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EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 1350 - PERRY ELLIS INTERNATIONAL, INCdex322.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 1350 - PERRY ELLIS INTERNATIONAL, INCdex321.htm
EX-31.2 - CERTIFICATION OF PFO PURSUANT TO RULE 13A-14(A)/15D-14(A) - PERRY ELLIS INTERNATIONAL, INCdex312.htm
EX-31.1 - CERTIFICATION OF PEO PURSUANT TO RULE 13A-14(A)/15D-14(A) - PERRY ELLIS INTERNATIONAL, INCdex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-21764

 

 

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Florida   59-1162998

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

3000 N.W. 107 Avenue

Miami, Florida

  33172
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (305) 592-2830

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock is 14,112,428 (as of September 7, 2010).

 

 

 


Table of Contents

PERRY ELLIS INTERNATIONAL, INC.

INDEX

 

     PAGE

PART I: FINANCIAL INFORMATION

  

Item 1:

  

Condensed Consolidated Balance Sheets (Unaudited)
as of July 31, 2010 and January 30, 2010

   1

Condensed Consolidated Statements of Operations (Unaudited)
for the three and six months ended July  31, 2010 and August 1, 2009

   2

Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended July  31, 2010 and August 1, 2009

   3

Notes to Unaudited Condensed Consolidated Financial Statements

   4

Item 2:

  

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

   20

Item 3:

  

Quantitative and Qualitative Disclosures About Market Risks

   28

Item 4:

  

Controls and Procedures

   29
PART II: OTHER INFORMATION    29

Item 6:

  

Exhibits

   29


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share data)

 

     July 31, 2010     January 30, 2010  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 43,388      $ 18,269   

Accounts receivable, net

     85,319        139,934   

Inventories

     114,907        112,315   

Deferred income taxes

     10,804        8,783   

Prepaid income taxes

     5,471        4,744   

Other current assets

     12,694        11,295   
                

Total current assets

     272,583        295,340   

Property and equipment, net

     55,988        60,467   

Intangible assets

     200,315        200,315   

Other assets

     4,664        5,194   
                

TOTAL

   $ 533,550      $ 561,316   
                

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 41,574      $ 65,203   

Accrued expenses and other liabilities

     15,801        13,640   

Accrued interest payable

     3,642        4,482   

Current portion - real estate mortgage

     577        11,021   

Unearned revenues

     5,880        6,002   

Other current liabilities

     7,227        6,936   
                

Total current liabilities

     74,701        107,284   
                

Senior subordinated notes payable, net

     105,487        129,870   

Real estate mortgages

     26,136        13,712   

Deferred pension obligation

     15,060        17,237   

Unearned revenues and other long-term liabilities

     19,313        20,639   

Deferred income tax

     6,654        2,458   
                

Total long-term liabilities

     172,650        183,916   
                

Total liabilities

     247,351        291,200   
                

Commitment and contingencies

    

Equity:

    

Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock $.01 par value; 100,000,000 shares authorized; 16,577,760 shares issued and outstanding as of July 31, 2010 and 16,094,573 shares issued and outstanding as of January 30, 2010

     166        161   

Additional paid-in-capital

     114,146        107,527   

Retained earnings

     189,064        179,838   

Accumulated other comprehensive loss

     (3,684     (3,655
                

Total

     299,692        283,871   

Treasury stock at cost; 2,462,196 shares as of July 31, 2010 and January 30, 2010

     (17,415     (17,415
                

Total Perry Ellis International, Inc stockholders’ equity

     282,277        266,456   

Noncontrolling interest

     3,922        3,660   
                

Total equity

     286,199        270,116   
                

TOTAL

   $ 533,550      $ 561,316   
                

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(amounts in thousands, except per share data)

 

     Three Months Ended     Six Months Ended
     July 31, 2010     August 1, 2009     July 31, 2010    August 1, 2009

Revenues:

         

Net sales

   $ 155,622      $ 152,980      $ 369,864    $ 367,018

Royalty income

     6,132        6,189        12,239      12,195
                             

Total revenues

     161,754        159,169        382,103      379,213

Cost of sales

     103,601        109,961        245,206      260,771
                             

Gross profit

     58,153        49,208        136,897      118,442
                             

Operating expenses

         

Selling, general and administrative expenses

     53,249        47,700        108,875      102,074

Depreciation and amortization

     3,018        3,390        6,137      7,013
                             

Total operating expenses

     56,267        51,090        115,012      109,087
                             

Operating income (loss)

     1,886        (1,882     21,885      9,355

Cost on early extinguishment of debt

     730        —          730      —  

Interest expense

     3,361        3,966        7,108      8,584
                             

Net (loss) income before income taxes

     (2,205     (5,848     14,047      771

Income tax (benefit) provision

     (317     (694     4,559      133
                             

Net (loss) income

     (1,888     (5,154     9,488      638

Less: Net income attributed to noncontrolling interest

     85        154        262      97
                             

Net (loss) income attributed to Perry Ellis International, Inc.

   $ (1,973   $ (5,308   $ 9,226    $ 541
                             

Net (loss) income attributed to Perry Ellis International, Inc. per share:

         

Basic

   $ (0.15   $ (0.42   $ 0.71    $ 0.04
                             

Diluted

   $ (0.15   $ (0.42   $ 0.66    $ 0.04
                             

Weighted average number of shares outstanding

         

Basic

     13,170        12,669        13,019      12,685

Diluted

     13,170        12,669        14,029      12,719

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)

 

     Six Months Ended  
     July 31, 2010     August 1, 2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 9,488      $ 638   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     6,048        6,898   

Provision for bad debts

     427        907   

Tax benefit from exercise of stock options

     (2,204     —     

Amortization of debt issue costs

     225        267   

Amortization of discounts

     87        92   

Deferred income taxes

     2,175        4,319   

Stock options and restricted shares issued as compensation

     2,066        1,243   

Costs on early extinguishment of debt

     730        —     

Change in fair value of derivatives

     513        —     

Changes in operating assets and liabilities:

    

Accounts receivable, net

     54,191        43,188   

Inventories

     (2,695     37,097   

Other current assets

     (549     (53

Prepaid income taxes

     1,528        2,759   

Other assets

     91        (385

Deferred pension obligation

     (2,177     556   

Accounts payable and accrued expenses

     (21,627     (14,797

Accrued interest payable

     (840     (209

Unearned revenues and other liabilities

     (1,911     (4,044
                

Net cash provided by operating activities

     45,566        78,476   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (1,423     (1,589
                

Net cash used in investing activities

     (1,423     (1,589
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings from senior credit facility

     347,715        252,217   

Payments on senior credit facility

     (347,715     (306,632

Payments on senior subordinated notes

     (25,454     —     

Proceeds from real estate mortgage

     13,000        —     

Payments on real estate mortgages

     (10,873     (233

Deferred financing fees

     (158     —     

Purchase of treasury stock

     —          (1,751

Payments on capital leases

     (130     (150

Tax benefit from exercise of stock options

     2,204        —     

Proceeds from exercise of stock options

     2,354        —     
                

Net cash used in financing activities

     (19,057     (56,549
                

Effect of exchange rate changes on cash and cash equivalents

     33        334   
                

NET INCREASE IN CASH AND CASH EQUIVALENTS

     25,119        20,672   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     18,269        8,813   
                

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 43,388      $ 29,485   
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 8,374      $ 8,701   
                

Income taxes

   $ 345      $ 334   
                

NON-CASH FINANCING AND INVESTING ACTIVITIES:

    

Accrued purchases of property and equipment

   $ 116      $ 74   
                

Capital lease financing

   $ 28      $ 906   
                

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. GENERAL

The accompanying unaudited condensed consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP for annual financial statements. These condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2010.

The information presented reflects all adjustments, which are in the opinion of management of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.

The condensed consolidated statement of cash flows for the six months ended August 1, 2009 has been restated to correct the presentation of net income. The Company had previously presented net income attributable to Perry Ellis International, Inc. and included a reconciling item to add back loss attributable to noncontrolling interests in the condensed consolidated statement of cash flows. This change in the presentation has no impact on net cash provided by operating activities or net increase in cash and cash equivalents on the condensed consolidated statement of cash flows for the six months ended August 1, 2009.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (now part of FASB Accounting Standards Codification (“ASC”) 860). The objective of this standard is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. This standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of this standard are to be applied to transfers that occur on or after the effective date. The adoption of this standard did not have a material impact on the results of operations or the financial position of the Company.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (now part of ASC 810). This standard amends FASB Interpretation 46(R) to require an enterprise to perform an analysis to determine whether an enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of or the right to receive benefits from the entity. This standard also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this standard did not have a material impact on the results of operations or the financial position of the Company.

 

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In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605)—Multiple Deliverable Revenue Arrangements.” ASU No. 2009-13 eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and expands the disclosures related to multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. The adoption of ASU No. 2009-13 will not have a material impact on the results of operations or financial position of the Company.

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. ASU 2010-06 also includes conforming amendments to employers’ disclosures about post retirement benefit plan assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. The adoption of this standard, except for the disclosure of activity within Level 3 fair value measurements, did not have a material impact on its financial statements. The Company has not completed its assessment of the impact, if any, that the disclosure of activity within Level 3 fair value measurements will have on its financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855)—Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard did not have a material impact on the results of operations or the financial position of the Company.

 

3. INVENTORIES

Inventories are stated at the lower of cost (weighted average cost) or market. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, freight, insurance and commissions to buying agents.

Inventories consisted of the following as of:

 

     July 31, 2010    January 30, 2010
     (in thousands)

Finished goods

   $ 113,233    $ 110,420

Raw materials and in process

     1,674      1,895
             

Total

   $ 114,907    $ 112,315
             

 

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4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

 

     July 31, 2010     January 30, 2010  
     (in thousands)  

Furniture, fixture and equipment

   $ 80,350      $ 79,304   

Buildings

     19,348        19,348   

Vehicles

     943        862   

Leasehold improvements

     23,776        23,668   

Land

     9,163        9,163   
                
     133,580        132,345   

Less: accumulated depreciation and amortization

     (77,592     (71,878
                

Total

   $ 55,988      $ 60,467   
                

The above table of property and equipment includes assets held under capital leases as of:

 

     July 31, 2010     January 30, 2010  
     (in thousands)  

Furniture, fixture and equipment

   $ 1,028      $ 1,000   

Less: accumulated depreciation and amortization

     (381     (213
                

Total

   $ 647      $ 787   
                

For the three months ended July 31, 2010 and August 1, 2009, depreciation and amortization expense relating to property and equipment amounted to $2.9 million and $3.3 million, respectively. For the six months ended July 31, 2010 and August 1, 2009, depreciation and amortization expense relating to property and equipment amounted to $6.0 million and $6.9 million, respectively.

 

5. LETTER OF CREDIT FACILITIES

Borrowings and availability under letter of credit facilities consist of the following as of:

 

     July 31, 2010     January 30, 2010  
     (in thousands)  

Total letter of credit facilities

   $ 54,571      $ 54,481   

Outstanding letters of credit

     (5,905     (5,496
                

Total letters of credit available

   $ 48,666      $ 48,985   
                

 

6. ADVERTISING AND RELATED COSTS

The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $3.1 million and $2.4 million for the three months ended July 31, 2010 and August 1, 2009, respectively, and $6.3 million and $6.2 million for the six months ended July 31, 2010 and August 1, 2009, respectively, and are included in selling, general and administrative expenses.

 

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7. NET (LOSS) INCOME PER SHARE ATTRIBUTED TO PERRY ELLIS INTERNATIONAL, INC.

Basic net (loss) income per share attributed to Perry Ellis International, Inc. is computed by dividing net (loss) income attributed to Perry Ellis International, Inc. by the weighted average shares of outstanding common stock. The calculation of diluted net (loss) income per share is similar to basic earnings per share except that the denominator includes potentially dilutive common stock. The potentially dilutive common stock included in the Company’s computation of diluted net (loss) income per share attributed to Perry Ellis International, Inc. includes the effects of the stock options, stock appreciation rights and unvested restricted shares as determined using the treasury stock method.

The following table sets forth the computation of basic and diluted net (loss) income per share:

 

     Three Months Ended     Six Months Ended
     July 31, 2010     August 1, 2009     July 31, 2010    August 1, 2009
     (in thousands, except per share data)

Numerator:

         

Net (loss) income attributed to Perry Ellis International, Inc.

   $ (1,973   $ (5,308   $ 9,226    $ 541

Denominator:

         

Basic income per share - weighted average shares

     13,170        12,669        13,019      12,685

Dilutive effect: stock options and unvested restricted stock

     —          —          1,010      34
                             

Diluted income per share - weighted average shares

     13,170        12,669        14,029      12,719
                             

Basic (loss) income per share

   $ (0.15   $ (0.42   $ 0.71    $ 0.04
                             

Diluted (loss) income per share

   $ (0.15   $ (0.42   $ 0.66    $ 0.04
                             

Antidilutive effect: (1)

     2,677        2,914        345      2,312
                             

 

(1) Represents stock options to purchase shares of common stock, stock appreciation rights and restricted stock that were not included in computing diluted (loss) income per share because their effects were antidilutive for the respective periods.

 

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8. EQUITY AND COMPREHENSIVE INCOME

The following table reflects the changes in equity attributable to both Perry Ellis International, Inc., and the noncontrolling interests of the subsidiary in which Perry Ellis International, Inc. has a majority, but not total, ownership interest.

 

     Attributed to
Perry Ellis
International, Inc.
    Attributed to
Noncontrolling
Interest
   Total  
     (in thousands)  

Equity at January 31, 2010

   $ 266,456      $ 3,660    $ 270,116   

Comprehensive income

     9,197        262      9,459   

Share transactions under employee and direct stock purchase plans

     6,624        —        6,624   
                       

Equity at July 31, 2010

   $ 282,277      $ 3,922    $ 286,199   
                       

Equity at February 1, 2009

   $ 248,794      $ 3,307    $ 252,101   

Comprehensive income

     3,190        97      3,287   

Share transactions under employee and direct stock purchase plans

     1,243        —        1,243   

Share repurchases

     (1,751     —        (1,751
                       

Equity at August 1, 2009

   $ 251,476      $ 3,404    $ 254,880   
                       

Accumulated other comprehensive loss attributed to Perry Ellis International, Inc. at July 31, 2010 and January 30, 2010 was comprised of the following:

 

     July 31, 2010     January 30, 2010  
     (in thousands)  

Foreign currency translation

   $ (814   $ (785

Unrealized loss on pension liability, net of tax

     (2,870     (2,870
                
   $ (3,684   $ (3,655
                

The following table reflects comprehensive (loss) income for the three and six months ended July 31, 2010 and August 1, 2009 attributable to both Perry Ellis International, Inc., and the noncontrolling interests of the subsidiary in which Perry Ellis International, Inc. has a majority, but not total, ownership interest.

 

     Three Months Ended     Six Months Ended
     July 31, 2010     August 1, 2009     July 31, 2010     August 1, 2009
     (in thousands)

Net (loss) income

   $ (1,888   $ (5,154   $ 9,488      $ 638
                              

Other Comprehensive (loss) income:

        

Foreign currency translation adjustments, net

     (70     1,993        (29     2,649
                              

Total other comprehensive income (loss)

     (70     1,993        (29     2,649
                              

Comprehensive (loss) income

     (1,958     (3,161     9,459        3,287

Less: comprehensive income attributable to the noncontrolling interest

     85        154        262        97
                              

Comprehensive (loss) income attributable to Perry Ellis International, Inc.

   $ (2,043   $ (3,315   $ 9,197      $ 3,190
                              

 

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9. REAL ESTATE MORTGAGE

The Company’s main administrative office, warehouse and distribution facility is a 240,000 square foot facility in Miami, Florida. The facility was partially financed with an $11.6 million real estate mortgage loan. The real estate mortgage contained certain covenants. Interest was fixed at 7.123%. In August 2008, the Company executed a maturity extension of the real estate mortgage loan until July 1, 2010. In July 2010, the Company paid off the real estate mortgage loan.

In July 2010, the Company refinanced its main administrative office, warehouse and distribution facility in Miami with a $13.0 million mortgage loan. The real estate mortgage loan contains certain covenants and the Company is not aware of any non-compliance with any of these covenants. The Company could be materially harmed if it violates any covenants because the lender under the real estate mortgage loan could declare all amounts outstanding thereunder to be immediately due and payable, which the Company may not be able to satisfy. The loan is due on August 1, 2020. Principal and interest of $83,000 is due monthly based on a 25 year amortization with the outstanding principal due at maturity. Interest is fixed at 5.80%. At July 31, 2010, the balance of the real estate mortgage loan totaled $12.8 million, net of discount, of which $217,000 is due within one year.

In June 2006, the Company entered into a mortgage loan for $15 million secured by its Tampa facility. The loan is due on June 7, 2016. Principal and interest of $297,000 were due quarterly based on a 20 year amortization with the outstanding principal due at maturity. Interest was set at 6.25% for the first five years, at which point it would have reset based on the terms and conditions of the promissory note. In June 2010, the Company negotiated with the bank to accelerate the rate reset that was scheduled to occur in June 2011. The interest rate was reduced to 5.75% per annum. The terms were restated to reflect new quarterly payments of principal and interest of $288,000, based on a 20 year amortization with the outstanding principal due at maturity. At July 31, 2010, the balance of the real estate mortgage loan totaled $13.9 million, net of discount, of which $360,000 is due within one year.

Under the terms of the mortgage loans, a covenant violation could constitute a cross-default under the senior credit facility, the letter of credit facilities and indenture relating to the senior subordinated notes resulting in all of the Company’s debt obligations becoming immediately due and payable, which it may not be able to satisfy.

 

10. SENIOR SUBORDINATED NOTES PAYABLE

In fiscal 2004, the Company issued $150 million 87/ 8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 1/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to the Company were $146.8 million yielding an effective interest rate of 9.1%.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict the Company’s ability and the ability of its subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. The Company is not aware of any non-compliance with any of its covenants in this indenture. The Company is prohibited from paying cash dividends under these covenants. The Company could be materially harmed if it violates any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which it may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of its debt obligations becoming immediately due and payable, which it may not be able to satisfy.

During fiscal 2010, the Company’s Board of Directors authorized the Company to purchase, from time to time and as market and business conditions warrant, its senior subordinated notes for cash in the open market or in privately negotiated transactions. The amount of senior subordinated notes that may be repurchased or otherwise retired, if any, were to be decided upon based on parameters approved by of the Company’s Board of Directors and were to depend on market conditions, trading levels of the Company’s senior subordinated notes, the Company’s cash position and other considerations.

 

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During the fourth quarter of fiscal 2010, the Company retired $20.8 million of its senior subordinated notes payable. In connection with this retirement, the Company paid an additional $98,000 in redemption premiums and commissions. Additionally the Company wrote-off approximately $259,000 in unamortized discount and bond fees associated with the retired portion of the senior subordinated notes.

During June 2010, the Company retired $25.0 million of its senior subordinated notes payable. In connection with this retirement, the Company paid an additional $453,000 in redemption premiums and commissions. Additionally the Company wrote-off approximately $277,000 in unamortized discount and bond fees associated with the retired portion of the senior subordinated notes.

 

11. DERIVATIVES

In August 2009, the Company entered into an interest rate swap agreement (the “Swap Agreement”) for an aggregate notional amount of $75 million in order to reduce the debt servicing costs associated with its $150 million 8 7/8% senior subordinated notes. The Swap Agreement is scheduled to terminate on September 15, 2013. 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 8 7/8% and is obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the one-month LIBOR rate plus 632 basis points for the period through September 15, 2013. The Swap Agreement has an optional call provision that allows the counterparty to settle the Swap Agreement at any time with 30 days notice and subject to declining termination premium payments from the counterparty in the event the call is exercised. The Swap Agreement is a fair value hedge as it has been designated against the 8 7/8% senior subordinated notes carrying a fixed rate of interest and converts the fixed interest payments to variable interest payments.

During August 2010, the Company was notified by the counterparty, that it would by exercising the optional call provision and effectively terminating the Swap Agreement in September 2010.

The location and amount of gains (losses) on derivative instruments and related hedged items reported in the consolidated statements of operations were as follows:

 

    

Location of Gain (Loss)
Recognized in Income

   Three Months Ended    Six Months Ended

Fair Value Hedging Relationship

      July 31, 2010     August 1, 2009    July 31, 2010     August 1, 2009
          (in thousands)

Derivative : Swap Agreement

   Interest expense    $ 1,064      $ —      $ 1,707      $ —  

Hedged item: Fixed rate debt

   Interest expense      (460     —        (481     —  
                                

Total (1)

      $ 604      $ —      $ 1,226      $ —  
                                

 

(1) Includes $604,000 and $371,000 for the three and six months ended July 31, 2010, respectively, related to the ineffectiveness of the hedging relationship.

In August 2009, the Company entered into an interest rate cap agreement (the “$75 million Cap Agreement”) for an aggregate notional amount of $75 million associated with the senior subordinated notes. The $75 million Cap Agreement is scheduled to become effective on December 15, 2010 and terminate on September 15, 2013. The $75 million Cap Agreement is being used to manage cash flow risk associated with the Company’s floating interest rate exposure pursuant to the Swap Agreement. The $75 million Cap Agreement limits the maximum interest rate on $75 million of the senior subordinated notes to 9.32%. The $75 million Cap Agreement does not qualify for hedge accounting treatment.

 

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The location and amount of (losses) on derivative instruments not designated as hedging instruments reported in the consolidated statements of operations were as follows:

 

    

Location of (Loss)
Recognized in Income

   Three Months Ended    Six Months Ended

Derivatives Not Designed As Hedging Instruments

      July 31, 2010     August 1, 2009    July 31, 2010     August 1, 2009
          (in thousands)

Derivative : 75 Million Cap Agreement

   Interest expense    $ (572   $ —      $ (1,255   $ —  
                                

Total

      $ (572   $ —      $ (1,255   $ —  
                                

Refer to Note 16, “Fair Value Measurements,” for disclosures of the fair value and line item caption of derivative instruments recorded on the condensed consolidated balance sheets.

 

12. INCOME TAXES

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company’s U.S. federal income tax returns for 2007 through 2010 are open tax years. The Company’s state tax filings are subject to varying statutes of limitations. The Company’s unrecognized state tax benefits are related to state tax returns open from 2002 through 2010, depending on each state’s particular statute of limitation. As of July 31, 2010, various state, local, and foreign income tax returns are under examination by taxing authorities.

The Company has a $1.1 million liability recorded for unrecognized tax benefits as of January 30, 2010, which includes interest and penalties of $0.3 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. All of the unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. During the three and six months ended July 31, 2010, the total amount of unrecognized tax benefits increased by approximately $46,000 and $78,000, respectively. The change to the total amount of the unrecognized tax benefit for the three and six months ended July 31, 2010 included an increase in interest and penalties of approximately $16,000 and $33,000, respectively.

It is reasonably possible that within the next twelve months the Company may settle its voluntary disclosure process with the State of New Jersey. The Company does not currently anticipate that such resolutions will significantly increase or decrease tax expense within the next twelve months. Furthermore, the statute of limitations related to the Company’s 2007 U.S. federal tax year will expire within the next twelve months. The lapse in the statute of limitations would be expected to decrease tax expense within the next twelve months. The expiration of the statute of limitations related to the Company’s 2007 U.S. federal tax year could result in a tax benefit of up to approximately $0.1 million.

 

13. STOCK OPTIONS AND RESTRICTED SHARES

During the first and second quarters of fiscal 2011, the Company granted stock appreciation rights (“SARs”) to purchase shares of common stock to certain key employees. The Company awarded an aggregate of 243,599 SARs with exercise prices ranging from $24.34 to $25.60, which generally vest over a three year period and have a seven year term. The total fair value of the SARs, based on the Black-Scholes Option Pricing Model, amounted to approximately $3.2 million, which will be recorded as compensation expense on a straight-line basis over the vesting period of each SAR.

In addition, the Company awarded to a director 3,720 SARs with an exercise price of $25.60, which vests over a three year period and has a seven year term. The total fair value of the SARs, based on the Black-Scholes Option Pricing Model, amounted to approximately $50,000, which will be recorded as compensation expense on a straight-line basis over the vesting period.

 

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During first quarter of fiscal 2011, the Company granted performance based restricted stock to certain key employees pursuant to the Company’s 2005 Long Term Incentive Compensation Plan, and subject to certain conditions in the grant agreement. Such stock generally vests 100% in April 2013, provided that each employee is still an employee of the Company on such date, and the Company has met certain performance criteria. A total of 40,704 shares of restricted stock were issued at an estimated value of $1.0 million, which will be recorded as compensation expense on a straight-line basis over the vesting period.

Also, during the first quarter of fiscal 2011, the Company awarded to a director 654 shares of restricted stock, which vest over a three year period at an estimated value of $15,000. This value will be recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

During second quarter of fiscal 2011, the Company granted an aggregate of 32,034 shares of restricted stock to certain key employees, which vest over a three year period at an estimated value of $0.7 million. This value will be recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

Also, during the second quarter of fiscal 2011, the Company awarded to five directors an aggregate of 12,655 shares of restricted stock, which vest over a three year period at an estimated value of $0.3 million. This value will be recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.

 

14. SEGMENT 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, Jantzen, John Henry, Original Penguin, Gotcha, Farah, Savane, Pro Player, Manhattan, Munsingwear and Laundry by Shelli Segal. 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.

The Company allocates certain corporate selling, general and administrative expenses based primarily on the revenues generated by the segments.

 

     Three Months Ended     Six Months Ended  
     July 31, 2010     August 1, 2009     July 31, 2010     August 1, 2009  
     (in thousands)  

Revenues:

        

Product

   $ 155,622      $ 152,980      $ 369,864      $ 367,018   

Licensing

     6,132        6,189        12,239        12,195   
                                

Total Revenues

   $ 161,754      $ 159,169      $ 382,103      $ 379,213   
                                

Operating Income (Loss):

        

Product

   $ (3,340   $ (6,827   $ 12,018      $ 196   

Licensing

     5,226        4,945        9,867        9,159   
                                

Total Operating Income (Loss)

   $ 1,886      $ (1,882   $ 21,885      $ 9,355   
                                

Net (Loss) Income Before Income Taxes

        

Product

   $ (9,692   $ (13,042   $ (2,492   $ (14,396

Licensing

     7,487        7,194        16,539        15,167   
                                

Total Net (Loss) Income Before Income Taxes

   $ (2,205   $ (5,848   $ 14,047      $ 771   
                                

 

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15. BENEFIT PLAN

The Company sponsors a qualified pension plan. The following table provides the components of net benefit cost for the plan during the three and six months ended July 31, 2010 and August 1, 2009, respectively:

 

     Three Months Ended     Six Months Ended  
     July 31, 2010     August 1, 2009     July 31, 2010     August 1, 2009  
     (in thousands)  

Service cost

   $ 63      $ 63      $ 126      $ 126   

Interest cost

     533        589        1,066        1,178   

Expected return on plan assets

     (452     (389     (904     (778

Amortization of net gain

     12        15        24        30   
                                

Net periodic benefit cost

   $ 156      $ 278      $ 312      $ 556   
                                

 

16. FAIR VALUE MEASUREMENTS

The carrying amounts of accounts receivable, accounts payable, accrued expenses, and accrued interest payable approximates fair value due to their short-term nature. The carrying amount of the senior credit facility approximates fair value due to the frequent resets of its floating interest rate. As of July 31, 2010 and January 30, 2010, the fair value of the senior subordinated notes payable was approximately $106.0 million and $129.9 million, respectively, based on quoted market prices. These estimated fair value amounts have been determined using available market information.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and the levels of inputs used to measure fair value:

 

          Fair Value Measurements At
July 31, 2010 Using
    

Balance Sheet Location

   Level 1    Level 2    Level 3    Total
          (in thousands)

Assets:

              

Interest rate swap

   Other current assets    $ —      $ 2,035    $ —      $ 2,035
                              

Total assets at fair value

      $ —      $ 2,035    $ —      $ 2,035
                              

Liabilities:

              

Interest rate cap

   Other current liabilities    $ —      $ 725    $ —      $ 725

Interest rate cap

   Unearned revenues and other long term liabilities      —        1,341      —        1,341
                              

Total liabilities at fair value

      $ —      $ 2,066    $ —      $ 2,066
                              

 

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          Fair Value Measurements At
January 30, 2010 Using
    

Balance Sheet Location

   Level 1    Level 2    Level 3    Total
          (in thousands)

Assets:

              

Interest rate swap

   Other current assets    $ —      $ 1,092    $ —      $ 1,092

Interest rate swap

   Other assets      —        90      —        90
                              

Total assets at fair value

      $ —      $ 1,182    $ —      $ 1,182
                              

Liabilities:

              

Interest rate cap

   Other current liabilities    $ —      $ 449    $ —      $ 449

Interest rate cap

   Unearned revenues and other long term liabilities      —        731      —        731
                              

Total liabilities at fair value

      $ —      $ 1,180    $ —      $ 1,180
                              

 

17. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS

The Company and several of its subsidiaries (the “Guarantors”) have fully and unconditionally guaranteed the senior subordinated notes on a joint and several basis. The following are consolidating condensed financial statements, which present, in separate columns: Perry Ellis International, Inc., (Parent Only), the Guarantors on a combined, or where appropriate, consolidated basis, and the Non-Guarantors on a consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of July 31, 2010 and January 30, 2010 and for the three and six months ended July 31, 2010 and August 1, 2009. The combined Guarantors are wholly owned subsidiaries of Perry Ellis International, Inc., and have fully and unconditionally guaranteed the senior subordinated notes payable on a joint and several basis.

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JULY 31, 2010

(amounts in thousands)

 

     Parent Only    Guarantors    Non-
Guarantors
   Eliminations     Consolidated

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —      $ 29,738    $ 15,894    $ (2,244   $ 43,388

Accounts receivable, net

     189      42,109      43,021      —          85,319

Intercompany receivable

     89,958      —        —        (89,958     —  

Inventories

     —        99,279      15,628      —          114,907

Other current assets

     18,418      18,690      3,614      (11,753     28,969
                                   

Total current assets

     108,565      189,816      78,157      (103,955     272,583

Property and equipment, net

     9,028      43,024      3,936      —          55,988

Intangible assets

     —        156,715      43,600      —          200,315

Investment in subsidiaries

     287,504      —        —        (287,504     —  

Other assets

     3,361      1,232      71      —          4,664
                                   

TOTAL

   $ 408,458    $ 390,787    $ 125,764    $ (391,459   $ 533,550
                                   

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable, accrued expenses and other current liabilities

   $ 18,835    $ 56,306    $ 13,851    $ (14,291   $ 74,701

Intercompany payable - Parent

     —        28,674      65,163      (93,837     —  
                                   

Total current liabilities

     18,835      84,980      79,014      (108,128     74,701
                                   

Notes payable

     105,487      —        —        —          105,487

Other long-term liabilities

     1,859      55,018      7,863      2,423        67,163
                                   

Total long-term liabilities

     107,346      55,018      7,863      2,423        172,650
                                   

Total liabilities

     126,181      139,998      86,877      (105,705     247,351
                                   

Total Perry Ellis International, Inc stockholders’ equity

     282,277      250,789      34,965      (285,754     282,277

Noncontrolling interest

     —        —        3,922      —          3,922
                                   

Equity

     282,277      250,789      38,887      (285,754     286,199
                                   

TOTAL

   $ 408,458    $ 390,787    $ 125,764    $ (391,459   $ 533,550
                                   

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JANUARY 30, 2010

(amounts in thousands)

 

     Parent Only    Guarantors    Non-
Guarantors
   Eliminations     Consolidated

ASSETS

             

Current Assets:

             

Cash and cash equivalents

   $ —      $ 8,313    $ 12,459    $ (2,503   $ 18,269

Accounts receivable, net

     377      104,411      35,146      —          139,934

Intercompany receivable

     63,759      —        —        (63,759     —  

Inventories

     —        100,167      12,148      —          112,315

Other current assets

     15,389      18,319      6,671      (15,557     24,822
                                   

Total current assets

     79,525      231,210      66,424      (81,819     295,340

Property and equipment, net

     10,558      46,272      3,637      —          60,467

Intangible assets

     —        156,715      43,600      —          200,315

Investment in subsidiaries

     278,275      —        —        (278,275     —  

Other assets

     3,729      1,394      71      —          5,194
                                   

TOTAL

   $ 372,087    $ 435,591    $ 113,732    $ (360,094   $ 561,316
                                   

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Accounts payable, accrued expenses and other current liabilities

   $ 15,786    $ 97,326    $ 12,477    $ (18,305   $ 107,284

Intercompany payable - Parent

     —        10,369      57,102      (67,471     —  
                                   

Total current liabilities

     15,786      107,695      69,579      (85,776     107,284
                                   

Notes payable

     88,620      41,250      —        —          129,870

Other long-term liabilities

     1,225      42,619      7,967      2,235        54,046
                                   

Total long-term liabilities

     89,845      83,869      7,967      2,235        183,916
                                   

Total liabilities

     105,631      191,564      77,546      (83,541     291,200
                                   

Total Perry Ellis International, Inc. stockholders’ equity

     266,456      244,027      32,526      (276,553     266,456

Noncontrolling interest

     —        —        3,660      —          3,660
                                   

Equity

     266,456      244,027      36,186      (276,553     270,116
                                   

TOTAL

   $ 372,087    $ 435,591    $ 113,732    $ (360,094   $ 561,316
                                   

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JULY 31, 2010

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations    Consolidated  

Revenue

   $ —        $ 142,918      $ 18,836      $ —      $ 161,754   

Gross profit

     —          49,079        9,074        —        58,153   

Operating income (loss)

     —          2,377        (491     —        1,886   

Costs on early extinguishment of debt

     —          730        —          —        730   

Interest, noncontrolling interest and income taxes

     (11     4,005        (865     —        3,129   

Equity in earnings of subsidiaries, net

     (1,984     —          —          1,984      —     

Net (loss) income attributed to Perry Ellis International, Inc.

     (1,973     (2,358     374        1,984      (1,973

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED AUGUST 1, 2009

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations    Consolidated  

Revenue

   $ —        $ 140,927      $ 18,242      $ —      $ 159,169   

Gross profit

     —          41,035        8,173        —        49,208   

Operating loss

     (89     (1,021     (772     —        (1,882

Interest, noncontrolling interest and income taxes

     20        2,947        459        —        3,426   

Equity in earnings of subsidiaries, net

     (5,199     —          —          5,199      —     

Net loss attributed to Perry Ellis International, Inc.

     (5,308     (3,968     (1,231     5,199      (5,308

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JULY 31, 2010

(amounts in thousands)

 

     Parent Only    Guarantors    Non-
Guarantors
    Eliminations     Consolidated

Revenue

   $ —      $ 338,113    $ 43,990      $ —        $ 382,103

Gross profit

     —        115,932      20,965        —          136,897

Operating income

     —        20,290      1,595        —          21,885

Costs on early extinguishment of debt

     —        730      —          —          730

Interest, noncontrolling interest and income taxes

     3      12,798      (872     —          11,929

Equity in earnings of subsidiaries, net

     9,229      —        —          (9,229     —  

Net income attributed to Perry Ellis International, Inc.

     9,226      6,762      2,467        (9,229     9,226

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED AUGUST 1, 2009

(amounts in thousands)

 

     Parent Only     Guarantors    Non-
Guarantors
    Eliminations     Consolidated

Revenue

   $ —        $ 339,479    $ 39,734      $ —        $ 379,213

Gross profit

     —          102,222      16,220        —          118,442

Operating (loss) income

     (90     11,569      (2,124     —          9,355

Interest, noncontrolling interest and income taxes

     27        8,805      (18     —          8,814

Equity in earnings of subsidiaries, net

     658        —        —          (658     —  

Net income (loss) attributed to Perry Ellis International, Inc.

     541        2,764      (2,106     (658     541

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JULY 31, 2010

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 6,447      $ 42,753      $ (4,032   $ 398      $ 45,566   
                                        

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     (443     (352     (628     —          (1,423
                                        

NET CASH USED IN INVESTING ACTIVITIES

     (443     (352     (628     —          (1,423
                                        

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Payments on senior credit facility

     —          (347,715     —          —          (347,715

Borrowings from senior credit facility

     —          347,715        —          —          347,715   

Payments on senior secured note

     (454     (25,000     —          —          (25,454

Payments on deferred financing fees

     —          (158     —          —          (158

Payments on real estate mortgage

     —          (10,873     —          —          (10,873

Payments on capital leases

     (130     —          —          —          (130

Proceeds from exercise of stock options

     2,354        —          —          —          2,354   

Tax benefit from exercise of stock options

     2,204        —          —          —          2,204   

Proceeds from refinancing real estate mortgage

     —          13,000        —          —          13,000   

Intercompany transactions

     (10,011     2,055        8,123        (167     —     
                                        

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (6,037     (20,976     8,123        (167     (19,057

Effect of exchange rate changes on cash and cash equivalents

     33        —          (28     28        33   
                                        

Net increase in cash and cash equivalents

     —          21,425        3,435        259        25,119   

Cash and cash equivalents at beginning of period

     —          8,313        12,459        (2,503     18,269   
                                        

Cash and cash equivalents at end of period

   $ —        $ 29,738      $ 15,894      $ (2,244   $ 43,388   
                                        

 

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED AUGUST 1, 2009

(amounts in thousands)

 

     Parent Only     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 10,189      $ 75,955      $ (12,343   $ 4,675      $ 78,476   
                                        

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchase of property and equipment

     (87     (1,357     (145     —          (1,589
                                        

NET CASH USED IN INVESTING ACTIVITIES

     (87     (1,357     (145     —          (1,589
                                        

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Borrowings on senior credit facility

     —          252,217        —          —          252,217   

Payments on senior credit facility

     —          (306,632     —          —          (306,632

Payments on real estate mortgage

     —          (233     —          —          (233

Purchase of treasury stock

     (1,751     —          —          —          (1,751

Payments on capital leases

     (150     —          —          —          (150

Intercompany transactions

     (8,535     (960     13,327        (3,832     —     
                                        

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (10,436     (55,608     13,327        (3,832     (56,549

Effect of exchange rate changes on cash and cash equivalents

     334        —          1,174        (1,174     334   
                                        

Net increase in cash and cash equivalents

     —          18,990        2,013        (331     20,672   

Cash and cash equivalents at beginning of period

     —          1,805        9,604        (2,596     8,813   
                                        

Cash and cash equivalents at end of period

   $ —        $ 20,795      $ 11,617      $ (2,927   $ 29,485   
                                        

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 30, 2010.

Forward–Looking Statements

We caution readers that this report includes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,” “continue,” target,” “contemplate,” or “will” and similar words or phrases or corporate terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control. Some of the factors that could affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are set forth in various places in this report. These factors include, but are not limited to:

 

   

general economic conditions,

 

   

a significant decrease in business from or loss of any of our major customers or programs,

 

   

anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,

 

   

recent economic conditions, including turmoil in the financial and credit markets,

 

   

the effectiveness of our planned advertising, marketing and promotional campaigns,

 

   

our ability to contain costs,

 

   

disruptions in the supply chain,

 

   

our future capital needs and our ability to obtain financing,

 

   

our ability to integrate acquired businesses, trademarks, tradenames and licenses,

 

   

our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,

 

   

the termination or non-renewal of any material license agreements to which we are a party,

 

   

changes in the costs of raw materials, labor and advertising,

 

   

our ability to carry out growth strategies including expansion in international and direct to consumer retail markets,

 

   

the level of consumer spending for apparel and other merchandise,

 

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our ability to compete,

 

   

exposure to foreign currency risk and interest rate risk,

 

   

possible disruption in commercial activities due to terrorist activity and armed conflict, and

 

   

other factors set forth in this report and in our other Securities and Exchange Commission (“SEC”) filings.

You are cautioned that all forward-looking statements involve risks and uncertainties, detailed in our filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 30, 2010 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets, the measurement of retirement related benefits and stock-based compensation. We believe that there have been no significant changes to our critical accounting policies during the three and six months ended July 31, 2010, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 30, 2010.

Results of Operations

The following is a discussion of the results of operations for the three and six month periods of the fiscal year ending January 29, 2011 (“fiscal 2011”) compared with the three and six month periods of the fiscal year ended January 30, 2010 (“fiscal 2010”).

Results of Operations - three and six months ended July 31, 2010 compared to three and six months ended August 1, 2009.

Net sales. Net sales for the three months ended July 31, 2010 were $155.6 million, an increase of $2.6 million, or 1.7%, from $153.0 million for the three months ended August 1, 2009. This increase was primarily driven by Perry Ellis men’s branded apparel and accessories. Additionally, increases came from other men’s wholesale apparel including increases in our golf business under numerous brands including Grandslam, PGA Tour, Callaway and Top-Flite, as well as, our Hispanic business under such brands as Cubavera and Solero, Havanera and Centro. Swim revenues also increased, for the second quarter of fiscal 2011, reflecting organic increases in Nike and Jantzen, slightly offset by reductions in private label programs. We also experienced growth in our direct to consumer business. These increases were partially offset by the planned reduction of $11 million in unprofitable businesses, principally mass market programs.

Net sales for the six months ended July 31, 2010 were $370.0 million, an increase of $3.0 million, or 0.8%, from $367.0 million for the six months ended August 1, 2009. Net sales increased primarily due to the Perry Ellis apparel and accessories business, our new Callaway product, which amounted to $7.0 million, the addition of the new Top-Flite and Solero products, sales from our new Pierre Cardin licensed brand and the overall increase in our direct to consumer business. These increases were partially offset by the reduction of $28.0 million in unprofitable businesses, principally mass market programs.

 

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Royalty income. Royalty income for the three months ended July 31, 2010 was $6.1 million, a decrease of $0.1 million, or 1.6%, from $6.2 million for the three months ended August 1, 2009. Royalty income essentially remained flat reflecting new licenses signed over the first half of fiscal 2011, which were offset by the non-renewal of licenses associated with our Ping golf business given its exit, and our Munsingwear corporate license business, as we prepare to bring that business in-house during the second half of fiscal 2011. Royalty income for the six months ended July 31, 2010 and August 1, 2009 was $12.2 million. Essentially flat due to the factors described above.

Gross profit. Gross profit was $58.2 million for the three months ended July 31, 2010, an increase of $9.0 million, or 18.3%, from $49.2 million for the three months ended August 1, 2009. Gross profit was $136.9 million for the six months ended July 31, 2010, as compared to $118.4 million for six months ended August 1, 2009, an increase of 15.6%.

As a percentage of total revenue, gross profit margins were 36.0% for the three months ended July 31, 2010, as compared to 30.9% for the three months ended August 1, 2009, an increase of 510 basis points. The increase in the gross profit percentage was attributed to the margin expansion of Perry Ellis men’s apparel and accessories, the exit of lower margin mass market private label programs and a prior golf license and the improved margin in our contemporary women’s and Original Penguin businesses. As a percentage of total revenue, gross profit margins were 35.8% for the six months ended July 31, 2010, as compared to 31.2% for the six months ended August 1, 2009, an increase of 459 basis points. The increase in the gross profit percentage came from the factors described above, and the addition of the new Callaway business.

The wholesale gross profit margin (which excludes the impact of royalty income) for the three months ended July 31, 2010, was 33.4%, as compared to 28.1% for the three months ended August 1, 2009. The wholesale gross profit margin percentage increased for the six months ended July 31, 2010, to 33.7%, as compared to 28.9% for the six months ended August 1, 2009. The increase for the three and six months ended July 31, 2010 was attributed to the factors described above.

We also improved EBITDA margin during the three and six months ended July 31, 2010, by 170 and 280 basis points, respectively, increasing it to 2.6% and 7.1%, respectively, as compared to the same period last year. These increases are primarily due to the increase in our gross profit margin, as explained above, offset by our increase in selling, general and administrative expenses as a percentage of total revenue, as explained below.

 

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The following is a reconciliation of EBITDA margin as compared to gross profit:

 

     Three Months Ended     Six Months Ended  
     July 31, 2010     August 1, 2009     July 31, 2010     August 1, 2009  

Net (loss) income attributed to Perry Ellis International, Inc.

   $ (1,973   $ (5,308   $ 9,226      $ 541   

Plus:

        

Depreciation and amortization

     3,018        3,390        6,137        7,013   

Interest expense

     3,361        3,966        7,108        8,584   

Net income attributable to noncontrolling interest

     85        154        262        97   

Income tax (benefit) provision

     (317     (694     4,559        133   
                                

EBITDA

   $ 4,174      $ 1,508      $ 27,292      $ 16,368   
                                

Gross profit

   $ 58,153      $ 49,208      $ 136,897      $ 118,442   

Less:

        

Selling, general and administrative expenses and cost on early extinguishment of debt

     (53,979     (47,700     (109,605     (102,074
                                

EBITDA

   $ 4,174      $ 1,508      $ 27,292      $ 16,368   
                                

Total revenues

   $ 161,754      $ 159,169      $ 382,103      $ 379,213   

EBITDA margin percentage of revenues

     2.6     0.9     7.1     4.3

EBITDA consists of earnings before interest, taxes, depreciation, amortization and noncontrolling interest. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, and does not represent cash flow from operations. EBITDA and EBITDA margin are presented solely as a supplemental disclosure because management believes that they are a common measure of operating performance in the apparel industry.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended July 31, 2010 was $53.2 million, an increase of $5.5 million, or 11.5%, from $47.7 million for the three months ended August 1, 2009. The increase was in line with our expectations. The increase, primarily in our wholesale business, reflects additional promotions and advertising investment in our core brands along with new brands – this includes celebrity endorsements, social media, print advertising as well as promotional events. We believe these investments are integral to building and supporting the brand images in order to complement the superior quality and value of product they bring to the end consumer. Increases were also reflected in investment in our employees through salary increases as well as bonus plans that rewarded improving profitability performance across most of our businesses.

As a percentage of total revenues, selling, general and administrative expenses were 32.9% for the three months ended July 31, 2010, as compared to 30.0% for the three months ended August 1, 2009. As a percentage of total revenue during the second quarter of fiscal 2011, this increase was in line with our anticipated results and primarily due to the factors explained above.

Selling, general and administrative expenses for the six months ended July 31, 2010, was $108.9 million, an increase of $6.8 million, or 6.7%, from $102.1 million for the six months ended August 1, 2009. The increase, primarily in our wholesale business, in selling, general and administrative expenses, on a dollar basis, is attributed to additional promotions and advertising investment in our core brands along with new brands. Increases were also reflected in investment in our employees through salary increases as well as bonus plans that rewarded improving profitability performance across most of our business. Additionally, expenses increased because of our expansion into our new wholesale brands, such as Callaway.

As a percentage of total revenues, selling, general and administrative expenses was 28.5% for the six months ended July 31, 2010, as compared to 26.9% for the six months ended August 1, 2009. As a percentage of total revenue during the first half of fiscal 2010, this increase was in line with our anticipated results and primarily due to the factors explained above.

 

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Depreciation and amortization. Depreciation and amortization for the three months ended July 31, 2010 was $3.0 million, a decrease of $0.4 million, or 11.8%, from $3.4 million for the three months ended August 1, 2009. Depreciation and amortization for the six months ended July 31, 2010, was $6.1 million, a decrease of $0.9 million, or 12.9%, from $7.0 million for the six months ended August 1, 2009. The decrease in depreciation and amortization is attributed to the reduction in capital expenditures over the last two years and the closure of several retail stores.

Costs on early extinguishment of debt. During the second quarter of fiscal 2011, we retired $25.0 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $453,000 in fees and premiums. Additionally we wrote-off approximately $277,000 in unamortized discount and bond fees associated with the retired portion of the senior subordinated notes. The senior subordinated notes were scheduled to mature in September 15, 2013. We did not retire any of our senior subordinated notes during the second quarter of fiscal 2010.

Interest expense. Interest expense for the three months ended July 31, 2010, was $3.4 million, a decrease of $0.6 million, or 15.0%, from $4.0 million for the three months ended August 1, 2009. Interest expense for the six months ended July 31, 2010, was $7.1 million, a decrease of $1.5 million, or 17.4%, from $8.6 million for the six months ended August 1, 2009. The overall decrease in interest expense is primarily attributable to the lower average balance on our senior credit facility and senior subordinated notes payable as compared to the comparable prior year period.

Income taxes. The income tax benefit for the three months ended July 31, 2010, was $0.3 million, a decrease of $0.4 million as compared to $0.7 million for the three months ended August 1, 2009. For the three months ended July 31, 2010, our effective tax rate was 14.4% as compared to 11.9% for the three months ended August 1, 2009. The primary reason for the increase in the effective rate was due to the change in ratio of income between domestic and foreign operations, of which the foreign operations are taxed at lower statutory tax rates.

Our income tax provision for the six months ended July 31, 2010 was $4.6 million, a $4.5 million increase as compared to $0.1 million for the six months ended August 1, 2009. For the six months ended July 31, 2010, our effective tax rate was 32.5% as compared to 17.2% for the six months ended August 1, 2009. The increase in the effective tax rate is attributed to the absence of any expirations in the amount of unrecognized tax benefits during the first half of fiscal 2011 as compared with expirations that occurred during the first half of fiscal 2010 and the change in ratio of income between domestic and foreign operations, of which the foreign operations are taxed at lower statutory tax rates.

Net (loss) income attributed to Perry Ellis International, Inc. The net (loss) for the three months ended July 31, 2010 was ($2.0) million, a decrease of $3.3 million, as compared to the net (loss) of ($5.3) million for the three months ended August 1, 2009. Net income for the six months ended July 31, 2010 was $9.2 million, an increase of $8.7 million, as compared to net income of $0.5 million for the six months ended August 1, 2009. The changes in operational results were due to the items described above.

Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility, and to a lesser extent, on our letter of credit facilities to finance our operations, acquisitions and capital expenditures. We believe that as a result of our increased discipline in our working capital and cash flow management, our working capital requirements will increase slightly for fiscal 2011 as compared to fiscal 2010. As of July 31, 2010, our total working capital was $197.8 million as compared to $188.1 million as of January 30, 2010 and $185.9 million as of August 1, 2009. During the first quarter of fiscal 2010, an underutilized $30 million letter of credit facility was terminated. Traditionally, our letter of credit facilities were used for trade financing. We have shifted our finance strategy from relying on letter of credit facilities to direct trade terms with our vendors, and as such, we did not need the excess capacity provided by this letter of credit facility. We believe that our cash flows from operations and availability under our senior credit facility and remaining letter of credit facilities are sufficient to meet our working capital needs.

 

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Net cash provided by operating activities was $45.6 million for the six months ended July 31, 2010, as compared to net cash provided by operating activities of $78.5 million for the six months ended August 1, 2009. Cash provided by operating activities, for the six months ended July 31, 2010, is primarily attributable to a decrease in accounts receivable of $54.2 million due to our collection efforts and a decrease of prepaid taxes of $1.5 million; offset by the reduction of accounts payable, accrued expenses and other liabilities in the amount of $21.6 million, an increase in inventory of $2.7 million and the decrease of unearned revenues and other liabilities of $1.9 million. For the six months ended August 1, 2009, cash provided by operating activities was primarily attributable to a decrease in accounts receivable of $43.2 million due to lower sales and our collection efforts, a decrease in inventory of $37.1 million due to improved inventory planning and a decrease of prepaid taxes of $2.8 million; offset by the reduction of accounts payable, accrued expenses and other liabilities in the amount of $14.8 million and the decrease of unearned revenues and other liabilities of $4.0 million.

Despite the increase in inventory for the six months ended July 31, 2010, we improved our inventory turnover ratio slightly to 4.6 as compared to 4.5 as of August 1, 2009 due to our improved inventory planning.

Net cash used in investing activities was $1.4 million for the six months ended July 31, 2010, as compared to net cash used in investing activities of $1.6 million for the six months ended August 1, 2009. The net cash used during the first six months of fiscal 2011 primarily reflects the purchase of property and equipment in the amount of $1.4 million, as compared to net cash used in the purchase of property and equipment in the amount of $1.6 million during the same period in fiscal 2010. We anticipate capital expenditures during fiscal 2011 of $4 million to $5 million in technology and systems, retail stores, and other expenditures.

Net cash used in financing activities for the six months ended July 31, 2010, was $19.1 million, as compared to net cash used in financing activities for the six months ended August 1, 2009 of $56.5 million. The net cash used during the first half of fiscal 2011 primarily reflects the repurchase of senior subordinated notes in the amount of $25.5 million, including redemption premiums and commissions of $0.5 million, the borrowings and payments on our senior credit facility of $347.7 million and the payment of $11.0 million on our mortgages and capital leases, offset by proceeds from exercises of stock options of $2.4 million and a tax benefit from the exercise of stock options of $2.2 million and the proceeds from our new mortgage loan in the amount of $13.0 million. The net cash used during the first half of fiscal 2010 primarily reflects the net payments on our senior credit facility of $54.4 million, the payments of $0.4 million on our mortgages and capital leases, and the purchase of treasury stock of $1.8 million.

During fiscal 2010, our Board of Directors authorized us to purchase, from time to time and as market and business conditions warrant, our senior subordinated notes for cash in the open market or in privately negotiated transactions. The amount of senior subordinated notes that may be repurchased or otherwise retired, if any, will be based on parameters approved by the Board of Directors and will depend on market conditions, trading levels of our senior subordinated notes, our cash position and other considerations. Through the second quarter of fiscal 2011 we have repurchased a total of $45.8 million of our senior subordinated notes.

The Board of Directors has approved a stock repurchase program, which authorizes us to continue to repurchase up to $20 million of our common stock for cash through September 2010. Although the Board of Directors allocated a maximum of $20 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares, and will reevaluate the program on an ongoing basis. No purchases have been made during fiscal 2011. Through the second quarter of fiscal 2011 total purchases of $17.4 million have been made under this plan.

 

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Senior Credit Facility

Effective March 31, 2010, we entered into an amendment to our senior credit facility. This amendment modified the senior credit facility to permit the sale of all present and future accounts receivable due from Kohl’s to Bank of America, N. A.

The following is a description of the terms of our senior credit facility with Wachovia Bank, National Association, et al, as amended, and does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the senior credit facility: (i) the line is up to $125 million with the opportunity to increase this amount in $25 million increments up to $200 million; (ii) the inventory borrowing limit is $75 million; (iii) the sublimit for letters of credit is up to $40 million; (iv) the amount of letter of credit facilities allowed outside of the facility is $110 million and (v) the outstanding balance is due at the maturity date of February 1, 2012. At July 31, 2010 we did not have any borrowings under the senior credit facility.

Certain Covenants. The senior credit facility contains certain covenants, which, among other things, requires us to maintain a minimum adjusted EBITDA (“Senior Credit Facility Adjusted EBITDA”), as defined in the senior credit facility (as opposed to the definition of EBITDA used by us for other purposes), if availability falls below a certain threshold. These covenants may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We are not aware of any non-compliance with any of our covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under the indenture and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Borrowing Base. Borrowings under our senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of its eligible factored accounts receivables up to $10.0 million plus (c) the lesser of (i) the inventory loan limit of $75 million, or (ii) the lesser of (A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (as defined in the senior credit facility) of eligible inventory, or (2) the loan limit; and in each case minus (x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (z) licensing reserves for which we are the licensee of certain branded products.

Interest. Interest on the principal balance under our senior credit facility accrues, at our option, at either (a) the greater of Wachovia’s prime lending rate or the Federal Funds rate; plus  1 /2% plus a margin spread of 100 to 175 basis points based upon the sum of our quarterly average excess availability plus excess cash for the immediately preceding fiscal quarter, at the time of borrowing or (b) the rate quoted by Wachovia as the average monthly Eurodollar Rate for 1-month Eurodollar deposits plus a margin spread of 200 to 275 basis points based upon the sum of our quarterly average excess availability plus excess cash for the immediately preceding fiscal quarter, at the time of borrowing.

Security. As security for the indebtedness under the senior credit facility, we granted the lenders a first priority security interest in substantially all of our existing and future assets other than our trademark portfolio and real estate owned, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries.

Letter of Credit Facilities

As of July 31, 2010, we maintained two U.S. dollar letter of credit facilities totaling $50.0 million, one letter of credit facility totaling $3.7 million utilized by our Canadian joint venture, and one letter of credit facility

 

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totaling $0.9 million utilized by our United Kingdom subsidiary. Each letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets. As of July 31, 2010, there was $48.7 million available under the existing letter of credit facilities.

$150 Million Senior Subordinated Notes Payable

In fiscal 2004, we issued $150 million 8 7/8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 1/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are not aware of any non-compliance with any of our covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

During the fourth quarter of fiscal 2010, we retired $20.8 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $98,000 in redemption premiums and commissions. Additionally, we wrote-off approximately $259,000 in unamortized discount and bond fees associated with the retired portion of our senior subordinated notes.

During June 2010, we retired $25.0 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $453,000 in redemption premiums and commissions. Additionally, we wrote-off approximately $277,000 in unamortized discount and bond fees associated with the retired portion of our senior subordinated notes.

Real Estate Mortgage Loans

In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami and partially financed the acquisition of the facility with an $11.6 million mortgage loan. The real estate mortgage loan contained certain covenants. Interest was fixed at 7.123%. In August 2008, we executed a maturity extension of the real estate mortgage loan until July 1, 2010. In July 2010, we paid off the real estate mortgage loan.

In July 2010, we refinanced our main administrative office, warehouse and distribution facility in Miami with a $13.0 million mortgage loan. The real estate mortgage loan contains certain covenants and we are not aware of any non-compliance with any of our covenants. We could be materially harmed if we violate any covenants because the lender under the real estate mortgage loan could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. The loan is due on August 1, 2020. Principal and interest of $83,000 is due monthly based on a 25 year amortization with the outstanding principal due at maturity. Interest is fixed at 5.80%. At July 31, 2010, the balance of the real estate mortgage loan totaled $12.8 million, net of discount, of which $217,000 is due within one year.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan is due on June 7, 2016. Principal and interest of $297,000 were due quarterly based on a 20 year amortization with the outstanding principal due at maturity. Interest was set at 6.25% for the first five years, at which point it would have reset based on the terms and conditions of the promissory note. In June 2010, we negotiated with the bank to accelerate the rate reset that was scheduled to occur in June 2011. The interest rate was reduced to 5.75% per annum. The terms were restated to reflect new quarterly payments of principal and interest of $288,000, based on a 20 year amortization with the outstanding principal due at maturity. At July 31, 2010, the balance of the real estate mortgage loan totaled $13.9 million, net of discount, of which $360,000 is due within one year.

 

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Under the terms of the mortgage loans, a covenant violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and indenture relating to our senior subordinated notes resulting in all our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance sheet arrangements” as defined by applicable GAAP and SEC rules.

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and six months ended July 31, 2010.

 

Item 3: Quantitative and Qualitative Disclosures about Market Risks

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates. 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.

Derivatives on $150 Million Senior Subordinated Notes Payable

In August 2009, we entered into an interest rate swap agreement (the “Swap Agreement”) for an aggregate notional amount of $75 million in order to reduce our debt servicing costs associated with our $150 million 8 7/8% senior subordinated notes. The Swap Agreement was scheduled to terminate on September 15, 2013. Under the Swap Agreement, we are entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 7/8% and are obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the one-month LIBOR rate plus 632 basis points for the period through September 15, 2013. The Swap Agreement has an optional call provision that allows the counterparty to settle the Swap Agreement at any time with 30 days notice and subject to declining termination premium payments from the counterparty in the event the call is exercised. The Swap Agreement is a fair value hedge as it has been designated against the 8 7/8% senior subordinated notes carrying a fixed rate of interest and converts the fixed interest payments to variable interest payments. The Swap Agreement resulted in a decrease to interest expense of $0.6 million and $1.2 million for the three and six months ended July 31, 2010, respectively. The fair value of the Swap Agreement recorded on our consolidated balance sheet was $2.0 million and $1.2 million as of July 31, 2010 and January 30, 2010, respectively.

During August 2010, we were notified by the counterparty, that it would by exercising the optional call provision and effectively terminating the Swap Agreement in September 2010.

In August 2009, we entered into an interest rate cap agreement (the “$75 million Cap Agreement”) for an aggregate notional amount of $75 million associated with our senior subordinated notes. The $75 million Cap Agreement is scheduled to become effective on December 15, 2010 and terminate on September 15, 2013. The $75 million Cap Agreement is being used to manage cash flow risk associated with our floating interest rate exposure pursuant to the Swap Agreement. The $75 million Cap Agreement limits the maximum interest rate on $75 million of our senior subordinated notes to 9.32%. The $75 million Cap Agreement does not qualify for hedge accounting treatment. The change in fair value resulted in an increase to interest expense of $0.6 million and $1.3 million for the three and six months ended July 31, 2010, respectively. The fair value of the $75 million Cap Agreement recorded on our consolidated balance sheet was $2.1 million and $1.2 million as of July 31, 2010 and January 30, 2010, respectively.

 

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Commodity Price Risk

We are exposed to market risks for the pricing of cotton and other fibers, which may impact fabric prices. Fabric is a portion of the overall product cost, which includes various components. We manage our fabric prices by using a combination of different strategies including the utilization of sophisticated logistics and supply chain management systems, which allow us to maintain maximum flexibility in our global sourcing of products. This provides us with the ability to re-direct our sourcing of products to the most cost-effective jurisdictions. In addition, we may modify our product offerings to our customers based on the availability of new fibers, yield enhancement techniques and other technological advances that allow us to utilize more cost effective fibers. Finally, we also have the ability to adjust our price points of such products, to the extent market conditions allow. These factors, along with our foreign-based sourcing offices, allow us to procure product from lower cost countries or capitalize on certain tariff-free arrangements, which help mitigate any commodity price increases that may occur. We have not historically managed, and do not currently intend to manage, commodity price exposures by using derivative instruments.

Other

Our current exposure to foreign exchange risk is not significant and accordingly, we have not entered into any transactions to hedge against those risks.

 

Item 4: Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(e) of the Securities Exchange Act. Based upon this evaluation, our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 31, 2010 in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms and (ii) that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended July 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

 

Item 6: Exhibits

Index to Exhibits

 

Exhibit
Number

  

Description

31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
32.1    Certification of Principal Executive Officer pursuant to Section 1350. (1)
32.2    Certification of Principal Financial Officer pursuant to Section 1350. (1)

(1)    Filed herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Perry Ellis International, Inc.
September 8, 2010   By:  

/S/ ANITA BRITT

  Anita Britt, Chief Financial Officer
  (Principal Financial Officer)

 

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Exhibit Index

 

Exhibit
Number

  

Description

31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1    Certification of Principal Executive Officer pursuant to Section 1350.
32.2    Certification of Principal Financial Officer pursuant to Section 1350.

 

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