's Amended and Restated Articles of Incorporation (1)
3.2 Registrant's Amended and Restated Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Indenture dated April 6, 1999 between the Company and State Street Bank
and Trust Company, as amended (6)
4.4 Purchase Agreement dated March 31, 1999 by and among the Company and the
Initial Purchasers (6)
4.5 Specimen Forms of 121/4% Senior Subordinated Notes due April 1, 2006 (6)
4.6 Indenture dated March 22, 2002 between the Company and State Street Bank
and Trust Company (11)
4.7 Purchase Agreement dated March 15, 2002 by and among the Company and the
Initial Purchaser (11)
4.8 Pledge and Security Agreement dated March 22, 2002 by and among the
Company, Jantzen Apparel Corp. and State Street Bank and Trust Company
(11)
4.9 Specimen Forms of 9 1/2% Senior Secured Notes due March 15, 2009 (11)
10.3 Form of Indemnification Agreement between the Company and each of the
Company's Directors and Officers (1)
10.9 1993 Stock Option Plan (1)(2)
10.10 Directors Stock Option (1)(2)
31
10.17 Amendment to Business Lease between George Feldenkreis and the Company
relating to office facilities (4)
10.18 Revocable Credit Facility Agreement dated May 26, 1995 between the
Company and Hamilton Bank, N.A. (4)
10.19 Revolving Line of Credit Agreement dated June 23, 1995 between the
Company and Ocean Bank (4)
10.20 Profit Sharing Plan (2)(4)
10.21 Amended and Restated Employment Agreement between the Company and George
Feldenkreis (2)(4)
10.22 Amended and Restated Employment Agreement between the Company and Oscar
Feldenkreis (2)(4)
10.24 Lease Agreement [Land] dated as of August 28, 1997 between SUP Joint
Venture, as Lessor and Registrant, as Lessee (6)
10.25 Lease Agreement [Building] dated as of August 28, 1997 between SUP Joint
Venture, as Lessor and the Company, as Lessee (6)
10.26 Amended and Restated Loan and Security Agreement dated as of March 31,
1998 (6)
10.27 Amendment to Amended and Restated Loan and Security Agreement dated as
of August 1, 1998 (7)
10.28 Purchase and Sale Agreement dated as of December 28, 1998 among Salant
Corporation, Frost Bros. Enterprises, Inc., Maquiladora Sur, S.A. de C.V.
and the Company (the "Salant Purchase Sale Agreement") (7)
10.29 First Amendment to the Salant Purchase and Sale Agreement dated as of
February 24, 1999 (7)
10.30 Amended and Restated Loan and Security Agreement dated as of March 26,
1999 (7)
10.31 Inventory Purchase Agreement dated March 12, 1999 between the Company and
Phillips-Van Heusen Corporation (7)
10.32 Stock Purchase Agreement dated as of January 28, 1999 by and among the
Company and Christopher C. Angell, Barbara Gallagher and Morgan Guaranty
Trust Company of New York, as Trustees of the PEI Trust created under
Par. E. of Article 3 of the Agreement dated November 19, 1985, as amended
January 27, 1986 (the "Perry Ellis Purchase and Sale Agreement") (8)
10.33 First Amendment to the Perry Ellis Purchase and Sale Agreement dated as
of March 31, 1999 (8)
10.34 Employment Agreement between Allan Zwerner and the Company (2)(6)
10.35 Employment Agreement between Timothy B. Page and the Company (2)(11)
10.36 Incentive Stock Option Plan (2)(9)
10.37 Asset Purchase Agreement dated as of March 15, 2002 by and among the
Company, Jantzen, Inc. and VF Canada, Inc. (11)
10.38 Fifth Amendment dated March 14, 2002 to Amended and Restated Loan and
Security Agreement dated March 26, 1999 (11)
10.39 Fourth Amendment to Master Agreement dated March 14, 2002, by and among
the Company, SUP Joint Venture, SunTrust Bank and Israeli Discount Bank
(11)
21.1 Subsidiaries of Registrant (11)
23.2 Consent of Deloitte & Touche LLP (11)
____________________
(1) Previously filed as an Exhibit of the same number to Registrant's
Registration Statement on Form S -1 (File No. 33-60750) and incorporated
herein by reference.
(2) Management Contract or Compensation Plan.
(3) Previously filed as an Exhibit of the same number to Registrant's Annual
Report on Form 10-K for the year ended January 31, 1995 and incorporated
herein by reference.
(4) Previously files as an Exhibit of the same number to Registrant's
Registration Statement on Form S-1 (File No. 33-96304) and incorporated
herein by reference.
(5) Previously filed as an Exhibit of the same number to Registrant's Annual
Report on Form 10-K for the year ended January 31, 1996 and incorporated
herein by reference.
(6) Previously filed as an Exhibit to Registrant's Registration Statement on
Form S-4 (File No. 33-78427) and incorporated herein by reference.
32
(7) Previously filed as an Exhibit to Registrant's Current Report on Form
8-K dated March 29, 1999 as amended and incorporated herein by
reference.
(8) Previously filed as an Exhibit to Registrant's Current Report on Form
8-K dated April 6, 1999 as amended and incorporated herein by
reference.
(9) Previously filed as an Exhibit to Registrant's Proxy Statement for
its 2000 Annual Meeting and incorporated herein by reference.
(10) Previously filed as an Exhibit to Registrant's Current Report on Form
8-K dated March 22, 2002 and incorporated herein by reference.
(11) Filed herewith.
(b) Reports on Form 8-K
None.
(c) Item 601 Exhibits
The exhibits required by Item 601 of Regulation S-K are set forth in
(a)(3) above.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are set
forth in (a)(2) above.
33
SIGNATURES
Pursuant to the requirement of Section 12 of the Securities Exchange Act of
1934, the Registrant has caused this report or amendment to thereto to be signed
on its behalf by the undersigned, thereunto duly authorized.
PERRY ELLIS INTERNATIONAL, INC.
Dated: April 19, 2002 BY: /s/ GEORGE FELDENKREIS
------------------------------------
George Feldenkreis
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in their capacities and on
the date indicated:
Name and Signature Title Date
------------------ ----- ----
/s/ GEORGE FELDENKREIS Chairman of the Board and April 19, 2002
- ------------------------- Chief Executive Officer
George Feldenkreis (Principal Executive Officer)
/s/ OSCAR FELDENKREIS President, Chief Operating April 19, 2002
- ------------------------- Officer and Director
Oscar Feldenkreis
/s/ TIMOTHY B. PAGE Chief Financial Officer April 19, 2002
- ------------------------- (Principal Financial and Accounting
Timothy B. Page Officer)
/s/ ALLAN ZWERNER President of Licensing April 19, 2002
- ------------------------- and Director
Allan Zwerner
/s/ RONALD BUCH Director April 19, 2002
- -------------------------
Ronald Buch
/s/ GARY DIX Director April 19, 2002
- -------------------------
Gary Dix
/s/ SALOMON HANONO Director April 19, 2002
- -------------------------
Salomon Hanono
/s/ JOSEPH P. LACHER Director April 19, 2002
- -------------------------
Joseph P. Lacher
/s/ LEONARD MILLER Director April 19, 2002
- -------------------------
Leonard Miller
34
INDEX TO FINANCIAL STATEMENTS
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 2002 and 2001 F-3
Consolidated Statements of Income for each of the three years
in the period ended January 31, 2002 F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended January 31, 2002 F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended January 31, 2002 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Perry Ellis International, Inc.:
We have audited the consolidated balance sheets of Perry Ellis International,
Inc. and subsidiaries (the "Company") as of January 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended January 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 19, 2002, except for Note 20,
As to which the date is March 22, 2002
F-2
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31,
2001 2002
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 344,741 $ 1,303,978
Accounts receivable, net 58,821,622 50,370,245
Inventories 43,556,374 45,409,047
Deferred income taxes 1,951,553 2,384,316
Prepaid income taxes 136,718 -
Other current assets 2,305,283 1,886,163
------------ ------------
Total current assets 107,116,291 101,353,749
Property and equipment, net 9,820,628 10,897,334
Intangible assets, net 122,016,681 117,938,894
Other 4,159,482 3,870,703
------------ ------------
TOTAL $243,113,082 $234,060,680
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,712,859 $ 5,966,368
Accrued expenses 3,660,364 3,259,602
Income taxes payable - 1,381,551
Accrued interest payable 4,215,835 3,808,997
Current portion - senior credit agreement - 21,756,094
Unearned revenues 1,996,752 1,838,929
Other current liabilities 1,651,467 2,410,583
------------ ------------
Total current liabilities 18,237,277 40,422,124
Senior subordinated notes payable, net 99,152,667 99,071,515
Deferred income tax 4,930,829 6,749,832
Long term debt- senior credit agreement 37,913,126 -
------------ ------------
Total long-term liabilities 141,996,622 105,821,347
------------ ------------
Total liabilities 160,233,899 146,243,471
------------ ------------
Commitments and Contingencies (Note 19)
Minority Interest - 613,671
------------ ------------
Stockholders' Equity:
Preferred stock $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Class A common stock $.01 par value; 30,000,000 shares authorized;
no shares issued or outstanding - -
Common stock $.01 par value; 30,000,000 shares authorized;
6,739,374 shares issued and 6,579,374 shares outstanding as of
January 31, 2001 and 6,337,440 shares issued and 6,286,740 shares
outstanding as of January 31, 2002 67,393 63,374
Additional paid-in-capital 29,063,407 26,286,040
Retained earnings 54,778,302 61,386,244
Accumulated other comprehensive income - (121,753)
------------ ------------
Total 83,909,102 87,613,905
Common stock in treasury at cost; 160,000 shares as of January 31, 2001
and 50,700 shares as of January 31, 2002 (1,029,919) (410,367)
------------ ------------
Total stockholders' equity 82,879,183 87,203,538
------------ ------------
TOTAL $243,113,082 $234,060,680
============ ============
See notes to consolidated financial statements.
F-3
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31
2000 2001 2002
------------- ------------ ------------
Revenues
Net Sales $229,549,158 $261,626,463 $253,033,752
Royalty Income 22,839,698 25,789,975 26,680,987
------------ ------------ ------------
Total Revenues 252,388,856 287,416,438 279,714,739
Cost of Sales 171,412,946 200,883,860 191,601,211
------------ ------------ ------------
Gross Profit 80,975,910 86,532,578 88,113,528
Operating Expenses
Selling, General and Administrative Expenses 44,479,497 52,146,750 57,170,447
Depreciation and Amortization 5,181,286 6,130,708 6,662,158
------------ ------------ ------------
Total Operating Expenses 49,660,783 58,277,458 63,832,605
------------ ------------ ------------
Operating Income 31,315,127 28,255,120 24,280,923
Interest Expense 13,905,498 15,766,461 13,549,746
------------ ------------ ------------
Income Before Minority Interest and Income Tax
Provision 17,409,629 12,488,659 10,731,177
Minority Interest - - 83,240
Income Tax Provision 6,529,681 4,662,655 4,039,995
------------ ------------ ------------
Net Income $ 10,879,948 $ 7,826,004 $ 6,607,942
============ ============ ============
Net Income per Share
Basic $ 1.62 $ 1.17 $ 1.01
============ ============ ============
Diluted $ 1.59 $ 1.16 $ 1.01
============ ============ ============
Weighted Average Number of Shares Outstanding
Basic 6,725,722 6,689,476 6,516,807
Diluted 6,856,538 6,745,441 6,534,749
See notes to consolidated financial statements.
F-4
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS ENDED JANUARY 31
ACCUMULATED
OTHER
ADDITIONAL COMPRE- COMPRE-
COMMON STOCK PAID-IN TREASURY HENSIVE HENSIVE RETAINED
----------------------
SHARES AMOUNT CAPITAL STOCK INCOME INCOME EARNINGS TOTAL
--------- --------- ----------- ----------- ------------- ---------- ------------ ------------
BALANCE, JANUARY 31, 1999 6,712,374 $ 67,123 $28,806,455 $ - $ - $ - $ 36,072,350 $64,945,928
Exercise of stock options 19,500 195 163,333 - - - - 163,528
Exercise of warrants - - - - - - - -
Net income - - - - - - 10,879,948 10,879,948
Tax benefit for exercise of
non-qualified stock options - - 30,867 - - - - 30,867
----------- --------- ----------- ---------- ----------- ---------- ----------- -----------
BALANCE, JANUARY 31, 2000 6,731,874 67,318 29,000,655 - - - 46,952,298 76,020,271
Exercise of stock options 7,500 75 57,425 - - - - 57,500
Net income - - - - - - 7,826,004 7,826,004
Tax benefit for exercise of
non-qualified stock options - - 5,327 - - - - 5,327
Purchase of treasury stock (160,000) (1,029,919) - - - (1,029,919)
----------- --------- ----------- ----------- ----------- ---------- ----------- -----------
BALANCE, JANUARY 31, 2001 6,579,374 67,393 29,063,407 (1,029,919) - - 54,778,302 82,879,183
Exercise of stock options 2,666 27 15,395 - - - - 15,422
Net income - - - - - 6,607,942 6,607,942 6,607,942
Foreign currency translation
adjustment - - - - (121,753) (121,753) - (121,753)
-----------
Comprehensive income $ 6,486,189
===========
Tax benefit for exercise of
non-qualified stock options - - - - - - --
Purchase of treasury stock (295,300) - - (2,177,256) - - (2,177,256)
Retirement of treasury stock (4,046) (2,792,762) 2,796,808 - - -
----------- --------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 31, 2002 6,286,740 $ 63,374 $26,286,040 $ (410,367) $ (121,753) $61,386,243 $87,203,538
=========== ========= =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-5
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31
2000 2001 2002
-------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,879,948 $ 7,826,004 $ 6,607,942
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,181,286 5,521,762 6,190,801
Provision for bad debts 450,541 330,435 1,575,000
Provision for deferred taxes 1,412,735 2,098,295 1,386,240
Amortization of debt issue cost 299,711 608,946 614,347
Amortization of bond discount 136,667 164,000 164,000
Minority Interest - - 83,240
Other 32,758 67,234 (64,250)
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (6,662,205) (13,174,087) 7,048,510
Inventories (3,037,630) (7,579,495) (1,528,619)
Other current assets and prepaid income taxes (1,291,628) 1,728,313 586,446
Other assets 509,924 (265,952) (701,044)
Accounts payable and accrued expenses 1,686,981 603,704 (1,160,561)
Income taxes payable - - 1,385,210
Accrued interest payable 4,233,183 (194,796) (604,768)
Other current liabilities and unearned revenues 214,260 153,951 792,354
------------- ------------ ------------
Net cash provided by (used in) operating activities 14,046,531 (2,111,686) 22,374,847
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,331,513) (2,711,741) (2,921,930)
Payment on purchase of intangible assets (1,025,185) (3,472,001) (98,928)
Proceeds from sale of trademark - 750,000 -
Payment for acquired businesses, net of cash acquired (100,734,467) - -
------------- ------------ ------------
Net cash (used in) investing activities: (104,091,165) (5,433,742) (3,020,858)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) in borrowings under term loan 11,250,000 (11,250,000) -
Net (payments) proceeds from senior credit facility (15,479,661) 19,881,630 (16,157,032)
Net proceeds from senior subordinated notes 98,852,000 - -
Debt issuance costs (4,719,962) - -
Tax benefit for exercise of non-qualified stock options 30,867 5,327 -
Purchase of treasury stock - (1,029,919) (2,177,256)
Proceeds from exercise of stock options 163,528 57,500 15,421
------------- ------------ ------------
Net cash provided by (used in) financing activities: 90,096,772 7,664,538 (18,318,867)
------------- ------------ ------------
Effect of exchange rate changes on cash and cash equivalents - - (75,886)
------------- ------------ ------------
NET INCREASE IN CASH 52,138 119,110 959,237
CASH AT BEGINNING OF YEAR 173,493 225,631 344,741
------------- ------------ ------------
CASH AT END OF YEAR $ 225,631 $ 344,741 $ 1,303,978
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 9,672,315 $ 15,961,257 $ 14,028,640
============= ============ ============
Income taxes $ 8,556,537 $ 750,000 $ 1,608,192
============= ============ ============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Change in fair value of Mark-to-Market interest rate swap/option $ - $ - $ (245,152)
============= ============ ============
See notes to consolidated financial statements.
F-6
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 2002
1. General
The Company is a leading licensor, designer and marketer of a broad line of
high quality men's sportswear, including sport and dress shirts, golf
sportswear, sweaters and casual dress pants and shorts, which sells to all
levels of retail distribution. The Company licenses its trademark portfolio
domestically and internationally for apparel and other products that it does not
sell including dress sportswear, outerwear, fragrances and accessories. The
Company has built a broad portfolio of brands through selective acquisitions and
the establishment of its own brands over its 35-year operating history. The
Company's distribution channels include regional, national and international
upscale department stores, mid-tier department stores, chain stores, mass
merchants, specialty stores and corporate wear distributors throughout the
United States, Puerto Rico and Canada.
2. Summary of Significant Accounting Policies
The following is a summary of the Company's significant accounting
policies:
PRINCIPLES OF CONSOLIDATION- The consolidated financial statements include
the accounts of Perry Ellis International, Inc., its wholly owned subsidiaries
and an entity in which the Company has a controlling interest. The ownership
interest of the noncontrolling owner in such entity is reflected as minority
interest. All intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts in
the consolidated financial statements and the accompanying notes. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-term
nature. The carrying amount of the senior credit facility approximates fair
value due to the relatively frequent resets of its floating interest rate. The
fair value of the 12 1/4% senior subordinated notes is approximately $104.0
million, based on quoted market prices. These estimated fair value amounts have
been determined using available market information or other appropriate
valuation methodologies.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Due to the short maturity period of cash equivalents, the
carrying amount of these instruments approximates fair value.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out basis) or market. Cost consists of the purchase price, customs, duties,
freight, insurance and commissions to buying agents.
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 per asset class range as
follows:
F-7
Avg. Useful
Asset Class Lives in Years
---------------------------------- --------------------
Furniture, fixtures and equipment 7
Vehicles 7
Leasehold Improvements 11
INTANGIBLE ASSETS - Intangible assets primarily represent costs capitalized
in connection with acquisitions, registration and protection of brand names and
license rights. Intangibles are amortized over their estimated useful lives,
which range from eight to forty years with a weighted average of 31.7 years.
Avg. Useful
Asset Class Lives in Years
-------------------------------- ----------------
Trademarks and Licensing Rights 15 - 40
Legal Costs 8
Goodwill 15
DEFERRED DEBT ISSUE COSTS - Costs incurred in connection with the financing
are capitalized and amortized on a straight-line basis, which approximates the
interest method, over the term of the related financing. Such amounts are
included in other long-term assets in the consolidated balance sheet.
LONG-LIVED ASSETS - Management reviews long-lived assets, including
intangible 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. At January 31, 2002,
management believes there was no significant impairment to long-lived assets.
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 $7.1 million, $8.2 million and $7.7 million
for the years ended January 31, 2000, 2001 and 2002, respectively.
REVENUE RECOGNITION - Sales are recognized upon transfer of legal title and
risk of loss to the customer (at shipment), 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. Royalties collected prior to being earned are deferred
and recognized as earned. The Company believes that its revenue recognition
policies conform to Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. The Company operates predominantly in North America, with
over 90% of its sales in the domestic market. One customer accounted for
approximately 14% of net sales for fiscal year 2000; two customers accounted for
approximately 14% and 11% of net sales for fiscal year 2001; and three customers
accounted for approximately 12%, 11% and 11% of net sales for fiscal year 2002.
The Company does not believe that these concentrations of sales and credit risk
represent a material risk of loss with respect to its financial position as of
January 31, 2002.
FOREIGN CURRENCY TRANSLATION - For the Company's international operations,
local currencies are considered their functional currencies. The Company
translates assets and liabilities to their
F-8
U.S. dollar equivalents at rates in effect at the balance sheet date and revenue
and expenses are translated at average monthly exchange rates. Translation
adjustments resulting from this process are recorded in Stockholders' Equity as
a component of Accumulated Other Comprehensive Income.
INCOME TAXES - Deferred income taxes result primarily from timing
differences in the recognition of expenses for tax and financial reporting
purposes and are accounted for in accordance with Financial Accounting Standards
Board Statement ("SFAS") No. 109, Accounting for Income Taxes, which requires
the liability method of computing deferred income taxes. Under the liability
method, deferred taxes are adjusted for tax rate changes as they occur.
NET INCOME PER SHARE - Basic net income per share is computed by dividing
net income by the weighted average shares of outstanding common stock. The
calculation of diluted net income per share is similar to basic earnings per
share except that the denominator includes potential dilutive common stock. The
potential dilutive common stock included in the Company's computation of diluted
net income per share includes the effects of the stock options and warrants
described in Note 17, as determined using the treasury stock method. The effect
of these dilutive securities amounted to 17,942 shares in 2002, 55,956 shares in
2001 and 130,816 shares in 2002.
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 ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As required by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has presented certain pro forma and other disclosures
related to stock-based compensation plans.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes derivative
financial instruments to reduce interest rate risk. In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended in June 2000
by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and hedging activities. They require that
an entity recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and measure those instruments at fair value. Changes
in the fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. Derivative financial instruments that do not
qualify for hedge accounting will be reported in earnings.
RECLASSIFICATIONS - Certain amounts in the prior years' financial
statements may have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENT - In November, the Financial Accounting
Standards Board ("FASB") Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Product)." This issue addresses the
recognition, measurement and income statement classification of consideration
from a vendor to a customer in connection with the customer's purchase or
promotion of the vendor's products. This consensus is expected to only impact
revenue and expense classifications and not change reported income. In
accordance with the consensus reached, the Company will adopt the required
accounting beginning with the fiscal year beginning February 1, 2002. The
Company's adoption of EITF No. 01-9 will result in reclassification of certain
marketing expenses to reflect them as reduction of revenues. The
reclassification will have no effect on net income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
F-9
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by SFAS No. 138, is effective for financial statements for fiscal years
beginning after June 15, 2000. The Company adopted the provisions of SFAS No.
133 effective February 1, 2001. On the date of adoption, SFAS No. 133 did not
have a significant impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interests method. SFAS No. 141 also addresses the recognition and measurement
of goodwill and other intangibles assets acquired in a business combination.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting treatment as it applies to goodwill and
other identifiable intangible assets with indefinite useful lives from an
amortization method to an impairment-only approach. Under SFAS No. 142, proper
accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in the case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date of this
statement is for fiscal years beginning after December 15, 2001. The Company
intends to adopt SFAS No. 142 for its fiscal year beginning February 1, 2002.
In accordance with SFAS No. 142, the Company has obtained a preliminary
valuation and estimated useful life report of all its trademarks from a third-
party independent valuation firm. Preliminary results of this analysis, which
the Company is still evaluating, would indicate no significant impairment in the
carrying value of its trademarks upon adoption of the standard and the
trademarks have indefinite useful lives. Under the new pronouncement,
amortization expense relating to identifiable intangible assets with indefinite
useful lives, which amounted to approximately $3,584,000, $3,955,000 and
$4,912,000 for fiscal January 31, 2000, 2001 and 2002, respectively, will not be
required in future years.
On October 3, 2001, the FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," it retains many of
the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations---Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The effective date
of SFAS No.144 is for fiscal years beginning after December 15, 2001. SFAS No.
144 is not expected to have a significant effect on the financial position or
the results of operation of the Company.
3. Shares Repurchase
On July 11, 2000, the Board of Directors of the Company approved a share
repurchase program in which up to 500,000 shares of common stock may be
purchased from time to time during the following 12 months. On July 11, 2001,
the Board of Directors extended the current share repurchase program for an
additional year, and on September 25, 2001 increased the number of shares
authorized for repurchase to 750,000 shares. The shares may be purchased in the
open market or in privately negotiated transactions.
For the fiscal year ended January 31, 2002, the Company had repurchased
295,300 additional shares at an average price of $7.37 per share. On March 2,
2001 and October 29, 2001, the Company retired 160,000 and 244,600 shares held
in the treasury, respectively.
F-10
4. Accounts Receivable
Accounts receivable consist of the following as of January 31:
2001 2002
------------ -----------
Trade accounts $51,848,737 $47,778,539
Royalties and other receivables 7,400,850 4,506,696
----------- -----------
Total 59,249,587 52,285,235
Less: Allowance for doubtful accounts (427,965) (1,914,990)
----------- -----------
Total $58,821,622 $50,370,245
=========== ===========
The activity for the allowance for doubtful account is as follows:
2000 2001 2002
------------ ---------- ----------
Allowance for doubtful accounts
Beginning balance $ 609,874 $1,014,576 $ 427,965
Provision 450,541 330,435 1,575,000
Write-offs, net of recoveries (45,839) (917,046) (87,975)
----------- ---------- ----------
Ending balance $ 1,014,576 $ 427,965 $1,914,990
=========== ========== ==========
The Company carries accounts receivable at the amount it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best estimates.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that become uncollectible could differ from those
estimates.
5. Inventories
Inventories consist of the following as of January 31:
2001 2002
----------- -----------
Finished goods $37,960,098 $40,467,911
Ras materials and in process 1,063,772 -
Merchandise in transit 4,532,504 4,941,136
----------- -----------
Total $43,556,374 $45,409,047
=========== ===========
6. Property and Equipment
Property and equipment consists of the following as of January 31:
2001 2002
----------- -----------
Furniture, fixture and equipment $11,509,202 $11,615,513
Vehicles 188,906 167,940
Leasehold improvements 2,458,947 3,209,254
Land 1,581,702 1,581,702
----------- -----------
Total 15,738,757 16,574,409
Less: accumulated depreciation
and amortization (5,918,129) (5,677,075)
----------- -----------
Total $ 9,820,628 $10,897,334
=========== ===========
Depreciation expense relating to property and equipment amounted to
approximately $1,241,000, $1,567,000 and $1,849,000 for the fiscal years ended
January 31, 2000, 2001 and 2002, respectively.
F-11
7. Intangible Assets
Intangible assets consisted of the following as of January 31:
2001 2002
------------ ------------
Trademarks and licenses $132,216,093 $132,315,018
Goodwill 16,165 16,165
------------ ------------
Total 132,232,258 132,331,183
Less: Accumulated amortization (10,215,577) (14,392,289)
------------ ------------
Balance, net $122,016,681 $117,938,894
============ ============
Amortization expense relating to the intangible assets amounted to
approximately $3,584,000, $3,955,000 and $4,342,000 for the fiscal years ended
January 31, 2000, 2001 and 2002, respectively.
8. Accrued Expenses
Accrued expenses consists of the following as of January 31:
2001 2002
---------- ----------
Salaries and commissions $1,808,047 $1,735,024
Royalties 318,325 281,280
Buying commissions 401,787 287,944
Other 1,132,205 955,354
---------- ----------
Total $3,660,364 $3,259,602
========== ==========
9. Other Current Liabilities
Other current liabilities consists of the following as of January 31:
2001 2002
---------- ----------
Unearned advertising reimbursements $1,334,969 $2,059,667
Other 316,498 350,916
---------- ----------
Total $1,651,467 $2,410,583
========== ==========
10. Derivatives Financial Instruments
The Company has an interest rate risk management policy with the objective
of managing its interest costs. To meet this objective the Company employs
hedging and derivatives strategies to limit the effects of changes in interest
rates on its operating income and cash flows, and to lower its overall fixed
rate interest cost on its senior subordinated notes.
The Company believes its interest rate risk management policy is generally
effective. Nonetheless, the Company's profitability may be adversely affected
during particular periods as a result of changing interest rates. In addition,
hedging transactions using derivative instruments involve risks such as counter-
party credit risk and risks regarding the legal enforceability of hedging
contracts. The counter-parties to the Company's arrangements are lenders of the
hedged debt instruments or are major financial institutions.
In August 2001, the Company entered into an interest rate swap, option and
interest rate cap agreements (the "August Swap Agreement") for an aggregate
notional amount of $40.0 million in order to minimize its debt servicing costs
associated with its $100.0 million of 12 1/4% senior subordinated notes due
April 1, 2006. The August Swap Agreement was subsequently modified through a
basis swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is
F-12
entitled to receive semi-annual interest payments on October 1, and April 1, at
a fixed rate of 12 1/4% and is obligated to make semi-annual interest payments
on October 1, and April 1, at a floating rate based on the 6-month LIBOR rate
plus 715 basis points for the 18 months period October 1, 2001 through March 31,
2003 (per October Swap Agreement); and 3-month LIBOR rate plus 750 basis point
for the period April 1, 2003 through April 1, 2006 (per the August Swap
Agreement). The Swap Agreement has optional call provisions with trigger dates
of April 1, 2003, April 1, 2004 and April 1, 2005, which contain certain premium
requirements in the event the call is exercised.
The fair value of the interest rate swap and option are recorded on the
Company's Consolidated Balance Sheet was ($0.245) million as of January 31,
2002. The interest rate cap and basis swap did not qualify for hedge accounting
treatment under the SFAS No. 133, resulting in $0.7 million reduction of
recorded interest expense in results of operations for the fiscal year ended
January 31, 2002.
The Company does not currently have a significant exposure to foreign
exchange risk and accordingly, has not entered into any transactions to hedge
against those risks. See summary of "Significant Accounting Policies" for policy
description of foreign currency translation.
11. Borrowings under Letter of Credit Facilities
The Company maintains two letter of credit facilities totaling $42.0
million. Each letter of credit is secured by the consignment of merchandise in
transit under that letter of credit. As of January 31, 2002, there was $31.0
million available under then existing letter of credit facilities.
Amounts outstanding under letter of credit facilities consist of the
following as of January 31:
2001 2002
------------ ------------
Total letter of credit facilities $ 52,000,000 $ 42,000,000
Outstanding letters of credit (27,923,927) (11,035,880)
------------ ------------
Available $ 24,076,073 $ 30,964,120
============ ============
12. Long Term Debt-Senior Credit Facility
The Company amended its senior credit facility on March 26, 1999 with a
group of banks consisting of a revolving credit facility of up to an aggregate
amount of $75.0 million. The weighted average interest rate on the senior credit
facility was 8.7% and 7.3% for the fiscal years ending January 31, 2001 and
2002, respectively. The facility contains covenants which require the Company to
maintain certain financial and net worth ratios and restricts the payment of
dividends. As of January 31, 2002, the Company was not in compliance with a
certain funded indebtedness to EBITDA financial covenant which noncompliance has
been waived subsequent to January 31, 2002. The senior credit facility is
secured by the assets of the Company.
The senior credit facility expires on October 1, 2002 and as such the
Company has classified its credit facility as current in the consolidated
balance sheet as of January 31, 2002. The Company is currently in active
discussions to renew or replace its existing senior credit facility. Management
believes this discussion will be successfully completed prior to the October 1,
2002 expiration date.
13. Senior Subordinated Notes Payable
The Company issued $100.0 million senior subordinated notes on April 6,
1999, the proceeds of which were used to acquire the Perry Ellis, John Henry and
Manhattan brands and to pay down the
F-13
outstanding balance of the senior credit facility. The notes mature on April 1,
2006, and bear interest at the rate of 12 1/4 % payable on April 1 and October 1
in each year. The proceeds to the Company were $98,852,000, yielding an
effective interest rate of 12.39% after deduction of discounts.
The notes are unsecured senior subordinated obligations and are
subordinated to all of the Company's existing and future senior indebtedness.
The notes rank equally with all of the Company's future senior subordinated
indebtedness.
The indenture agreement contains certain covenants which requires the
Company to maintain certain financial ratios and restricts the payment of
dividends. As of January 31, 2002, the Company was in compliance with its debt
covenants of the senior subordinated notes.
Optional Redemption. The notes are redeemable at the option of the Company,
as a whole or in part from time to time, at any time on or after April 1, 2003
at the redemption prices (expressed as percentages of principal amount) set
forth below, together with accrued interest, if any, to the date of redemption,
if redeemed during the 12-month period beginning on April 1 of the years
indicated below (subject to the right of holders of record on relevant record
dates to receive interest due on an interest payment date):
Year Redemption Price
---- ----------------
2003.......................... 106.125%
2004.......................... 103.063%
2005 and thereafter........... 100.000%
In addition, at any time or from time to time before April 1, 2002, the
Company may redeem up to 35% of the aggregate principal amount of the notes
within 60 days of one or more public equity offerings with the net proceeds of
such offering at a redemption price equal to 112.25% of the principal amount
thereof, together with accrued interest, if any, to the date of redemption
(subject to the right of holders of record on relevant record dates to receive
interest due on relevant interest payment dates); provided that, after giving
effect to any such redemption, at least 65% of the aggregate principal amount of
the notes initially issued remains outstanding. The Company did not exercise the
redemption option before April 1, 2002.
14. Income Taxes
The income tax provision consists of the following for each of the years
ended January 31:
2000 2001 2002
---------- ---------- ----------
Current income taxes:
Federal $4,677,353 $2,450,203 $2,115,199
State 528,929 242,627 300,810
Foreign (89,337) (128,460) 237,746
---------- ---------- ----------
Total 5,116,945 2,564,370 2,653,755
Deferred income taxes:
Federal and state 1,412,735 2,098,295 1,386,240
---------- ---------- ----------
Total $6,529,680 $4,662,665 $4,039,995
========== ========== ==========
The following table reconciles the statutory federal income tax rate to the
Company's effective income tax rate for each of the years ended January 31:
F-14
2000 2001 2002
---------- ---------- ----------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from
State income taxes, net of federal
Income tax benefit 2.9 2.5 2.7
Benefit of graduated rate (1.0) (0.6) (0.6)
Other (2.5) 0.6 0.8
---------- ---------- ----------
Total 34.4% 37.5% 37.9%
========== ========== ==========
Deferred income taxes are provided for the temporary differences between
financial reporting basis and the tax basis of the Company's assets and
liabilities under SFAS No. 109. The tax effects of temporary differences as of
January 31 are as follows:
2001 2002
----------- -----------
Deferred Tax Assets
Inventory $ 855,394 $ 909,481
Allowance for doubtful accounts 155,168 698,971
Accrued expenses 26,458 104,655
Unearned revenue 723,966 671,209
Other 190,567 -
----------- -----------
Subtotal 1,951,553 2,384,316
----------- -----------
Deferred Tax Liabilities
Fixed assets (1,419,643) (1,635,853)
Intangible assets (3,410,355) (4,889,857)
Other 100,831 (224,122)
----------- -----------
Subtotal (4,930,829) (6,749,832)
----------- -----------
Net deferred tax asset (liability) $(2,979,276) $(4,365,516)
=========== ===========
Management believes that a valuation allowance for deferred income tax
assets is not deemed necessary as the assets are expected to be recovered.
Deferred taxes have not been recognized on unremitted earnings of the Company's
foreign subsidiaries based on the "indefinite reversal" criteria of APB Opinion
No. 23.
15. Retirement Plan
The Company has a 401(k) Profit Sharing Plan (the "Plan") in which eligible
employees may participate. Employees are eligible to participate in the Plan
upon the attainment of age 21, and completion of one year of service.
Participants may elect to contribute up to 15% of their annual compensation, not
to exceed amounts prescribed by statutory guidelines. The Company is required to
contribute an amount equal to 50% of each participant's eligible contribution up
to 6% of the participant's annual compensation. The Company may elect to
contribute additional amounts at its discretion. The Company's contributions to
the Plan were approximately $128,000, $173,000 and $199,000 for the fiscal years
ended January 31, 2000, 2001 and 2002, respectively.
F-15
16. Related Party Transactions
The Company leases certain office and warehouse space owned by the Chairman
of the Board of Directors and Chief Executive Officer under certain lease
arrangements, most of which are month-to-month. Rent expense, including taxes,
for these leases amounted to $265,000, $316,000 and $537,000, for the years
ended January 31, 2000, 2001 and 2002, respectively.
The Company entered into licensing agreements (the "License Agreements")
with Isaco International, Inc. ("Isaco"), pursuant to which Isaco was granted
the exclusive license to use the Natural Issue, Perry Ellis and Career Club
brand names in the United States and Puerto Rico to market a line of men's
underwear, hosiery and loungewear. The principal shareholder of Isaco is the
father-in-law of the Company's President and Chief Operating Officer. Royalty
income earned from the License Agreements amounted to $438,000, $834,000 and
$1,230,000 for the years ended January 31, 2000, 2001 and 2002, respectively.
17. Stock Options and Warrants
Stock Options - The Company adopted a 1993 Stock Option Plan (the "1993
Plan") and a Directors Stock Option Plan (the "Directors Plan") (collectively,
the "Stock Option Plans"), under which shares of common stock are reserved for
issuance upon the exercise of the options. The number of shares issuable under
the Directors Plan is 150,000. The number of shares issuable under the 1993
plan is 1,500,000. The Stock Option Plans are designed to serve as an incentive
for attracting and retaining qualified and competent employees, directors,
consultants, and independent contractors of the Company. The 1993 Plan provides
for the granting of both incentive stock options and nonstatutory stock options.
Incentive stock options may only be granted to employees. Only non-employee
directors are eligible to receive options under the Directors Plan. All matters
relating to the Directors Plan are administered by a committee of the Board of
Directors consisting of two or more employee directors, including selection of
participants, allotment of shares, determination of price and other conditions
of purchase, except that the per share exercise price of options granted under
the Directors Plan may not be less than the fair market value of the common
stock on the date of grant.
Options can be granted under the 1993 Plan on such terms and at such prices
as determined by the Board of Directors, or a committee thereof, except that the
per share exercise price of incentive stock options granted under the 1993 Plan
may not be less than the fair market value of the common stock on the date of
grant, and in the case of an incentive stock option granted to a 10%
shareholder, the per share exercise price will not be less than 110% of such
fair market value.
A summary of the stock option activity for options issued under the 1993
Plan and the Directors Plan is as follows for the years ended January 31:
Option Price Per Share Options Exercisable
-------------------------- ---------------------------
Number Number Weighted Average
of Shares Low High Weighted of Shares Exercise Price
----------- ------ ------ -------- --------- ----------------
Outstanding January 31, 1999 566,000 $6.67 $15.75 $11.95 410,375 $12.66
Granted 2000 501,000 $8.81 $13.50 $ 9.26
Exercised 2000 (19,500) $6.67 $10.07 $ 8.39
Cancelled 2000 (15,000) $6.50 $15.25 $ 9.59
-----------
Outstanding January 31, 2000 1,032,000 $7.67 $15.75 $10.69 833,459 $10.73
Granted 2001 167,000 $5.13 $13.00 $ 8.41
Exercised 2001 (7,500) $7.67 $ 7.67 $ 7.67
Cancelled 2001 (78,500) $9.63 $14.25 $10.13
-----------
Outstanding January 31, 2001 1,113,550 $5.13 $15.75 $10.44 940,616 $10.41
Granted 2002 71,667 $5.13 $ 8.85 $ 7.37
Exercised 2002 (2,666) $5.13 $ 6.88 $ 5.79
F-16
Cancelled 2002 (88,750) $5.13 $13.44 $10.40
----------
Outstanding January 31, 2002 1,093,801 $5.13 $15.75 $10.27 980,774 $10.40
==========
The following table summarizes information about options outstanding as of
January 31, 2002:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ---------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------- ------------- ---------------- ---------------- ----------- --------------
$ 5.13 $ 7.50 88,501 6.4 $ 5.57 62,666 $ 5.21
$ 7.51 $ 10.00 663,750 4.3 $ 8.80 621,292 $ 8.80
$ 10.01 $ 12.00 78,550 1.0 $ 10.56 42,149 $ 10.56
$ 12.01 $ 15.75 263,000 6.7 $ 15.49 254,667 $ 15.56
As described in Note 2, we account for stock-based compensation using the
provisions of APB No. 25 and related interpretations. No compensation expense
has been recognized in the years ended January 31, 2000, 2001 and 2002 as the
exercise prices for the stock options granted were equal to their fair market
value at the time of grant. Had compensation cost for options granted been
determined in accordance with the fair value provisions of SFAS No. 123, our net
income and net income per share would have been reduced to the pro forma amounts
presented below for the years ended January 31:
2000 2001 2002
----------- ---------- ----------
Pro forma net income $10,150,643 $7,078,649 $6,185,478
=========== ========== ==========
Pro forma net income per share:
Basic $ 1.51 $ 1.08 $ 0.95
=========== ========== ==========
Diluted $ 1.48 $ 1.05 $ 0.95
=========== ========== ==========
The fair value of these options was estimated at the date of grant using
the Black-Scholes Option Pricing Model with the following weighted-average
assumptions for 2000, 2001 and 2002:
2000 2001 2002
----------------------------
Risk free interest 6.5% 6.5% 3.3%
Dividend yield 0.0% 0.0% 0.0%
Volatility factors 64.0% 67.9% 67.3%
Weighted average life (years) 9.0 4.5 1.9
Using the Black-Scholes Option Pricing Model, the estimated weighted-
average fair value per option granted in 1999, 2000 and 2001 was $6.99, $4.43
and $2.75, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
F-17
Because our stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of our stock options.
The pro forma amounts may not be representative of the future effects on
reported net income and net income per share that will result from the future
granting of stock options, since the pro forma compensation expense is allocated
over the periods in which options become exercisable and new option awards are
granted each year.
18. Segment Information
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," the Company's principal segments are
grouped between the generation of revenues from products and royalties. The
Licensing segment derives its revenues from royalties associated from the use of
its brand names, principally Perry Ellis, John Henry, Manhattan and Munsingwear.
The Product segment derives its revenues from the design, import and
distribution of apparel to department stores and other retail outlets,
principally throughout the United States. Trademark assets and costs have been
allocated among the divisions where the brands are shared.
2000 2001 2002
------------- ------------- -------------
Revenues
Product $ 229,549,158 $ 261,626,463 $ 253,033,752
Licensing 22,839,698 25,789,975 26,680,987
------------- ------------- -------------
Total Revenues $ 252,388,856 $ 287,416,438 $ 279,714,739
============= ============= =============
Operating Income
Product $ 15,065,942 $ 10,772,903 $ 7,882,648
Licensing 16,249,185 17,482,217 16,398,275
------------- ------------- -------------
Total Operating Income $ 31,315,127 $ 28,255,120 $ 24,280,923
============= ============= =============
Interest Expense
Product $ 3,417,678 $ 3,353,726 $ 1,630,120
Licensing 10,487,820 12,412,735 11,919,626
------------- ------------- -------------
Total Interest Expense $ 13,905,498 $ 15,766,461 $ 13,549,746
============= ============= =============
Income Tax Provision
Product $ 4,368,823 $ 2,721,285 $ 2,637,938
Licensing 2,160,858 1,941,370 1,402,057
------------- ------------- -------------
Total Income Tax Provision $ 6,529,681 $ 4,662,655 $ 4,039,995
============= ============= =============
Depreciation and Amortization
Product $ 1,493,055 $ 1,824,137 $ 2,181,229
Licensing 3,688,231 4,306,571 4,480,929
------------- ------------- -------------
Total Depreciation and Amortization $ 5,181,286 $ 6,130,708 $ 6,662,158
============= ============= =============
Identifiable Assets
Product $ 113,454,814 $ 120,506,469
Licensing 127,685,408 111,057,137
F-18
Corporate 1,972,860 2,497,074
------------- -------------
Total Identifiable Assets $ 243,113,082 $ 234,060,680
============= =============
F-19
19. Commitments and Contingencies
The Company has licensing agreements, as licensee, for the use of certain
branded and designer labels. The license agreements expire on varying dates
through December 31, 2003. Total royalty payments under these license
agreements amounted to $1,105,716, $1,198,106 and $1,635,239 for the years ended
January 31, 2000, 2001 and 2002, respectively, and were classified as cost of
sales.
The Company's administrative offices, warehouse and distribution facility
are located in a 240,000 square foot leased facility in Miami, which was built
to our specifications and completed in 1997. The facility is occupied pursuant
to a synthetic lease, which has an initial term expiring in August 2002, annual
rental payment of approximately $900,000 and a minimum contingent rental payment
of $14.5 million at the end of the 5-year term. The synthetic lease will not be
renewed and the Company is in the process of arranging new financing for its
facilities through a mortgage lender.
The synthetic lease was entered into with a group of financial institutions
to finance the acquisition and construction of the Company's corporate
headquarters. The financial institutions assumed the Company's obligation to
purchase the facility and, in turn, leased the facility to us. The obligations
under the synthetic lease are secured by a security interest in substantially
all the Company's existing and future assets, whether tangible or intangible,
including, without limitation, accounts receivable, inventory deposit accounts,
general intangibles, intellectual property and equipment.
In addition to customary covenants found in secured lending agreements, the
synthetic lease also contains various restrictive financial and other covenants
including, without limitation, (a) prohibitions on the incurrence of additional
indebtedness or guarantees, (b) restrictions on the creation of additional
liens, (c) certain limitations on dividends and distributions or capital
expenditures by the Company, (d) restrictions on mergers or consolidations,
sales of assets, investments and transactions with affiliates and (e) certain
financial maintenance tests. Such financial maintenance tests, include, among
others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a minimum
current ratio, (iii) a minimum net worth and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, the Company was not in compliance with
the funded indebtedness to EBITDA financial covenant. The lessor under, and the
financial institutions which financed, the synthetic lease have waived the
noncompliance with this financial covenant.
The Company leases three warehouse facilities in Miami totaling
approximately 103,000 square feet from our Chairman and CEO and partnerships
controlled by him, to handle the overflow of bulk shipments and the specialty
division and PING operations. All leases are on a month-to-month basis at
market prices.
The Company leases two locations in New York City totaling approximately
8,500 square feet each, these leases expire in December 2007 and 2012. These
locations are used for offices and showrooms.
The Company leases a retail store in the Sawgrass Mills outlet mall in
Sunrise, Florida with 11,240 square feet. This lease expires in September 2005.
Since the Company began leasing this facility in May 2001, the location have
been used as a test retail outlet store to sell our brands, principally Perry
Ellis America.
In order to monitor production of the Company's products in the Far East,
we maintain offices in South Korea, and China, and also lease offices jointly
with SPX Corporation, a publicly held company, in Beijing, China and Taipei,
Taiwan.
F-20
Minimum aggregate annual commitments for all of the Company's non-
cancelable operating lease commitments, including the minimum contingent rental
payment described above, are as follows.
Year Ending January 31,
- -----------------------
2003 $15,951,620 (A)
2004 465,650
2005 461,725
2006 461,725
2006 453,142
Future 1,017,125
-------------
Total $18,810,987
=============
(A) Includes synthetic lease payments of $15.4 million
Rent expense for these operating leases, including the related party rent
payments discussed in Note 16 amounted to $1,946,000, $1,660,632 and $2,526,293
for fiscal years ending January 31, 2000, 2001 and 2002, respectively.
The Company is subject to claims and suits, and is the initiator of claims
and suits against others, in the ordinary course of business. The Company does
not believe that the resolution of any pending claims will have a material
adverse effect on its financial position, results of operations or cash flows.
20. Subsequent Events
Senior Secured Notes
On March 22, 2002, the Company completed a private offering of $57.0
million 9 1/2% senior secured notes due March 15, 2009. The proceeds of the
private offering were used to fund the Jantzen acquisition, to reduce the amount
of outstanding debt under the Company's senior credit facility and as additional
working capital. The senior secured notes are secured by a security interest
granted in the Company's existing portfolio of trademarks and licenses, and the
trademarks and licenses acquired in connection with the Jantzen acquisition (see
below); all license agreements with respect to these trademarks; and all income,
royalties and other payments with respect to such licenses. The senior secured
notes are senior secured obligations of the Company and will rank pari passu in
right of payment with all of the Company's existing and future senior
indebtedness. The senior secured notes are effectively senior to all unsecured
indebtedness of the Company to the extent of the value of the assets securing
the notes.
Jantzen Acquisition
On March 22, 2002, the Company completed the acquisition from subsidiaries
of VF Corporation of certain assets of the Jantzen swimwear business for
approximately $24.0 million, excluding fees related to the transaction. The
Jantzen brand has a history of over 90 years and its products are sold in
upscale department stores, mid-tier department stores, chain stores, mass
merchants and specialty shops. The acquisition was financed with a portion of
the proceeds from a $57.0 million private offering of 9 1/2% senior secured
notes due March 15, 2009, which we closed simultaneously with the acquisition.
The Company has, through the acquisition of Jantzen, a lease agreement for
the Jantzen's Portland, Oregon office space for an initial six-month period.
This facility totals approximately 83,900 square feet. The Company has entered
into a lease for a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period, commencing March 22, 2002. This facility
totals approximately 279,000 square feet. The Seneca, South Carolina facility
carries an option to acquire the facility, which the Company can exercise within
60 days of the March 22, 2002 commencement date. The Company has been assigned
a lease agreement for office and showroom space in New York City totaling 8,200
square feet through August 2006, which contains certain renewal provisions. In
addition, the Company has entered into a lease agreement with Tommy Hilfiger
F-21
to occupy approximately 200 square feet of space in Tommy Hilfiger's facility
located in New York City through 2005.
Interest Rate Swap and Option Agreement
On March 15, 2002, the Company entered into interest rate swap and option
agreements for an aggregate notional amount of $57.0 million in order to
minimize the debt servicing costs associated with the senior secured notes. The
swap agreement is scheduled to terminate on March 15, 2009. Under the swap
agreement, the Company is entitled to receive semi-annual interest payments on
September 15 and March 15 at a fixed rate of 9 1/2% and are obligated to make
semi-annual interest payments on September 15 and March 15 at a floating rate
based on the three-month LIBOR rate plus 369 basis points for the period from
March 22, 2002 through March 15, 2009. The swap agreement has optional call
provisions with trigger dates of March 15, 2005, March 15, 2006 and March 15,
2007, which contain premium requirements in the event the call is exercised.
Senior Credit Facility
In March 2002, the Company amended its existing senior credit facility with
the Company's group of banks, which as amended, provides the Company with a
revolving credit facility of up to an aggregate amount of $60.0 million. This
amendment was done concurrently with the $57.0 million senior subordinated notes
offering discussed above. Borrowings are limited under the terms of a borrowing
base calculation, which generally restricts the outstanding balance to the sum
of (a) 80% of eligible receivables plus, (b) 90% of eligible factored accounts
receivable plus 60% of eligible inventories, as defined. Interest on borrowings
is variable, based upon the Company's option of selecting the bank's prime rate,
or a short term LIBOR rate plus an additional amount based on the Company's debt
coverage and other financial ratios.
Letters of Credit
Subsequent to January 31, 2002, the Company added two additional letter of
credit facilities for an aggregate amount of $25.0 million. Concurrently with
adding the additional facilities, the Company lowered one of its two existing
facilities by the amount of $5.0 million. The Company now has four facilities
totaling $62.0 million.
Synthetic Lease
In March 2002, the Company amended its synthetic lease with the lessor and
the financial institution that financed the synthetic lease, which as amended
provides that the Company shall exercise the purchase option of the lease on or
prior to June 30, 2002, increased the amount of stand-by letter of credit to
$5.5 million and waived the noncompliance of a certain financial covenant the
Company was not in compliance as of January 31, 2002. The Company is in the
process of arranging new financing to replace the synthetic lease through a
mortgage lender and the Company received a satisfactory financing offer from
such lender, subject to additional due diligence. The transaction will result
in the recognition of both an asset and a related liability on the Company's
balance sheet.
F-22
21. Summarized Quarterly Financial Data
(Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------------------
(Dollars in thousands)
FISCAL YEAR ENDED JANUARY 31, 2002
Net Sales $80,866 $58,926 $60,511 $52,731 $253,034
Royalty Income 6,065 6,858 6,403 7,355 26,681
----------------------------------------------------------------------------------------------
Total Revenues 86,931 65,784 66,914 60,086 279,715
Gross Profit 26,150 20,673 19,542 21,749 88,114
Net Income $ 3,198 $ 1,487 $ 970 $ 952 $ 6,608
Income per share:
Basic $ 0.49 $ 0.23 $ 0.15 $ 0.15 $ 1.01
Diluted $ 0.49 $ 0.23 $ 0.15 $ 0.15 $ 1.01
FISCAL YEAR ENDED JANUARY 31, 2001
Net Sales $78,232 $58,941 $64,356 $60,097 $261,626
Royalty Income 6,093 6,747 6,275 6,675 25,790
----------------------------------------------------------------------------------------------
Total Revenues 84,325 65,688 70,631 66,772 287,416
Gross Profit 25,453 20,923 19,121 21,036 86,533
Net Income $ 3,590 $ 1,818 $ 351 $ 2,067 $ 7,826
Income per share:
Basic $ 0.53 $ 0.27 $ 0.05 $ 0.31 $ 1.17
Diluted $ 0.53 $ 0.27 $ 0.05 $ 0.31 $ 1.16
FISCAL YEAR ENDED JANUARY 31, 2000
Net Sales $59,479 $45,273 $66,618 $58,179 $229,549
Royalty income 2,316 6,744 6,454 7,326 22,840
----------------------------------------------------------------------------------------------
Total revenues 61,795 52,017 73,072 65,505 252,389
Gross Profit 17,623 18,707 23,210 21,435 80,975
Net Income $ 2,892 $ 1,607 $ 3,964 $ 2,417 $ 10,880
Net income per share:
Basic $ 0.43 $ 0.24 $ 0.59 $ 0.36 $ 1.62
Diluted $ 0.43 $ 0.23 $ 0.58 $ 0.35 $ 1.59
F-23
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- --------------- -----------
4.6 Indenture dated March 22, 2002 between the Company
and State Street Bank and Trust Company
4.7 Purchase Agreement dated March 15, 2002 by and among
the Company and the Initial Purchaser
4.8 Pledge and Security Agreement dated March 22, 2002
by and among the Company, Jantzen Apparel Corp.
and State Street Bank and Trust Company
4.9 Specimen Forms of 9 1/2% Senior Secured Notes due
March 15, 2009
10.35 Employment Agreement between Timothy B. Page and the
Company
10.38 Fifth Amendment dated March 14, 2002 to Amended and
Restated Loan and Security Agreement dated March
26, 1999
10.39 Fourth Amendment to Master Agreement dated March 14,
2002, by and among the Company, SUP Joint
Venture, SunTrust Bank and Israeli Discount Bank
21.1 Subsidiaries of Registrant
23.2 Consent of Deloitte & Touche LLP