As filed with the
Securities and Exchange Commission
pursuant to Rule 424B3
Registration No. 333-89256
PROSPECTUS
Perry Ellis International, Inc.
Offer to Exchange
9 1/2% Series B Senior Secured Notes Due 2009
for any and all Outstanding 9 1/2% Series A Senior Secured Notes Due 2009
($57,000,0000 in Principal Amount Outstanding)
The Company
We are a leading licensor, designer and marketer of a broad line of high
quality men's sportswear, including sport and dress shirts, golf sportswear, and
casual and dress pants and shorts, which we sell to all levels of retail
distribution. Beginning in mid fiscal 2003, we plan to design, license and
market women's, girl's, men's and boy's swimwear.
The Exchange Offer
Expires 5:00 p.m., New York City time, July 14, 2002, unless extended.
Subject to certain customary conditions, which we may waive, the exchange
offer is not conditioned upon a minimum aggregate principal amount of existing
senior secured notes being tendered.
All outstanding senior secured notes validly tendered and not withdrawn
will be exchanged.
The exchange offer is not subject to any condition other than that the
exchange offer not violate applicable law or any applicable interpretation of
the Staff of the Securities and Exchange Commission ("SEC").
The Exchange Notes
The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the existing senior secured notes, except that we
have registered the exchange notes with the SEC. In addition, the exchange notes
will not be subject to certain transfer restrictions, and certain provisions
relating to an increase in the stated interest rate on the existing senior
secured notes will be eliminated.
Interest on the exchange notes will accrue from March 22, 2002 at the rate
of 9 1/2% per annum, payable semi-annually in arrears on each March 15 and
September 15, beginning September 15, 2002.
You should carefully consider the Risk Factors beginning on page 13 of this
prospectus before participating in the exchange offer.
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
________________________
The date of this prospectus is June 13, 2002.
TABLE OF CONTENTS
Page
SUMMARY .................................................................................................... 1
RISK FACTORS ............................................................................................... 13
THE EXCHANGE OFFER ......................................................................................... 23
USE OF PROCEEDS ............................................................................................ 32
CAPITALIZATION ............................................................................................. 33
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION ............................................... 34
SELECTED HISTORICAL FINANCIAL INFORMATION .................................................................. 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................... 43
BUSINESS ................................................................................................... 52
DESCRIPTION OF OTHER INDEBTEDNESS .......................................................................... 66
DESCRIPTION OF THE NOTES ................................................................................... 69
REGISTRATION RIGHTS ........................................................................................ 106
PLAN OF DISTRIBUTION ....................................................................................... 107
CERTAIN FEDERAL TAX CONSIDERATIONS ......................................................................... 108
LEGAL MATTERS .............................................................................................. 112
EXPERTS .................................................................................................... 112
WHERE YOU CAN FIND MORE INFORMATION ........................................................................ 112
Unless the context otherwise requires, all references to "Perry Ellis,"
the "Company," "we," "us" or "our" include Perry Ellis International, Inc. and
its subsidiaries. References in this prospectus to annual financial data for
Perry Ellis refer to fiscal years ending January 31. The term "Consolidated
Financial Statements" means the consolidated financial statements of Perry Ellis
International, Inc. and its subsidiaries and accompanying notes contained in
this prospectus.
i
Forward-Looking Statements
This prospectus and the various documents incorporated by reference
into this prospectus contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are based on current expectations rather than historical facts and they are
indicated by words or phrases such as "anticipate," estimate," "expect,"
"project," "believe," "intend," "envision" and similar words or phrases. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Some of the factors that would affect our financial performance, cause
actual results to differ from our estimates, or underlie such forward-looking
statements, are set forth in various places in this prospectus and the documents
incorporated by reference, including under the heading "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this prospectus. These factors include:
. general economic conditions;
. the effectiveness of our planned advertising, marketing and
promotional campaigns;
. our ability to carry out growth strategies;
. our ability to contain costs;
. our ability to integrate acquired businesses, trademarks,
tradenames and licenses into our existing organization and
operations;
. our future capital needs and the ability to obtain financing;
. our ability to predict consumer preferences;
. our ability to compete;
. the termination or non-renewal of any material license agreements
to which we are a party;
. anticipated trends and conditions in our industry, including
future consolidation;
. changes in fashion trends and customer acceptance of both new
designs and newly introduced products;
. the level of consumer spending for apparel and other merchandise;
. competition among department and specialty stores;
. possible disruption in commercial activities due to terrorist
activity and armed conflict; and
. other factors set forth in this prospectus and 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.
________________________
This prospectus refers to trademarks and tradenames owned by or
licensed to us as well as trademarks owned by third parties.
________________________
ii
This prospectus is based on information provided by us and by other
sources that we believe are reliable. This prospectus summarizes certain
documents and other information and we refer you to them for a more complete
understanding of what we discuss in this prospectus. In making an investment
decision, you must rely on your own examination of our company and the terms of
the exchange offer and the exchange notes, including the merits and risks
involved.
You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We are incorporating by reference the document listed below that we
have filed with the SEC, which means we can disclose important information to
you referring you to that document. The information incorporated by reference
is considered to be a part of this prospectus. We incorporate by reference our
Annual Report on Form 10-K for the year ended January 31, 2002 (except for Item
8).
You may request a copy of this filing, or the indenture, registration
rights agreement, the asset purchase agreement, the senior credit facility or
the synthetic lease without charge, by writing or telephoning our Corporate
Secretary at the following address:
Perry Ellis International, Inc.
3000 N.W. 107th Avenue
Miami, FL 33172
Tel.: 305-592-2830
iii
SUMMARY
The following summary highlights selected information about this
exchange offer. It may not contain all the information that is important to you.
For a more complete understanding of this exchange offer, we encourage you to
read this entire document and the documents to which we have referred you, as
well as consult your own business, legal and tax advisors. The term "existing
notes" refers to the 9 1/2% Series A Senior Secured Notes due 2009 that were
issued on March 22, 2002. The term "exchange notes" refers to the 9 1/2% Series
B Senior Secured Notes due 2009 issuable in this exchange offer. Reference is
made in this exchange offer to the Jantzen acquisition. The Jantzen acquisition
closed concurrently with the offering of the existing notes on March 22, 2002.
Business Overview
We are a leading licensor, designer and marketer of a broad line of
high quality men's sportswear, including sport and dress shirts, golf
sportswear, sweaters and casual and dress pants and shorts, which we sell to all
levels of retail distribution. We license our trademark portfolio domestically
and internationally for apparel and other products that we do not sell,
including dress sportswear, outerwear, fragrances and accessories. Beginning in
mid fiscal 2003 we plan to design, license and market women's, girl's, men's and
boy's swimwear under the Jantzen(R) and Nike(R) brands, and women's swimwear
under the Tommy Hilfiger(R) brand. We have built a broad portfolio of brands
through selective acquisitions and the establishment of our own brands over our
35-year operating history. Our distribution channels include regional, national
and international, mass merchants, chain stores, department stores and specialty
stores throughout the United States, Puerto Rico and Canada. Our largest
customers include Wal-Mart Stores, Inc., J.C. Penney Company, Inc., Target
Corp., Mervyn's, Kohl's Corporation and Sears Roebuck & Co. We currently use
approximately 100 independent suppliers, located in the Far East, other parts of
Asia, and Central America, to source our products.
Through acquisition of brands and internal growth, we have experienced
significant overall growth in recent years. From fiscal 1997 to fiscal 2002, we
experienced a compound annual growth rate of 12.0% in revenues. In order to
continue to grow, we plan to selectively evaluate a number of acquisition
candidates each year.
We own or license the brand names under which most of our products are
sold. These brand names include Crossings(R), Cubavera(R), Havana Shirt Co.(R)
and Natural Issue(R) for casual sportswear, John Henry(R) and Manhattan(R) for
dress casual wear, Perry Ellis(R), Mondo di Marco(R) and Andrew Fezza(R) for
dress sportswear, Perry Ellis America(R) for jeans wear, PING(R) and
Munsingwear(R) for golf sportswear and Pro Player(R) and Nautica(R) for
activewear. We are positioned to enter the women's market for swimwear and
sportswear with the March 2002 acquisition of the Jantzen brands. Through our
"family of brands" marketing strategy, we seek to develop and enhance a distinct
brand name for each product category within each distribution channel. We also
produce goods sold under the private label program of our various retail
customers. We market our brands to a wide range of segments, targeting consumers
in specific age, income and ethnic groups. Currently, our products are
predominantly produced for the men's segment of the apparel industry, in which
fashion trends tend to be less volatile than in other segments. The percentage
of our net sales from branded products decreased to 63.0% in fiscal 2002 from
66.0% in fiscal 2001.
We also license our proprietary brands to third parties for the
manufacture and marketing of various products, some of which we do not sell,
including dress sportswear, outerwear, fragrances and accessories. In addition
to generating additional revenue for us, these licensing arrangements raise the
overall awareness of our brands.
1
We believe that our competitive strengths position us well to
capitalize on several trends that have affected the apparel sector in recent
years. These trends include the consolidation of the department and chain store
sectors into a smaller number of stronger retailers, which represent some of our
most important customers; the increased reliance of retailers on reliable
suppliers with design expertise and advanced systems and technology; and the
continued importance of strong brands as a source of product differentiation.
Jantzen Acquisition
On March 22, 2002, we completed the acquisition from subsidiaries of VF
Corporation of certain assets of the Jantzen swimwear business for approximately
$24.0 million, excluding fees related to the transaction. The Jantzen brands
have a history of over 90 years and its products are sold in upscale department
stores, mid-tier department stores, chain stores, mass merchants and specialty
shops. The acquisition was financed with a portion of the proceeds from the
private offering of the existing notes, which we closed simultaneously with the
acquisition.
The Jantzen assets we acquired consist primarily of the Jantzen
trademarks and tradenames, license agreements, certain equipment, other items of
personal property, showroom leases and inventory relating to the 2003 season,
which commences on July 1, 2002. As part of this acquisition, we also acquired
the licenses for the Tommy Hilfiger brand for women's swimwear and for the Nike
brand for women's and girl's swimwear, men's and boy's racing swimsuits, swim
equipment, swimwear accessories and apparel.
In connection with the Jantzen acquisition, we entered into a lease
agreement with VF Corporation to occupy Jantzen's Portland, Oregon office
facility for an initial six-month period. In addition, we entered into a lease
agreement to occupy a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period. We had a right of first refusal to
purchase the Seneca distribution center facility, which we exercised on May 20,
2002 at a price of $2.5 million. We anticipate closing on this purchase in
approximately 90 days.
We believe this acquisition opens up a new market for us and we plan to
build on Jantzen's reputation for high-quality swimwear. It will expand our
licensing revenues, add to our strong portfolio of brands, and allow us to
broaden our product line into new product categories, such as women's swimwear
and sportswear.
Recent Developments
Our preliminary results for the first quarter of fiscal 2003 included
total revenues of $84.7 million, net income of $4.8 million and fully diluted
earnings per share of $0.75. Net sales excluding royalty income in the quarter
ended April 30, 2002 decreased by $2.3 million to $78.6 million from the first
quarter of fiscal 2002. First quarter fiscal 2002 net sales included $6.1
million from sales of Perry Ellis America shoes by our European subsidiary. In
periods prior and subsequent to such quarter this product was sold by a third
party licencee and accordingly, we only recognized royalty income from those
sales during those periods. The decrease in net sales in Europe was offset in
part by an increase in net sales in the United States and Canada.
History
We were incorporated in Florida in April 1967 and changed our name from
Supreme International Corporation to Perry Ellis International, Inc. on June 18,
1999. Our executive offices are located at 3000 N.W. 107th Avenue, Miami,
Florida 33172, and our telephone number is (305) 592-2830.
2
The Exchange Offer
Registration Rights
Agreement ................ We sold the existing notes on March 22, 2002 to
First Union Securities, Inc., the initial
purchaser, under a purchase agreement dated March
15, 2002. Pursuant to the purchase agreement,
Perry Ellis, our subsidiaries who guaranteed our
obligations under the existing notes and the
initial purchaser entered into a registration
rights agreement, which granted the holders of
the existing notes certain exchange and
registration rights. This exchange offer is
intended to satisfy certain of our obligations
under the registration rights agreement.
The Exchange Offer ....... We are offering to exchange up to $57,000,000
aggregate principal amount of the exchange notes
for up to $57,000,000 aggregate principal amount
of the existing notes. Existing notes may be
exchanged only in $1,000 increments.
The terms of the exchange notes are identical in
all material respects to the existing notes
except for certain transfer restrictions and
registration rights relating to the existing
notes and certain provisions relating to an
increase in the stated interest rate on the
existing notes.
Resale ................... Based on an interpretation by the staff of the
SEC set forth in no-action letters issued to
third parties, including "Exxon Capital Holdings
Corporation" (available May 13, 1988), "Morgan
Stanley & Co. Incorporated" (available June 5,
1991), "Mary Kay Cosmetics, Inc." (available June
5, 1991), "Warnaco, Inc." (available October 11,
1991) and Shearman & Sterling" (available July 2,
1993), we believe that the exchange notes may be
offered for resale, resold and otherwise
transferred by you without compliance with the
registration and prospectus delivery provisions
of the Securities Act provided that:
. you are acquiring the exchange notes issued in
the exchange offer in the ordinary course of
business;
. you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate
in the distribution of the exchange notes;
. you are not a broker-dealer who purchased the
existing notes directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act; and
. you are not an "affiliate" of ours as
"affiliates" is defined in Rule 405 of the
Securities Act.
If our belief is inaccurate and you transfer any
exchange note issued to you in the exchange offer
without delivering a prospectus meeting the
requirements of the Securities Act or without an
exemption from registration of your exchange
notes from these requirements, you may incur
liability under the
3
Securities Act. We do not assume or
indemnify you against such liability.
Each broker-dealer that is issued exchange
notes for its own account in exchange for
existing notes which were acquired by such
broker-dealer as a result of
marketing-making or other trading
activities, must acknowledge that it will
deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of the exchange
notes. The letter of transmittal states
that by so acknowledging and by delivering
a prospectus, the broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. A
broker-dealer may use this prospectus for
an offer to resell or otherwise retransfer
the exchange notes. We have agreed that,
for a period of 180 days after the date of
this prospectus, we will make this
prospectus and any amendment or supplement
to this prospectus available to any such
broker-dealer for use in connection with
any such resales.
The exchange offer is not being made to,
nor will we accept surrenders for exchange
from, holders of existing notes in any
jurisdiction in which this exchange offer
or the acceptance thereof would not be in
compliance with the securities of blue sky
laws of such jurisdiction.
Expiration Date .................. 5:00 p.m., New York City time, on July 14,
2002, unless the exchange offer is
extended. You may withdraw existing notes
you tender pursuant to the exchange offer
at any time prior to 5:00 p.m., New York
City time, on July 14, 2002. See "The
Exchange Offer--Expiration Date" and
"--Extensions and Amendments."
Accrued Interest on the Exchange
Notes and the Existing Notes ..... The exchange notes will bear interest from
the date of issuance of the existing notes
that are tendered in exchange for the
exchange notes. Accordingly, holders of
existing notes that are accepted for
exchange will not receive interest that is
accrued but unpaid on such existing notes
at the time of tender. The exchange notes
will bear interest at a rate of 9 1/2% per
annum, payable semi-annually on March 15
and September 15 of each year commencing
September 15, 2002.
Termination of the Exchange
Offer ............................ We may terminate the exchange offer if we
determine that our ability to proceed could
be materially impaired due to the
occurrence of certain conditions. You will
be entitled to an increase in the stated
interest rate on the existing notes and
will have certain rights against us under
the registration rights agreement should we
fail to consummate the exchange offer. See
"The Exchange Offer--Termination."
4
Procedures for Tendering
Existing Notes ................ If you wish to tender your existing notes
pursuant to the exchange offer, sign and
date the letter of transmittal in accordance
with the instructions, and deliver the
letter of transmittal, along with the
existing notes and any other required
documentation, to the exchange agent. By
executing the letter of transmittal, you
will represent to us that, among other
things:
. the exchange notes you receive will be
acquired in the ordinary course of your
business,
. you have no arrangement with any person
to participate in the distribution of the
exchange notes, and
. you are not an "affiliate" of ours.
Special Procedures for
Beneficial Owners ............. If you are a beneficial owner whose existing
notes are registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and wish to tender
such existing notes in the exchange offer,
please contact the registered holder as soon
as possible and instruct them to tender on
your behalf and comply with our instructions
set forth elsewhere in this prospectus.
Guaranteed Delivery
Procedures .................... If you wish to tender your existing notes,
you may, in certain instances, do so
according to the guaranteed delivery
procedures set forth elsewhere in this
prospectus under "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights ............. You may withdraw existing notes you tender
pursuant to the exchange offer at any time
prior to 5:00 p.m., New York City time on
July 14, 2002 by furnishing a written or
facsimile transmission notice of withdrawal
to the exchange agent containing the
information set forth in "The Exchange
Offer--Withdrawal of Tenders."
Acceptance of Existing
Notes and Delivery of
Exchange Notes ................ Subject to certain conditions (as summarized
above in "Termination of the Exchange Offer"
and described more fully in "The Exchange
Offer--Termination"), we will accept for
exchange any and all existing notes that are
properly tendered in the exchange offer
prior to the expiration date. See "The
Exchange Offer--Procedures for Tendering."
The exchange notes issued pursuant to the
exchange offer will be delivered promptly
following the expiration date.
5
Exchange Agent ................. State Street Bank and Trust Company, the
trustee under the indenture, is serving as
exchange agent in connection with the exchange
offer.
The mailing address of the exchange agent is
State Street Bank and Trust Company, Corporate
Trust Department, P.O. Box 778, Boston,
Massachusetts 02102-0078, Attention: Ralph
Jones, and the address for hand or overnight
delivery is State Street Bank and Trust
Company, Corporate Trust Company, 2 Avenue de
Lafayette, 5/th/ Floor, Corporate Trust
Window, Boston, Massachusetts 02111-1724,
Attention: Ralph Jones.
Any deliveries in New York should be sent to
the exchange agent at State Street Bank and
Trust Company, Corporate Trust Department, 61
Broadway, New York, New York 10006, Attention:
Ralph Jones.
For assistance and requests for additional
copies of this prospectus, the letter of
transmittal or the notice of guaranteed
delivery, the telephone number for the
exchange agent is (617) 662-1452, and the
facsimile number for the exchange agent is
(617) 662-1548, Attention: Ralph Jones.
See "The Exchange Offer" for more detailed information concerning the terms of
the exchange offer.
6
Summary of Terms of Exchange Notes
Issuer ......................... Perry Ellis International, Inc.
General ........................ The exchange notes will be freely tradable and
otherwise substantially identical to the
existing notes. The exchange notes will not
have registration rights or provisions for
additional interest. The exchange notes will
evidence the same debt as the existing notes,
and the existing notes are and the exchange
notes will be governed by the same indenture.
See "The Exchange Offer--Purpose and Effect of
the Exchange Offer."
Notes Offered .................. $57,000,000 aggregate principal of 9 1/2%
senior secured notes due 2009.
Maturity Date .................. March 15, 2009.
Interest Payment Dates ......... March 15 and September 15 of each year,
commencing September 15, 2002.
Collateral ..................... The exchange notes will be secured by: (1) all
of our portfolio of trademarks existing on
March 22, 2002, the issue date of the existing
notes; (2) all license agreements with respect
to these trademarks; and (3) all income,
royalties and other payments with respect to
such licenses. Any sale, transfer or
disposition of the collateral will have to
comply with the "Limitations of Sale of
Collateral" covenant set forth in "Description
of the Notes." We are obligated to pledge
additional collateral in certain circumstances
as set forth in "Description of the Notes -
Security Agreement and Collateral."
Guarantees ..................... Each of our material subsidiaries will jointly
and severally, fully and unconditionally,
guarantee the exchange notes on a senior
basis. Future subsidiaries also may be
required to guarantee the exchange notes. See
"Description of the Notes - Subsidiary
Guarantees" and "- Certain
Covenants-Limitation on Guarantees of
Indebtedness by Restricted Subsidiaries."
Ranking ........................ The exchange notes will be senior secured
obligations of our company and will rank pari
passu in right of payment with all of our
existing and future senior indebtedness. The
exchange notes will also be effectively senior
to all our unsecured indebtedness to the
extent of the value of the assets securing the
notes.
Each subsidiary guarantee will be a senior
obligation of such guarantor issuing such
subsidiary guarantee, ranking pari passu with
all other existing and future senior
indebtedness of such guarantor. In the case of
Jantzen Apparel Corp., the corporation that
holds the Jantzen trademarks, its guarantee
shall be a senior secured obligation of
Jantzen Apparel, and therefore will be
effectively senior to all unsecured
indebtedness of Jantzen Apparel to the extent
of the value of Jantzen Apparel's assets
securing the notes.
7
After giving effect to the issuance and sale
of the existing notes, our use of the net
proceeds therefrom and the consummation of the
Jantzen acquisition, at January 31, 2002 we
had $184.9 million of consolidated
indebtedness outstanding, including $154.7
million of senior secured indebtedness. In
addition, we would have had additional
availability under the senior credit facility
of $56.4 million, all of which would have been
senior secured indebtedness if borrowed. We
also have approximately $14.5 million in
secured obligations under the synthetic lease
on our headquarters facility, which expires on
June 30, 2002. We do not anticipate renewing
the synthetic lease and have already obtained
a commitment for a conventional mortgage for
the property.
We and our subsidiaries may incur additional
indebtedness, subject to certain limitations.
See "Description of the Notes - Ranking" and
"- Certain Covenants - Limitation on
Indebtedness."
Optional Redemption ............ We may redeem the exchange notes, in whole or
in part, at any time, on or after March 15,
2005, at the redemption prices (expressed as
percentages of principal amount) set forth
below, plus accrued and unpaid interest, if
any, to the redemption date, if redeemed
during the 12-month period beginning on March
15 of the years indicated below:
Year Redemption Price
---- ----------------
2005 ................... 104.750%
2006 ................... 102.375%
2007 and thereafter .... 100.000%
Public Equity Offering
Optional Redemption ............ On or before March 15, 2005, we may redeem up
to 35% of the aggregate principal amount of
the exchange notes with the net proceeds of
certain public sales of our common stock at
109.500% of the principal amount thereof, plus
accrued and unpaid interest, if any, if at
least 65% of the aggregate principal amount of
the exchange notes originally issued remains
outstanding after such redemption. See
"Description of the Notes-Redemption."
Change in Control .............. Upon certain changes in control, the holders
may require us to repurchase all or a portion
of the exchange notes at a purchase price
equal to 101% of the principal amount of the
exchange notes, plus accrued and unpaid
interest, if any, to the purchase date. See
"Description of the Notes - Certain Covenants
- Purchase of Notes upon a Change in Control."
Certain Covenants .............. The indenture governing the exchange notes
will contain covenants that, among other
things, restrict our ability and the ability
of our subsidiaries to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase
our capital stock;
. make certain investments;
8
. issue or sell capital stock of
restricted subsidiaries;
. create certain liens;
. sell assets;
. sell or transfer any collateral;
. in the case of our restricted
subsidiaries, make dividends or other
payments;
. in the case of our restricted
subsidiaries, guarantee indebtedness;
. engage in transactions with affiliates;
and
. consolidate, merge or transfer all or
substantially all of our assets and the
assets of our subsidiaries on a
consolidated basis.
These covenants are subject to important
exceptions and qualifications, which are
described under the heading "Description of
the Notes" in this prospectus.
Risk Factors ................... You should carefully consider all of the
information contained in this prospectus prior
to investing in the exchange notes. In
particular, we urge you to carefully consider
the factors set forth under "Risk Factors"
beginning on page 13 of this prospectus.
9
Summary Pro Forma Condensed Combined Financial Information
The "Pro Forma Condensed Combined Financial Information" set forth
below gives effect to (i) the Jantzen acquisition (ii) the offering of the
existing notes and (iii) the repayment of the senior credit facility, as if they
had occurred on February 1, 2001.
The information presented below has been derived from our consolidated
financial statements and the financial statements of The Jantzen Business
("Jantzen"). This information does not purport to represent what our operating
results or financial condition would actually have been had the Jantzen
acquisition, the offering of the existing notes and repayment of senior credit
facility actually occurred as of the dates indicated above or to project our
financial condition for any future period. The information presented below
should be read in conjunction with our consolidated financial statements and
notes thereto, "Unaudited Pro Forma Condensed Combined Financial Information"
and notes thereto, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto of
Perry Ellis International, Inc. and Jantzen included elsewhere herein.
Pro Forma Condensed Combined Financial Information
Pro Forma
Fiscal Year Ended
January 31, 2002
----------------
(dollars in millions, except per share data)
Statement of Income Data:
Total revenues $ 351.8
Operating income 16.7
Interest expense 15.3
Earnings per share
Basic $ 0.105
===========
Diluted $ 0.105
===========
10
Summary Historical Financial Information
(Dollars in thousands, except for per share data)
The following table presents historical financial and operating data
derived from our audited consolidated financial statements and audited financial
statements of Jantzen. The historical financial data should be read in
conjunction with our consolidated financial statements and notes thereto, and
our "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fiscal Year Ended
January 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- ----------
(in thousands, except per share amounts)
Perry Ellis Historical
Income Statement Data:
Net sales ................................ $ 190,689 $ 221,347 $ 229,549 $ 261,626 $ 253,034
Net royalty income ....................... 4,032 3,057 22,840 25,790 26,681
----------- ----------- ----------- ----------- ----------
Total revenues ........................... 194,721 224,404 252,389 287,416 279,715
Cost of sales ............................ 145,991 166,198 171,413 200,884 191,601
----------- ----------- ----------- ----------- ----------
Gross profit ............................. 48,730 58,206 80,976 86,532 88,114
Selling, general and
administrative expenses ............... 34,137 39,478 44,480 52,147 57,171
Depreciation and amortization ............ 1,748 2,161 5,181 6,130 6,662
----------- ----------- ----------- ----------- ----------
Operating income ......................... 12,845 16,567 31,315 28,255 24,281
Interest expense ......................... 2,782 3,494 13,905 15,766 13,550
----------- ----------- ----------- ----------- ----------
Income before minority interest and
income tax provision ................. 10,063 13,073 17,410 12,489 10,731
Minority interest ........................ -- -- -- -- 83
----------- ----------- ----------- ----------- ----------
Income tax provision ..................... 2,885 4,491 6,530 4,663 4,040
----------- ----------- ----------- ----------- ----------
Net income ............................... $ 7,178 $ 8,582 $ 10,880 $ 7,826 $ 6,608
=========== =========== =========== =========== ==========
Net income per share:
Basic ........................... $ 1.10 $ 1.29 $ 1.62 $ 1.17 $ 1.01
Diluted ......................... $ 1.08 $ 1.27 $ 1.59 $ 1.16 $ 1.01
Weighted average number of shares
outstanding:
Basic ........................... 6,541 6,674 6,726 6,689 6,517
Diluted ......................... 6,666 6,770 6,857 6,745 6,535
Balance Sheet Data (at year end):
Working capital .......................... 66,166 71,300 70,651 88,879 60,932
Total assets ............................. 101,650 108,958 224,873 243,113 234,061
Total debt (a) ........................... 39,658 33,511 128,270 137,066 120,828
Total stockholders' equity ............... 55,155 64,946 76,020 82,879 87,204
Other Financial Data and Ratios:
EBITDA (b) ............................... 14,593 18,728 36,496 34,385 30,860
Cash flows from operations ............... (3,101) 14,341 14,047 (2,112) 22,375
Cash flows from investing ................ (4,555) (10,240) (104,091) (5,434) (3,021)
Cash flows from financing ................ 7,910 (4,938) 90,097 7,665 (18,319)
Capital expenditures ..................... 3,828 4,005 2,332 2,712 2,922
Ratio of earnings to fixed charges (c) ... 4.1x 4.2x 2.2x 1.8x 1.4x
11
Fiscal Year Ended
-------------------------------------------------------------------------
January 1, 2000 December 30, 2000 December 29, 2001
-------------------- ---------------------- ----------------------
Jantzen Historical
Income Statement Data:
Net sales ..................................... $ 140,331 $ 111,524 $ 94,159
Net royalty income ............................ 1,740 1,055 1,683
-------------------- ---------------------- ----------------------
Total revenues ................................ 142,071 112,579 95,842
Cost of sales ................................. 103,652 72,033 73,007
Selling, general and administrative
expenses .................................... 41,180 35,664 32,611
Amortization .................................. 684 684 684
-------------------- ---------------------- ----------------------
Operating (loss) income ....................... (4,075) 4,198 (10,460)
Interest income ............................... 20 15 41
Miscellaneous, net ............................ (182) (405) (13)
-------------------- ---------------------- ----------------------
(Loss) income before income taxes and
cumulative effect of change
in accounting principles .................... (3,873) 4,618 (10,406)
Income taxes .................................. (1,356) 1,789 (3,782)
-------------------- ---------------------- ----------------------
(Loss) income before cumulative effect of
change in accounting principle .............. (2,517) 2,829 (6,624)
Cumulative effect on prior years of
change in accounting principles, net of
income taxes ................................ -- (124) --
-------------------- ---------------------- ----------------------
Net (loss) income ............................. $ (2,517) $ 2,705 $ (6,624)
==================== ====================== ======================
Balance Sheet Data (at year end):
Working capital ............................... N/A 29,296 29,349
Total assets .................................. N/A 68,196 67,405
Total debt .................................... N/A 13,718 14,672
Total stockholders' equity .................... N/A 54,478 52,733
Other Financial Data and Ratios:
EBITDA (b) .................................... (1,376) 5,917 (8,463)
Cash flows from operations .................... 593 391 529
Cash flows from investing ..................... (634) (604) (325)
Cash flows from financing ..................... -- -- --
Capital expenditures .......................... 634 604 325
______________________________________________
a) Total debt includes the balance of the senior subordinated notes and
borrowings under our senior credit facility.
b) EBITDA represents net income before taking into consideration interest
expense, income tax expense, depreciation expense, and amortization
expense. EBITDA is not a measurement of financial performance under
accounting principles generally accepted in the United States of America
and does not represent cash flow from operations. Accordingly, you should
not regard this figure as an alternative to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts, investors and
other interested parties in our industry but is not necessarily comparable
with similarly titled measures for other companies.
c) For purposes of computing this ratio, earnings consist of earnings before
income taxes and fixed charges. Fixed charges consist of interest expense,
amortization of deferred debt issuance costs and the portion of rental
expense of our synthetic lease deemed representative of the interest
factor.
12
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before deciding to tender your existing notes in
the exchange offer.
We have a significant amount of debt and interest payment obligations
that may impact our ability to satisfy our obligations under the exchange notes.
We now have a significant amount of debt. See "Description of Other
Indebtedness." The following chart, with dollar amounts in millions, shows
certain important credit statistics and is presented as of and for the fiscal
year ended January 31, 2002 after giving effect to the Jantzen acquisition and
the offering of the existing notes:
Total debt (a) ...................................... $ 154.7
Stockholders' equity (a) ............................ $ 87.2
_______________________________
(a) These figures are unaudited and represent estimates prepared by
management. Total debt does not include the approximately $14.5 million
in secured obligations under the synthetic lease, which expires on June
30, 2002. We do not anticipate renewing the synthetic lease and have
already obtained a commitment for a conventional mortgage for the
property.
Our substantial indebtedness could have important consequences to you,
including:
. making it more difficult for us to satisfy our obligations with
respect to the exchange notes;
. increasing our vulnerability to adverse general economic and
industry conditions;
. limiting our ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and
other general corporate requirements;
. requiring us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby reducing
the availability of our cash flow to fund working capital,
capital expenditures, acquisitions or other general corporate
purposes;
. limiting our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; and
. placing us at a competitive disadvantage compared to our less
leveraged competitors.
Our ability to pay interest on the exchange notes and to satisfy our
other debt obligations will depend upon, among other things, our future
operating performance and our ability to refinance indebtedness when necessary.
Each of these factors is, to a large extent, dependent on economic, financial,
competitive and other factors beyond our control. If, in the future, we cannot
generate sufficient cash from operations to make scheduled payments on the notes
or to meet our other obligations, we will need to refinance our existing debt,
obtain additional financing or sell assets. We cannot assure you that our
business will generate cash flow or that we will be able to obtain funding
sufficient to satisfy our debt service requirements.
The value of the assets pledged as collateral for the exchange notes
could be impaired in the future.
A significant portion of our assets consists of trademarks and
licenses. We had approximately $142.3 million in book value of intangible assets
as of January 31, 2002 after giving effect to the Jantzen acquisition. The value
of these assets could be reduced materially in the future due to changing
consumer preferences, our failure to implement our business strategy,
competition and other future trends. As a result, our assets that are pledged as
collateral could be impaired in the future and may not be sufficient to
13
repay the notes.
Our revenue and profits are sensitive to general economic conditions,
consumer confidence and spending patterns.
The retail industry has historically been subject to substantial
cyclical variations and is particularly affected by adverse trends in the
general economy, with consumer spending tending to decline during recessionary
periods. The success of our operations depends on consumer spending, which is
impacted by a number of factors including actual and perceived economic
conditions affecting disposable consumer income (such as unemployment, wages and
salaries), business conditions, interest rates, availability of credit and tax
rates, for the economy as a whole and in international, regional and local
markets where our products are sold. Any significant deterioration in general
economic conditions (such as the current economic downturn) or increases in
interest rates could reduce the level of consumer spending and inhibit
consumers' use of credit, and thereby have a material adverse effect on our
business, financial condition, results of operations and prospects by, among
other things, inhibiting consumers' use of credit.
Our business could be negatively impacted by the financial instability
of our customers.
During the past several years, various retailers, including some of our
customers, have experienced significant difficulties, including bankruptcies,
liquidations, consolidation of ownership, and increased centralization of buying
decisions. These and other financial problems of some of our customers increase
the risk of extending credit to these retailers. Consistent with industry
practices, we sell products primarily on open account after completing an
appropriate credit review. A significant adverse change in a customer or its
financial position could cause us to limit or discontinue business with that
customer, require us to assume more credit risk relating to that customer's
receivables or limit our ability to collect amounts related to previous
purchases by that customer, all of which could have a material adverse effect on
our business, financial condition and results of operation.
The recent bankruptcy filing of K-Mart adversely affected our results
of operations, requiring us to take a $1.4 million charge against net income
during the fourth quarter of fiscal 2002.
We may not be able to anticipate consumer preferences and fashion
trends.
We believe that our success depends on our ability to anticipate,
identify and respond to changing fashion trends in a timely manner. Due to the
fact that we are increasing our marketing of women's apparel with the Jantzen
acquisition, we may be more vulnerable to changes in fashion trends as women's
fashion trends have historically changed more rapidly than the men's apparel
trends. If we misjudge consumer preferences or if a shift in fashion trends
turns away from our products, it could negatively impact our ability to market
our products to retailers.
We rely on a few key customers, and the loss of any one key customer
would substantially reduce our revenue.
We derive a significant amount of our revenues from a few major
customers. Net sales to our five largest customers totaled approximately 47% of
net sales during fiscal 2002, 42% of net sales during fiscal 2001 and 49% of net
sales during fiscal 2000. Our largest customers include Wal-Mart, Target, J.C.
Penney, Kohl's and Mervyn's. Sales to Target, Wal-Mart and J.C. Penney accounted
for approximately 12%, 11% and 11% of net sales during fiscal 2002,
respectively. Sales to Wal-Mart and J.C. Penney accounted for approximately 14%
and 11% of net sales during fiscal 2001, respectively. Target accounted for
approximately 14% of net sales for fiscal 2000. No other single customer
accounted for more than 10% of net sales during these fiscal years.
14
Although we have long-established relationships with many of our
customers, we do not have long-term contracts with any of them and purchases
generally occur on an order-by-order basis. We believe that purchasing decisions
are generally made independently by individual department stores within a
company controlled group. There has been a trend, however, toward more
centralized purchasing decisions. As such decisions become more centralized, the
risk to us of such concentration increases. A significant decrease in business
from or loss of any of our major customers could have a material adverse effect
on our financial condition and results of operations.
Our contract manufacturers may be unable to manufacture and deliver
products in a timely manner or met quality standards.
We currently utilize independent contract manufacturers to produce
substantially all of our apparel products. We depend upon the ability of our
contract manufacturers to secure a sufficient supply of raw materials,
adequately finance the production of goods ordered and maintain sufficient
manufacturing and shipping capacity. The use of contract manufacturing and the
resulting lack of direct control could subject us to difficulty in obtaining
timely delivery of products of acceptable quality. We do not have long-term
contracts with any of our suppliers.
We primarily use foreign suppliers for our products and raw materials
which poses additional risks to our business operations.
During fiscal 2002, 99.7% of our products were produced by and
purchased from independent contract manufacturers located in foreign countries.
We currently use approximately 100 suppliers in countries in the Far East and
other parts of Asia and approximately 30 suppliers in Mexico and countries in
Central America. Because most of our products are manufactured abroad, we are
required to order products further in advance than would be the case if products
were manufactured domestically. Typically, we do not place orders with our
suppliers until after we have received an order from our retail customers. In
those cases in which we place an order with a supplier before receiving an order
from a retail customer, if we overestimate retailers' demand, we may be required
to hold goods in inventory which we may be unable to sell at historical margins;
if we underestimate retailers' demand, we may not be able to fill reorders on a
timely basis.
No one foreign country accounts for more than 15% of our sourcing mix.
However, foreign manufacturing is subject to a number of other risks, including:
. work stoppages;
. transportation delays and interruptions;
. political instability;
. economic disruptions;
. the imposition of new or adversely adjusted tariffs, duties,
quotas, import and export controls, and other regulations; and
. changes in governmental policies and other events.
If any of these events occur, our contract manufacturers' ability to
produce and ship product during a given retailing season will be impaired, which
could result in loss of revenues, customer orders and customer goodwill and
could have a material adverse effect on our business, financial condition,
results of operations and prospects.
We require our independent manufacturers to operate in compliance with
applicable laws and regulations. While our operating guidelines promote ethical
business practices and our staff periodically
15
visits and monitors the operations of our independent manufacturers, we do not
control these manufacturers or their labor practices. The violation of labor or
other laws by one of our independent manufacturers or the divergence of an
independent manufacturer's labor practices from those generally accepted as
ethical in the United States, could interrupt, or otherwise disrupt the shipment
of finished products to us or damage our reputation. For example, the United
States has imposed penalties on imported foreign products which are found to
have been manufactured by convict, forced or indentured labor and has, from time
to time, threatened to withdraw China's "most favored nation" status (from where
less than 14% of our products are currently purchased), which could result in
the imposition of reduced quotas and/or higher tariffs on products imported from
that country. Any of these, in turn, could have a material adverse effect on our
financial condition and results of operation.
Although we have historically contracted to purchase substantially all
of our goods in U.S. dollars, reductions in the value of the U.S. dollar could
ultimately increase the prices that we pay for our products.
We are dependent upon the revenue generated by our licensing alliances
and the loss or inability to renew certain licenses could reduce our revenue and
royalty income.
A portion of our net income is derived from licensing revenue received
from our licensing partners. Approximately 40.1% of our licensing revenue for
fiscal 2002 was derived from four licensing partners. Of this 40.1%, our largest
licensee accounted for 23.5% of the total licensing revenue.
We had no other licensing partner which accounted for more than 5% of
our licensing revenue for fiscal 2002. The interruption of the business of any
one of our material licensing partners could also adversely affect our licensing
revenues and net income.
We currently license the PING, Andrew Fezza, Nautica, Nike and Tommy
Hilfiger brands from third parties. These licenses vary in length of term,
renewal conditions and royalty obligations. There can be no guarantee that, if
we desire to renew or extend any of these licenses, we would be able to do so on
favorable terms, if at all. If we are unable to renew or extend any of these
licenses, we could experience a shortfall in revenue and royalty income.
We are subject to certain restrictions imposed by our indebtedness that
may limit our ability to implement our business strategy successfully.
The indenture governing the exchange notes will contain covenants that,
among other things, restrict our ability and the ability of our subsidiaries to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase our capital stock;
. make certain investments;
. issue or sell capital stock of restricted subsidiaries;
. create certain liens;
. sell assets;
. sell or transfer any collateral;
. in the case of our restricted subsidiaries, make dividends or other
payments;
16
. in the case of our restricted subsidiaries, guarantee indebtedness;
. engage in transactions with affiliates; and
. consolidate, merge or transfer all or substantially all of our
assets and the assets of our subsidiaries on a consolidated basis.
These covenants are subject to important exceptions and qualifications
which are described under the heading "Description of the Notes" in this
prospectus.
In addition, the senior credit facility, the indenture governing our
12 1/4% outstanding senior subordinated notes, and, to a lesser extent, the
synthetic lease covering our headquarters facility contain many restrictive
covenants similar to the indenture's covenants which, among other things, impose
certain limitations on us. The senior credit facility contains covenants which
are generally more restrictive than those contained in both indentures. The
senior credit facility and the synthetic lease require us to maintain specified
consolidated financial ratios and satisfy certain consolidated financial tests.
Our ability to meet those financial ratios and financial tests may be affected
by events beyond our control, and we cannot assure you that we will meet those
tests. If we fail to meet those tests or breach any of the covenants, the
lenders under the senior credit facility or the lessor under, and the financial
institutions which financed, the synthetic lease 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 granted as collateral to secure that indebtedness. We cannot
assure you that our assets would be sufficient to repay in full the indebtedness
under the senior credit facility and/or the synthetic lease. As of January 31,
2002, we were not in compliance with the funded indebtedness to EBITDA financial
covenant of our senior credit facility and our synthetic lease. The senior
lenders under our senior credit facility and the lessor under, and the financial
institutions which financed, the synthetic lease waived the noncompliance of the
financial covenant.
In addition, if we default under either indenture, the senior credit
facility or the synthetic lease, that default could constitute a cross-default
under the indentures or the senior credit facility or the synthetic lease, as
applicable. We also have approximately $14.5 million in secured obligations
under the synthetic lease, which expires on June 30, 2002. We do not anticipate
renewing the synthetic lease and will be required to satisfy the obligation by
such date. See "Description of the Notes" and "Description of Other
Indebtedness."
These operating and financial restrictions and covenants may adversely
affect, and in fact may limit or prohibit, our ability to finance future
acquisitions, our operations and our capital needs. See "Description of Other
Indebtedness" and "Description of the Notes."
We need significant working capital to fund our operations, a
substantial portion of which is financed.
We need significant working capital to purchase inventory and finance
accounts receivable and are generally required to post letters of credit when
placing an order with one of our foreign manufacturers. Currently, a substantial
portion of our working capital requirements is met through the senior credit
facility. We also maintain letter of credit facilities to permit us to post
letters of credit. In the event we are unable to extend or renew either the
senior credit facility or letter of credit facilities on satisfactory terms or
in the event borrowings thereunder were unavailable to us as a result of our
noncompliance with the financial and operating covenants contained therein, our
ability to purchase inventory and finance accounts receivable would be curtailed
or eliminated and our business, financial condition, results of operations and
prospects could be materially adversely affected. See "Description of Other
Indebtedness."
Our business strategy includes making selective acquisitions, including
the Jantzen acquisition, which we may not successfully integrate into our own
operations.
17
Our business strategy includes making selective acquisitions to add new
product lines and expand our portfolio of brand names. This strategy presents
certain risks inherent in:
. assessing the value, strengths and weaknesses of brand names;
. evaluating the costs and uncertain returns of expanding our
operations; and
. integrating the brands acquired with existing operations.
Our growth strategy may affect short-term cash flow and net income as
we increase our indebtedness and incur expenses to promote newly acquired brands
and expand our inventory. As a result, revenue and operating results may
fluctuate. All the factors discussed in this risk factor are applicable to the
Jantzen acquisition. The integration of the Jantzen brands acquired with
existing operations will require the dedication of management resources. We
cannot assure you that we will successfully expand our portfolio of brands, that
any acquired brand names, including the Jantzen brand, will be successfully
integrated into our operations or that any expansion will result in
profitability. The failure to successfully implement our growth strategy may
have a material adverse effect on our business, financial condition, results of
operations and prospects.
Our anticipated growth may place significant demands on our management
and our operational, financial and marketing resources. In connection with the
acquisition of new brand names, we anticipate expanding the number of our
employees, the scope of our operating systems and the geographic area of our
operations. For example, following consummation of the Jantzen acquisition, we
intend to hire a number of Jantzen employees and have exercised our option to
acquire Jantzen's Seneca, South Carolina distribution center for $2.5 million.
We believe this growth will increase the complexity of our operations and the
level of responsibility exercised by both existing and new management personnel.
To manage this expected growth, we intend to invest further in our operating
systems and to continue to expand, train and manage our employee base, although
we cannot assure you that our current operating and financial systems and
controls will continue to be adequate as we grow or that any steps taken to
improve such systems and controls will be sufficient. Our failure to
successfully integrate and manage our growth may have a material adverse effect
on our business, financial condition, results of operations and prospects.
We may not uncover all risks associated with the Jantzen acquisition or
any future acquisitions and a significant liability may arise after closing.
There may be liabilities that we failed or were unable to discover in
the course of performing due diligence investigations related to the Jantzen
acquisition and any future acquisitions. Such liabilities could include those
arising from the trademarks, employee benefits contribution obligations of a
prior owner, and noncompliance with applicable federal, state or local
environmental requirements by prior owners for which we, as a successor owner,
may be responsible. We try to minimize these risks by conducting such due
diligence, including trademark, employee benefits and environmental reviews,
that we deem appropriate under the circumstances. However, we cannot assure you
that we have identified or, in the case of future acquisitions, will identify,
all existing or potential risks. For example, we did not conduct an independent
complete title search on the foreign trademarks that we were acquiring in the
Jantzen acquisition, which constituted a significant portion of the Jantzen
trademark portfolio. We have required the sellers to indemnify us against
undisclosed liabilities. However, we cannot assure you that the indemnification,
even if obtained, will be enforceable, collectible or sufficient in amount,
scope or duration to fully offset the possible liabilities associated with the
business or property acquired. Any of these liabilities, individually or in the
aggregate, could have a material adverse effect on our business, financial
condition, results of operations and prospects.
18
We operate in a highly competitive and fragmented industry.
The retail apparel industry is highly competitive and fragmented. Our
competitors include numerous apparel designers, manufacturers, importers and
licensors, many of which have greater financial and marketing resources than us.
We believe that the principal competitive factors in the apparel industry are:
. timeliness, reliability and quality of services provided;
. market share and visibility;
. price; and
. the ability to anticipate customer demands and maintain appeal of
products to customers.
The level of competition and the nature of our competitors varies by
product segment with low-margin, mass-market manufacturers being our main
competitors in the less expensive segment of the market and American and foreign
designers and licensors competing with us in the more upscale segment of the
market. We believe that our continued dedication to customer service, product
assortment and quality control, as well as our aggressive pursuit of licensing
and acquisition opportunities, directly address the competitive factors in all
market segments. Although we have been able to compete successfully to date,
there can be no assurance that we will continue to be able to do so in the
future.
We are affected by seasonality which has historically affected our
revenue in the second and fourth quarters.
Our products have historically been geared toward lighter-weight
products generally worn during the spring and summer months, which typically
caused disproportionately higher revenues to be realized during the first and
third quarters of each fiscal year. Although this seasonality has been somewhat
reduced with the introduction of fall, winter and holiday merchandise, our
business is still affected by seasonality.
We may not be able to respond adequately to our rapid growth.
During the past eight years, we have experienced rapid growth in sales,
expansion of our product offerings, acquisitions and integration of additional
brands and an increase in our customer base. Part of our business strategy is to
expand our licensing activities. Any future growth will require increasing
amounts of working capital and financing and may place a significant strain on
our management and on our financial and information processing systems. The
failure to obtain additional financing, to maintain or upgrade these systems, to
recruit additional staff and key personnel or to respond effectively to other
difficulties associated with rapid expansion could have a material adverse
effect on our business, financial condition, results of operations and
prospects.
Our trademarks and other intellectual property rights may not be
adequately protected outside the United States.
We believe that our trademarks and other proprietary rights are
important to our success and our competitive position. We devote substantial
resources to the establishment and protection of our trademarks on a worldwide
basis. We have in the past successfully resolved any conflicts through both
legal action and negotiated settlements, none of which we believe has had a
material impact on our financial condition and results of operations.
Nevertheless, we cannot assure you that the actions we have taken to establish
and protect our trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a
19
violation of the trademarks and proprietary rights of others. Also, we cannot
assure you that others will not assert rights in, or ownership of, trademarks
and other proprietary rights of ours or that we will be able to successfully
resolved these types of conflicts to our satisfaction. In addition, the laws of
certain foreign countries may not protect proprietary rights to the same extent
as do the laws of the United States.
We depend on certain key personnel.
Our future success depends to a significant extent on retaining the
services of certain executive officers and directors, in particular George
Feldenkreis, our Chairman of the Board and Chief Executive Officer, and Oscar
Feldenkreis, our President and Chief Operating Officer. They are each party to
an employment agreement with us, which expire in 2003. We cannot guarantee that
any key member of management will continue in his or her capacity for any period
of time. The loss of the services of either individual, or any other key member
of management, could have a material adverse effect on our business, financial
condition, results of operations and prospects. Our continued success is also
dependent upon our ability to attract and retain qualified management,
administrative and sales personnel to support our future growth and our
inability to do so may have a material adverse effect on our business, financial
condition, results of operations and prospects.
We are controlled by a few principal shareholders.
As of the date of this prospectus, George Feldenkreis, our Chairman of
the Board and Chief Executive Officer, his children, Oscar Feldenkreis, our
President and Chief Operating Officer, and Fanny Hanono, our Secretary and
Treasurer, and their respective affiliates, beneficially owned approximately 53%
of our outstanding common stock. As a result, such persons will effectively have
the ability to significantly influence the election of our directors and the
outcome of all other issues submitted to our shareholders.
We may be unable to repurchase our outstanding notes upon a change in
control.
Upon the occurrence of certain specific kinds of change in control
events, holders may require us to repurchase all outstanding notes. However, it
is possible that we will not have sufficient funds at the time of the change in
control to make the required repurchase of all our outstanding notes. In
addition, restrictions in our senior credit facility will not allow such
repurchases. In addition, certain important corporate events, such as leveraged
recapitalizations, that would increase the level of our indebtedness, would not
constitute a "Change of Control" under our indentures. See "Description of the
Notes - Certain Covenants - Purchase of Notes upon a Change in Control."
The trustee's ability to foreclose on the collateral that secures the
exchange notes may prevent you from realizing value from the collateral.
We cannot assure you that if we default on the exchange notes, the
exercise of the legal remedies provided in the indenture, including foreclosure
on the pledged interests, particularly, in jurisdictions outside of the United
States of America, will provide sufficient funds to repay amounts due on the
exchange notes and our other debt. The perfection of the security interest will
be completed after the closing and may take several months.
The subsidiary guarantees may be limited by fraudulent conveyance laws.
Various fraudulent conveyance laws have been enacted for the protection
of creditors. These laws may be utilized by a court to find that a guarantee
could be voided or claims in respect of a guarantee could be subordinated to all
other debts of that guarantor if, among other things, the guarantor, at the time
it incurred the debt evidenced by its guarantee received less than reasonably
equivalent value or fair consideration for the incurrence of such guarantee; and
20
. was insolvent or rendered insolvent by reason of the issuance of
the guarantee; or
. was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor or to a fund for the benefit
of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent conveyance
laws will vary depending upon the law applied in any proceeding to determine
whether a fraudulent conveyance has occurred. Generally, however, a guarantor
would be considered insolvent if:
. the sum of its debts, including contingent liabilities, was greater
than the fair saleable value of all of its assets; or
. the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
. it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history and
other factors, we believe that each guarantor, after giving effect to the debt
incurred by that guarantor in connection with the offering of the existing
notes, will not be insolvent, will not have unreasonably small capital for the
business in which it is engaged and will not have incurred debts beyond its
ability to pay such debts as they mature. However, we cannot assure you as to
what standard a court would apply in making such determinations or that a court
would agree with our conclusions in this regard.
A trading market for the exchange notes may not develop.
There has not been an established trading market for the existing
notes. Although the initial purchaser has informed us that it currently intends
to make a market in the exchange notes, it has no obligation to do so and may
discontinue making a market at any time without notice.
The exchange notes have been designated as eligible for trading in the
PORTAL market. However, we do not intend to apply for listing of the exchange
notes, on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System.
The liquidity of any market for the exchange notes will depend upon the
number of holders of the exchange notes, our performance, the market for similar
securities, the interest of securities dealers in making a market in the
exchange notes and other factors. A liquid trading market may not develop for
the exchange notes.
There may be adverse consequences if you fail to exchange your existing
notes for exchange notes.
If you do not tender your existing notes, your existing notes will
remain restricted securities and will be subject to certain transfer
restrictions. As restricted securities, your existing notes:
21
. may be resold only if registered pursuant to the Securities Act, if
an exemption from registration is available thereunder, or if
neither such registration nor such exemption is required by law;
and
. shall bear a legend restricting transfer in the absence of
registration or an exemption therefrom.
In addition, a holder of existing notes who desires to sell or
otherwise dispose of all or any part of its existing notes under an exemption
from registration under the Securities Act, if requested by us, must deliver to
us an opinion of independent counsel experienced in Securities Act matters,
reasonably satisfactory in form and substance to us, that such exemption is
available.
22
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The existing notes were sold by us to the initial purchaser pursuant to
a purchase agreement dated March 15, 2002. The initial purchaser subsequently
placed the existing notes with qualified institutional buyers in reliance on
Rule 144A under the Securities Act. As a condition to the purchase of the
existing notes by the initial purchasers, Perry Ellis and the guarantors entered
into a registration rights agreement with the initial purchasers, which
requires, among other things, that within 65 days following the issuance and
sale of the existing notes, we and the guarantors file with the SEC the
registration statement with respect to the exchange notes, use our reasonable
best efforts to cause the registration statement to become effective under the
Securities Act and, upon the effectiveness of the registration statement, offer
to the holders of the existing notes the opportunity to exchange their existing
notes for a like principal amount of exchange notes, which will be issued
without a restrictive legend and may be reoffered and resold by the holder
without restrictions or limitations under the Securities Act. A copy of the
registration rights agreement has been filed as an exhibit to the registration
statement of which this prospectus is a part. The term "holder" with respect to
the exchange offer means any person in whose name existing notes are registered
on our books.
Based on existing interpretations of the Securities Act by the staff of
the SEC set forth in several no-action letters to third parties, and subject to
the immediately following sentence, we believe that the exchange notes issued
pursuant to the exchange offer may be offered for resale, resold and otherwise
transferred by the holders thereof (other than holders who are broker-dealers or
a person that is our "affiliate" (within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery provisions of the Securities Act. However, any purchaser of notes who
is our affiliate or who intends to participate in the exchange offer for the
purpose of distributing the exchange notes, or any broker-dealer who purchased
the existing notes from us to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (i) will not be able to rely on
the interpretations by the staff of the SEC set forth in the above-mentioned
no-action letters; (ii) will not be able to tender its existing notes in the
exchange offer; and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the exchange notes unless such sale or transfer is made pursuant to
an exemption from such requirements. We do not intend to seek our own no-action
letter, and there is no assurance that the staff of the SEC would make a similar
determination with respect to the exchange notes as it has in such no-action
letters to third parties. See "Plan of Distribution."
As a result of the filing and effectiveness of the registration
statement of which this prospectus is a part, we and the guarantors will not be
required to pay an increased interest rate on the existing notes. Following the
consummation of the exchange offer, holders of existing notes not tendered will
not have any further registration rights except in certain limited circumstances
requiring the filing of a shelf registration statement, and the existing notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for the existing notes not tendered could be
adversely affected after the exchange offer.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, we will accept all existing notes
properly tendered and not withdrawn prior to 5:00 p.m. New York City time, on
the expiration date. After authentication of the exchange notes by the trustee
or an authenticating agent, we will issue $1,000 principal amount of exchange
notes in exchange for each $1,000 principal amount of outstanding existing notes
accepted in the exchange offer. Holders may tender some or all of their existing
notes pursuant to the exchange offer in denominations of $1,000 and integral
multiples thereof.
23
Each holder of the existing notes (other than certain specified
holders) who wishes to exchange existing notes for exchange notes in the
exchange offer will be required to represent that (i) it is not our affiliate or
of any guarantor, (ii) any exchange notes to be received by it were acquired in
the ordinary course of its business, and (iii) it has no arrangement with any
person to participate in the distribution (within the meaning of the Securities
Act) of the exchange notes.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The staff of the SEC has taken the position that
participating broker-dealers may fulfill their prospectus delivery requirements
with respect to the exchange notes (other than a resale of an unsold allotment
from the original sale of the existing notes) with the prospectus contained in
the exchange offer registration statement. We will be required to allow
participating broker-dealers to use the prospectus contained in this exchange
offer registration statement (subject to certain "black out" periods) following
the exchange offer, in connection with the resale of exchange notes received in
exchange for existing notes acquired by such participating broker-dealers for
their own account as a result of market-making or other trading activities. See
"Plan of Distribution."
The form and terms of the exchange notes are identical in all material
respects to the form and terms of the existing notes except that (i) the
exchange notes will be issued in a transaction registered under the Securities
Act, (ii) the exchange notes will not be subject to transfer restrictions, and
(iii) certain provisions relating to an increase in the stated interest rate on
the existing notes provided for in certain circumstances will be eliminated. The
exchange notes will evidence the same debt as the existing notes. The exchange
notes will be issued under and entitled to the benefits of the indenture.
As of the date of this prospectus, $57,000,000 aggregate principal
amount of the existing notes is outstanding. In connection with the issuance of
the existing notes, we arranged for the existing notes, of which were initially
purchased by qualified institutional buyers as defined pursuant to Rule 144A
under the Securities Act, to be issued and transferable in book-entry form
through the facilities of the depository, acting as depository. The exchange
notes will also be issuable and transferable in book-entry form through the
depository.
This prospectus, together with the accompanying letter of transmittal,
is initially being sent to all registered holders as of the close of business on
June 14, 2002. We intend to conduct the exchange offer in accordance with the
applicable requirements of the Exchange Act, and the rules and regulations of
the SEC thereunder, including Rule 14e-1, to the extent applicable. The exchange
offer is not conditioned upon any minimum aggregate principal amount of existing
notes being tendered, and holders of the existing notes do not have any
appraisal or dissenters' rights under the Business Corporation Act of the State
of Florida or under the indenture in connection with the exchange offer. We
shall be deemed to have accepted validly tendered existing notes when, as and if
we have given oral or written notice thereof to the exchange agent. See "--
Exchange Agent." The exchange agent will act as agent for the tendering holders
for the purpose of receiving exchange notes from us and delivering exchange
notes to such holders.
If any tendered existing notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted existing notes will be returned, at our
cost, to the tendering holder thereof as promptly as practicable after the
expiration date.
Holders who tender existing notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to
24
the exchange of existing notes pursuant to the exchange offer. We will pay all
charges and expenses, other than certain applicable taxes, in connection with
the exchange offer. See "-- Solicitation of Tenders; Fees and Expenses."
Neither our Board of Directors nor we make any recommendation to
holders of existing notes as to whether to tender or refrain from tendering all
or any portion of their existing notes pursuant to the exchange offer. Moreover,
no one has been authorized to make any such recommendation. Holders of existing
notes must make their own decision whether to tender pursuant to the exchange
offer and, if so, the aggregate amount of existing notes to tender after reading
this prospectus and the letter of transmittal and consulting with their
advisors, if any, based on their own financial position and requirements.
Expiration Date
The term "expiration date" shall mean 5:00 p.m., New York City time, on
July 14, 2002, unless we, in our sole discretion, extend the exchange offer, in
which case the term "expiration date" shall mean the latest date to which the
exchange offer is extended.
Extensions and Amendments
We expressly reserve the right, in our sole discretion (i) to delay
acceptance of any existing notes, to extend the exchange offer or to terminate
the exchange offer and to refuse to accept existing notes not previously
accepted, if any of the conditions set forth herein under "-- Termination" shall
have occurred and shall not have been waived by us (if permitted to be waived by
us), by giving oral or written notice of such delay, extension or termination to
the exchange agent, and (ii) to amend the terms of the exchange offer in any
manner. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by oral or written notice thereof by us
to the registered holders of the existing notes. If the exchange offer is
amended in a manner determined by us to constitute a material change, we will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of the existing notes.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we shall have no obligation to publish, advise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
Interest on the Exchange Notes
The exchange notes will bear interest from the date of issuance of the
existing notes that are tendered in exchange for the exchange notes (or the most
recent date on which interest was paid or duly provided for on the existing
notes surrendered in exchange for the exchange notes). Accordingly, holders of
existing notes that are accepted for exchange will not receive interest that is
accrued but unpaid on such existing notes at the time of tender. Interest on the
exchange notes will be payable semi-annually on each March 15 and September 15,
commencing on September 15, 2002.
Procedures for Tendering
Only a holder may tender its existing notes in the exchange offer. To
tender in the exchange offer, a holder must complete, sign and date the letter
of transmittal or a facsimile thereof, have the signatures thereof guaranteed if
required by the letter of transmittal, and mail or otherwise deliver such letter
of transmittal or such facsimile, together with the existing notes (unless such
tender is being effected pursuant to the procedure for book-entry transfer
described below) and any other required documents, to the exchange agent, prior
to 5:00 p.m. New York City time, on the expiration date.
25
Any financial institution that is a participant in the depository's
book-entry transfer facility system may make book-entry delivery of the existing
notes by causing the depository to transfer such existing notes into the
exchange agent's account in accordance with the depository's procedure for such
transfer. Although delivery of existing notes may be effected through book-entry
transfer into the exchange agent's account at the depository, the letter of
transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
by the exchange agent at its address set forth herein under "-- Exchange Agent"
or the holder must acknowledge and agree to the terms of the letter of
transmittal by transmitting a computer-generated message to the exchange agent
through the depository's Automated Tender Offer Program (ATOP) prior to 5:00
p.m., New York City time, on the expiration date. Delivery of documents to the
depository in accordance with its procedures does not constitute delivery to the
exchange agent.
The tender by a holder will constitute an agreement between such
holder, us and the exchange agent in accordance with the terms and subject to
the conditions set forth herein and in the letter of transmittal.
The letter of transmittal will include representations to us that,
among other things, (1) the exchange notes received pursuant to the exchange
offer are being acquired in the ordinary course of business of the person
receiving such exchange notes (whether or not such person is the holder), (2)
neither the holder nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such exchange notes, (3)
neither the holder nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the company or any guarantor, (4) the
holder is not engaged in, and does not intend to engage in, a distribution of
the exchange notes, and (5) if the tendering holder is a broker-dealer (as
defined in the Exchange Act) (a) it acquired the existing notes for its own
account as a result of market-making activities or other trading activities and
(b) it has not entered into any arrangement or understanding with us, any
guarantor or any "affiliate" of ours or any guarantor (within the meaning of
Rule 405 under the Securities Act) to distribute the exchange notes to be
received in the exchange offer. In the case of a broker-dealer that receives
exchange notes for its own account in exchange for existing notes which were
acquired by it as a result of market-making or other trading activities, the
letter of transmittal will also include an acknowledgment that the broker-dealer
will deliver a copy of this prospectus in connection with the resale by it of
exchange notes received pursuant to the exchange offer. See "Plan of
Distribution."
The method of delivery of existing notes and the letter of transmittal
and all other required documents to the exchange agent is at the election and
risk of the holders. Instead of delivery by mail, it is recommended that holders
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure delivery to the exchange agent prior to the expiration
date. No letter of transmittal or existing notes should be sent to us. Holders
may also request that their respective brokers, dealers, commercial banks, trust
companies or nominees effect such tender for holders in each case as set forth
herein and in the letter of transmittal.
Any beneficial owner whose existing notes are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf. If such beneficial owner wishes
to tender on his own behalf, such beneficial owner must, prior to completing and
executing the letter of transmittal and delivering his existing notes, either
make appropriate arrangements to register ownership of the existing notes in
such owner's name or obtain a properly completed bond power from the registered
holder. The transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association
26
of Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act unless
the existing notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" of the letter of transmittal or
(ii) for the account of an eligible institution. If the letter of transmittal is
signed by a person other than the registered holder listed therein, such
existing notes must be endorsed or accompanied by appropriate bond powers which
authorize such person to tender the existing notes on behalf of the registered
holder, in either case signed as the name of the registered holder or holders
appears on the existing notes. If the letter of transmittal or any existing
notes or bond powers are signed or endorsed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by us, evidence satisfactory to us of
their authority to so act must be submitted with such letter of transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered existing notes will be
determined by us in our sole discretion, which determination will be final and
binding. We reserve the absolute right to reject any and all existing notes not
properly tendered or any existing notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the absolute right to waive
any irregularities or conditions of tender as to particular existing notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of existing notes must be cured within such time as we shall determine. Although
we intend to notify holders of defects or irregularities with respect to tenders
of existing notes, neither we, the exchange agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of existing notes nor shall any of them incur any liability for failure
to give such notification. Tenders of existing notes will not be deemed to have
been made until such irregularities have been cured or waived. Any existing
notes received by the exchange agent that we determine are not properly tendered
or the tender of which is otherwise rejected by us and as to which the defects
or irregularities have not been cured or waived by us will be returned by the
exchange agent to the tendering holder unless otherwise provided in the letter
of transmittal, as soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion to (a)
purchase or make offers for any existing notes that remain outstanding
subsequent to the expiration date, or, as set forth under "-- Termination," to
terminate the exchange offer and (b) to the extent permitted by applicable law,
purchase existing notes in the open market, in privately negotiated transactions
or otherwise. The terms of any such purchases or offers may differ from the
terms of the exchange offer.
27
Book-Entry Transfer
We understand that the exchange agent will make a request promptly
after the date of this prospectus to establish accounts with respect to the
existing notes at the Depository Trust Company for the purpose of facilitating
the exchange offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of existing notes by causing such book-entry
transfer facility to transfer such existing notes into the exchange agent's
account with respect to the existing notes in accordance with the book-entry
transfer facility's procedures for such transfer. Although delivery of existing
notes may be effected through book-entry transfer into the exchange agent's
account at the book-entry transfer facility, an appropriate letter of
transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the exchange agent at its address set forth below
on or prior to the expiration date, or, if the guaranteed delivery procedures
described below are complied with, with the time period provided under such
procedures. Delivery of documents to the book-entry transfer facility does not
constitute delivery to the exchange agent.
Guaranteed Delivery Procedures
Holders who wish to tender their existing notes and (i) whose existing
notes are not immediately available, or (ii) who cannot deliver their existing
notes, the letter of transmittal or any other required documents to the exchange
agent prior to the expiration date, or (iii) if such holder cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an eligible institution as defined in
the Exchange Act;
(b) prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of guaranteed
delivery (by facsimile transmittal, mail or hand delivery) or a transmitted
message and notice of guaranteed delivery through ATOP setting forth the name
and address of the holder, the certificate number or numbers of such holder's
existing notes and the principal amount of such existing notes tendered, stating
that the tender is being made thereby, and guaranteeing that, within five
business days after the expiration date, the letter of transmittal (or facsimile
thereof), together with the certificate(s) representing the existing notes to be
tendered in proper form for transfer and any other documents required by the
letter of transmittal will be deposited by the eligible institution with the
exchange agent; and
(c) such properly completed and executed letter of transmittal (or
facsimile thereof), together with the certificate(s) representing all tendered
existing notes in proper form for transfer (or confirmation of a book-entry
transfer into the exchange agent's account at the depository of existing notes
delivered electronically) and all other documents required by the letter of
transmittal are received by the exchange agent within five business days after
the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery
will be sent to holders who wish to tender their existing notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of existing notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of existing notes in the exchange offer, a written
or facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the expiration date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the existing notes to be withdrawn (the
"Depositor"), (ii) identify the
28
existing notes to be withdrawn (including the certificate number or numbers and
principal amount of such existing notes or, in the case of existing notes
transferred by book-entry transfer, the name and number of the account at the
depository to be credited), (iii) be signed by the Depositor in the same manner
as the original signature on the letter of transmittal by which such existing
notes were tendered (including any required signature guarantee) or be
accompanied by documents of transfer sufficient to permit the trustee with
respect to the existing notes to register the transfer of such existing notes
into the name of the Depositor withdrawing the tender and (iv) specify the name
in which any such existing notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by us, whose
determination shall be final and binding on all parties. Any existing notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
exchange offer, and no exchange notes will be issued with respect thereto unless
the existing notes so withdrawn are validly retendered. Any existing notes that
have been tendered but are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn existing notes may be retendered by following one of the procedures
described above under "-- Procedures for Tendering" at any time prior to the
expiration date.
Termination
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or to exchange notes for, any existing notes,
and may terminate or amend the exchange offer as provided herein before the
acceptance of such existing notes if, in our judgment, our ability to proceed
with the exchange offer can reasonably be expected to be impaired as a result of
certain events set forth in the registration rights agreement. Accordingly, the
exchange offer is subject to the following conditions:
. that the exchange offer, or the making of any exchange by a
holder, does not violate applicable law or any applicable
interpretation of the staff of the SEC,
. that no action or proceeding shall have been instituted or
threatened in any court or by or before any governmental
agency or body which may materially impair our ability to
proceed with the exchange offer,
. that there shall not have been adopted or enacted any law,
statute, rule or regulation that can reasonably be expected
to impair our ability to proceed with the exchange offer,
. that there shall not have been declared by United States
federal or Florida or New York state authorities a banking
moratorium, and
. that trading on the Nasdaq National Market or generally in
the United States over-the-counter market shall not have
been suspended by order of the SEC or any other governmental
agency.
If we determine that we may terminate the exchange offer for any of the
reasons set forth above, we may (i) refuse to accept any existing notes and
return any existing notes that have been tendered to the holders thereof, (ii)
extend the exchange offer and retain all existing notes tendered prior to the
expiration date of the exchange offer, subject to the rights of such holders of
tendered existing notes to withdraw their tendered existing notes or (iii) waive
such termination event with respect to the exchange offer and accept all
properly tendered existing notes that have not been withdrawn. If such waiver
constitutes a material change in the exchange offer, we will disclose such
change by means of a supplement to this prospectus that will be distributed to
each registered holder, and we will extend the exchange offer for a period of
five to ten business days, depending upon the significance of the waiver and the
manner of disclosure to the registered holders, if the exchange offer would
otherwise expire during such period.
29
Exchange Agent
State Street Bank and Trust Company, the trustee under the indenture,
has been appointed as exchange agent for the exchange offer. In such capacity,
the exchange agent has no fiduciary duties and will be acting solely on the
basis of our directions. Requests for assistance and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
the exchange agent addressed as follows:
By Mail: State Street Bank and Trust Company
Corporate Trust Department
P.O. Box 778
Boston, Massachusetts 02102-0078
Attention: Ralph Jones
By Hand or Overnight Delivery: State Street Bank and Trust Company
Corporate Trust Department
2 Avenue de Lafayette
5/th/ Floor, Corporate Trust Window
Boston, Massachusetts 02111-1724
Attention: Ralph Jones
By Mail, Hand Delivery, or Overnight Courier State Street Bank and Trust Company
in New York: Corporate Trust Department
61 Broadway, 15/th/ Floor
New York, New York 10006
Attention: Ralph Jones
By Facsimile: State Street Bank and Trust
Attention: Ralph Jones
(617) 662-1452
To Confirm: (617) 662-1548
Delivery of the letter of transmittal to an address other than as set
forth above or transmission of instructions via facsimile other than as set
forth above does not constitute a valid delivery of such letter of transmittal.
Solicitation of Tenders; Fees and Expenses
The expenses of soliciting tenders pursuant to the exchange offer will
be borne by us. The principal solicitation pursuant to the exchange offer is
being made by mail. Additional solicitations may be made by our officers and
regular employees and our affiliates in person, by telegraph, telephone or
telecopier.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We, however, will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket costs and expenses in connection
therewith and will indemnify the exchange agent for all losses and claims
incurred by it as a result of the exchange offer. We may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus,
letters of transmittal and related documents to the beneficial owners of the
existing notes and in handling or forwarding tenders for exchange.
30
The expenses to be incurred in connection with the exchange offer,
including fees and expenses of the exchange agent and trustee and accounting and
legal fees and printing costs, will be paid by us.
We will pay all transfer taxes, if any, applicable to the exchange of
existing notes pursuant to the exchange offer. If, however, certificates
representing exchange notes or existing notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the
existing notes tendered, or if tendered existing notes are registered in the
name of any person other than the person signing the letter of transmittal, or
if a transfer tax is imposed for any reason other than the exchange of existing
notes pursuant to the exchange offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the letter of transmittal, the amount
of such transfer taxes will be billed by us directly to such tendering holder.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
existing notes, as reflected in our accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by us upon the consummation of the exchange offer. The expenses of
the exchange offer will be amortized by us over the term of the exchange notes.
Federal Income Tax Consequences
The exchange of exchange notes for existing notes pursuant to the
exchange offer should not be treated as an "exchange" for United States federal
income tax purposes because the exchange notes should not be considered to
differ materially in kind or extent from the existing notes. Rather, the
exchange notes received by a United States holder should be treated as a
continuation of the existing notes in the hands of such holder. As a result,
there should be no United States federal income tax consequences to United
States holders exchanging existing notes for exchange notes pursuant to the
exchange offer.
Consequences of Not Exchanging Existing Notes
Participation in the exchange offer is voluntary. Holders of the
existing notes are urged to consult their financial and tax advisors in making
their own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered existing notes pursuant to the terms of, this exchange offer,
we will have fulfilled a covenant contained in the terms of the registration
rights agreement. Holders of the existing notes who do not tender their
certificates in the exchange offer will continue to hold such certificates and
will be entitled to all the rights, and subject to the limitations applicable
thereto, under the indenture, except for any such rights under the registration
rights agreement that by their term terminate or cease to have further effect as
a result of the making of this exchange offer. See "Description of the Notes."
All untendered existing notes will continue to be subject to the restrictions on
transfer set forth in the indenture. To the extent that existing notes are
tendered and accepted in the exchange offer, the trading market for untendered
existing notes could be adversely affected.
We may in the future seek to acquire untendered existing notes in the
open market or through privately negotiated transactions, through subsequent
exchange offers or otherwise. We intend to make any such acquisitions of
existing notes in accordance with the applicable requirements of the Exchange
Act, and the rules and regulations of the SEC thereunder, including Rule 14e-1,
to the extent applicable. We have no present plan to acquire any existing notes
that are not tendered in the exchange offer or to file
31
a registration statement to permit resales of any existing notes that are not
tendered pursuant to the exchange offer.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive existing notes in like principal amount which are
identical in all material respects to the exchange notes. The exchange notes,
however, will be issued in a transaction registered under the Securities Act and
hence will not bear legends restricting the transfer thereof. In addition,
certain provisions relating to an increase in the stated interest rate on the
existing notes provided for under certain circumstances will be eliminated. The
existing notes surrendered in exchange for exchange notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the exchange notes
will not result in a change in our indebtedness.
32
CAPITALIZATION
The following table sets forth our historical capitalization as of
January 31, 2002, and our capitalization of such date, adjusted for the
consummation of the Jantzen acquisition and the offering of the existing notes.
This table should be read in conjunction with our consolidated financial
statements and notes thereto, and the Unaudited Pro Forma Condensed Combined
Financial Information and Notes thereto included elsewhere in this prospectus.
January 31, 2002 January 31, 2002
---------------- ----------------
Historical As Adjusted
---------- -----------
(in millions)
Cash and cash equivalents ........................ $ 1.3 $ 11.2
Total debt:
Senior credit facility ...................... 21.8 --
Senior subordinated notes ................... 99.1 99.1
Notes offered hereby ........................ -- 55.6
------------- -----------
Total debt(a) ........................... 120.9 154.7
------------- -----------
Total stockholders' equity ....................... 87.2 87.2
------------- -----------
Total capitalization(b) ................. $ 208.1 $ 241.9
============= ===========
________________________
(a) We have entered into a synthetic lease with an unaffiliated third
party. We have an obligation to repay $14.5 million under the synthetic
lease on June 30, 2002, which amount is not included in the total debt.
(b) Total capitalization equals total debt plus total stockholders' equity.
33
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following sets forth Perry Ellis' Unaudited Pro Forma Condensed Combined
Financial Information as of and for the fiscal year ended January 31, 2002,
giving effect to the Jantzen acquisition under the "purchase" method of
accounting, the offering of the existing notes and repayment of the senior
credit facility. Perry Ellis' Unaudited Pro Forma Condensed Combined Balance
Sheet Information presents the Jantzen acquisition, the offering of the existing
notes and repayment of the senior credit facility, each as if they had been
consummated on January 31, 2002. Perry Ellis' Unaudited Pro Forma Condensed
Combined Income Statement Information presents the Jantzen acquisition, the
offering of the existing notes and the repayment of the senior credit facility,
each as if they had been consummated on February 1, 2001. The Unaudited Pro
Forma Condensed Combined Financial Information of the combined companies are
presented for illustrative purposes only, and therefore do not purport to
present the financial position or results of operations of Perry Ellis had the
Jantzen acquisition, the offering of the existing notes and repayment of the
senior credit facility occurred on the dates indicated, nor are they necessarily
indicative of the results of operations which may be expected to occur in the
future.
The historical financial information for Perry Ellis and Jantzen has been
derived from the respective audited financial statements. The pro forma
adjustments relating to the acquisition and integration of Jantzen represent
Perry Ellis' preliminary determination of these adjustments and are based upon
available information and certain assumptions Perry Ellis considers reasonable
under the circumstances. Final amounts could differ from those set forth herein.
The pro forma adjustments do not include additional cost savings that Perry
Ellis believes will be realized through the combination of the two companies.
The Jantzen acquisition did not include working capital related to the 2002
product lines (primarily accounts receivable and inventories) and real estate
assets.
34
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
BALANCE SHEET
Year Ended January 31, 2002
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------
Historical (1) Pro forma
-------------------- -----------------------------
Perry Ellis Jantzen Adjustments (2) Combined
----------- ------- --------------- --------
ASSETS
Cash $ 1,304 $ 445 $ 9,421 (a) $ 11,170
Receivables, net 50,370 11,536 (11,536) (b) 50,370
Inventories 45,409 23,456 (21,265) (c) 47,600
Intangible assets, net 117,939 17,737 6,615 (d) 142,291
Other assets 19,039 14,231 (12,022) (e) 21,248
-------- -------- -------- --------
Total Assets $234,061 $ 67,405 $(28,787) $272,679
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities $ 25,415 $ 14,672 $ (9,898) (f) $ 30,189
Senior credit facility 21,756 -- (21,756) (g) --
Senior subordinated notes payable, net 99,072 -- -- 99,072
Notes offered hereby -- -- 55,600 (h) 55,600
-------- -------- -------- --------
Total Liabilities 146,243 14,672 23,946 184,861
Minority interest 614 -- -- 614
Stockholders' equity 87,204 52,733 (52,733) (i) 87,204
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity $234,061 $ 67,405 $(28,787) $272,679
======== ======== ======== ========
See Notes to Unaudited Pro Forma Condensed Combined Financial Information.
35
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INCOME STATEMENT
Year Ended January 31, 2002
(Dollars in Thousands Except Per Share Data)
------------------------------------------------------------------------------------------------
Historical (1) Pro forma
----------------------- ------------------------------
Perry Ellis Jantzen Adjustments (3) Combined
----------- --------- --------------- --------
Net sales $ 253,034 $ 94,159 $ (23,777) (a) $323,416
Royalty income 26,681 1,683 -- 28,364
--------- --------- --------- --------
Total revenues 279,715 95,842 (23,777) 351,780
Cost of sales 191,601 73,007 (20,838) (b) 243,770
--------- --------- --------- --------
Gross profit 88,114 22,835 (2,939) 108,010
Selling, general and
administrative expenses 63,916 33,282 (5,848) (c) 91,350
--------- --------- --------- --------
Operating income (loss) 24,198 (10,447) 2,909 16,660
Interest expense (income) 13,550 (41) 1,782 (d) 15,291
--------- --------- --------- --------
Income (loss) before provision
for income taxes 10,648 (10,406) 1,127 1,369
Income tax provision (benefit) 4,040 (3,782) 427 (e) 685
--------- --------- --------- --------
Net income (loss) $ 6,608 $ (6,624) $ 700 $ 684
========= ========= ========= ========
Earnings per share
Basic $ 0.105
========
Diluted $ 0.105
========
See Notes to Unaudited Pro Forma Condensed Combined Financial Information.
36
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(Dollars in Thousands)
(1) The year ended January 31, 2002 is Perry Ellis' historical financial
reporting period. For the pro forma year ended January 31, 2002, Jantzen
financial information has been included for the twelve months ended
December 29, 2001, due to Jantzen historically reporting on fiscal years
ending on the Saturday closest to the end of December. Perry Ellis believes
the effect of the difference in these reporting periods is not significant,
and therefore is not reflected in the Unaudited Pro Forma Condensed
Combined Financial Information.
(2) The Jantzen purchase price was $23,978, excluding assumed liabilities of
$1,957 and acquisition costs of $1,073. The purchase price and the purchase
price allocation is calculated as follows:
Purchase price determination:
Net purchase price $ 23,978
Liabilities assumed and expenses incurred in
connection with the acquisition 3,030
------------
Gross purchase price $ 27,008
============
Purchase price allocation:
Inventories $ 2,191
Machinery and equipment 465
Trademarks 24,352
------------
Gross purchase price $ 27,008
============
For purposes of preparing the Unaudited Pro Forma Condensed Combined
Balance Sheet, the Jantzen assets acquired and liabilities assumed have
been recorded at their estimated fair values. A final determination of the
required purchase accounting adjustments and of the fair value of the
assets and liabilities of Jantzen acquired or assumed has not yet been
made. Accordingly, the purchase accounting adjustments made in connection
with the development of the unaudited pro forma condensed combined
financial information reflect Perry Ellis' best estimate based upon
currently available information.
37
As of
January 31,
2002
(a) Adjustments to cash:
Elimination of Jantzen cash not acquired $ (445)
Notes offered hereby, net of discounts 55,600
Repayment of senior credit facility (21,756)
Acquisition of Jantzen (23,978)
--------
Total adjustments to cash $ 9,421
--------
(b) Adjustment to receivables, net:
Elimination of Jantzen receivables not acquired $(11,536)
--------
(c) Adjustment to inventories:
Elimination of Jantzen inventories not acquired. Perry Ellis acquired all
inventories held for the 2003 season with a fair value of $2,191 $(21,265)
--------
(d) Adjustments to intangible assets, net:
Elimination of Jantzen intangible assets not acquired $(17,737)
Purchase price allocated to Jantzen trademark 24,352
--------
Total adjustments to intangibles, net $ 6,615
--------
(e) Adjustments to other assets:
Elimination of Jantzen other assets not acquired $(14,231)
Purchase price allocated to property and equipment acquired from Jantzen 465
Deferred financing costs related to the Notes offered hereby 1,744
--------
Total adjustments to other assets $(12,022)
--------
(f) Adjustments to accounts payable and other liabilities:
Elimination of Jantzen liabilities not assumed $(14,672)
Accrual for severance costs assumed from Jantzen 1,957
Accrual for deferred financing and acquisitions costs 2,817
--------
Total adjustments to accounts payable and other liabilities $ (9,898)
--------
(g) Adjustment to senior credit facility:
Repayment of senior credit facility $(21,756)
--------
(h) Adjustment to notes offered hereby:
Notes offered hereby, net of discounts $ 55,600
--------
(i) Adjustment to stockholders' equity:
Elimination of Jantzen equity $(52,733)
--------
(3) The Pro Forma Combined Condensed Income Statement Data for the year ended
January 31, 2002 present the effects of the Jantzen acquisition, the
offering of the existing notes and repayment of the senior credit facility,
in each case as if they occurred as of the beginning of such period,
including:
38
For the
year ended
January 31,
2002
(a) Adjustment to net sales:
Elimination of sales related to merchandise sold to retail customers through
an affiliated chain of factory outlet stores owned by VF Corporation. The
retail distribution channel was not acquired by Perry Ellis $(23,777)
--------
(b) Adjustment to cost of sales:
Elimination of cost of sales related to merchandise sold to retail
customers through an affiliated chain of factory outlet stores owned
by VF Corporation. The retail distribution channel was not acquired by
Perry Ellis $(20,838)
--------
(c) Adjustments to selling, general and administrative expenses:
Elimination of selling and distribution expenses related to merchandise
sold to retail customers through an affiliated chain of factory outlet stores
owned by VF Corporation. The retail distribution channel was not acquired
by Perry Ellis $ (4,993)
Amortization of deferred financing costs related to the Notes offered hereby 249
Reductions of depreciation expense on property, plant and equipment not
acquired by Perry Ellis (1,104)
--------
Total adjustments to selling, general and administrative expenses $ (5,848)
--------
(d) Adjustments to interest expense:
Estimated interest expense associated with Notes offered hereby $ 5,415
Estimated effect on interest expense of the interest rate swap entered into
concurrently with the notes offered hereby (2,148)
Estimated savings on interest expense due to the repayment on the senior
credit facility (1,485)
--------
Total adjustments to interest expense $ 1,782
--------
(e) Adjustment to the provision for income taxes at an effective rate of 37.9% $ 427
--------
39
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share data)
The following table presents selected financial and operating data of
Perry Ellis and the audited financial statements of Jantzen. The historical
financial data should be read in conjunction with our consolidated financial
statements and related notes thereto appearing elsewhere herein and the combined
financial statements and notes thereto of Jantzen appearing elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Certain amounts in prior fiscal years have been reclassified to
conform to the current year presentation.
Fiscal Year Ended January 31,
------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
Perry Ellis Historical Income Statement Data:
Net sales ........................................ $190,689 $221,347 $229,549 $261,626 $253,034
Net royalty income ............................... 4,032 3,057 22,840 25,790 26,681
-------- -------- -------- -------- --------
Total revenues ................................... 194,721 224,404 252,389 287,416 279,715
Cost of sales .................................... 145,991 166,198 171,413 200,884 191,601
-------- -------- -------- -------- --------
Gross profit ..................................... 48,730 58,206 80,976 86,532 88,114
Selling, general and administrative expenses ..... 34,137 39,478 44,480 52,147 57,171
Depreciation and amortization .................... 1,748 2,161 5,181 6,130 6,662
-------- -------- -------- -------- --------
Operating income ................................. 12,845 16,567 31,315 28,255 24,281
Interest expense ................................. 2,782 3,494 13,905 15,766 13,550
-------- -------- -------- -------- --------
Income before minority interest and income tax
provision .................................... 10,063 13,073 17,410 12,489 10,731
Minority interest ................................ - - - - 83
Income taxes ..................................... 2,885 4,491 6,530 4,663 4,040
-------- -------- -------- -------- --------
Net income ....................................... $ 7,178 $ 8,582 $ 10,880 $ 7,826 $ 6,608
======== ======== ======== ======== ========
Net income per share:
Basic ........................................ $ 1.10 $ 1.29 $ 1.62 $ 1.17 $ 1.01
Diluted ...................................... $ 1.08 $ 1.27 $ 1.59 $ 1.16 $ 1.01
Weighted average number of shares outstanding:
Basic ........................................ 6,541 6,674 6,726 6,689 6,517
Diluted ...................................... 6,666 6,770 6,857 6,745 6,535
Balance Sheet Data (at year end):
Working capital .................................. 66,166 71,300 70,651 88,879 60,932
Total assets ..................................... 101,650 108,958 224,873 243,113 234,061
Total debt (a) ................................... 39,658 33,511 128,270 137,066 120,828
Total stockholders' equity ....................... 55,155 64,946 76,020 82,879 87,204
40
Fiscal Year Ended January 31,
------------------------------------------------------------------
1998 1999 2000 2001 2002
------- -------- -------- -------- --------
Perry Ellis Historical
Other Financial Data and Ratios:
EBITDA (b) ................................. 14,593 18,728 36,496 34,385 30,860
Cash flows from operations ................. (3,101) 14,341 14,047 (2,112) 22,375
Cash flows from investing .................. (4,555) (10,240) (104,091) (5,434) (3,021)
Cash flows from financing .................. 7,910 (4,938) 90,097 7,665 (18,319)
Capital expenditures ....................... 3,828 4,005 2,332 2,712 2,922
Ratio of earnings to fixed charges (c) ..... 4.1x 4.2x 2.2x 1.8x 1.4x
Fiscal Year Ended
-------------------------------------------------------------------------
January 1, 2000 December 30, 2000 December 29, 2001
-------------------- ---------------------- ----------------------
Jantzen Historical
Income Statement Data:
Net sales ..................................... $ 140,331 $ 111,524 $ 94,159
Net royalty income ............................ 1,740 1,055 1,683
-------------------- ---------------------- ----------------------
Total revenues ................................ 142,071 112,579 95,842
Cost of sales ................................. 103,652 72,033 73,007
Selling, general and administrative
expenses ...................................... 41,180 35,664 32,611
Amortization .................................. 684 684 684
-------------------- ---------------------- ----------------------
Operating (loss) income ....................... (4,075) 4,198 (10,460)
Interest income ............................... 20 15 41
Miscellaneous, net ............................ (182) (405) (13)
-------------------- ---------------------- ----------------------
(Loss) income before income taxes and
cumulative effect of change
in accounting principles .................... (3,873) 4,618 (10,406)
Income taxes .................................. (1,356) 1,789 (3,782)
-------------------- ---------------------- ----------------------
(Loss) income before cumulative effect of
change in accounting principle .............. (2,517) 2,829 (6,624)
Cumulative effect on prior years of
change in accounting principles, net of
income taxes ................................ -- (124) --
-------------------- ---------------------- ----------------------
Net (loss) income ............................. $ (2,517) $ 2,705 $ (6,624)
==================== ====================== ======================
Balance Sheet Data (at year end):
Working capital ............................... N/A 29,296 29,349
Total assets .................................. N/A 68,196 67,405
Total debt .................................... N/A 13,718 14,672
Total stockholders' equity .................... N/A 54,478 52,733
Other Financial Data and Ratios:
EBITDA (b) .................................... (1,376) 5,917 (8,463)
Cash flows from operations .................... 593 391 529
Cash flows from investing ..................... (634) (604) (325)
Cash flows from financing ..................... -- -- --
Capital expenditures .......................... 634 604 325
_____________________________
41
a) Total debt includes balances outstanding under senior credit
facilities, long-term debt and current portion of long-term debt.
b) EBITDA represents net income before taking into consideration interest
expense, income tax expense, depreciation expense and amortization
expense. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and does not represent cash
flow from operations. Accordingly, do not regard this figure as an
alternative to cash flows as a measure of liquidity. We believe that
EBITDA is widely used by analysts, investors and other interested
parties in our industry but is not necessarily comparable with
similarly titled measures for other companies.
c) For purposes of computing this ratio, earnings consist of earnings
before income taxes including minority interest and fixed charges.
Fixed charges consist of interest expense, amortization of deferred
debt issuance costs and the portion of rental expense of our synthetic
lease deemed representative of the interest factor.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
We generate revenues from two primary sources: sales of our products
and licensing of trademarks. The following table sets forth, for the periods
indicated, selected items in our consolidated statements of income expressed as
a percentage of total revenues:
Fiscal Year Ended January 31,
-------------------------------------
2000 2001 2002
-------- -------- --------
Net sales 91.0% 91.0% 90.5%
Royalty income 9.0% 9.0% 9.5%
-------- -------- --------
Total revenues 100.0% 100.0% 100.0%
Cost of sales 67.9% 69.9% 68.5%
-------- -------- --------
Gross profit 32.1% 30.1% 31.5%
Selling, general and administrative expenses 17.6% 18.1% 20.4%
Depreciation and amortization 2.1% 2.1% 2.4%
-------- -------- --------
Operating income 12.4% 9.9% 8.7%
Interest expense 5.5% 5.5% 4.9%
-------- -------- --------
Income before minority interest and
income taxes 6.9% 4.4% 3.8%
Minority interest - - -
Income tax provision 2.6% 1.6% 1.4%
-------- -------- --------
Net income 4.3% 2.8% 2.4%
======== ======== ========
Fiscal 2002 as Compared to Fiscal 2001
Total revenues. Total revenues consist of net sales and royalty income.
Total revenue decreased $7.7 million or 2.7% to $279.7 million in fiscal 2002
from $287.4 million in the prior year. The decrease was due to a decrease in net
sales of $8.6 million offset by an increase in royalty income of $0.9 million as
described below.
Net sales. Net sales decreased $8.6 million or 3.3% to $253.0 million
in fiscal 2002 from $261.6 million in the comparable period last year. The
decrease is primarily attributable to three factors. First, shipments to K-Mart
Corporation were lower in the fourth quarter of fiscal 2002 due to K-Mart's
financial difficulties during the year and its bankruptcy filing in January
2002. This decrease totaled approximately $3.0 million. Second, we experienced a
short-term delay in receipt of some product orders of approximately $2.0
million, which we previously planned to ship in late January, because a
Miami-based bank, which was our primary source of letter of credit financing,
was seized by federal regulators. We have since been able to obtain adequate
letter of credit facilities with other financial institutions.
43
Third, general economic conditions, which adversely impacted retail sales,
resulted in lower than expected sell through and reorder rates from retailers.
Royalty income. Royalty income was $26.7 million in fiscal 2002, a $0.9
million or 3.5% increase over the prior year amount of $25.8 million. The
increase was due to two one-time accelerated payments for early termination of
licensing agreements. Excluding accelerated payments by two licensees for early
contract terminations during fiscal 2002 totaling a net of $1.6 million,
royalties decreased by $0.7 million last year primarily due to the general
economic conditions, which resulted in certain licensees experiencing a decrease
in their sales volume.
Cost of sales. Cost of sales for fiscal 2002 of $191.6 million was $9.3
million, or 4.6% lower than the prior year amount of $200.9 million due mainly
to the decrease in net sales as described above. As a percent of revenues, cost
of sales decreased from 69.9% in fiscal 2001 to 68.5% in fiscal 2002, due
primarily to a change in our sales mix between private label and branded label
sales. Gross profit was $88.1 million in fiscal 2002 or 31.5% of revenues as
compared to $86.5 million or 30.1% of revenues in the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $57.2 million in fiscal 2002, as compared to $52.1
million in the prior year, an increase of $5.1 million or 9.8%. As a percent of
total revenues, selling, general and administrative expenses increased from
18.1% in fiscal year 2001 to 20.4% in fiscal 2002. The increase was due
primarily to a charge of $1.4 million resulting from the K-Mart bankruptcy,
accounting for the consolidation of our new Canadian joint venture with expenses
of $0.9 million in fiscal 2002, expenses incurred by our newly formed European
subsidiary of $1.6 million and expenses incurred by our Sawgrass Mills outlet
store of $0.6 million.
Depreciation and amortization expenses. Depreciation and amortization
expense in fiscal 2002 was $6.7 million or 2.4% of revenues as compared to $6.1
million or 2.1% of revenues in fiscal 2001. The increase of $0.6 million in
fiscal 2002 as compared to the prior year was due primarily to a full year
effect of amortization of the Pro Player and Mondo di Marco trademarks acquired
in fiscal 2001.
Interest expense. Interest expense in fiscal 2002 was $13.6 million as
compared to $15.8 million in the prior year. The decrease is primarily
attributable to the decrease in borrowings under the senior credit facility,
favorable interest rates and the recognition of $0.7 million in income derived
from an interest rate swap agreement entered into by us during the third quarter
of fiscal 2002.
Income taxes. Income taxes in fiscal 2002 were $4.0 million, a $0.7
million decrease as compared to $4.7 million in fiscal 2001. The decrease was
due primarily to a decrease in pretax income. The effective tax rates for fiscal
2001 and 2002 were 37.5% and 37.9%, respectively.
Net income. Net income for fiscal 2002 decreased $1.2 million or 15.4%
from fiscal 2001, as a result of the items discussed above.
Fiscal 2001 as Compared to Fiscal 2000
Total revenues. Total revenues consist of net sales and royalty income.
Total revenue increased $35.0 million or 13.9% to $287.4 million in fiscal 2001
from $252.4 million in fiscal 2000. The increase was due to increases in both
net sales of $32.1 million and royalty income of $3.0 million as a result of
internal growth and acquisitions.
Net sales. Net sales increased $32.1 million or 14.0% to $261.6 million
in fiscal 2001 from $229.5 million in the comparable period last year, due
mainly to private label programs with Wal-Mart and J.C. Penney. Sales from
private label products increased to 34% of the net sales mix in fiscal 2001
44
from 21% in fiscal 2000. Decreases in branded sales of Natural Issue and
Munsingwear during fiscal 2001 were somewhat offset by increases in sales of
PING, Grand Slam and other brands.
Royalty income. Royalty income was $25.8 million for fiscal 2001, a
$3.0 million or 12.9% increase over the prior year amount of $22.8 million. The
increase was primarily attributable to the acquisitions of the Perry Ellis, John
Henry and Manhattan brands, which had a full year of operations in fiscal 2001
and only ten months of operations in the fiscal 2000.
Cost of sales. Cost of sales for fiscal 2001 of $200.9 million was
$29.5 million or 17.2% higher than the prior year amount of $171.4 million due
mainly to the increase in net sales. As a percentage of revenues, cost of sales
increased from 67.9% in fiscal 2000 to 69.9% in fiscal 2001, due primarily to
our increased net sales mix attributable to private label product as well as
markdown pressures from some of our retailers. Gross profit was $86.5 million in
fiscal 2001, or 30.1% of total revenue as compared to $81.0 million, or 32.1% of
total revenue for the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $52.1 million in fiscal 2001, as compared to $44.5
million in the prior year, an increase of $7.6 million or 17.1%, due primarily
to increases in payroll, advertising and facility costs to support the increase
in revenues from internal growth and acquisitions. As a percentage of total
revenues, selling, general and administrative expenses increased from 17.7% in
fiscal 2000 to 18.1% in fiscal 2001 due mainly to a full year of activities in
licensing operations, other increases such as payroll, advertising and facility
costs to support the revenue increase, as well as startup cost for the launch of
the Perry Ellis America brand.
Depreciation and amortization expenses. Depreciation and amortization
expense for fiscal 2001 was $6.1 million or 2.1% of total revenues, as compared
to $5.2 million or 2.1% of total revenues in fiscal 2000. The increase of $0.9
million in fiscal 2001 as compared to the prior year was due to a full year of
amortization of intangible assets from the acquisitions of the Perry Ellis, John
Henry and Manhattan brands in fiscal 2001 as compared to ten months of
amortization in fiscal 2000, as well as the amortization of intangible assets
from the purchase of the Pro Player and Mondo di Marco trademarks in fiscal
2001.
Interest expense. Interest expense for fiscal 2001 was $15.8 million as
compared to $13.9 million in fiscal 2000. The increase is due to the additional
indebtedness incurred as a result of the acquisitions of the Perry Ellis, John
Henry and Manhattan brands in fiscal 2000, and to a lesser extent the effect of
floating rates increases in interest expense associated with our senior credit
facility during fiscal 2001.
Income taxes. Income taxes during fiscal 2001 were $4.7 million, a $1.8
million decrease as compared to $6.5 million in fiscal 2000. The decrease was
due primarily to a decrease in pretax income. The effective tax rates for fiscal
2001 and 2000 were relatively consistent at 37.5% and 37.4%, respectively.
Net income. Net income for fiscal 2001 decreased $3.1 million or 28.4%
from fiscal 2000, as a result of the items discussed above.
Liquidity and Capital Resources
We rely primarily upon cash flow from operations and borrowings under
our senior credit facility to finance operations and expansion. Net cash
provided by operating activities was $22.4 million in fiscal 2002, as compared
to $2.1 million used in operations in fiscal 2001, and $14.0 million provided by
operations in fiscal 2000. The $22.4 million of cash provided by operations in
fiscal 2002 as compared to the $2.1 million used in operations in the prior year
is primarily attributable to earnings and to a decrease in accounts receivable
of $7.0 million since the beginning of the year due to increased cash
collections and lower sales in January 2002 and an increase in inventory of $1.5
million due to the timing of receipts
45
of goods at January 31, 2002 and levels of replenishment inventory. In fiscal
2001, net cash used in operating activities was $2.1 million, primarily
attributable to earnings and to a decrease in accounts receivable and inventory
of $13.2 million and $7.6 million, respectively.
In fiscal 2002, net cash used in investing activities was $3.0 million,
principally due to purchases of property and equipment. Net cash used in
investing activities for fiscal 2001 was $5.4 million, mainly due to the
acquisitions of the Pro Player and Mondo di Marco brands, which totaled $3.5
million, net and $2.7 million in purchases of property and equipment.
In fiscal 2002, net cash used in financing activities of $18.3 million
was due mainly to payments made under our senior credit facility of $16.1
million and purchase of treasury stock of $2.2 million. The net decrease in
borrowings under the senior credit facility resulted primarily from lower
accounts receivable and lower levels of inventories. In fiscal 2001, net cash
provided by financing activities was $7.7 million resulting from the net
increased borrowings of $8.6 million under our senior credit facility offset by
the purchases of treasury stock of $1.0 million. The net decrease in borrowings
under our senior credit facility in fiscal 2001 resulted from $19.9 million in
borrowings primarily due to the increases in accounts receivable and
inventories, offset by the $11.3 million repayment of the term loan portion of
our senior credit facility.
Capital expenditures for fiscal 2002 totaled $2.9 million and consisted
primarily of purchases of office equipment, leasehold improvements and computer
software. Capital expenditures of $2.7 million for fiscal 2001 consisted
primarily of purchases of office equipment, warehouse machinery and computer
software.
Senior Credit Facility
In March 2002, we amended our senior credit facility with our group of
banks. As amended, the senior credit facility now provides us with a revolving
credit line up to an aggregate amount of $60.0 million. This amendment was done
concurrently with the sale of $57.0 million of senior secured notes. The
indebtedness under the senior credit facility ranks pari passu with our senior
secured notes. The following is a description of the terms of the senior credit
facility, as amended, and does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the senior
credit facility. The outstanding balance under our senior credit facility was
$21.8 million on January 31, 2002.
Certain Covenants. The senior credit facility contains certain
covenants which require us to maintain certain financial ratios, a minimum net
worth and which restricts the payment of dividends. As of January 31, 2002, we
were not in compliance with a certain funded indebtedness to EBITDA financial
covenant of our senior credit facility. The senior lenders of our bank group
under our senior credit facility have waived the noncompliance of the financial
covenant in connection with the March 2002 amendment of the senior credit
facility.
The senior credit facility expires on October 1, 2002 and as such we
have classified our senior credit facility as current in the consolidated
balance sheet as of January 31, 2002. We are currently in active discussions to
renew or replace our existing senior credit facility. Management believes this
discussion will be successfully completed prior to the October 1, 2002
expiration date.
Borrowings Base. Borrowings under the senior credit facility are
limited under its terms to a borrowing base calculation, which generally
restricts the outstanding balances to the sum of (a) 80.0% of eligible
receivables plus (b) 90.0% of our eligible factored accounts receivable plus (c)
60.0% of eligible inventory minus (d) the full amount of all outstanding letters
of credit issued pursuant to the senior credit facility which are not fully
secured by cash collateral and (e) $9.0 million synthetic lease reserve, which
must be maintained until the expiration date of our synthetic lease in June
2002.
46
The maximum amount of borrowing under the senior credit facility
attributable to eligible inventory is $30.0 million.
Interest. Interest on the principal balance under the senior credit
facility shall accrue, at our option, at either a) our bank prime lending rate
with adjustments depending upon our ratio of indebtedness to EBITDA at the time
of borrowing or b) 2.75% above the rate quoted by our bank as the average London
interbank offered rate ("LIBOR") for 1, 2, 3 and 6-month Eurodollar deposits
with adjustments depending upon our ratio of indebtedness to EBIDTA at the time
of borrowing.
Security. As security for the indebtedness under the senior credit
facility, we granted the lenders a first priority security interest in
substantially all of our existing and future assets, including, without
limitation, accounts receivable, inventory deposit accounts, general intangibles
and equipment. Lenders under the senior credit facility have a second priority
security interest in our trademarks.
Letters of Credit
As of January 31, 2002, we maintained two letter of credit facilities
totaling $42.0 million. Each letter of credit is secured by the consignment of
merchandise in transit under that letter of credit. As of January 31, 2002,
there was $31.0 million available under existing letter of credit facilities.
Subsequent to January 31, 2002, we added two additional letter of credit
facilities, totaling $25.0 million and reduced the availability under one of its
two existing letter of credit facilities by $5.0 million. As of April 15, 2002,
we had four letter of credit facilities totaling $62.0 million.
Senior Secured Notes
On March 22, 2002, we completed a private offering of the existing
notes. The proceeds of the private offering were used to fund the Jantzen
acquisition, to reduce the amount of outstanding debt under the senior credit
facility and as additional working capital. See "Description of the Notes."
Synthetic Lease
The synthetic lease, as amended in March 2002, expires in June 2002 and
we have an obligation to pay $14.5 million at the termination of the term. The
synthetic lease was entered into with a group of financial institutions to
finance the acquisition and construction of our corporate headquarters. The
financial institutions assumed our obligation to purchase the facility and, in
turn, leased the facility to us. The obligations under the synthetic lease are
secured by a security interest in substantially all our existing and future
assets, whether tangible or intangible, including, without limitation, accounts
receivable, inventory deposit accounts, general intangibles, intellectual
property and equipment. We do not anticipate renewing the synthetic lease. We
have already obtained a commitment for a conventional mortgage for the property.
In addition to customary covenants found in secured lending agreements,
the synthetic lease also contains various restrictive financial and other
covenants including, without limitation, (a) prohibitions on the incurrence of
additional indebtedness or guarantees, (b) restrictions on the creation of
additional liens, (c) certain limitations on dividends and distributions or
capital expenditures by us, (d) restrictions on mergers or consolidations, sales
of assets, investments and transactions with affiliates, and (e) certain
financial maintenance tests. Such financial maintenance tests, include, among
others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a minimum
current ratio, (iii) a minimum net worth, and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, we were not in compliance with the
funded indebtedness to EBITDA financial covenant. The lessor under, and the
financial institutions which financed, the synthetic lease have waived the
noncompliance with this financial covenant.
47
Contractual Obligations and Commercial Commitments
The following tables illustrate our contractual obligations and
commercial commitments as of January 31, 2002 and include the effects of the
transactions and amendments discussed above that occurred subsequent to January
31, 2002.
-----------------------------------------------------------------------------------------------------------------
Payments Due by Period
------------------------------------------------------------------------------------
Contractual Less than 1 - 3 4 - 5 After 5
Obligations Total 1 year years years years
-----------------------------------------------------------------------------------------------------------------
Senior Secured Notes $ 100,000,000 - - $ 100,000,000 -
=================================================================================================================
Senior Subordinate Notes $ 57,000,000 - - - $ 57,000,000
=================================================================================================================
Senior Credit Facility $ 21,756,094 $ 21,756,094 - - -
=================================================================================================================
Operating Leases $ 24,654,724 $ 17,627,421 $ 3,268,977 $ 2,741,201 $ 1,017,125
=================================================================================================================
Total Contractual Cash
Obligations $ 203,410,818 $ 39,383,515 $ 3,268,977 $ 102,741,201 $ 58,017,125
=================================================================================================================
-----------------------------------------------------------------------------------------------------------------
Amount of Commitment Expiration Per Period
-------------------------------------------------------------------
Other Total
Commercial Amounts Less than 1 - 3 4 - 5 After 5
Commitments Committed 1 year years years years
-----------------------------------------------------------------------------------------------------------------
Letter of Credit $ 11,035,880 $ 11,035,880 - - -
=================================================================================================================
Stand by Letters of
Credit $ 8,250,000 $ 5,500,000 - $ 2 ,750,000 -
=================================================================================================================
Total Commercial
Commitments $ 19,285,880 $ 16,535,880 - $ 2,750,000 -
=================================================================================================================
Management believes that the combination of borrowing availability
under the amended senior credit facility, letter of credit facilities, and funds
anticipated to be generated from operating activities will be sufficient to meet
our operating and capital needs in the foreseeable future.
Derivatives Financial Instruments
We adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, effective
February 1, 2001. SFAS No. 133 requires that all derivative financial
instruments such as interest rate swap contracts and foreign exchange contracts,
be recognized in the financial statements and measured at fair value regardless
of the purpose or intent for holding them. Changes in the fair value of
derivative financial instruments are either recognized in income or
shareholders' equity (as a component of comprehensive income), depending on
whether the derivative qualifies as a hedge and is being used to hedge changes
in fair value or cash flows. The adoption of SFAS No. 133 did not have a
material effect on our financial statements.
48
During fiscal 2002, we entered into derivative financial instruments in
order to manage the overall borrowing costs associated with our senior
subordinate notes. At January 31, 2002, we had an interest rate swap agreement
with a notional amount of $40.0 million dollars maturing on April 1, 2006. The
swap is a fair value hedge as it has been designated against the senior
subordinate notes carrying a fixed rate of interest and converts such notes to
variable rate debt. The hedge qualifies for short-cut accounting and
accordingly, the interest rate swap contracts are reflected at fair value in our
consolidated balance sheet and the related portion of fixed-rate debt being
hedged adjusted for an offsetting amount with no effect on the statement of
income.
At January 31, 2002, we had an interest rate cap maturing on April 1,
2006 and a basis swap maturing on April 3, 2003, both with a notional amount of
$40.0 million. The interest rate cap hedges against increases in the variable
rate of interest paid on the interest rate swap and the basis swap decreased the
spread on the interest rate swap for 18 months. Neither of these derivatives
qualified for hedge accounting and accordingly, are reflected at fair value in
our consolidated balance sheet with the offset being recognized in income for
the current period. Interest expense for the fiscal year January 31, 2002 has
been reduced by approximately $0.7 million as a result of the recognition of
these derivatives.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
As such, some accounting policies have a significant impact on amounts reported
in these financial statements. A summary of those significant accounting
policies can be found in Note 1 to the consolidated financial statements. In
particular, judgment is used in areas such as determining the allowance for
uncollectible accounts receivable, provision for sales returns and allowances,
inventory valuations, and provisions for assets impairments on long-lived
assets.
New Accounting Pronouncements
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached
a consensus on Issue No. 01-9, "Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products)." This issue
addresses the recognition, measurement and income statement classification of
consideration from a vendor to a customer in connection with the customer's
purchase or promotion of the vendor's products. This consensus is expected to
impact revenue and expense classifications by immaterial amounts and have no
effect on reported income. In accordance with the consensus reached, we will
adopt EITF Issue No. 01-9 for its fiscal year beginning February 1, 2002.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS No. 141 also addresses the recognition and
measurement of goodwill and other intangibles assets acquired in a business
combination. We intend to apply the provisions of this pronouncement to the
Jantzen acquisition. SFAS No. 141 is not expected to have a significant effect
on our financial position or results of operation.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which changes the accounting treatment as it applies to
goodwill and other identifiable intangible assets with indefinite useful lives
from an amortization method to an impairment-only approach. Under SFAS No. 142,
proper accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in the case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date of SFAS No. 142
49
is for fiscal years beginning after December 15, 2001. We have adopted SFAS No.
142 for our fiscal year beginning February 1, 2002. In accordance with SFAS No.
142, we obtained a preliminary valuation of all of our trademarks from a
third-party independent valuation firm. Based on this preliminary valuation, we
do not expect to record any significant impairment in the value of our
trademarks upon adoption of the standard.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," it retains many of
the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations---Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The effective date
of SFAS No. 144 is for fiscal years beginning after December 15, 2001. SFAS No.
144 is not expected to have a significant effect on our financial position or
results of operation.
Forward Looking Statements
Except for the historical information contained herein, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements that involve a number of risks and
uncertainties, including the risks described elsewhere in this prospectus and
detailed from time to time in our filings with the SEC.
Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial statements represents the
potential changes in the fair value, earnings or cash flows arising from changes
in interest rates or foreign currency exchange rates. We manage this exposure
through regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. Our policy allows the use
of derivative financial instruments for identifiable market risk exposure,
including interest rate and foreign currency fluctuations. We do not enter into
derivative financial contracts for trading or other speculative purposes except
for as discussed below.
In August 2001, we entered into interest rate swap, option and interest
rate cap agreements (the "August Swap Agreement"), for an aggregate notional
amount of $40.0 million in order to minimize our debt servicing costs associated
with our $100.0 million of 12 1/4% senior subordinated notes due April 1, 2006.
The August Swap Agreement was subsequently modified through a basis swap entered
into in October 2001 (the "October Swap Agreement," and collectively with the
August Swap Agreement, the "Swap Agreement"). The Swap Agreement is scheduled to
terminate on April 1, 2006. Under the Swap Agreement, we are entitled to receive
semi-annual interest payments on October 1, and April 1, at a fixed rate of 12
1/4% and are obligated to make semi-annual interest payments on October 1, and
April 1, at a floating rate based on the 6-month LIBOR rate plus 715 basis
points for the 18 months period October 1, 2001 through March 31, 2003 (per
October Swap Agreement); and 3-month LIBOR rate plus 750 basis point for the
period April 1, 2003 through April 1, 2006 (per the August Swap Agreement). The
Swap Agreement has optional call provisions with trigger dates of April 1, 2003,
April 1, 2004 and April 1, 2005, which contain certain premium requirements in
the event the call is exercised.
As of January 31, 2002, the fair value of the August 2001 swap and the
option contracts recorded on our Consolidated Balance Sheet was ($0.08) million
and ($0.16) million, respectively. The interest rate cap and basis swap refer
to, "Management's Discussion and Analysis of Financial Conditions," did not
qualify for hedge accounting treatment under the SFAS No. 133, resulting in $0.7
million reduction of recorded interest expense on the Statement of Operations
for the fiscal year ended January 31, 2002.
50
As a result of our hedging and interest rate risk policies, a 25 basis
point change in interest rates would have impacted our net earnings by
approximately $62,700 and $91,500 during fiscal 2002 and 2001, respectively.
In conjunction with the March 22, 2002 offering of $57.0 million of 9
1/2% senior secured notes due March 15, 2009, we entered into interest rate swap
and option agreements for an aggregate notional amount of $57.0 million in order
to minimize the debt servicing costs associated with the notes. The swap
agreement is scheduled to terminate on March 15, 2009. Under the swap agreement,
we are entitled to receive semi-annual interest payments on September 15 and
March 15 at a fixed rate of 9 1/2% and are obligated to make semi-annual
interest payments on September 15 and March 15 at a floating rate based on the
three-month LIBOR rate plus 369 basis points for the period from March 22, 2002
through March 15, 2009. The swap agreement has optional call provisions with
trigger dates of March 15, 2005, March 15, 2006 and March 15, 2007, which
contain premium requirements in the event the call is exercised.
Our current exposure to foreign exchange risk is not significant and
accordingly, we have not entered into any transactions to hedge against those
risks.
51
BUSINESS
Overview
We are a leading licensor, designer and marketer of a broad line of
high quality men's sportswear, including sport and dress shirts, golf
sportswear, sweaters and casual and dress pants and shorts, which we sell to all
levels of retail distribution. We license our trademark portfolio domestically
and internationally for apparel and other products that we do not sell,
including dress sportswear, outerwear, fragrances and accessories. Beginning in
mid fiscal 2003 we plan to design, license and market women's, girl's, men's and
boy's swimwear under the Jantzen and Nike brands and women's swimwear under the
Tommy Hilfiger brand. We have built a broad portfolio of brands through
selective acquisitions and the establishment of our own brands over our 35-year
operating history. Our distribution channels include regional, national and
international, mass merchants, chain stores, department stores and specialty
stores throughout the United States, Puerto Rico and Canada. Our largest
customers include Wal-Mart, J.C. Penney, Target, Mervyn's, Kohl's and Sears
Roebuck. We currently use approximately 100 independent suppliers, located in
the Far East, other parts of Asia, and Central America, to source our products.
Through acquisition of brands and internal growth, we have experienced
significant overall growth in recent years. From fiscal 1997 to fiscal 2002, we
experienced a compound annual growth rate of 12.0% in revenues. In order to
continue to grow, we plan to selectively evaluate a number of acquisition
candidates each year.
We own or license the brand names under which most of our products are
sold. These brand names include Crossings, Cubavera, Havana Shirt Co. and
Natural Issue for casual sportswear, John Henry and Manhattan for dress casual
wear, Perry Ellis, Mondo di Marco and Andrew Fezza for dress sportswear, Perry
Ellis America for jeans wear, PING and Munsingwear for golf sportswear and Pro
Player and Nautica for activewear. We are positioned to enter the women's market
for swimwear and sportswear with the March 2002 acquisition of the Jantzen
brands. Through our "family of brands" marketing strategy, we seek to develop
and enhance a distinct brand name for each product category within each
distribution channel. We also produce goods sold under the private label program
of our various retail customers. We market our brands to a wide range of
segments, targeting consumers in specific age, income and ethnic groups.
Currently, our products are predominantly produced for the men's segment of the
apparel industry, in which fashion trends tend to be less volatile than in other
segments. The percentage of our net sales from branded products decreased to
63.0% in fiscal 2002 from 66.0% in fiscal 2001.
We also license our proprietary brands to third parties for the
manufacture and marketing of various products, some of which we do not sell,
including dress sportswear, outerwear, fragrances and accessories. In addition
to generating additional revenue for us, these licensing arrangements raise the
overall awareness of our brands.
We believe that our competitive strengths position us well to
capitalize on several trends that have affected the apparel sector in recent
years. These trends include the consolidation of the department and chain store
sectors into a smaller number of stronger retailers, which represent some of our
most important customers; the increased reliance of retailers on reliable
suppliers with design expertise and advanced systems and technology; and the
continued importance of strong brands as a source of product differentiation.
52
Jantzen Acquisition
On March 22, 2002, we completed the acquisition from subsidiaries of VF
Corporation of certain assets of the Jantzen swimwear business for approximately
$24.0 million, excluding fees related to the transaction. The Jantzen brands
have a history of over 90 years and its products are sold in upscale department
stores, mid-tier department stores, chain stores, mass merchants and specialty
shops. The acquisition was financed with a portion of the proceeds from the
$57.0 million private offering of the existing notes, which we closed
simultaneously with the acquisition.
The Jantzen assets we acquired consist primarily of the Jantzen
trademarks and tradenames, license agreements, certain equipment, other items of
personal property, showroom leases and inventory relating to the 2003 season,
which commences on July 1, 2002. As part of the Jantzen acquisition, we also
acquired the licenses for the Tommy Hilfiger brand for women's swimwear and for
the Nike brand for women's and girl's swimwear, men's and boy's racing
swimsuits, swim equipment, swimwear accessories and apparel.
In connection with the Jantzen acquisition, we entered into a lease
agreement with VF Corporation to occupy Jantzen's Portland, Oregon office
facility for an initial six-month period. In addition, we entered into a lease
agreement to occupy a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period. We also have exercised our right of first
refusal to purchase the Seneca distribution center facility, which we exercised
on May 20, 2002 at a price of $2.5 million. We anticipate closing on this
purchase in approximately 90 days.
We believe this acquisition opens up a new market for us and we plan to
build on Jantzen's reputation for high-quality swimwear. It will expand our
licensing revenues, add to our strong portfolio of brands, and allow us to
broaden our product line into new product categories, such as women's swimwear
and sportswear.
Competitive Strengths
We believe that we have the following competitive advantages in our
industry:
Portfolio of Family of Brands. We own and distribute nine major brands
(Perry Ellis, Munsingwear, Crossings, Natural Issue, John Henry, Manhattan,
Mondo di Marco, Grand Slam and Jantzen) with a total of over 41 sub-brands (such
as Penguin Sport(R) and Career Club(R)). We also design, source and market five
other major brands (Andrew Fezza, PING, Nautica, Tommy Hilfiger and Nike), which
we license under existing agreements with various expiration dates and renewal
options. We also license the Perry Ellis, John Henry, Manhattan, Natural Issue,
Pro Player, Mondo di Marco, Munsingwear and Jantzen brands to licensees for
products that we do not sell directly to retailers. These brands enjoy national
recognition in their respective sectors of the market and we believe have a
loyal consumer and retailer following. Brand recognition is critical in the
apparel industry, where strong brand names help define consumer preferences and
drive department store floor space allocation.
Strong Retailer Relationships. We believe our established relationships
with retailers at all distribution levels give us the opportunity to maximize
the selling space dedicated to our products, monitor our brand presentation and
merchandising selection, and introduce new brands and products. We have
long-standing relationships with our largest customers, which include J.C.
Penney and Sears Roebuck (more than 22 years), Federated Department Stores (15
years), Wal-Mart (13 years), Kohl's (nine years) and Target (eight years). We
believe that we have maintained these relationships as a result of our quality
brand name products and our dedication to customer service. Management, in
conjunction with our staff of sales people and commissioned agents, meets with
our major customers frequently to review product offerings, establish and
monitor sales plans, and design joint advertising and promotional campaigns. We
believe our reliable delivery times, consistent product quality and quick
response to
53
fashion trends and inventory demands allow us to meet our retailers' current
requirements. In addition, our global sourcing network, design expertise,
advanced systems and technology, and warehousing facility enhance our ability to
meet the changing and increasing needs of our retailers.
Strong Licensing Capabilities and Relationships. By actively licensing
the brands we own, we have gained significant experience in identifying
potential licensing opportunities and have established relationships with many
active licensees. Our acquisition of the Perry Ellis brand during fiscal 2000
positioned us in more retail outlets with more exposure nationally and
internationally. We believe that over the past three years we have successfully
integrated new brands into our business. We believe that our broad portfolio of
brands appeals to licensees because it gives them the opportunity to sell their
products into many different retail distribution channels. For example, a
manufacturer of men's accessories might license the Natural Issue brand to sell
to national department stores or license the Munsingwear brand to target mass
merchandisers. Further, by aligning our strengths with those of our licensees,
we have been able to enhance our sourcing capabilities, and plan our marketing
campaigns on an aggregate basis to maximize return on investment. We believe
that our licensing expertise, which is supported by a dedicated staff, will
allow us to continue marketing our brands to apparel producers effectively. We
will be bringing our experience and expertise to our Jantzen brands and expect
to position them among the key players in the swimwear and sportswear market.
World-Wide Low-Cost Sourcing Capabilities. Our global network of
suppliers enables us to purchase apparel products at competitive cost without
sacrificing quality, while at the same time reacting quickly to our retailers'
needs and maximizing production flexibility. We developed this expertise through
more than 35 years of experience in purchasing our products from suppliers
around the world. No individual supplier in fiscal 2002 accounted for more than
10.0% of our total sourcing needs. We do not have long-term arrangements with
any of our suppliers, thereby affording us greater flexibility in making
purchasing decisions with our vendor base. We currently maintain a staff of
experienced sourcing professionals, principally located in the United States,
Korea, China, and Taiwan. We made the decision during this past year to close
our office in Mexico and expand our Asian operations with the opening of a new
office in Shanghai, China. This decision was based on the growth of our Far East
sourcing and the better management of the Mexican and Latin American sourcing
through the Miami office. With the global network of ten sourcing and quality
assurance offices, we closely monitor our suppliers to maintain strict quality
standards and identify new sourcing opportunities. By sourcing our products, we
manage our inventories more effectively, and do not incur the costs of
maintaining and operating production facilities.
Design Expertise and Advanced Technology. Our in-house staff consists
of 16 senior designers, who have an average of 18 years of experience, and are
supported by a staff of 20 other design professionals. Together, they design
substantially all of our products utilizing computer-aided design technology.
The use of this technology minimizes the time-consuming and costly production of
actual sewn samples prior to customer approval. It also allows us to create
custom-designed products meeting the specific needs of our customers and
facilitates a quick response to changing fashion trends. Our computer-aided
design system was recently upgraded to allow us to enhance our design technology
and instantaneously share our designs with our suppliers globally, and react
quicker to new product.
54
Capacity for Growth. We are leveraging our recent investments in
infrastructure and our skilled personnel to accommodate future internal growth
and selected acquisitions. Our 240,000 square feet office and warehouse facility
in Miami, with approximately 170,000 square feet of warehouse space, has
positioned us to increase capacity to handle current and future growth. We
believe these facilities, two third-party warehouse facilities in California,
our two showrooms in New York and other facilities we use are sufficient to
accommodate current operations and additional personnel. With the Jantzen
acquisition we entered into a lease agreement for one-year period with a 60-day
option to acquire a portion of Jantzen's Seneca, South Carolina distribution
center facility. We have exercised our option to acquire the Seneca distribution
facility. We also own three acres of land adjacent to our facilities in Miami,
Florida, which affords us the opportunity to expand our primary warehousing and
office space when needed.
Proven Ability to Integrate Acquisitions. Since 1993, we have
selectively acquired and integrated seven major brands, which currently have
over 40 sub-brands. In assessing acquisition candidates, we selectively target
brands that we believe are under-performing and can be revitalized using our
competitive strengths. To date our most significant brand purchases have been
our acquisitions of the Munsingwear brand in fiscal 1997, the Perry Ellis, John
Henry and Manhattan brands in fiscal 2000, and the Jantzen brands in fiscal
2003. As part of an extensive integration process we:
. improved the responsiveness to market trends by applying our
design and sourcing expertise;
. communicated new positioning of the brands through various
wide-ranging marketing programs;
. continued licensing operations immediately upon acquisition
without interruption;
. solidified the management team to design and market
licensing brands;
. repositioned the brands based on our "family of brands"
strategy;
. renegotiated existing contracts and developed new licensing
agreements in new segments and markets; and
. implemented the sourcing and distribution of products
previously licensed.
We believe that we can successfully integrate additional brands into our family
of brands, revitalizing them consistent with our competitive strengths.
Experienced Management Team. Our senior management team averages nearly
20 years of experience in the apparel industry. Our management team also has
significant experience in developing and revitalizing brand names, licensing
brands; has an established reputation with retailers, the trade and the
financial community; and possesses a diverse skill base, which incorporates
brand marketing, sourcing and management information systems.
55
Business Strategy
Our "family of brands" marketing approach is designed to develop a
distinct brand for each product category within each distribution channel. For
example, we sell our golf sportswear under the Munsingwear brand to mass
merchants, under the Grand Slam brand to department stores and under the PING
brand to higher-end retailers, golf shops and resorts. By differentiating our
brands in this manner, we can better satisfy the needs of each type of retailer
by offering brands tailored to its specific distribution channel. In addition,
we believe that this strategy helps insulate us from changing retail patterns,
allows us to maintain the integrity of each distribution channel and helps
prevent brand erosion.
Our objective is to develop and enhance our brands by:
. carefully maintaining distinct distribution channels for
each brand;
. consistently designing, sourcing and marketing high quality
products;
. reinforcing the image of our brands and continuously
promoting them; and
. updating our styles to keep them current.
Controlling strong brands allows us to increase our retail base,
license these brands to third parties, develop sub-brands and grow
internationally.
To achieve our objective, we have adopted a strategy based on the
following elements:
Increase Brand Name Recognition. We intend to enhance recognition of
our brand names by promoting our brands at the retailer and consumer levels. As
part of this effort, we conduct cooperative advertising in print and broadcast
media in which various retailers feature our products in their advertisements.
We also engage in direct consumer advertising in select markets by securing
highly visible billboards and events, sponsorships, and advertising in
periodicals such as Men's Health, Maxim and Gentleman's Quarterly in association
with specific regional or national events. We will continue the Jantzen's
emphasis in print advertisements in influential fashion magazines such as In
Style, Glamour and Cosmopolitan and intend to sponsor selected athletes and
celebrities in the future. We believe these campaigns will serve to further
enhance and broaden our customer base. Licensing our brands to third parties
also serves to improve brand recognition by providing increased consumer
exposure. We have a strong presence at trade shows, such as "MAGIC" in Las
Vegas, Market Week in New York and golf shows and events throughout the country.
We also continue to maintain web sites for each of our major brands to take
advantage of opportunities created by the Internet.
Increase Distribution. We have increased the distribution of our
existing products by expanding the number of regional and national retailers
that carry our brands and gained greater penetration in the number of stores in
which each of these retailers sells our products. This increased exposure has
broadened our established reputation at the retail and consumer levels. We
selectively pursue new channels of distribution for our products, focusing on
maintaining the integrity of our products and reinforcing our image at existing
retail stores, as well as introducing our products to geographic areas and
consumer sectors that are presently less familiar with our products.
Continue to Diversify Product Line. We continue to broaden the range of
our product lines, capitalizing on the name recognition, popularity and discrete
target customer segmentation of each major brand. For example, we expanded into
dress sportswear with the licensing of the Andrew Fezza brand and high-end golf
sportswear with the licensing of the PING brand. We also entered into the jeans
wear market with the reintroduction of the Perry Ellis America brand in
department stores and expanded the Natural Issue brand in the mid-tier
department stores and chain stores. This year, we added a new brand
56
to the corporate wear (Advertising Specialty Industry) market with the licensing
of the Nautica brand for knits, woven casual shirts, fleece tops, outerwear and
headwear. For fiscal 2003 with the acquisition of Jantzen, we have entered into
a new market for us with women's swimwear and sportswear.
Adapt to Changing Marketplace. The apparel business continues to
present new challenges in changing styles, customer demands and consumer tastes,
getting goods to market, and reacting to the technologies employed by the
retailers and imposed on suppliers. By continuing to strive for improvements in
our design department we continue to develop new designs suited to the various
lifestyles we cater to. Our continuing commitment to sourcing and logistics
enables us to meet the time pressures of gearing up for the new sales seasons,
and reacting quickly to customer demands. Some examples of our ability to meet
the challenges in our business follow:
. In January 2001, we started distribution into the corporate
wear market, which is geared towards selling merchandise to
large corporations as uniforms and for promotional
activities. We diversified our internal sales structure to
better service these customers and their sales channels. We
have continued to grow the corporate wear business by
licensing the Nautica brand and integrating it into our
distribution flow.
. In response to increased private label programs being
promoted by some of our retail customers, we increased our
branded supply with private label goods. While these goods
generally have lower initial profit margins, they represent
a steady source of supply for the retailer and generate
meaningful revenues for us.
. The Jantzen acquisition in March 2002 provides us with our
first entry into the women's swimwear and sportswear market.
This step gives us the opportunity to apply our design,
marketing and global sourcing capabilities in the women's
wear market. With our competitive strengths in the industry
we expect to generate considerable top line growth for the
Jantzen brands over the coming years.
Expand Licensing Activities. Since acquiring the Munsingwear brand in
fiscal 1997, we have significantly expanded the licensing of our brands to third
parties for various product categories. The acquisitions of the Perry Ellis,
John Henry, Manhattan, Pro Player and Mondo di Marco brands have provided us,
and will continue to provide us, with significant licensing opportunities. The
acquisition of the Jantzen brands is expected to significantly enhance these
opportunities. We are using these nationally recognized brands to expand our
licensing activities, particularly with respect to product categories such as
women's wear and activewear, and to enter into historically underserved
geographic areas for us, such as Latin America, Europe and Asia. We are
continually working with our licensees to strengthen their design, finished
products and marketing campaigns, thereby increasing our revenues. We also
continually review our possible entry into new markets and provide potential
licensees with strong brands, design expertise and innovative marketing
strategies.
Pursue Strategic Acquisitions. The apparel industry has followed the
consolidation trend of the retail industry as large retailers have continued to
give preferences to more dependable and flexible vendors. We are frequently
presented with and evaluate new acquisition opportunities and intend to continue
our strategy of making selective acquisitions to add new product lines and
expand our portfolio of brands. Since fiscal 1993, we have acquired, or obtained
licenses for, several brands, including Munsingwear, Perry Ellis, John Henry,
Manhattan, Crossings, PING, Andrew Fezza, Mondo di Marco, Pro Player, Nautica,
Jantzen, Tommy Hilfiger and Nike. The March 2002 acquisition of the Jantzen
brands presents us with an opportunity to apply our design, sourcing, marketing
and distribution expertise to a new market, which we believe has significant
upside potential for us.
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Brands
The key components of our brand strategy are to: (a) provide consistent
high quality products, (b) distribute our brands in distinct channels of
distribution, and (c) reinforce and capitalize on each brand's image through new
product development and image advertising. This strategy has enabled us to
increase our customer base, license our brands to third parties and develop
sub-brands.
Nearly 63.0% of our products are sold under brands we own or license
from third parties. We currently own nine nationally recognized brands whose
products we source and sell to retailers and other channels. These brands
include Natural Issue, Munsingwear, Grand Slam, John Henry, Manhattan, Perry
Ellis, Perry Ellis America, Crossings and Jantzen. There have been over 41
sub-brands developed from these nine major brands. We also distribute the PING,
Andrew Fezza, Nautica, Tommy Hilfiger and Nike brands under license
arrangements.
We license Perry Ellis, our premier brand, as well as John Henry,
Manhattan, Natural Issue, Pro Player, Mondo di Marco, Career Club, Crossings,
Munsingwear and Jantzen for product categories that we do not sell directly to
the retailers. Our depth of brand selection enables us to target consumers
across a wide range of ages, incomes and lifestyles.
Perry Ellis. We acquired the Perry Ellis brand, which is associated
with elegance, quality, value, comfort and innovative designs in fiscal 2000.
The Perry Ellis brand is designed to appeal primarily to high-income,
status-conscious, professional 25-50 year-old men. We primarily license the
Perry Ellis brand to third parties for a wide variety of products.
Munsingwear. We purchased the Munsingwear brands along with its
associated sub-brands in fiscal 1997 to appeal to the middle-income 30-70
year-old men who prefer classic casual sportswear and to sports enthusiasts.
Munsingwear and its sub-brands have over 100 years of history. Munsingwear
apparel items include golf shirts, vests, jackets and casual pants. The
Munsingwear brand is primarily sold in mid-tier department stores such as
Mervyn's at retail price points for shirts ranging from $17.99 to $24.99 and for
casual pants from $19.99 to $24.99.
Some of the successful sub-brands of the Munsingwear brand include the
Munsingwear Lifestyle sub-brands for casual sportswear and the Munsingwear Golf
and Slammer sub-brands for golf sportswear. These sub-brands are sold primarily
to regional mass merchants such as Meijer Inc. at retail price points ranging
from $12.99 to $19.99.
Grand Slam and Penguin Sport. We purchased the Grand Slam and Penguin
Sport brands as part of the Munsingwear acquisition in fiscal 1997. Grand Slam,
with its signature penguin icon logo appeals to the middle-income 30-60 year-old
men who prefer a classic casual activewear. The Grand Slam brand is primarily
sold in mid-tier department stores, at retail price points for shirts ranging
from $24.99 to $34.99 and for pants from $29.99 to $39.99.
The Penguin Sport brand offers a functional sportswear design aimed at
the golf market. It is sold primarily in the mid-tier department stores such as
Kohl's and Mervyn's, as well as specialty and sporting goods stores at retail
price points ranging from $33.99 to $35.99. Grand Slam and Penguin Sport
products include golf shirts, vests, jackets, pants and shorts.
Natural Issue. We developed the Natural Issue brand in 1988 to appeal
to middle-income 25-55 year-old men. Natural Issue's products include shirts,
sweaters and pants. It is designed to suit the needs of the consumer with a
broad cross-cultural appeal. We are expanding our pants product to include the
Natural Issue Executive Khaki pant line. Natural Issue is primarily sold in the
mid-tier department stores, such as Kohl's, J.C. Penney and Mervyn's, at retail
price points for shirts ranging from $26.99 to $34.99 and for pants from $39.99
to $44.99.
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John Henry. This brand, which we originally licensed and then acquired
in fiscal 2000, is designed to appeal to middle income 25-45 year-old men. Our
product offerings form a "dress casual collection." The John Henry brand is
primarily sold at the mid-tier department stores such as Sears Roebuck (both in
the United States and Canada) and Mervyn's at retail price points ranging from
$25.99 to $34.99.
Manhattan. We acquired the Manhattan brand in fiscal 2000. For over 100
years, the Manhattan label has been associated with men's dress shirts. We have
diversified the Manhattan brand in the United States to include a wider range of
sportswear and classic dress-casual apparel. We currently offer an exclusive
collection at K-Mart consisting of pants, shirts and sweaters, in a variety of
styles and patterns geared towards a casual lifestyle. The brand is designed to
appeal to 25-65 year-old men. The Manhattan brand is sold at retail price points
for shirts and sweaters ranging from $12.99 to $22.99 and for pants from $19.99
to $24.99.
Cubavera and Havana Shirt Co. In fiscal 2000 and 2002, we introduced
the Cubavera and the Havana Shirt Co. brands, respectively. This line of
clothing is designed to appeal to the growing tropical and Latin influences on
consumers' style and tastes. Cubavera is currently sold in major department
stores such as Federated Department Stores and May Department Stores, as well as
specialty shops, at retail price points ranging from $29.99 to $39.99. The
Havana Shirt Co. is currently sold in department stores at retail price points
ranging from $24.99 to $34.99.
Crossings. We purchased the well-known Crossings brand in fiscal 1998
and positioned it to appeal to middle-income 35-55 year-old men. This brand was
well known in the 1980's as the premier sweater brand. We have positioned the
brand to be associated with value and quality and further expanded it to include
shirts and pants. The Crossings brand is primarily sold to upscale department
stores such as Federated Department Stores, May Department Stores and Saks, Inc.
at retail price points for shirts ranging from $19.99 to $29.99 and for pants
from $19.99 to $29.99.
Perry Ellis America. We introduced the Perry Ellis America brand for
jeans wear during fiscal 2001. The Perry Ellis America brand is designed to
appeal primarily to 18-30 year-old men, and is sold at retail price points for
shirts ranging from $19.99 to $39.99 and for pants from $37.99 to $44.99.
Pro Player. We acquired the Pro Player brand in fiscal 2001. This brand
is well recognized in the sports apparel market and appeals to 18-45 year-old
men. We license and sell this brand to third parties for a wide variety of
products and is sold at retail price points ranging from $16.99 to $22.99.
Jantzen. We acquired the Jantzen brands in March 2002. With this
acquisition we will be entering the women's swimwear and sportswear market. The
Jantzen brands have a history of over 90 years and appeal to middle-income 30-55
year-old women. The products will be sold in upscale department stores, mid-tier
department stores, chain stores and specialty shops at retail price points
ranging from $49.99 to $89.99.
PING. We have an apparel master license for the PING golf brand, which
is designed to appeal to high-income 25-50 year-old men who are
status-conscious. The license had an initial term expiring in December 2003 and
has been renewed for another year until December 2004. The brand is a well-known
and prestigious golf brand, which we positioned to be associated with the
highest standard of quality in the golf business. Our products under this brand
include golf shirts, sweaters, shorts and outerwear. The PING brand is sold
primarily in the golf shops and top-tier specialty stores at retail price points
ranging from $43.99 to $99.99.
Andrew Fezza. We license the Andrew Fezza brand, under a license that
covers the United States, its territories and possessions and has an initial
term expiring in June 2003. We have an option to renew this license for an
additional five years but have not yet determined whether we will exercise such
59
option. Andrew Fezza is a recognized living American designer who is actively
involved with the design and marketing of the brand. We have positioned the
brand to be associated with a classic European style at a moderate price. Andrew
Fezza's products include shirts and pants. The Andrew Fezza brand is sold to
department stores such as May Department Stores, Federated Department Stores and
Saks, Inc. at retail price points for shirts ranging from $21.99 to $29.99 and
for pants from $19.99 to $34.99.
Tommy Hilfiger. We acquired a license for the Tommy Hilfiger brand for
women's swimwear as part of the acquisition of the Jantzen brands in March 2002.
The products will be sold in upscale department stores, chain stores and
specialty shops at retail price points ranging from $49.99 to $99.99.
Nike. We acquired a license for the Nike brand for women's swimwear and
swimwear accessories as part of the acquisition of the Jantzen brands in March
2002. The products will be sold in upscale department stores, chain stores and
specialty shops at retail price points ranging from $39.99 to $89.99.
Mondo di Marco. We acquired the Mondo di Marco brand in fiscal 2001.
This brand is positioned to appeal to 18-40 year-old men. The Mondo di Marco
brand is licensed to a third party and is sold primarily in up-scale department
stores at retail price points ranging from $29.99 to $69.99.
Other Markets
Private Label. In addition to our sales of branded products, we sell
products to retailers for marketing as private label or own store lines. In
fiscal 2002, we sold private label products to Target, Wal-Mart, J.C. Penney,
Goody's, K-Mart, Mervyn's, Meijer and Sears Roebuck. Private label sales
generally yield lower profit margins than sales of comparable branded products,
but they often achieve higher sales volumes. Private label sales accounted for
approximately 36.6%, 34.0% and 21.0% of net sales during fiscal 2002, 2001 and
2000, respectively.
Corporate wear. We entered into the corporate wear business at the end
of fiscal 2001. We recognized the change in the current business environment and
have begun to provide a variety of corporations with high quality designer
products. We currently offer the PING, Nautica and Perry Ellis brands in this
market. We sell primarily to corporate wear distributors at price point ranging
from $29.99 to $89.99.
Products and Product Design
We offer a broad line of high quality men's sportswear, including woven
and knit sport shirts, golf sportswear, activewear, sweaters, jackets, vests,
casual and dress pants and shorts. Substantially all our products are designed
by our in-house staff utilizing our advanced computer-aided design technology.
This technology enables us to produce computer-generated simulated samples that
display how a particular style will look in a given color and fabric before it
is actually produced. These samples can be printed on paper or directly onto
fabric to accurately present the colors and patterns to a potential customer. In
addition, we can quickly alter the simulated sample in response to the
customer's comments, such as change of color, print layout, collar style and
trimming, pocket details and/or placket treatments. The use of computer-aided
design technology minimizes the time-consuming and costly need to produce actual
sewn samples prior to retailer approval and allows us to create custom-designed
products meeting the specific needs of customers.
In designing our apparel products, we seek to promote consumer appeal
by combining functional, colorful and high quality fabrics with creative designs
and graphics. Styles, color schemes and fabrics are also selected to encourage
consumers to coordinate outfits and form collections, thereby encouraging
multiple purchases. Our designers stay continuously abreast of the latest design
trends, fabrics, colors, styles and consumer preferences by attending trade
shows and periodically conducting market research in
60
Europe and the United States. In addition, we actively monitor the retail sales
of our products to determine changes in consumer trends.
In accordance with standard industry practices for licensed products,
we have the right to approve the concepts and designs of all products produced
and distributed by our licensees.
Our products include:
Shirts. We offer a broad line of sport shirts, which include cotton and
cotton-blend printed, yarn-dyed and solid knit shirts, cotton woven shirts,
silk, cotton and rayon printed button front sport shirts, linen sport shirts,
golf shirts, and embroidered knits and woven shirts. Our shirt line also
includes brushed twill shirts, jacquard knits and yarn-dyed flannels. In
addition, we are also the leading distributor in the United States of Guayabera
shirts. We market shirts under a number of our own brands as well as the private
labels of our retailers. Our shirts are produced in a wide range of men's sizes,
including sizes for the big and tall men's market. Sales of shirts accounted for
approximately 74%, 74% and 78% of our net sales during fiscal 2002, 2001 and
2000, respectively.
Pants. Our pants lines include a variety of styles of wool, wool-blend,
linen and poly/rayon dress pants, casual pants in cotton and poly/cotton and
linen/cotton walking shorts. We offer our pants in a wide range of men's sizes.
We market our pants as single items or as a collection to complement our shirt
lines. Sales of pants accounted for approximately 20%, 20% and 16% of our net
sales during fiscal 2002, 2001 and 2000, respectively.
Swimwear and Sportswear. With the acquisition of the Jantzen brands in
March 2002, we are entering into the women's swimwear and sportswear market in
fiscal 2003.
Other Products. We offer sweaters, vests, jackets and pullovers under
our existing brands as well as private label. The majority of the other products
we sell are sweaters, which accounted for approximately 6%, 6% and 5% of net
sales during fiscal 2002, 2001 and 2000, respectively. With the acquisition of
Jantzen, we will offer swimwear accessories beginning in fiscal 2003.
Marketing and Distribution
We market our apparel products to customers principally through the
direct efforts of an in-house sales staff, independent commissioned sales
representatives who work exclusively for us, and other non-exclusive independent
commissioned sales representatives, who generally market other product lines as
well as ours. We also attend major industry trade shows in the fashion, golf and
corporate sales areas.
We also advertise to customers through print advertisements in a
variety of consumer and trade magazines and newspapers, and through outdoor
advertising such as billboards strategically placed to be viewed by consumers.
In order to promote our men's sportswear at the retail level, we conduct
cooperative advertising in print and broadcast media, which features our
products in our customers' advertisements. The cost of this cooperative
advertising is shared with our customers. We also conduct various in-store
marketing activities with our customers, such as retail events and promotions
and share in the cost of these events. These events and promotions are in great
part orchestrated to coincide with high volume shopping times such as holidays
(Christmas, Thanksgiving and Father's Day). In addition to event promotion, we
place perennial displays and signs of our products in retail establishments.
We started direct consumer advertising in selected markets featuring
the Perry Ellis, Natural Issue, John Henry, Grand Slam and Munsingwear brand
names through the placement of highly visible billboards, sponsorships and
special event advertising. We will integrate the Jantzen brands in our
advertising campaigns. We also maintain informational web sites featuring our
brands and create and
61
implement editorial and public relations strategies designed to heighten the
visibility of our brands. All these activities are coordinated around each brand
in an integrated marketing approach.
The following table sets forth the principal brand names for our
product categories at different levels of retail distribution:
--------------------------------------------------------------------------------------------------------------------------
Brand Portfolio Dress Jeans Sports
Channel of Casual Casual Wear Golf Apparel
Distribution
--------------------------------------------------------------------------------------------------------------------------
Jantzen(3)
Upscale Department Mondo di Marco Tommy Hilfiger(3)
Store PING Collection Nike(3)
--------------------------------------------------------------------------------------------------------------------------
Perry Ellis America
Jantzen(3)
Crossings Andrew Fezza Tommy Hilfiger(3)
Department Store Cubavera Perry Ellis (1) Perry Ellis America Grand Slam Nike(3)
--------------------------------------------------------------------------------------------------------------------------
Natural Issue Penguin Sport Pro Player
Mid-Tier Stores Munsingwear John Henry Natural Issue Munsingwear Jantzen(3)
--------------------------------------------------------------------------------------------------------------------------
Mass Merchants Store Brands Manhattan Store Brands
--------------------------------------------------------------------------------------------------------------------------
Green Grass(2) PING Collection
--------------------------------------------------------------------------------------------------------------------------
Corporate Nautica Perry Ellis (1) PING Collection
--------------------------------------------------------------------------------------------------------------------------
Jantzen(3)
Specialty Tommy Hilfiger(3)
Stores Havana Shirt Co. Nike(3)
--------------------------------------------------------------------------------------------------------------------------
(1) We are primarily a licensor for the Perry Ellis brand in the dress
sportswear category.
(2) This includes high-end and specialty golf shops and resorts.
(3) We acquired the Jantzen brand and licenses for the Tommy Hilfiger and
Nike brands in March 2002.
We believe that customer service is a key factor in successfully
marketing our apparel products and provide our customers with a high level of
customer service. We coordinate efforts with customers to develop products
meeting their specific needs using our design expertise and computer-aided
design technology. Utilizing our well-developed sourcing capabilities, we strive
to produce and deliver products to our customers on a timely basis.
Our in-house sales staff is responsible for customer follow-up and
support, including monitoring prompt order fulfillment and timely delivery. We
utilize an Electronic Data Interchange ("EDI") system for certain customers in
order to provide advance-shipping notices, process orders and conduct billing
operations. In addition, certain customers use the EDI system to communicate
their weekly inventory requirements per store to us electronically. We then fill
these orders either by shipping directly to the individual stores or by sending
shipments, individually packaged and bar coded by store, to a centralized
customer distribution center.
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Sources of Supply
We currently use independent contract manufacturers, all of whom are
overseas, to produce all of our products. We have approximately 100 suppliers in
countries in the Far East, other parts of Asia, Mexico and in other countries in
Central America. We believe that the use of numerous independent suppliers
allows us to maximize production flexibility while avoiding significant capital
expenditures and the costs of maintaining and operating production facilities.
We maintain offices in Beijing, Shanghai and Guangzhou, China; Seoul,
South Korea; and Taipei, Taiwan. We also operate through independent agents
based in Thailand, Pakistan, Indonesia, Philippines, United Arab Emirates and
other countries to source our products and to monitor production at contract
manufacturing facilities in order to ensure quality control and timely delivery.
Our personnel based in our Miami, Florida office, perform similar functions with
respect to our suppliers in Mexico and Central America. We conduct inspections
of samples of each product prior to cutting by contractors, during the
manufacturing process and prior to shipment. We also have full-time quality
assurance inspectors in the Dominican Republic, Honduras, El Salvador and
Guatemala and in each of our overseas offices. Finished goods are generally
shipped to our Miami, Florida facility for repackaging and distribution to
customers. In fiscal 2003, we will also begin shipments to Jantzen's Seneca,
South Carolina facility for repackaging and distribution to customers.
In order to assist with timely delivery of finished goods, we function
as our own customs broker. We prepare our own customs documentation and arrange
for any inspections or other clearance procedures with the United States Customs
Service. We are a member of the United States Customs Automated Interface
program. This membership permits us to clear our goods through United States
Customs electronically and generally reduces the necessary clearance time to a
matter of hours rather than days.
Licensing Operations
For the past seven years, we have been actively licensing the brands we
own. The licensing of our brands to third parties for various product categories
is one of our strategies. The licensing of our brands enhances their image by
widening the range and distribution of these products without requiring us to
make significant capital investments or incur significant operating expenses. As
a result of this strategy, we have gained significant experience in identifying
potential licensing opportunities and have established strong relationships with
many active licensees.
We are currently the licensor of 126 license agreements (including 13
acquired in the Jantzen acquisition), for various products including sportswear,
outerwear, underwear, activewear, women's sportswear, fragrances, loungewear and
with the acquisition of Jantzen, women's swimwear. Sales of licensed products by
our licensees were approximately $490.0 million, $577.8 million and $485.0
million in fiscal 2002, 2001 and 2000, respectively. We received royalties from
these sales of approximately $26.7 million, $25.8 million and $22.8 million in
fiscal 2002, 2001 and 2000, respectively. Excluding accelerated payments by two
licensees for early contract terminations during fiscal 2002, royalties
decreased last year due to the general economic conditions and certain licensees
experiencing a decrease in their sales volume.
To maintain a brand's image, we closely monitor our licensees and
approve all licensed products. In evaluating a prospective licensee, we consider
the candidate's experience, financial stability, manufacturing performance and
marketing ability. We also evaluate the marketability and compatibility of the
proposed products with our other products. We regularly monitor product design,
development, merchandising and marketing of licensees, and we schedule meetings
throughout the year with licensees to ensure quality, uniformity and consistency
with our products. We also give our licensees a view of our products and fashion
collections and our expectations of where our products should be positioned in
the
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market place. In addition to approving in advance all of our licensees'
products, we also approve their advertising, promotional and packaging
materials.
As part of our licensing strategy, we work with our licensees to
further enhance the development, image, and sales of their products. We offer
licensees marketing support and our relationships with retailers help them
generate higher revenues and become more profitable.
Our license agreements generally extend for a period of three to five
years with options to renew prior to expiration for an additional multi-year
period. The typical agreement requires that the licensee pay us the greater of a
royalty based on a percentage of the licensee's net sales of the licensed
products or a guaranteed minimum royalty that typically increases over the term
of the agreement. Generally, licensees are required to spend a percentage of the
net sales of licensed products for advertising and promotion of the licensed
products in their territory.
Customers
We sell merchandise to a broad spectrum of retailers, including
mid-tier department stores, upscale department stores, mass merchants and
specialty stores. Our largest customers include Target, J.C. Penney, Wal-Mart,
Kohl's and Mervyn's. Net sales to our five largest customers accounted for
approximately 47%, 42% and 49% of net sales in fiscal 2002, 2001 and 2000,
respectively. For fiscal 2002, net sales to Target accounted for approximately
12%, while net sales to J.C. Penney and Wal-Mart accounted for approximately
11%, each. For fiscal 2001, net sales to Wal-Mart accounted for approximately
14% of total net sales and sales to J.C. Penney accounted for approximately 11%
of net sales. For fiscal 2000, net sales to Target accounted for approximately
14% of net sales. No other single customer accounted for more than 10% of net
sales during such fiscal years.
Seasonality
Our products have historically been geared towards lighter weight
apparel generally worn during the spring and summer months. We believe that this
seasonality has been reduced with the introduction of fall, winter and holiday
merchandise. Our higher priced products generally tend to be less sensitive to
economic conditions and weather conditions. While the variation in our sales on
a quarterly basis has narrowed somewhat, seasonality can be affected by a
variety of factors, including the mix of advance and fill-in orders, the amount
of sales to different distribution levels, and overall product mix between
traditional and fashion merchandise.
We generally receive orders from our retailers approximately five to
seven months prior to shipment. For approximately 80.0% of our sales, we have
orders from our retailers before we place orders with our suppliers. A summary
of the order and delivery cycle for our four primary selling seasons is
illustrated below:
Merchandise Season Advance Order Period Delivery Period to Retailers
----------------------------- ----------------------------- ----------------------------------
Spring July to September(1) January to March
Summer October to December April and May
Fall January to March July to September
Holiday April to June October and November
(1) The advanced order period for products under the Jantzen and Tommy
Hilfiger brands, as well as the majority of the products under the Nike brand,
is September to November.
Sales and receivables are recorded when inventory is shipped, with
payment terms generally 30 to 75 days from the date of shipment. Our backlog of
orders include confirmed and unconfirmed orders, which we believe, based on
industry practice and past experience, will be confirmed. The amount of
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unfilled orders at a point in time is affected by a number of factors, including
the mix of product, the timing of receipt and processing of customer orders, and
the scheduling of sourcing and shipping of product, which in most cases is
dependent on the desires of the customer. Backlog is also affected by on-going
trend among customers to reduce the lead-time on their orders. During the last
half of fiscal 2002, a number of customers delayed placing orders and re-orders
compared to our previous experience. As a result of these factors a comparison
of unfilled orders from period to period is not necessarily meaningful and may
not be indicative of eventual actual shipments.
Competition
The retail apparel industry is highly competitive and fragmented. Our
competitors include numerous apparel designers, manufacturers, importers and
licensors, many of which have greater financial and marketing resources than us.
We believe that the principal competitive factors in the industry are:
. timeliness, reliability and quality of services provided,
. market share and visibility,
. price and fashion, and
. the ability to anticipate consumer demands and maintain
appeal of products to customers.
The level of competition and the nature of our competitors varies by
product segment with low-margin, mass-market manufacturers being our main
competitors in the less expensive segment of the market and American and foreign
designers and licensors competing with us in the more upscale segment of the
market. We believe that our continued dedication to customer service, product
assortment and quality control, as well as our aggressive pursuit of licensing
and acquisition opportunities, directly address the competitive factors in all
market segments. Although we have been able to compete successfully to date,
there can be no assurance that we will continue to be able to do so in the
future.
Trademarks
Most of our material trademarks are registered with the United States
Patent and Trademark Office. We may be subject to claims and suits against us,
and may be the initiator of claims and suits against others, in the ordinary
course of our business, including claims arising from the use of our trademarks.
In international jurisdictions, there are several pending claims to our right to
use selected trademarks that we own. We do not believe that the resolution of
any pending claims in international jurisdictions will have a material adverse
affect on our business, financial condition, results of operations or cash
flows.
Employees
At May 24, 2002, we had approximately 475 full-time employees
worldwide. None of our employees are subject to collective bargaining
agreements, and we consider our employee relations to be satisfactory.
Properties
Our administrative offices, warehouse and distribution facility are
located in a 240,000 square foot leased facility in Miami, which was built to
our specifications and completed in 1997. The facility is occupied pursuant to a
synthetic lease, which has an initial term expiring in June 2002, annual rental
payment of approximately $900,000 and a minimum contingent rental payment of
$14.5 million on June 30, 2002. We do not anticipate renewing the synthetic
lease when it matures. Instead, we anticipate replacing it with a conventional
mortgage, which will result in recognition of both an asset and related
liability on our balance sheet. We have secured a commitment for the mortgage.
For purposes of potential future expansion, we have purchased roughly three
acres of land adjacent to our facility.
We lease three warehouse facilities in Miami totaling approximately
103,000 square feet from George Feldenkreis, our Chairman and CEO, to handle the
overflow of bulk shipments and the specialty and PING operations. All leases are
on a month-to-month basis at market prices.
We lease two locations in New York City totaling approximately 8,500
square feet each. These leases expire in December 2007 and 2012. These locations
are used for offices and showrooms.
We lease a retail store in the Sawgrass Mills outlet mall in Sunrise,
Florida with 11,240 square feet. This lease expires in September 2005. Since we
began leasing this facility in May 2001, we have used this location as a test
retail outlet store to sell our brands.
We have, through the acquisition of Jantzen, a lease agreement for
office space in Portland, Oregon for an initial six-month period. This facility
totals approximately 83,900 square feet. In addition, we entered into a lease
for a portion of Jantzen's Seneca, South Carolina distribution center facility
for a one-year period, commencing March 22, 2002. This facility totals
approximately 279,000 square feet. We have exercised our option to purchase the
Seneca, South Carolina facility.
In order to monitor production of our products in the Far East, we
maintain offices in South Korea and China, and also lease offices jointly with
GFX Corporation, a privately held company, in Beijing, China and Taipei, Taiwan.
Legal Proceedings
We are subject to claims and suits against us, and are the initiator of
claims and suits against others, in the ordinary course of business, including
claims arising from the use of our trademarks. We do not believe that the
resolution of any pending claims will have a material adverse affect on our
business, financial condition or results of operations.
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DESCRIPTION OF OTHER INDEBTEDNESS
Senior Credit Facility
Our amended senior credit facility with Bank of America, N.A., formerly
known as Nationsbank, N.A., as agent for a syndicate of lenders, provides us
with a revolving credit facility of up to an aggregate amount of $60.0 million.
The senior credit facility expires in October 2002 and the indebtedness
thereunder ranks pari passu with our senior secured notes. The following is a
description of the terms of the senior credit facility, as amended and does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the senior credit facility. You may
request a copy of the senior credit facility without charge from us, see "Where
You Can Find More Information."
Borrowing Base. Borrowings under the senior credit facility are not
permitted to exceed the sum of (a) 80.0% of our eligible accounts receivable
plus (b) 90.0% of our eligible factored accounts receivable plus (c) 60.0% of
our eligible inventory minus (d) the full amount of all outstanding letters of
credit issued pursuant to the senior credit facility which are not fully secured
by cash collateral and (e) $9.0 million synthetic lease reserve which must be
maintained until the expiration date of our synthetic lease in June 2002.
The maximum amount of borrowing under the senior credit facility
attributable to eligible inventory is $30.0 million.
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Interest. Interest on the principal balance outstanding under the
senior credit facility shall accrue, at our option, at either (a) our prime
lending rate with adjustments depending upon our ratio of indebtedness to EBITDA
at the time of borrowing or (b) 2.75% above the rate quoted by our bank as the
average LIBOR for 1, 2, 3 and 6-month Eurodollar deposits with adjustments
depending upon our ratio of indebtedness to EBITDA at the time of the 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, including, without
limitation, accounts receivable, inventory deposit accounts, general
intangibles, intellectual property and equipment. Lenders under the senior
credit facility have a second priority security interest in our trademarks.
Certain Covenants. In addition to customary covenants, the senior
credit facility contains various restrictive financial and other covenants
including, without limitation, prohibitions on the incurrence of additional
indebtedness or guarantees, restrictions on the creation of additional liens,
certain limitations on dividends and distributions or capital expenditures by
us, restrictions on mergers or consolidations, sales of assets, investments and
transactions with affiliates, and certain financial maintenance tests. Such
financial maintenance tests, include, among others (i) a maximum funded
indebtedness to EBITDA ratio of 6.0 to 1; (ii) a minimum current ratio of 1.2 to
1 at the end of any fiscal quarter; (iii) a minimum fixed charge coverage ratio
(measured for the prior four fiscal quarters) of 1.2 to 1 at the end of any
fiscal quarter; and (iv) a minimum net worth of $64.0 million as of April 1999,
and increasing annually by $5.0 million on January 31 of each year.
Events of Default. The events of default under the senior credit
facility are customary for facilities of such nature and will include payment
and non-payment defaults and certain events of bankruptcy or insolvency.
As of January 31, 2002, the balance outstanding and the balance
available under our senior credit facility was $21.8 million and $30.7 million,
respectively. In addition, as of January 31, 2002, we were not in compliance
with the funded indebtedness to EBITDA financial covenant. The senior lenders,
however, have waived such noncompliance, in connection with the March 2002
amendment of the senior credit facility.
Other Debt
The Synthetic Lease. The synthetic lease expires on June 30, 2002 and
we have an obligation to pay $14.5 million at the termination of the term. The
synthetic lease was entered into with a group of financial institutions to
finance the acquisition and construction of our corporate headquarters. The
financial institutions assumed our obligation to purchase the facility and, in
turn, leased the facility to us. The obligations under the synthetic lease are
secured by a security interest in substantially all our existing and future
assets, whether tangible or intangible, including, without limitation, accounts
receivable, inventory deposit accounts, general intangibles, intellectual
property and equipment. We do not anticipate renewing the synthetic lease. We
have already obtained a commitment for a conventional mortgage for the property.
In addition to customary covenants found in secured lending agreements,
the synthetic lease also contains various restrictive financial and other
covenants including, without limitation, (a) prohibitions on the incurrence of
additional indebtedness or guarantees, (b) restrictions on the creation of
additional liens, (c) certain limitations on dividends and distributions or
capital expenditures by Perry Ellis, (d) restrictions on mergers or
consolidations, sales of assets, investments and transactions with affiliates
and (e) certain financial maintenance tests. Such financial maintenance tests,
include, among others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a
minimum current ratio, (iii) a minimum net worth and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, we were not in compliance with the
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funded indebtedness to EBITDA financial covenant. The lessor under, and the
financial institutions which financed, the synthetic lease have waived the
noncompliance with this financial covenant.
Letter of Credit Facilities. We maintain four letter of credit
facilities totaling $62.0 million. Each letter of credit facility is secured by,
among other things, the consignment of merchandise in transit under such letter
of credit. Indebtedness under these facilities bears interest at variable rates
approximately equal to the lenders' specified base lending rates less 1.0%
annually.
12 1/4% Senior Subordinated Notes
As of January 31, 2002, we had $99.1 million (as adjusted for the swap
transaction we entered into in August 2001) of issued and outstanding
indebtedness under our 12 1/4% senior subordinated notes due April 2006. These
notes will continue to accrete in value to $100.0 million at maturity. The
12 1/4% notes were issued under an indenture dated as of April 6, 1999. Under
the terms of this indenture, the 12 1/4% notes are guaranteed, jointly and
severally, and fully and unconditionally, on an unsecured senior subordinated
basis by all of our subsidiaries. We can issue an additional $25.0 million under
the indenture.
The 12 1/4% notes mature on April 1, 2006 and are our general unsecured
senior subordinated obligations. The indenture limited the aggregate principal
amount of the 12 1/4% notes to $125.0 million. The notes bear interest at the
rate of 12 1/4% per annum, payable semi-annually on April 1 and October 1 of
each year.
The 12 1/4% notes are redeemable, in whole or in part, prior to
maturity at our option at redemption prices specified in the indenture, plus
accrued interest to the date of redemption.
We and our subsidiary guarantors are restricted, under the indenture
governing the 12 1/4% notes from, among other things, (a) incurring additional
indebtedness, except for specified indebtedness; (b) making specified payments,
except under specific circumstances; and (c) creating liens other than specified
encumbrances.
Interest Rate Swaps
In August 2001, we entered into interest rate swap, option and interest
rate cap agreements for an aggregate notional amount of $40.0 million in order
to minimize the debt servicing costs associated with the senior subordinated
notes. The swap agreement was subsequently modified through a basis swap entered
into in October 2001. The swap agreement is scheduled to terminate on April 1,
2006. Under the swap agreement, we are entitled to receive semi-annual interest
payments on October 1 and April 1 at a fixed rate of 12 1/4% and are obligated
to make semi-annual interest payments on October 1 and April 1 at a floating
rate based on the six-month LIBOR rate plus 715 basis points for the period from
October 1, 2001 through March 31, 2003; and three-month LIBOR rate plus 750
basis point for the period from April 1, 2003 through April 1, 2006. The swap
agreement has optional call provisions with trigger dates of April 1, 2003,
April 1, 2004 and April 1, 2005, which contain certain premium requirements in
the event the call is exercised.
On March 15, 2002, we entered into interest rate swap and option
agreements for an aggregate notional amount of $57.0 million in order to
minimize the debt servicing costs associated with the existing notes. The swap
agreement is scheduled to terminate on March 15, 2009. Under the swap agreement,
we are entitled to receive semi-annual interest payments on September 15 and
March 15 at a fixed rate of 9 1/2% and are obligated to make semi-annual
interest payments on September 15 and March 15 at a floating rate based on the
three-month LIBOR rate plus 369 basis points for the period from March 22, 2002
through March 15, 2009. The swap agreement has optional call provisions with
trigger dates of March 15, 2005, March 15, 2006 and March 15, 2007, which
contain premium requirements in the event the call is exercised.
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DESCRIPTION OF THE NOTES
The exchange notes will be issued and all the existing notes were
issued under an indenture among Perry Ellis, as issuer, each of the guarantors,
as guarantors, and State Street Bank and Trust Company, as Trustee. Upon the
issuance of the exchange notes, if any, or the effectiveness of the Shelf
Registration Statement, the indenture will be subject to and governed by the
Trust Indenture Act of 1939, as amended. References to the notes include the
exchange notes unless the context otherwise requires.
The following summary of certain provisions of the indenture does not
purport complete and is subject to, and qualified in its entirety by reference
to, the provisions of the indenture, including the definitions of certain terms
contained therein and those terms made part of the indenture by reference to the
Trust Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions."
General
The notes will mature on March 15, 2009, will be initially limited to
$57,000,000 aggregate principal amount and will be secured senior obligations of
Perry Ellis.
Each note will bear interest at the rate set forth on the cover page
hereof from March 22, 2002 or from the most recent interest payment date to
which interest has been paid or duly provided for, payable in cash on September
15, 2002 and semiannually thereafter on March 15 and September 15 in each year
until the principal thereof is paid or duly provided for to the Person in whose
name the exchange note (or any predecessor note) is registered at the close of
business on the March 1 or September 1 next preceding such interest payment
date. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
Principal of, premium, if any, and interest on the notes will be
payable, and the notes will be exchangeable and transferable, at the office or
agency of Perry Ellis in The City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee); provided,
however, that, at the option of Perry Ellis, interest may be paid by check
mailed to the address of the Person entitled thereto as such address shall
appear on the security register. See "--Book Entry; Delivery and Form."
The notes will be issued only in fully registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer, exchange or
redemption of notes, but Perry Ellis may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith.
Additional Notes
Subject to the covenants described below under "--Certain Covenants"
and applicable law, Perry Ellis may issue Additional Notes under the indenture;
provided that the aggregate principal amount of all notes issued under the
indenture does not exceed $75,000,000. The notes offered hereby and any
Additional Notes subsequently issued would be treated as a single class for all
purposes under the indenture.
Security Agreement and Collateral
Perry Ellis and Jantzen Apparel have entered into a Security Agreement
with State Street Bank and Trust Company, as the Collateral Agent. The Security
Agreement created a security interest in the Collateral for the benefit of the
holders of the notes and will be in full force and effect as long as the notes
are outstanding. In summary, the Collateral includes (1) all trademarks, trade
dress, logos, slogans, designs, domain names, and business and corporate names
owned by Perry Ellis and Jantzen Apparel as
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of March 22, 2002; (2) all license agreements and authorizations and franchises
with respect to such trademarks; and (3) all income, royalties and other
payments due or payable with respect to such licenses, authorizations and
franchises.
In connection with the Security Agreement, the Collateral Agent will
file or cause to be filed such filings in the United States of America in order
to perfect the security interest granted in the Collateral in these
jurisdictions. The agent for the lenders under our senior credit facility, the
agent for the lenders under our synthetic lease and the lenders under certain
letters of credit have heretofore been granted a security interest in the
Collateral. On March 22, 2002, the Collateral Agent, the agent for the lenders
under our senior credit facility, the agent for the lenders under our synthetic
lease and the lenders under certain letters of credit entered into an
intercreditor agreement pursuant to which such parties agreed that, among the
parties, the Collateral Agent, for the benefit of the holders of the notes, will
have first priority rights in the Collateral, the agent for the lenders under
our senior credit facility will have second priority rights in the Collateral,
the agent for the lenders under our synthetic lease will have third priority
rights in the Collateral and the lenders under certain letters of credit will
have fourth priority rights in the Collateral. The intercreditor agreement
contains other provisions that are customary for transactions of this nature.
Upon (1) any Collateral Sale in accordance with the provisions of the
Indenture (including the "Limitation on Sale of Collateral" covenant) or (2) the
making of a Collateral Sale Proceeds Offer (as defined in the "Limitation on
Sale of Collateral" covenant), the Collateral Agent will, at such grantor's
request and expense, release such item of Collateral from the security interest
granted under the Security Agreement; provided, however, that:
. at the time of such request and such release, no Default shall
have occurred and be continuing,
. such grantor shall have delivered to the Collateral Agent, at
least ten business days prior to the date of the proposed
release, (1) a written request for release describing the item of
Collateral and the terms of the sale, lease, transfer or other
disposition in reasonable detail, including, without limitation,
the price and any expenses incurred in connection with the
transaction, (2) a form of release for execution by the
Collateral Agent and (3) a certificate of such grantor stating
that (i) the transaction is in compliance with the Indenture;
(ii) except where the Collateral is cash, the Collateral Fair
Market Value to be released, together with a written opinion of a
qualified independent valuation firm as to such Collateral Fair
Market Value, and (iii) other matters as the Collateral Agent may
reasonably request, and
. the proceeds of any such sale, lease, transfer or other
disposition of Collateral required to be applied, or any payment
to be made in connection therewith, in accordance with the
Indenture, to the extent so required, be paid.
Upon any sale, transfer or other disposition of any license agreement
or the right to receive royalties or payments under such license agreements of
any grantor in accordance with the provisions of the Indenture to a Wholly Owned
Restricted Subsidiary of Perry Ellis that is not organized under the laws of
United States of America, the Collateral Agent will, at such grantor's request
and expense, release such item of Collateral from the security interest granted
under the Security Agreement; provided, however, that:
. at the time of such request and such release, no Default shall
have occurred and be continuing,
. such grantor shall have delivered to the Collateral Agent, at
least ten business days prior to the date of the proposed
release, (1) a written request for release describing each
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license agreement or the right to receive royalties or payments
under such license agreements to be released and the terms of the
sale, transfer or other disposition in reasonable detail,
including, without limitation, the price and any expenses
incurred in connection with the transaction, (2) a form of
release for execution by the Collateral Agent and (3) a
certificate of such grantor stating that (i) the transaction is
in compliance with the Indenture; (ii) the Collateral Fair Market
Value of the license agreements or rights to receive royalties or
payments under such license agreements to be released, together
with a written opinion of a qualified independent valuation firm
as to such Collateral Fair Market Value; and (iii) other matters
as the Collateral Agent may reasonably request, and
. Perry Ellis complies with its obligation to pledge Additional
Collateral, if required under the Security Agreement and
Indenture.
Perry Ellis shall be obligated to pledge, or cause its
Subsidiaries to pledge, Additional Collateral:
(1) within 20 business days after the last day of every other
fiscal year, beginning January 31, 2004, where the
Collateral Fair Market Value on such date does not exceed
the aggregate principal amount of notes outstanding on
such date by 100%;
(2) within 20 business days after the closing of the sale,
transfer or other disposition of any license agreement or
rights to receive royalties or payments under such
license agreements by a grantor to a Wholly Owned
Restricted Subsidiary of Perry Ellis that is not
organized under the laws of the United States of America
if (i) the Collateral Fair Market Value (as certified on
a date within six months prior to such closing date)
minus (ii) the Collateral Fair Market Value of the
license agreements or rights to receive royalties or
payments under such license agreements released does not
exceed the aggregate principal amount of notes
outstanding on such closing date by 100%;
(3) within 20 business days after the closing of a Collateral
Sale Proceeds Offer whereby (a) less than 100% in
aggregate principal amount of the notes have been
purchased and (b) on such closing date, the amount that
is equal to (i) the Collateral Fair Market Value (as
certified on a date within six months of such closing
date) minus (ii) the Collateral Sale Proceeds used in the
Collateral Sale Proceeds Offer, does not exceed the
aggregate principal amount of notes outstanding on such
closing date by 100%; and
(4) within 20 business days after the closing date of an
Additional Notes offering if the Collateral Fair Market
Value on a date within six months of such closing date
does not exceed the aggregate principal amount of the
notes and Additional Notes outstanding by 100%.
Restrictions in the senior credit facility do not allow the
pledging of Additional Collateral in the foregoing circumstances. The
failure of Perry Ellis to pledge, or cause its Subsidiaries to pledge,
Additional Collateral when required would result in an Event of Default
and would give the Trustee and the holder of the notes the rights
described under "--Events of Defaults."
In addition to this obligation to secure the notes with
Additional Collateral, at its option, and subject to restrictions in
the senior credit facility, the Company may from time to time, pledge
Additional Collateral to the Collateral Agent.
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In this section, "Collateral" means
. all trademarks (including, without limitation, service marks),
collective marks, trade dress, logos, designs, slogans, domain
names, trade names, business names, corporate names and other
source identifiers, whether or not registered, whether
currently in use or not, including, without limitation, all
common law rights and registrations and applications for
registration thereof, including, without limitation, the
trademark registrations and trademark applications set forth
in a schedule to the Security Agreement (as such schedule may
be supplemented from time to time by security agreement
supplements executed and delivered by such grantor to the
Collateral Agent from time to time), and all other marks
registered in or applied for with the U.S. Patent and
Trademark Office or in any office or agency of any state or
territory of the United States or any foreign country (but
excluding any United States intent-to-use trademark
application to the extent that, and solely during the period
which, the grant of a security interest therein would impair
upon the validity and enforceability of such intent-to-use
trademark applications under applicable law) and all rights
herein provided by international treaties and conventions, all
extensions and renewals of any of the foregoing, together in
each case with the goodwill of the business connected
therewith and symbolized thereby, and all rights corresponding
thereto throughout the world and all other rights of any kind
whatsoever of such grantor accruing thereunder or pertaining
thereto (the "Trademarks");
. all license agreements, permits, consents, orders and
franchises relating to the Trademarks, including, without
limitation, the license agreements set forth in a schedule to
the Security Agreement (as such schedule may be supplemented
from time to time by security agreement supplements executed
and delivered by a grantor to the Collateral Agent from time
to time), and all proceeds, income, royalties and other
payments now or hereafter due and/or payable with respect
thereto, subject, in each case, to the terms of such license
agreements, permits, authorizations and franchises;
. any and all claims for damages and injunctive relief for past,
present and future infringement, dilution, misappropriation,
violation, misuse or breach with respect to the Collateral
with the right, but not the obligation, to sue for and
collect, or otherwise recover, such damages; and
. all proceeds of collateral for, and supporting obligations
relating to, any and all of the Collateral (including, without
limitation, proceeds, collateral and supporting obligations
that constitute property of the types described in the
foregoing clauses and, to the extent not otherwise included,
all (i) payments under insurance (whether or not the Trustee
is the loss payee thereof), or any damages, indemnity,
warranty or guaranty, payable by person of loss or damage to
or otherwise with respect to any of the foregoing Collateral
and (ii) cash.
"Additional Collateral" means, at any relevant date, assets
that (i) constitute similar or comparable assets to the Collateral
disposed of, (ii) has a Collateral Fair Market Value, that, together with
the Collateral Fair Market Value of existing Collateral, shall exceed the
aggregate principal amount of notes outstanding on such date by 100.0%,
and (iii) are free and clear of all Liens other than Liens permitted by
the paragraph (b) in the definition of "Permitted Liens."
"Collateral Fair Market Value" means, the value of the
Collateral concerned that is determined in good faith and evidenced by a
resolution of the board of directors filed with the Trustee and
Collateral Agent, which determination shall be based on the written
opinion of a qualified independent valuation firm prepared
contemporaneously with and attached to such resolution.
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Redemption
Optional Redemption. The notes will be redeemable at the option of the
Company, as a whole or from time to time in part, at any time on or after March
15, 2005 at the redemption prices (expressed as percentages of principal amount)
set forth below, together with accrued interest, if any, to the date of
redemption, if redeemed during the 12-month period beginning on March 15 of the
years indicated below (subject to the right of holders of record on relevant
record dates to receive interest due on an interest payment date):
Redemption
Year Price
---- -----
2005 ........................................ 104.750%
2006 ........................................ 102.375%
2007 and thereafter ......................... 100.000%
In addition, at any time or from time to time before March 15, 2005,
the Company may redeem up to 35% of the aggregate principal amount of the notes
(including the principal amount of any Additional Notes) within 60 days of one
or more Public Equity Offerings with the net proceeds of such offering at a
redemption price equal to 109.500% of the principal amount thereof, together
with accrued interest, if any, to the date of redemption (subject to the right
of holders of record on relevant record dates to receive interest due on
relevant interest payment dates); provided that, after giving effect to any such
redemption, at least 65% of the aggregate principal amount of the notes
initially issued (including the principal amount of any Additional Notes)
remains outstanding.
Mandatory Redemption. Following the occurrence of a Change in Control,
the holders may require the Company to make an offer to purchase all outstanding
notes at a price of 101% of the principal amount thereof (determined at the date
of purchase), plus accrued interest thereon, if any, to the date of purchase,
and, upon the occurrence of an Asset Sale, the Company may be obligated to make
an offer to purchase all or a portion of the outstanding notes at a price of
100% of the principal amount thereof (determined at the date of purchase), plus
accrued interest, if any, to the date of purchase. See "--Certain
Covenants--Purchase of Notes upon a Change in Control" and "--Limitation on Sale
of Assets," respectively.
Selection; Effect of Redemption Notice. If less than all the notes are
to be redeemed, the particular notes to be redeemed will be selected by the
Trustee in compliance with the requirements of the principal national security
exchange, if any, on which the notes are listed, or if the notes are not so
listed, by such method as the Trustee will deem fair and appropriate; provided
that no such partial redemption will reduce the principal amount of a note not
redeemed to less than $1,000; provided further that any such redemption pursuant
to the provisions relating to a Public Equity Offering shall be made on a pro
rata basis or on as nearly a pro rata basis as practicable (subject to the
procedures of DTC or any other depository). Notice of redemption will be sent by
first-class mail at least 30 but not more than 60 days before the redemption
date to each holder of notes to be redeemed at its registered address. On and
after the redemption date, interest will cease to accrue on notes or portions
thereof called for redemption, unless the Company defaults in the payment of the
redemption price.
Sinking Fund
The notes will not be entitled to the benefit of any sinking fund.
Ranking
The notes will be senior secured obligations of the Company and will
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company and will rank senior in right of
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payment to all existing and future subordinated indebtedness of the Company. The
notes will also be effectively senior to all unsecured indebtedness of the
Company to the extent of the value of the assets securing the notes.
Each Subsidiary Guarantee will be a senior obligation of such Guarantor
issuing such Subsidiary Guarantee, ranking pari passu with all other existing
and future senior indebtedness of such Guarantor and will rank senior in right
of payment to all existing and future subordinated indebtedness of the
Guarantors. In the case of Jantzen, its Guarantee shall be a senior secured
obligation of Jantzen, and therefore will be effectively senior to all unsecured
indebtedness of Jantzen to the extent of the value of Jantzen's assets securing
the notes.
After giving effect to the issuance and sale of the existing notes, the
use of the net proceeds therefrom and the consummation of the Jantzen
acquisition, on January 31, 2002, the Company would have had $154.7 million of
consolidated indebtedness outstanding, including $55.6 million of senior secured
indebtedness that would also have been senior secured indebtedness of the
Guarantors. In addition, the Company would have had additional availability
under the senior credit facility of approximately $56.4 million, all of which
would have been senior secured indebtedness if borrowed. The Company also has
approximately $14.5 million in secured obligations over the balance of the term
of the synthetic lease.
Subsidiary Guarantees
Payment of the principal of, premium, if any, and interest on the
notes, when and as the same become due and payable (whether at Stated Maturity
or on a redemption date, or pursuant to a Change in Control Purchase Offer or an
Excess Proceeds Offer, and whether by declaration of acceleration, call for
redemption or otherwise), will be guaranteed, jointly and severally, on a senior
basis by the Guarantors. The Indenture will provide that the obligations of each
Guarantor under its Subsidiary Guarantee will be limited so as not to constitute
a fraudulent conveyance under applicable laws. Each of the Company's current
material Restricted Subsidiaries will be Guarantors. Future Restricted
Subsidiaries also may be required to guarantee the notes. See "Certain
Covenants--Limitation on Guarantees of Indebtedness by Restricted Subsidiaries."
The Indenture will provide further that, so long as no Default exists
or would exist, the Subsidiary Guarantee issued by any Guarantor shall be
automatically and unconditionally released and discharged upon any sale,
exchange or transfer to any Person that is not an Affiliate of the Company of
all of the Company's Capital Stock in, or all or substantially all the assets
of, such Guarantor (which transaction is otherwise in compliance with the
Indenture, including, without limitation, the provisions of "--Certain
Covenants--Limitation on Sale of Assets" and "--Limitation on Issuances and
Sales of Preferred Stock by Restricted Subsidiaries").
Certain Covenants
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness. The Company will not, and will not permit
any Restricted Subsidiary to, create, issue, assume, guarantee or in any manner
become directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Indebtedness (including any Acquired Indebtedness),
other than Permitted Indebtedness; provided, however, that (i) the Company and
any Guarantor may incur Indebtedness, other than Acquisition Indebtedness, if at
the time of such incurrence the Consolidated Fixed Charge Coverage Ratio for the
four full fiscal quarters immediately preceding the incurrence of such
Indebtedness, taken as one period, would have been at least equal to 2:1 and
(ii) the Company and any Guarantor may incur Acquisition Indebtedness if at the
time of such incurrence the Consolidated Fixed Charge Coverage Ratio for the
four full fiscal quarters immediately preceding the incurrence of such
Indebtedness, taken as one period, would have been at least equal to 2.25:1.
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Limitation on Restricted Payments. (a) The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Company or any Restricted
Subsidiary (other than dividends or distributions payable solely in shares of
Qualified Capital Stock of the Company or in options, warrants or other rights
to acquire such shares of Qualified Capital Stock) (other than the declaration
or payment of dividends or distributions to the extent declared or paid to the
Company or any Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of the Company or any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Restricted Subsidiary) or any options, warrants or other rights to acquire such
shares of Capital Stock;
(iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal payment,
sinking fund payment or maturity, any Subordinated Indebtedness of the Company
or any Restricted Subsidiary; or
(iv) make any Investment (other than any Permitted Investment) in any
Person (such payments or other actions described in (but not excluded from)
clauses (i) through (iv) are collectively referred to as "Restricted Payments"),
unless at the time of, and immediately after giving effect to, the proposed
Restricted Payment (the amount of any such Restricted Payment, if other than
cash, being the Fair Market Value of the assets to be transferred), (i) no
Default or Event of Default shall have occurred and be continuing, (2) the
Company could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "Limitation on Indebtedness" covenant
and (3) the aggregate amount of all Restricted Payments declared or made after
the date of the Indenture shall not exceed the sum of:
(A) 50% of the Consolidated Adjusted Net Income of the Company
accrued on a cumulative basis during the period beginning on date of
the Indenture and ending on the last date of the Company's last fiscal
quarter ending prior to the date of such proposed Restricted Payment
(or, if such aggregate cumulative Consolidated Adjusted Net Income
shall be a loss, minus 100% of such loss), plus
(B) the aggregate net cash proceeds received after the date of
the Indenture by the Company from the issuance or sale (other than to
any Subsidiary) of shares of Qualified Capital Stock of the Company
(including upon the exercise of options, warrants or rights) or
warrants, options or rights to purchase shares of Qualified Capital
Stock of the Company, plus
(C) the aggregate net cash proceeds received after the date of
the Indenture by the Company from the issuance or sale (other than to
any Subsidiary) of debt securities or Redeemable Capital Stock that
have been converted into or exchanged for Qualified Capital Stock of
the Company, to the extent such securities were originally sold for
cash, together with the aggregate net cash proceeds received by the
Company (other than from a Subsidiary) in connection with such
conversion or exchange, plus
(D) to the extent that any Investment constituting a
Restricted Payment that was made after the date of the Indenture is
sold or is otherwise liquidated or repaid, an amount (to the extent
not included in Consolidated Adjusted Net Income) equal to the
lesser of (x) the cash proceeds with respect to such Investment (less
the cost of the disposition of such Investment and net of taxes) and
(y) the initial amount of such Investment, plus
(E) so long as the Designation thereof was treated as a
Restricted Payment that was made after the date of the Indenture, with
respect to any Unrestricted Subsidiary that has been redesignated as a
Restricted Subsidiary after the date of the Indenture in accordance
with the
75
"Limitation on Unrestricted Subsidiaries" covenant, the Fair Market
Value of the Company's interest in such Subsidiary at the time of such
redesignation; provided that such amount shall not in any case exceed
the Designation Amount with respect to such Restricted Subsidiary upon
its Designation, minus the Designation Amount (measured as of the date
of Designation) with respect to any Restricted Subsidiary which has
been designated as an Unrestricted Subsidiary after the date of the
Indenture in accordance with the "Limitation on Unrestricted
Subsidiaries" covenant, plus
(F) $1.0 million.
(b) Even if the Company and its Restricted Subsidiaries is not in
compliance with paragraph (a) of this covenant, the Company and its Restricted
Subsidiaries may take the following actions so long as (with respect to clauses
(ii), (iii), (iv), (v) and (vi) below) at the time of and after giving effect
thereto no Default or Event of Default shall have occurred and be continuing:
(i) the payment of any dividend within 60 days after the
date of declaration thereof, if at such date of declaration the payment
of such dividend would have complied with the provisions of paragraph
(a) of this covenant;
(ii) the purchase, redemption or other acquisition or
retirement for value of any shares of Capital Stock of the Company in
exchange for, or out of the net cash proceeds of a substantially
concurrent issuance and sale (other than to a Subsidiary) of, shares of
Qualified Capital Stock of the Company;
(iii) the purchase, redemption, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness in
exchange for, or out of the net cash proceeds of a substantially
concurrent issuance and sale (other than to a Subsidiary) of, shares of
Qualified Capital Stock of the Company;
(iv) the purchase of any Subordinated Indebtedness at a
purchase price not greater than 101% of the principal amount thereof in
the event of a Change in Control in accordance with provisions similar
to the "Purchase of Notes upon a Change in Control" covenant; provided
that prior to such purchase the Company has made the Change in Control
Offer as provided in such covenant with respect to the notes and has
purchased all notes validly tendered for payment in connection with
such Change in Control Offer;
(v) the purchase, redemption, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness
(other than Redeemable Capital Stock) in exchange for, or out of the
net cash proceeds of a substantially concurrent incurrence (other than
to a Subsidiary) of, new Subordinated Indebtedness of the Company or
the Restricted Subsidiary whose Subordinated Indebtedness is being
purchased, redeemed, defeased, acquired or retired so long as (A) the
principal amount of such new Subordinated Indebtedness does not exceed
the principal amount (or, if such Subordinated Indebtedness being
refinanced provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration
thereof, such lesser amount as of the date of determination) of the
Indebtedness being so purchased, redeemed, defeased, acquired or
retired, plus either the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such
Indebtedness being refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing,
plus, in either case, the amount of reasonable expenses of the Company
incurred in connection with such refinancing, (B) such new Subordinated
Indebtedness is subordinated to the notes to the same extent as such
Indebtedness so purchased, redeemed, defeased, acquired or retired and
(C) such new Indebtedness has an Average Life longer than the Average
Life of the notes and no scheduled principal payment prior to the 91st
day after the final Stated Maturity of principal of the notes; and
76
(vi) purchases or redemptions of Capital Stock (including cash
settlements of stock options) held by employees, officers or directors
of the Company or any of its subsidiaries upon their death, disability
or termination of employment with the Company or one of its
subsidiaries; provided that such payments shall not exceed $1.0 million
in any fiscal year in the aggregate or $3.0 million in the aggregate
during the term of the notes.
The actions described in clauses (i), (ii), (iii), (iv) and (vi) of
this paragraph (b) shall be Restricted Payments that shall be permitted to be
taken in accordance with this paragraph (b) but shall reduce the amount that
would otherwise be available for Restricted Payments under clause (3) of
paragraph (a)(iv) of this covenant and the actions described in clause (v) of
this paragraph (b) shall be Restricted Payments that shall be permitted to be
taken in accordance with this paragraph (b) and shall not reduce the amount that
would otherwise be available for Restricted Payments under clause (3) of
paragraph (a)(iv) of this covenant.
Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries. The Indenture will provide that the Company (i) will not permit
any Restricted Subsidiary to issue any Preferred Stock (other than to the
Company or a Wholly Owned Restricted Subsidiary) and (ii) will not permit any
person (other than the Company or a Wholly Owned Restricted Subsidiary) to own
any Preferred Stock of any Restricted Subsidiary.
Limitation on Transactions with Affiliates. The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with, or for the benefit of, any Affiliate of the Company or any
Restricted Subsidiary (other than the Company or a Wholly Owned Restricted
Subsidiary) (collectively, "Interested Persons"), unless (i) such transaction or
series of transactions are on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than would have been able to be
obtained in an arm's-length transaction with third parties that are not
Interested Persons, (ii) with respect to any transaction or series of related
transactions involving aggregate consideration equal to or greater than $1.0
million, the Company has delivered an officers' certificate to the Trustee
certifying that such transaction or series of transactions complies with clause
(i) above, (iii) with respect to any transaction or series of related
transactions involving aggregate consideration equal to or greater than $5.0
million, such transaction or series of related transactions (x) has been
approved by the Board of Directors of the Company (including a majority of the
Disinterested Directors of the Company) or (y) the Company has obtained a
written opinion from a nationally recognized investment banking or valuation
firm certifying that such transaction or series of related transactions is fair
to the Company or its Restricted Subsidiary, as the case may be, from a
financial point of view and (iv) with respect to any transaction or series of
related transactions involving aggregate consideration equal to or greater than
$10.0 million, the Company has obtained a written opinion from a nationally
recognized investment banking or valuation firm certifying that such transaction
or series of transactions is fair to the Company or its Restricted Subsidiaries,
as the case may be, from a financial point of view; provided, however, that this
covenant will not restrict (1) the Company from paying regular compensation and
fees to directors of the Company or any Restricted Subsidiary who are not
employees of the Company or any Restricted Subsidiary which are reasonable and
customary for comparable companies in the same industry, (2) loans and advances
to officers, directors and employees of the Company or any Restricted Subsidiary
in the ordinary course of business in accordance with the past practices of the
Company or any Restricted Subsidiary not to exceed $1.0 million in the aggregate
outstanding at any time, (3) any transactions made in compliance with the
"Limitation on Restricted Payments" covenant, and (4) the performance of any
written agreement as in effect on the date of the Indenture.
Limitation on Liens. Other than Permitted Liens, the Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume or suffer to exist any Lien securing Pari Passu
Indebtedness or Subordinated Indebtedness on or with respect to any of its
property or assets,
77
including any shares of stock or indebtedness of any Restricted Subsidiary,
whether owned at the date of the Indenture or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any right
to receive income thereon, unless (x) in the case of any Lien securing Pari
Passu Indebtedness, the notes or the Subsidiary Guarantee of such Restricted
Subsidiary, as the case may be, are secured by a Lien on such property, assets
or proceeds that is senior in priority to or pari passu with such Lien and (y)
in the case of any Lien securing Subordinated Indebtedness, the notes or the
Subsidiary Guarantee of such Restricted Subsidiary, as the case may be, are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Lien.
Purchase of Notes upon a Change in Control. If a Change in Control
shall occur at any time, then each holder of notes will have the right to
require that the Company purchase such holder's notes, in whole or in part in
integral multiples of $1,000, at a purchase price (the "Change in Control
Purchase Price") in cash in an amount equal to 101% of the principal amount
thereof, plus accrued interest, if any, to the date of purchase (the "Change in
Control Purchase Date"), pursuant to the offer described below (the "Change in
Control Offer") and the other procedures set forth in the Indenture.
Within 30 days following any Change in Control, the Company shall
notify the Trustee thereof and give written notice of such Change in Control to
each holder of notes by first-class mail, postage prepaid, at the address of
such holder appearing in the security register, stating, among other things, (i)
the Change in Control Purchase Price and the Change in Control Purchase Date,
which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed, or such later date as is necessary to
comply with requirements under the Exchange Act or any applicable securities
laws or regulations; (ii) that any note not tendered will continue to accrue
interest; (iii) that, unless the Company defaults in the payment of the Change
in Control Purchase Price, any notes accepted for payment pursuant to the Change
in Control Offer shall cease to accrue interest after the Change in Control
Purchase Date; and (iv) certain procedures that a holder of notes must follow to
accept a Change in Control Offer or to withdraw such acceptance.
If a Change in Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change in Control
Purchase Price for all of the notes that might be delivered by holders of the
notes seeking to accept the Change in Control Offer. Additionally, restrictions
in the Senior Credit Facility do not allow the repurchase of the notes in the
event of a Change in Control. The failure of the Company to make or consummate
the Change in Control Offer or pay the Change in Control Purchase Price when due
would result in an Event of Default and would give the Trustee and the holders
of the notes the rights described under "--Events of Default."
One of the events which constitutes a Change in Control under the
Indenture is the disposition of "all or substantially all" of the Company's
assets. This term has not been interpreted under New York law (which is the
governing law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event holders of the notes elect to require the Company to
purchase the notes and the Company elects to contest such election, there can be
no assurance as to how a court interpreting New York law would interpret the
phrase.
The existence of a holder's right to require the Company to purchase
such holder's notes upon a Change in Control may deter a third party from
acquiring the Company in a transaction that constitutes a Change in Control.
The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than
restrictions existing under the Senior Credit Facility or under Indebtedness as
in effect on the date of the Indenture) that would materially impair the ability
of the Company to make a Change in Control Offer to purchase the notes or, if
such Change in Control Offer is made, to pay for the notes tendered for
purchase.
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The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws and regulations in connection with a Change in Control Offer.
Limitation on Sale of Assets. (a) The Company will not, and will not
permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Restricted Subsidiary for such
Asset Sale is not less than the fair market value of the assets sold (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a Board Resolution) and (ii) at least 75% of such
consideration consists of cash or Cash Equivalents; provided, however, that (A)
the amount of any Indebtedness of a Restricted Subsidiary that is not a
Guarantor or any Indebtedness of the Company (other than Subordinated
Indebtedness) or Indebtedness of any Guarantor (other than Subordinated
Indebtedness) that is assumed by the transferee in such Asset Sale and from
which the Company and the Restricted Subsidiaries are fully released shall be
deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company and its Restricted Subsidiaries (excluding
any liabilities that are incurred in connection with or in anticipation of such
Asset Sale) and (B) any securities, notes or other similar obligations received
by the Company or such Restricted Subsidiary from such transferee that are
converted within 30 days of the related Asset Sale into cash or Cash Equivalents
(to the extent of the cash or Cash Equivalents received) shall be deemed to be
cash for purposes of determining the percentage of cash consideration received
by the Company or the Restricted Subsidiaries.
(b) If the Company or any Restricted Subsidiary engages in an Asset
Sale, the Company may use the Net Cash Proceeds thereof, within 365 days after
such Asset Sale, to (i) permanently repay or prepay any then outstanding
Indebtedness of the Company or any Subsidiary Guarantor, or any Restricted
Subsidiary that is not a Guarantor, in each case other than Subordinated
Indebtedness or Pari Passu Indebtedness that is not secured (and to
correspondingly reduce commitments with respect thereto) or (ii) invest (or
enter into a legally binding agreement to invest) in other properties or assets
to replace the properties or assets that were the subject of the Asset Sale or
in properties and assets that will be used in businesses of the Company or its
Restricted Subsidiaries, as the case may be, existing at the time such assets
are sold. If any such legally binding agreement to invest such Net Cash Proceeds
is terminated, then the Company may, within 90 days of such termination or
within 365 days of such Asset Sale, whichever is later, invest such Net Cash
Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical
contained in such clause (ii)) above. The amount of such Net Cash Proceeds not
so used as set forth above in this paragraph (b) constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $5.0 million,
the Company shall, within 30 business days, make an offer to purchase (an
"Excess Proceeds Offer") from all holders of notes, on a pro rata basis, that
aggregate principal amount of notes as can be purchased with the Note Portion of
Excess Proceeds (defined below) at a price in cash equal to 100% of the
aggregate principal amount of the notes plus accrued and unpaid interest, if
any, to the date such Excess Proceeds Offer is consummated. To the extent that
the aggregate principal amount of notes validly tendered and not withdrawn
pursuant to an Excess Proceeds Offer is less than the Note Portion of Excess
Proceeds, the Company may use such surplus for general corporate purposes. If
the aggregate principal amount of notes validly tendered and not withdrawn by
holders thereof exceeds the amount of notes that can be purchased with the Note
Portion of Excess Proceeds, notes to be purchased will be selected pro rata
based on the aggregate principal amount of notes tendered by each holder. Upon
completion of an Excess Proceeds Offer, the amount of Excess Proceeds shall be
reset to zero.
In the event that any other secured indebtedness of the Company that
ranks pari passu with the notes (the "Other Debt") requires an offer to purchase
to be made to repurchase such Other Debt upon the consummation of an Asset Sale,
the Company may apply the Excess Proceeds otherwise required to be applied to an
Excess Proceeds Offer to offer to purchase such Other Debt and to an Excess
Proceeds Offer so long as the amount of such Excess Proceeds applied to purchase
the notes is not less than the Note
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Portion of Excess Proceeds. With respect to any Excess Proceeds, the Company
shall make the Excess Proceeds Offer in respect thereof at the same time as the
analogous offer to purchase is made pursuant to any Other Debt and the purchase
date in respect thereof shall be the same as the purchase date in respect of any
Other Debt.
For purpose of this covenant, "Note Portion of Excess Proceeds" means
(1) if no Other Debt is being offered to be purchased, the amount of the Excess
Proceeds and (2) if Other Debt is being offered to be purchased, the amount of
the Excess Proceeds equal to the product of (z) the Excess Proceeds and (y) a
fraction the numerator of which is the aggregate principal amount of the
outstanding notes (the "Note Amount") and the denominator of which is the sum of
the Note Amount and the aggregate principal amount (or accreted value in the
case of original issue discount Other Debt) as of the relevant purchase date of
all outstanding Other Debt for which an offer to purchase is being made in
compliance with this covenant.
In the event that the Company makes an Excess Proceeds Offer, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any other applicable Federal or state securities laws and
regulations and any applicable requirements of any securities exchange on which
the notes are listed.
Limitation on Sale of Collateral. (a) The Company will not, and will
not permit any Restricted Subsidiary to, engage in any Collateral Sale unless
(i) the consideration received by the Company or such Restricted Subsidiary for
such Collateral Sale is not less than the Collateral Fair Market Value and (ii)
100% of such consideration consists of cash or Cash Equivalents; provided,
however, that any securities, notes or other similar obligations received by the
Company or such Restricted Subsidiary from such transferee that are converted
within 30 days of the related Collateral Sale into cash or Cash Equivalents (to
the extent of the cash or Cash Equivalents received) shall be deemed to be cash
for purposes of determining the percentage of cash consideration received by the
Company or the Restricted Subsidiaries.
(b) If the Company or any Restricted Subsidiary engages in a Collateral
Sale, subject to paragraph (c) below, the Company shall pledge the Collateral
Sale Proceeds to the Collateral Agent as Additional Collateral.
(c) When the aggregate amount of Collateral Sale Proceeds exceeds $5.0
million, the Company shall use the Collateral Sale Proceeds thereof, within 30
business days, to make an offer to purchase (a "Collateral Sale Proceeds Offer")
from all holders of notes, on a pro rata basis, that aggregate principal amount
of notes as can be purchased with the Collateral Sale Proceeds at a price in
cash equal to 100% of the aggregate principal amount of the notes plus accrued
and unpaid interest, if any, to the date such Collateral Sale Proceeds Offer is
consummated. To the extent that the aggregate principal amount of notes validly
tendered and not withdrawn pursuant to a Collateral Sale Proceeds Offer is less
than the Collateral Sale Proceeds, the Company shall pledge such surplus as
Additional Collateral. If the aggregate principal amount of notes validly
tendered and not withdrawn by holders thereof exceeds the amount of notes that
can be purchased with the Collateral Sale Proceeds, notes to be purchased will
be selected pro rata based on the aggregate principal amount of notes tendered
by each holder.
In the event that the Company makes a Collateral Sale Proceeds Offer,
the Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any other applicable Federal or state securities laws and
regulations and any applicable requirements of any securities exchange on which
the notes are listed.
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries.
(a) The Company will not permit any Restricted Subsidiary that is not a
Guarantor, directly or indirectly, to guarantee, assume or in any other manner
become liable with respect to any Indebtedness of the Company or any other
Restricted Subsidiary unless (i)(A) such Restricted Subsidiary simultaneously
executes and delivers a supplemental
80
indenture, in form satisfactory to the Trustee, providing for a guarantee on the
same terms as the guarantee of such Indebtedness of the obligations under the
notes and the Indenture by such Restricted Subsidiary and (B), with respect to
any guarantee of Subordinated Indebtedness, any such guarantee shall be
subordinated to such Restricted Subsidiary's Subsidiary Guarantee at least to
the same extent as such Subordinated Indebtedness is subordinated to the notes,
and (ii) such Restricted Subsidiary delivers to such Trustee an opinion of
counsel reasonably satisfactory to the Trustee to the effect that such
supplemental indenture has been duly executed and delivered by such Restricted
Subsidiary and is in compliance with the terms of the Indenture.
(b) Notwithstanding the foregoing, any guarantee of the notes created
pursuant to the provisions described in the foregoing paragraph (a) will provide
by its terms that it will be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer to any Person not an
Affiliate of the Company of all of the Company's Capital Stock in, or all or
substantially all the assets of, the applicable Guarantor (which sale, exchange
or transfer is otherwise in compliance with the Indenture) or (ii) the release
by the holders of the Indebtedness of the Company described in the preceding
paragraph of their guarantee by such Restricted Subsidiary (including any deemed
release upon payment in full of all obligations under such Indebtedness), at a
time when (A) no other Indebtedness of the Company has been guaranteed by such
Restricted Subsidiary or (B) the holders of all such other Indebtedness which is
guaranteed by such Restricted Subsidiary also release their guarantee by such
Restricted Subsidiary (including any deemed release upon payment in full of all
obligations under such Indebtedness).
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in
cash or otherwise, or make any other distributions on or in respect of its
Capital Stock to the Company or any other Restricted Subsidiary, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans or advances to the Company or any other Restricted Subsidiary, (d)
transfer any of its properties or assets to the Company or any other Restricted
Subsidiary (other than customary restrictions on transfers of property subject
to a Lien permitted under the Indenture that would not materially adversely
affect the Company's ability to satisfy its obligations under the notes and the
Indenture) or (e) guarantee any Indebtedness of the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of (i) applicable law, (ii) customary provisions restricting
subletting or assignment of any lease or assignment of any other contract to
which the Company or any Restricted Subsidiary is a party or to which any of
their respective properties or assets are subject, (iii) any agreement or other
instrument of a Person acquired by the Company or any Restricted Subsidiary in
existence at the time of such acquisition (but not created in contemplation
thereof), which encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, (iv) encumbrances and restrictions in
effect on the Issue Date pursuant to the Senior Credit Facility and its related
documentation, (v) any encumbrance or restriction contained in contracts for
sales of assets permitted by the "Limitation on Sale of Assets" covenant with
respect to the assets to be sold pursuant to such contracts and (vi) any
encumbrance or restriction existing under any agreement that extends, renews,
refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clauses (iii) and (iv); provided that the terms
and conditions of any such encumbrances or restrictions are not materially less
favorable to the holders of the notes than those under or pursuant to the
agreement so extended, renewed, refinanced or replaced.
Limitation on Sale and Leaseback Transactions. The Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly, enter
into any Sale and Leaseback Transaction with respect to any property or assets
(whether now owned or hereafter acquired), unless (i) the sale or transfer of
such property or assets to be leased is treated as an Asset Sale and the Company
complies with the "Limitation on Sale of Assets" covenant and (ii) the Company
or such Restricted Subsidiary would be permitted to
81
incur Indebtedness under the "Limitation on Indebtedness" covenant in the amount
of the Capitalized Lease Obligations incurred in respect of such Sale and
Leaseback Transaction.
Limitation on Unrestricted Subsidiaries. (a) The Board of Directors of
the Company may designate any Subsidiary (other than a Guarantor) to be an
"Unrestricted Subsidiary" (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the
time of or after giving effect to such designation;
(ii) the Company would be permitted to make an Investment
(other than a Permitted Investment) at the time of Designation
(assuming the effectiveness of such designation) pursuant to the first
paragraph of the "Limitation on Restricted Payments" covenant in an
amount (the "Designation Amount") equal to the greater of (1) the net
book value on such date of the Company's interest in such Subsidiary
calculated in accordance with GAAP or (2) the Fair Market Value on such
date of the Company's interest in such Subsidiary as determined in good
faith by the Company's Board of Directors;
(iii) the Company would be permitted under the Indenture to
incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the "Limitation on Indebtedness" covenant at
the time of such designation (assuming the effectiveness of such
designation); and
(iv) such Unrestricted Subsidiary does not own any Capital
Stock in any Restricted Subsidiary of the Company which is not
simultaneously being designated an Unrestricted Subsidiary.
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to the
"Limitation on Restricted Payments" covenant for all purposes of the Indenture
in an amount equal to the greater of (1) the net book value of the Company's
interest in such Subsidiary calculated in accordance with GAAP or (2) the Fair
Market Value of the Company's interest in such Subsidiary as determined in good
faith by the Board of Directors of the Company.
The Indenture will further provide that neither the Company nor any
Restricted Subsidiary shall at any time (x) provide a guarantee of, or similar
credit support to, any Indebtedness of any Unrestricted Subsidiary (including of
any undertaking, agreement or instrument evidencing such Indebtedness); provided
that the Company may pledge Capital Stock of any Unrestricted Subsidiary on a
nonrecourse basis such that the pledgee has no claim whatsoever against the
Company other than to obtain such pledged property, (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any other Indebtedness that provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon (or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity) upon the occurrence of a default with respect to any
other Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including
any corresponding right to take enforcement action against such Unrestricted
Subsidiary).
(b) The Board of Directors of the Company may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if:
(i) no Default or Event of Default shall have occurred and
be continuing at the time of and after giving effect to such
designation; and
(ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such designation would, if
incurred at such time, have been permitted to be incurred for all
purposes under the Indenture.
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Any such designation as an Unrestricted Subsidiary or Restricted
Subsidiary by the Board of Directors of the Company shall be evidenced to the
Trustee by filing a board resolution with the Trustee giving effect to such
designation.
Reports. The Company will file on a timely basis with the SEC, to the
extent such filings are accepted by the SEC and whether or not the Company has a
class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that the Company would be required to file
if it were subject to Section 13 or 15 of the Exchange Act. The Company will
also be required (a) to file with the Trustee, and provide to each holder of
notes, without cost to such holder, copies of such reports and documents within
15 days after the date on which the Company files such reports and documents
with the SEC or the date on which the Company would be required to file such
reports and documents if the Company were so required, and (b) if filing such
reports and documents with the SEC is not accepted by the SEC or is prohibited
under the Exchange Act, to supply at the Company's cost copies of such reports
and documents to any prospective holder of notes promptly upon written request.
If any Guarantor's financial statements would be required to be included in the
financial statements filed or delivered pursuant to the Indenture if the Company
were subject to Section 13 or 15(d) of the Exchange Act, the Company shall
include such Guarantor's financial statements in any filing or delivery pursuant
to the Indenture. The Indenture also provides that, so long as any of the notes
remain outstanding, the Company will make available to any prospective purchaser
of notes or beneficial owner of notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act, until such
time as the Company has either exchanged the notes for securities identical in
all material respects which have been registered under the Securities Act or
until such time as the holders thereof have disposed of such notes pursuant to
an effective registration statement under the Securities Act.
Consolidation, Merger and Sale of Assets
The Company will not, in a single transaction or through a series of
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets as an entirety to any other Person or Persons or
permit any of its Restricted Subsidiaries to enter into any such transaction or
series of transactions if such transaction or series of transactions, in the
aggregate, would result in the sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of the properties and assets of
the Company and its Restricted Subsidiaries on a consolidated basis to any other
Person or Persons, unless at the time and immediately after giving effect
thereto (i) either (a) the Company will be the continuing corporation or (b) the
Person (if other than the Company) formed by such consolidation or into which
the Company or such Restricted Subsidiary is merged or the Person that acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all the properties and assets of the Company and its Restricted
Subsidiaries on a consolidated basis (the "Surviving Entity") (1) will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and (2) will
expressly assume, by a supplemental indenture in form reasonably satisfactory to
the Trustee, the Company's obligation for the due and punctual payment of the
principal of, premium, if any, and interest on all the notes and the performance
and observance of every covenant of the Indenture on the part of the Company to
be performed or observed; (ii) immediately before and immediately after giving
effect to such transaction or series of transactions on a pro forma basis (and
treating any obligation of the Company or any Restricted Subsidiary incurred in
connection with or as a result of such transaction or series of transactions as
having been incurred at the time of such transaction), no Default or Event of
Default will have occurred and be continuing; (iii) immediately after giving
effect to such transaction or series of transactions on a pro forma basis (on
the assumption that the transaction or series of transactions occurred on the
first day of the four-quarter period immediately prior to the consummation of
such transaction or series of transactions with the appropriate adjustments with
respect to the transaction or series of transactions being included in such pro
forma calculation), the Company (or the Surviving Entity if the Company is not
the continuing obligor under the Indenture) could incur at least $1.00 of
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additional Indebtedness (other than Permitted Indebtedness) under the provisions
of the "Limitation on Indebtedness" covenant; (iv) each Guarantor, if any,
unless it is the other party to the transactions described above, shall have by
supplemental indenture confirmed that its Subsidiary Guarantee will apply to
such Person's obligations under the Indenture and the notes; and (v) if any of
the property or assets of the Company or any of its Restricted Subsidiaries
would thereupon become subject to any Lien, the provisions of the "Limitation on
Liens" covenant are complied with.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the Company or the Surviving
Entity shall have delivered to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, conveyance,
transfer, lease or other disposition, and if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
comply with the requirements of the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied with.
Each Guarantor, if any (other than any Subsidiary whose Subsidiary
Guarantee is being released pursuant to the provisions under "--Subsidiary
Guarantees" or "--Certain Covenants--Limitation on Issuance of Guarantees of
Indebtedness by Subsidiaries" as a result of such transaction), shall not, and
the Company will not permit a Guarantor to, in a single transaction or through a
series of related transactions, merge or consolidate with or into any other
corporation or other entity (other than the Company or any Guarantor), or sell,
assign, convey, transfer, lease or otherwise dispose of its properties and
assets on a consolidated basis substantially as an entirety to any entity (other
than the Company or any Guarantor) unless (i) either (a) such Guarantor shall be
the continuing corporation or (b) the Person (if other than such Guarantor)
formed by such consolidation or into which such Guarantor is merged or the
entity which acquires by sale, assignment, conveyance, transfer, lease or
disposition all or substantially all of the properties and assets of such
Guarantor, as the case may be, shall be a corporation organized and validly
existing under the laws of the United States, any state thereof or the District
of Columbia, and shall expressly assume by an indenture supplemental to the
Indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of such Guarantor under the notes and the
Indenture; (ii) immediately before and immediately after giving effect to such
transaction on a pro forma basis, no Default or Event of Default shall have
occurred and be continuing; and (iii) such Guarantor shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
such consolidation, merger, sale, assignment, conveyance, transfer, lease or
disposition and such supplemental indenture comply with the Indenture.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of the Company or any Guarantor in accordance with the immediately
preceding paragraphs, the successor Person formed by such consolidation or into
which the Company or such Guarantor, as the case may be, is merged or the
successor Person to which such sale, assignment, conveyance, transfer, lease or
disposition is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company or such Guarantor, as the case may be,
under the Indenture and/or the Subsidiary Guarantees, as the case may be, with
the same effect as if such successor had been named as the Company or such
Guarantor, as the case may be, therein and/or in the Subsidiary Guarantees, as
the case may be. When a successor assumes all the obligations of its predecessor
under the Indenture, the notes or a Subsidiary Guarantee, as the case may be,
the predecessor shall be released from those obligations; provided that in the
case of a transfer by lease, the predecessor shall not be released from the
payment of principal and interest on the notes or a Subsidiary Guarantee, as the
case may be.
Events of Default
The following will be "Events of Default" under the Indenture:
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(i) default in the payment of any interest on any note when it
becomes due and payable and continuance of such default for a
period of 30 days;
(ii) default in the payment of the principal of, or premium, if
any, on any note at its Maturity (upon acceleration, optional
redemption, required purchase or otherwise);
(iii) default in the performance, or breach, of the provisions
described in "Consolidation, Merger and Sale of Assets," the
failure to make or consummate a Change in Control Offer in
accordance with the provisions of the "Purchase of Notes upon
a Change in Control" covenant or the failure to make or
consummate an Excess Proceeds Offer in accordance with the
provisions of the "Limitation on Sale of Assets" covenant or
the failure to make or consummate a Collateral Sale Proceeds
Offer in accordance with the provisions of the "Limitation on
Sale of Collateral" covenant;
(iv) default in the performance of the Company's obligation to
pledge Additional Collateral and the continuance of such
default for a period of 30 days;
(v) default in the performance, or breach, of any covenant or
agreement of the Company or any Guarantor contained in the
Indenture or any Subsidiary Guarantee (other than a default in
the performance, or breach, of a covenant or warranty which is
specifically dealt with in clauses (i), (ii) or (iv) above)
and continuance of such default or breach for a period of 30
days after written notice shall have been given to the Company
by the Trustee or to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount of the
notes then outstanding;
(vi) (A) one or more defaults in the payment of principal of or
premium, if any, on Indebtedness of the Company or any
Restricted Subsidiary aggregating $10.0 million or more, when
the same becomes due and payable at the Stated Maturity
thereof, and such default or defaults shall have continued
after any applicable grace period and shall not have been
cured or waived or (B) Indebtedness of the Company or any
Restricted Subsidiary aggregating $10.0 million or more shall
have been accelerated or otherwise declared due and payable,
or required to be prepaid or repurchased (other than by
regularly scheduled required prepayment) prior to the Stated
Maturity thereof;
(vii) one or more judgments or orders shall be rendered against the
Company or any Restricted Subsidiary for the payment of money,
either individually or in an aggregate amount, in excess of
$10.0 million and shall not be discharged and either (A) an
enforcement proceeding shall have been commenced by any
creditor upon such judgment or order or (B) there shall have
been a period of 60 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending
appeal or otherwise, was not in effect;
(viii) any Subsidiary Guarantee of a Significant Subsidiary ceases to
be in full force and effect or is declared null and void or
any of the Subsidiary Guarantees of Significant Subsidiaries
is found to be invalid or any Guarantor which is a Significant
Subsidiary denies that it has any further liability under any
Subsidiary Guarantee, or gives notice to such effect (other
than by reason of the termination of the Indenture or the
release of any such Subsidiary Guarantee in accordance with
the Indenture); or
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(ix) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant
Subsidiary.
If an Event of Default (other than as specified in clause (ix) above)
shall occur and be continuing, the Trustee or the holders of not less than 25%
in aggregate principal amount of the notes then outstanding, by notice to the
Company, may, and the Trustee, upon the request of such holders, shall declare
the principal of, premium, if any, and accrued interest on all of the
outstanding notes immediately due and payable. Upon any such declaration all
such amounts payable in respect of the notes shall become immediately due and
payable. If an Event of Default specified in clause (ix) above occurs and is
continuing, then the principal of, premium, if any, and accrued interest on all
of the outstanding notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder of notes.
At any time after a declaration of acceleration under the Indenture,
but before a judgment or decree for payment of the money due has been obtained
by the Trustee, the holders of a majority in aggregate principal amount of the
outstanding notes, by written notice to the Company and the Trustee, may rescind
such declaration and its consequences if (a) the Company has paid or deposited
with the Trustee a sum sufficient to pay (i) all overdue interest on all
outstanding notes, (ii) all unpaid principal of and premium, if any, on any
outstanding notes that have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the notes, (iii) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the notes, and (iv) all sums paid or
advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(b) all Events of Default, other than the non-payment of amounts of principal
of, premium, if any, or interest on the notes that has become due solely by such
declaration of acceleration, have been cured or waived. No such rescission shall
affect any subsequent default or impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount
of the outstanding notes may, on behalf of the holders of all the notes, waive
any past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each note outstanding.
If a Default or an Event of Default occurs and is continuing and is
known to the Trustee, the Trustee shall mail to each holder of the notes notice
of the Default or Event of Default within 10 days after the occurrence thereof.
Except in the case of a Default or an Event of Default in payment of principal
of, premium, if any, or interest on any notes, the Trustee may withhold the
notice to the holders of such notes if a committee of its trust officers in good
faith determines that withholding the notice is in the interests of the holders
of the notes.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company and the Guarantors of their
respective obligations under the Indenture and as to any default in such
performance. The Company is also required to notify the Trustee within five
business days of the occurrence of any Default or Event of Default.
Defeasance or Covenant Defeasance of Indenture
The Company may, at its option and at any time, elect to have the
obligations of the Company and any Guarantor upon the outstanding notes
discharged. Such defeasance means that the Company will be deemed to have paid
and discharged the entire Indebtedness represented by the outstanding notes and
to have satisfied all of its other obligations under such notes and the
Indenture insofar as such notes are concerned, except for (i) the rights of
holders of outstanding notes to receive payments in respect of the principal of,
premium, if any, and interest on such notes when such payments are due, (ii) the
Company's obligations to issue temporary notes, register the transfer or
exchange of any notes, replace mutilated,
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destroyed, lost or stolen notes, maintain an office or agency for payments in
respect of the notes and segregate and hold such payments in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and any
Guarantor released with respect to certain covenants set forth in the Indenture,
and any omission to comply with such obligations will not constitute a Default
or an Event of Default with respect to the notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the notes, cash in United States dollars, U.S.
Government Obligations, or a combination thereof, which through the scheduled
payment of principal and interest thereon will provide money in an amount
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay and discharge the principal of, premium, if any, and
interest on the outstanding notes to redemption or maturity; (ii) no Default or
Event of Default will have occurred and be continuing on the date of such
deposit or, insofar as an event of bankruptcy under clause (ix) of "Events of
Default" above is concerned, at any time during the period ending on the 91st
day after the date of such deposit; (iii) such defeasance or covenant defeasance
will not result in a breach or violation of, or constitute a default under, the
Indenture or any material agreement or instrument to which the Company or any
Guarantor is a party or by which it is bound; (iv) in the case of defeasance,
the Company shall have delivered to the Trustee an opinion of counsel stating
that the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or, since the date of the final offering memorandum,
there has been a change in applicable federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that the holders
of the outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance had not occurred; (v) in the case
of covenant defeasance, the Company shall have delivered to the Trustee an
opinion of counsel to the effect that the holders of the notes outstanding will
not recognize income, gain or loss for federal income tax purposes as a result
of such covenant defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such covenant defeasance had not occurred; (vi) in the case of
defeasance or covenant defeasance, the Company shall have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit or after the date such opinion is delivered, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company shall have delivered to the Trustee an officers' certificate stating
that the deposit was not made by the Company with the intent of preferring the
holders of the notes or any Subsidiary Guarantee over the other creditors of
either the Company or any Guarantor with the intent of hindering, delaying or
defrauding creditors of either the Company or any Guarantor; and (viii) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with.
Satisfaction and Discharge
The Indenture will cease to be of further effect (except as to
surviving rights of registration of transfer or exchange of the notes as
expressly provided for in the Indenture) and the Trustee, at the expense of the
Company, will execute proper instruments acknowledging satisfaction and
discharge of the Indenture when (a) either (i) all the notes theretofore
authenticated and delivered (other than destroyed, lost or stolen notes which
have been replaced or paid and notes for whose payment money has been deposited
in trust with the Trustee or any paying agent or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged from such trust
as provided for in the Indenture) have been delivered to the Trustee for
cancellation or (ii) all notes not theretofore delivered to the Trustee for
cancellation (x) have become due and payable, (y) will become due and payable at
Stated Maturity within one year or (z) are to be called for redemption within
one year under arrangements
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satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust for such purpose an amount sufficient to pay and discharge the entire
Indebtedness on the notes not theretofore delivered to the Trustee for
cancellation, for principal of, premium, if any, and interest on the notes to
the date of such deposit (in the case of notes which have become due and
payable) or to the Stated Maturity or redemption date, as the case may be; (b)
the Company has paid or caused to be paid all sums payable under the Indenture
by the Company; and (c) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided in the Indenture relating to the satisfaction and discharge
of the Indenture have been complied with.
Amendments and Waivers
With certain exceptions, modifications and amendments of the Indenture
may be made by a supplemental indenture entered into by the Company, the
Guarantors and the Trustee with the consent of the holders of a majority in
aggregate outstanding principal amount of the notes then outstanding; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding note affected thereby: (i) change the Stated Maturity
of the principal of, or any installment of interest on, any note, or reduce the
principal amount thereof, or premium, if any, or the rate of interest thereon or
change the coin or currency in which the principal of any note or any premium or
the interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or, in the
case of redemption, on or after the redemption date); (ii) amend, change or
modify the obligation of the Company to make and consummate an Excess Proceeds
Offer with respect to any Asset Sale in accordance with the "Limitation on Sale
of Assets" covenant or the obligation of the Company to make and consummate a
Change in Control Offer in the event of a Change in Control in accordance with
the "Purchase of Notes upon a Change in Control" covenant, including, in each
case, amending, changing or modifying any definition relating thereto; (iii)
reduce the percentage in principal amount of outstanding notes, the consent of
whose holders is required for any such supplemental indenture or the consent of
whose holders is required for any waiver of compliance with certain provisions
of the Indenture; (iv) modify any of the provisions relating to supplemental
indentures requiring the consent of holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase the
percentage of outstanding notes required for such actions or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the holder of each note affected thereby; (v) except as otherwise
permitted under "Consolidation, Merger and Sale of Assets" consent to the
assignment or transfer by the Company or any Guarantor of any of their rights or
obligations under the Indenture; or (vi) amend or modify any of the provisions
of the Indenture or the related definitions affecting the security interests of
holders of the notes in the Collateral, or the ranking of the notes or any
Subsidiary Guarantee in any manner which adversely affects the holders of the
notes.
Notwithstanding the foregoing, without the consent of any holder of the
notes, the Company, any Guarantor and the Trustee may modify or amend the
Indenture: (a) to evidence the succession of another Person to the Company, a
Guarantor or any other obligor on the notes, and the assumption by any such
successor of the covenants of the Company or such obligor or Guarantor in the
Indenture and in the notes and in any Subsidiary Guarantee in accordance with
"--Consolidation, Merger and Sale of Assets;" (b) to add to the covenants of the
Company, any Guarantor or any other obligor upon the notes for the benefit of
the holders of the notes or to surrender any right or power conferred upon the
Company or any other obligor upon the notes, as applicable, in the Indenture, in
the notes or in any Subsidiary Guarantee; (c) to cure any ambiguity, or to
correct or supplement any provision in the Indenture, the notes or any
Subsidiary Guarantee which may be defective or inconsistent with any other
provision in the Indenture, the notes or any Subsidiary Guarantee or make any
other provisions with respect to matters or questions arising under the
Indenture, the notes or any Subsidiary Guarantee; provided that, in each case,
such provisions shall not adversely affect the interest of the holders of the
notes; (d) to comply with the
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requirements of the SEC in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act; (e) to add a Guarantor under the
Indenture; (f) to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture; or (g) to mortgage, pledge, hypothecate
or grant a security interest in favor of the Trustee for the benefit of the
holders of the notes as additional security for the payment and performance of
the Company's and any Guarantor's obligations under the Indenture, in any
property, or assets, including any of which are required to be mortgaged,
pledged or hypothecated, or in which a security interest is required to be
granted to the Trustee pursuant to the Indenture or otherwise.
The holders of a majority in aggregate principal amount of the notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
The Trustee
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. If an Event of Default has occurred and is continuing,
the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
Person would exercise under the circumstances in the conduct of such Person's
own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company or any Guarantor, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest (as defined) it must eliminate such conflict or resign. The
Trustee will also act as the Collateral Agent for the holders of the notes. In
addition, the Trustee is also the trustee for the Company's $100,000,000
aggregate principal amount of 12 1/4% Senior Subordinated Notes due 2006.
Governing Law
The Indenture, the notes and the Subsidiary Guarantees will be governed
by, and construed in accordance with, the laws of the State of New York.
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at
the time such Person becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or (b)
assumed in connection with the acquisition of assets from such Person. Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary.
"Acquisition Indebtedness" means Indebtedness of a Person incurred in
connection with or in contemplation of (i) an investment by the Company or any
of its Restricted Subsidiaries in any other Person pursuant to which such Person
becomes a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries, (ii) an acquisition by the
Company or any of its Restricted Subsidiaries of the property and assets of any
Person other than the Company or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person or
(iii) the purchase by the Company or any of its Restricted Subsidiaries from a
third party of any licenses, trademarks, service marks, trade names or other
intellectual property rights of such third party; provided, however, that
Indebtedness incurred in a transaction or series of related transactions having
a Fair Market Value of less than $5.0 million will not be considered to be
Acquisition Indebtedness.
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"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Capital
Stock or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any Person having a relationship
with such Person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of (a) any
Capital Stock of any Restricted Subsidiary; (b) all or substantially all of the
properties and assets of the Company or its Restricted Subsidiaries; (c) all or
substantially all of the properties and assets of any division or line of
business of the Company or any Restricted Subsidiary, other than in the ordinary
course of business or (d) any other properties or assets of the Company or any
Restricted Subsidiary outside of the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties or assets (i) that is governed by the provisions of the
Indenture described under "--Consolidation, Merger and Sale of Assets," (ii)
between or among the Company and Wholly Owned Restricted Subsidiaries in
accordance with the terms of the Indenture, (iii) in compliance with the
"Limitation on Restricted Payments" covenant, (iv) that consists of grants by
the Company or its Restricted Subsidiaries in the ordinary course of business of
licenses or sub-licenses to use any of the intellectual property rights of the
Company or its Restricted Subsidiaries, (v) that constitute Collateral, or (vi)
having a Fair Market Value of less than $750,000 in any given fiscal year.
"Average Life" means, as of the date of determination with respect to
any Indebtedness, the quotient obtained by dividing (a) the sum of the products
of (i) the number of years from the date of determination to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (ii) the
amount of each such principal payment by (b) the sum of all such principal
payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978,
as amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any duly authorized committee of such board.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests (whether general or limited), participations,
rights in or other equivalents (however designated) of such Person's equity, and
any other interest or participation that confers the right to receive a share of
the profits and losses, or distributions of assets of, such Person and any
rights (other than debt securities convertible into Capital Stock), warrants or
options exchangeable for or convertible into such Capital Stock, whether now
outstanding or issued after the date of the Indenture.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purpose of the Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
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"Cash Equivalents" means (a) any evidence of Indebtedness with a
maturity of one year or less issued or directly and fully guaranteed or insured
by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (b) certificates of deposit or acceptances with a
maturity of one year or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500 million; and (c) commercial paper with a maturity
of one year or less issued by a corporation that is not an Affiliate of the
Company and is organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1 by S&P or any successor rating
agency or at least P-1 by Moody's or any successor rating agency; (d) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (a) and (b) above; and (e) demand and time
deposits with a domestic commercial bank that is a member of the Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500 million.
"Change in Control" means the occurrence of any of the following
events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of all outstanding Voting
Stock of the Company, and either (x) the Permitted Holders beneficially own,
directly or indirectly, in the aggregate Voting Stock of the Company that
represents a lesser percentage of the aggregate ordinary voting power of all
classes of the Voting Stock of the Company, voting together as a single class,
than such other person or group and are not entitled (by voting power, contract
or otherwise) to elect directors of the Company having a majority of the total
voting power of the Board of Directors, or (y) such other person or group is
entitled to elect directors of the Company having a majority of the total voting
power of the Board of Directors;
(b) the Company consolidates with, or merges with or into, another
Person or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person consolidates with,
or merges with or into, the Company, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction (i) where the outstanding Voting Stock of the Company is not
converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company) or is converted into
or exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation and cash, securities
and other property (other than Capital Stock of the surviving or transferee
corporation) in an amount that could be paid by the Company as a Restricted
Payment as described under the "Limitation on Restricted Payments" covenant and
(ii) immediately after such transaction, no "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act), other than Permitted
Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 35% of the total voting power of all
outstanding Voting Stock of the surviving or transferee corporation, and either
(x) the Permitted Holders beneficially own, directly or indirectly, in the
aggregate Voting Stock of the Company that represents a lesser percentage of the
aggregate ordinary voting power of all classes of the Voting Stock of the
Company, voting together as a single class, than such other person or group and
are not entitled (by voting power, contract or otherwise) to elect directors of
the Company having a majority of the total voting power of the Board of
Directors, or (y) such other person or group is entitled to elect directors of
the Company having a majority of the total voting power of the Board of
Directors;
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(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors, or
whose nomination for election by the stockholders of the Company, was approved
by a vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies with the
provisions described under "Consolidation, Merger and Sale of Assets."
"Collateral Sale" means any sale, issuance, conveyance, transfer or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of
Collateral. For the purposes of this definition, the term "Collateral Sale"
shall not include:
(a) the transfer of Collateral between or among the Company and its
Wholly Owned Restricted Subsidiaries that are duly organized and
validly existing under the laws of the United States of America
in accordance with the terms of the Indenture, provided, that the
transferee becomes a party to the Security Agreement and the
transfer is made subject to the security interest held by the
Collateral Agent on behalf of the holders of the notes;
(b) the transfer or assignment of license agreements or the right to
receive royalties or payments under such license agreements to a
Wholly Owned Restricted Subsidiary of the Company that is not
organized under the laws of the United States of America,
provided, that the aggregate payments due under all the license
agreements or rights so transferred each fiscal year shall not,
in the aggregate, exceed 30% of the total payment due under all
the licenses of the Company and its Restricted Subsidiaries in
such fiscal year;
(c) any licensing of the Collateral in the ordinary course of
business; and
(d) any licensing of the Collateral that is reasonably required in
order to enable the lenders to the Company and its Restricted
Subsidiaries to sell or liquidate inventory in which such lenders
have a security interest to satisfy any outstanding Indebtedness
to such lenders of the Company or such Restricted Subsidiaries.
"Collateral Sale Proceeds" means with respect to any Collateral Sale,
the proceeds thereof in the form of cash or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment banks) related to such Collateral Sale, (ii)
provisions for all taxes payable as a result of such Collateral Sale and (iii)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP against any
liabilities associated with such Collateral Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Collateral Sale, all
as reflected in an officers' certificate delivered to the Trustee and Collateral
Agent.
"Consolidated Adjusted Net Income" means, for any period, the
consolidated net income (or loss) of the Company and all Restricted Subsidiaries
for such period as determined in accordance with GAAP, adjusted, to the extent
included in calculating such net income, by excluding, without duplication, (a)
all extraordinary gains or losses (net of taxes, fees and expenses relating
thereto), (b) gains or losses (net of taxes, fees and expenses relating thereto)
attributable to asset dispositions other than in the ordinary course of
business, (c) the portion of net income of any Person (other than the Company or
a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the
Company or any Restricted Subsidiary has
92
an ownership interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any Restricted Subsidiary in cash
dividends or cash distributions during such period, (d) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary is not at the date of
determination (regardless of any waiver) permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary or its stockholders, and (e) for purposes of calculating
Consolidated Adjusted Net Income under the "Limitation on Restricted Payment"
covenant any net income (or loss) from any Restricted Subsidiary while it was an
Unrestricted Subsidiary at any time during such period other than any amounts
actually received from such Restricted Subsidiary during such period; provided
that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated Adjusted Net Income will be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Consolidated Adjusted Net Income otherwise attributable to such Restricted
Subsidiary multiplied by (B) the quotient of (1) the number of shares of
outstanding common stock of such Restricted Subsidiary not owned on the last day
of such period by the Company or any of its Restricted Subsidiaries divided by
(2) the total number of shares of outstanding common stock of such Restricted
Subsidiary on the last day of such period.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for
any period, the ratio of (a) the sum of Consolidated Adjusted Net Income and, to
the extent deducted in computing Consolidated Adjusted Net Income, Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges, in each case, for such period to (b) the sum of (i) Consolidated
Interest Expense for such period and (ii) the aggregate amount of dividends and
other distributions paid, accrued or scheduled to be paid or accrued in respect
of Redeemable Capital Stock of the Company or any Restricted Subsidiary for such
period, in each case after giving pro forma effect to (A) the incurrence of the
Indebtedness giving rise to the need to make such calculation and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of the net proceeds occurred, on the first day of such period, (B)
the incurrence, repayment or retirement of any other Indebtedness by the Company
and its Restricted Subsidiaries since the first day of such period as if such
Indebtedness was incurred, repaid or retired on the first day of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average daily balance
of such Indebtedness during such period) and (C) the acquisition (whether by
purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any company, entity or business acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first day
of such period, as if such acquisition or disposition occurred on the first day
of such period.
"Consolidated Income Tax Expense" means, for any period, the provision
for federal, state, local and foreign income taxes of the Company and all
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without
duplication, (1) the sum of (a) the interest expense of the Company and its
Restricted Subsidiaries for such period, including, without limitation, (i)
amortization of debt discount, (ii) the net cost of Interest Rate Agreements
(including amortization of discounts), (iii) the interest portion of any
deferred payment obligation, (iv) all commissions, discounts and other fees and
charges owed with respect to the letter of credit, bankers' acceptance financing
or similar facilities and (v) amortization of debt issuance costs, plus (b) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and its Restricted Subsidiaries
during such period, plus (c) one-third of lease rental payments in connection
with operating leases paid, accrued and/or scheduled to be paid or accrued
during such period, in each case as determined on a consolidated basis in
accordance with GAAP; provided that (x) the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma basis and
(A) bearing a floating interest rate shall be computed as if the rate in effect
on the date of computation
93
had been the applicable rate for the entire period and (B) which was not
outstanding during the period for which the computation is being made but which
bears, at the option of the Company, a fixed or floating rate of interest, shall
be computed by applying, at the option of the Company, either the fixed or
floating rate, and (y) in making such computation, the Consolidated Interest
Expense attributable to interest on any Indebtedness under a revolving credit
facility computed on a pro forma basis shall be computed based upon the average
daily balance of such Indebtedness during the applicable period.
"Consolidated Non-Cash Charges" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of the Company and any
Restricted Subsidiary reducing Consolidated Adjusted Net Income for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
non-cash charge that requires an accrual of or reserve for cash charges for any
future period or constituting an extraordinary item or loss).
"Currency Agreements" means any spot or forward foreign exchange
agreements and currency swap, currency option or other similar financial
agreements or arrangements entered into by the Company or any of its Restricted
Subsidiaries designed to protect against or manage exposure to fluctuations in
foreign currency exchange rates.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or
series of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the
sale value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the date of the Indenture.
"Guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any Person's financial
condition or to cause any other Person to achieve certain levels of operating
results; provided that no license or sub-license entered into in the ordinary
course of business between the Company or any Restricted Subsidiary (other than
with an Affiliate thereof) shall be deemed to be a guarantee as a result of any
minimum royalty or revenue provisions with which the Company or such Restricted
Subsidiary must comply.
"Guarantor" means any Restricted Subsidiary that incurs a Subsidiary
Guarantee; provided that, upon the release and discharge of any Person from its
Subsidiary Guarantee in accordance with the Indenture, such Person shall cease
to be a Guarantor.
"Indebtedness" means, with respect to any Person, without duplication,
(a) all liabilities of such Person for borrowed money (including overdrafts) or
for the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities incurred in the ordinary course
94
of business, but including, without limitation, all obligations, contingent or
otherwise, of such Person in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (b) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (c) all indebtedness of such
Person created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade payables arising in the ordinary course of business, (d) all Capitalized
Lease Obligations of such Person, (e) all obligations of such Person under or in
respect of Interest Rate Agreements or Currency Agreements, (f) all Indebtedness
referred to in (but not excluded from) the preceding clauses of other Persons
and all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or with respect to property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness (the amount of such obligation being deemed to be the
lesser of the Fair Market Value of such property or asset or the amount of the
obligation so secured), (g) all guarantees by such Person of Indebtedness
referred to in this definition of any other Person, and (h) all Redeemable
Capital Stock of such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection
agreements and other types of interest rate hedging agreements (including,
without limitation, interest rate swaps, caps, floors, collars and similar
agreements) designed to protect against or manage exposure to fluctuations in
interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee or other extension of credit or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase,
acquisition or ownership by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued or owned by,
any other Person and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP. "Investments" shall exclude
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices.
"Issue Date" means the date on which the notes are originally issued
under the Indenture.
"Lease" means the Master Agreement dated August 28, 1997 among the
Company, as lessee and guarantor, SUP Joint Venture, as lessor, Suntrust Bank,
Miami, N.A., as agent, Atlantic Financial Managers, Inc. and Atlantic Financial
Group, Ltd. and certain other financial institutions, as lenders, and the
related Lease Agreement (Land), Lease Agreement (Building), Loan Agreement,
Guaranty and Security Agreement and Financing Statement (all as defined in the
Master Agreement) dated as of August 28, 1997, in each case as such agreements
have been amended as of the Issue Date and any renewal, replacement or extension
thereof on terms similar to those in effect on the date of the Indenture;
provided that any such renewal, replacement or extension will not increase the
amount of the guarantee by the Company of the obligations of the lessor under
the Lease or the rental obligations of the Company at the expiration of the term
of the Lease Agreement (Building) and Lease Agreement (Land) as of the date of
such renewal, replacement or extension.
95
"Letter of Credit Facilities" means the letters of credit entered into
by the Company in the ordinary course of business, as the same may be amended,
supplemented or otherwise modified including any refinancing, refunding,
replacement or extension thereof.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), privilege, security interest, hypothecation, assignment for
security, claim, or preference or priority or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired. A Person will be deemed to own subject to a Lien
any property which such Person has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement (other than a
consignment), capital lease or other title retention agreement.
"Maturity" means, with respect to any note, the date on which any
principal of such note becomes due and payable provided in such note or in the
Indenture, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary), net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of legal
counsel and investment banks) related to such Asset Sale, (ii) provisions for
all taxes payable as a result of such Asset Sale, (iii) payments made to retire
Indebtedness where payment of such Indebtedness is secured by the assets or
properties the subject of such Asset Sale, (iv) amounts required to be paid to
any Person (other than the Company or any Restricted Subsidiary) owning a
beneficial interest in the assets subject to the Asset Sale and (v) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve required in accordance with GAAP against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee.
"Pari Passu Indebtedness" means (a) with respect to the notes,
Indebtedness that ranks pari passu in right of payment to the notes and (b) with
respect to any Subsidiary Guarantee, Indebtedness that ranks pari passu in right
of payment to such Subsidiary Guarantee.
"Permitted Holders" means, as of the date of determination, (a) Oscar
Feldenkreis, George Feldenkreis, their spouses, their respective lineal
descendants and the spouses of such lineal descendants, (b) any Person
controlled by any of the Persons included in the foregoing clause (a) (as the
term "controlled" is defined under the definition of "Affiliate"), (c) trusts
for the benefit of any of the Persons included in the foregoing clause (a), and
(d) any charitable foundation a majority of whose members, trustees or
directors, as the case may be, are Persons included in the foregoing clause (a).
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Company and the Guarantors under the
Senior Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed the greater of (I) $60.0 million; and (II)
the sum of (1) 85% of Eligible Receivables (as defined in clauses (a)
through (o) of the definition thereof contained in the Senior Credit
Facility on the date of the Indenture), plus (2) 90% of Eligible
Factoring Credit Balances (as defined in clauses (a) through (c) of the
definition thereof contained in the Senior Credit Facility on the date
of Indenture) plus (3) the lesser of (i) 60% of Eligible Inventory (as
defined in clauses (a) through (e) and (g) through (i) of the
definition thereof contained in the Senior Credit Facility on the date
of Indenture) and (ii)
96
$30.0 million, minus (4) the full amount of all outstanding letters of
credit issued pursuant to, or authorized under, the Senior Credit
Facility for the account of the Company or the Restricted Subsidiaries
which are not fully secured by cash collateral;
(b) Indebtedness of the Company with respect to any letters of
credit under the Letter of Credit Facilities in an aggregate principal
amount at any one time outstanding not to exceed $60 million;
(c) Indebtedness of the Company pursuant to the notes (other
than any Additional Notes) or of any Restricted Subsidiary pursuant to
a Subsidiary Guarantee;
(d) Indebtedness of the Company or any Restricted Subsidiary
outstanding on the date of the Indenture (other than Indebtedness under
the Senior Credit Facility, the Letter of Credit Facilities and the
Lease);
(e) Indebtedness of the Company owing to any Wholly Owned
Restricted Subsidiary; provided that any Indebtedness of the Company
owing to any such Restricted Subsidiary is unsecured and is
subordinated in right of payment from and after such time as the notes
shall become due and payable (whether at Stated Maturity, acceleration
or otherwise) to the payment and performance of the Company's
obligations under the notes; provided further that any disposition,
pledge or transfer of any such Indebtedness to a Person (other than a
disposition, pledge or transfer to the Company or another Wholly Owned
Restricted Subsidiary) shall be deemed to be an incurrence of such
Indebtedness by the Company not permitted by this clause (e);
(f) Indebtedness of a Restricted Subsidiary owing to the
Company or to another Wholly Owned Restricted Subsidiary; provided that
any such Indebtedness of any Guarantor is subordinated in right of
payment to the Subsidiary Guarantee of such Guarantor; provided further
that any disposition, pledge or transfer of any such Indebtedness to a
Person (other than a disposition, pledge or transfer to the Company or
a Wholly Owned Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by such Restricted Subsidiary not
permitted by this clause (f);
(g) guarantees of any Restricted Subsidiary made in accordance
with the provisions of the "Limitation on Guarantees of Indebtedness by
Restricted Subsidiaries" covenant;
(h) obligations of the Company or any Guarantor entered into
in the ordinary course of business (i) pursuant to Interest Rate
Agreements designed to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of
the Company or any Restricted Subsidiary, which obligations do not
exceed the aggregate principal amount of such Indebtedness and (ii)
pursuant to Currency Agreements entered into by the Company or any of
its Restricted Subsidiaries in respect of its (x) assets or (y)
obligations, as the case may be, denominated in a foreign currency;
(i) Indebtedness of the Company or any Guarantor in respect of
purchase money obligations, Capitalized Lease Obligations of the
Company or any Guarantor and Subordinated Indebtedness of the Company
or any Guarantor in an aggregate amount which does not exceed $5.0
million at any one time outstanding;
(j) Indebtedness of the Company or any Guarantor consisting of
guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of
assets, including, without limitation, shares of Capital Stock of
Restricted Subsidiaries;
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(k) Indebtedness of the Company or any Guarantor represented
by (x) letters of credit for the account of the Company or any
Restricted Subsidiary or (y) other obligations to reimburse third
parties pursuant to any surety bond or other similar arrangements,
which letters of credit or other obligations, as the case may be, are
intended to provide security for workers' compensation claims, payment
obligations in connection with self-insurance or other similar
requirements in the ordinary course of business;
(1) the guarantee of the obligations of the lessor under the
Lease; and
(m) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of
any Indebtedness, referred to in clause (c) or (d) of this definition,
including any successive refinancings, so long as (i) any such new
Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, such lesser amount
as of the date of determination) so refinanced, plus the lesser of the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness refinanced or the
amount of any premium reasonably determined as necessary to accomplish
such refinancing, (ii) in the case of any refinancing by the Company of
Pari Passu Indebtedness or Subordinated Indebtedness, such new
Indebtedness is made pari passu with or subordinate to the notes at
least to the same extent as the Indebtedness being refinanced, (iii) in
the case of any refinancing by any Guarantor of Pari Passu Indebtedness
or Subordinated Indebtedness, such new Indebtedness is made pari passu
with or subordinate to the Subsidiary Guarantee of such Guarantor at
least to the same extent as the Indebtedness being refinanced, (iv)
such new Indebtedness has an Average Life longer than the Average Life
of the notes and a final Stated Maturity later than the final Stated
Maturity of the notes and (v) Indebtedness of the Company or a
Guarantor may only be refinanced with Indebtedness of the Company or a
Guarantor and Indebtedness of a Restricted Subsidiary that is not a
Guarantor may only be refinanced with Indebtedness of such Restricted
Subsidiary.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments in the Company or any Restricted Subsidiary;
(c) intercompany Indebtedness to the extent permitted under
clause (e) or (f) of the definition of "Permitted Indebtedness";
(d) Investments in an amount not to exceed $5.0 million at any
one time outstanding;
(e) Investments by the Company or any Restricted Subsidiary in
another Person, if as a result of such Investment (i) such other Person
becomes a Wholly Owned Restricted Subsidiary or (ii) such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all of its assets to, the Company or a Wholly Owned
Restricted Subsidiary;
(f) bonds, notes, debentures and other securities received as
consideration for Assets Sales to the extent permitted under the
"Limitation of Sale of Assets" covenant;
(g) any loans or other advances made pursuant to any employee
benefit plans (including plans for the benefit of directors) or
employment agreements or other compensation arrangements (including for
the purchase of Capital Stock of the Company by employees), in each
case as approved by the Board of Directors of the Company, in an
aggregate amount at any one time outstanding not to exceed $1.0
million; or
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(h) negotiable instruments held for deposit or collection in
the ordinary course of business, except to the extent they would
constitute Investments in Affiliates.
"Permitted Liens" means:
(a) Liens existing on the date of this Indenture;
(b) Liens securing Indebtedness that is permitted to be incurred
under "Limitation on Indebtedness" covenant;
(c) Liens on any property or assets of a Restricted Subsidiary
granted in favor of the Company or any Wholly Owned Restricted
Subsidiary;
(d) Liens securing the notes and any Subsidiary Guarantee;
(e) Liens securing Acquired Indebtedness created prior to (and not
in connection with, or in contemplation of) the incurrence of
such Indebtedness by the Company or any Restricted Subsidiary;
provided that such Lien does not extend to any property and
assets acquired in connection with the incurrence of such
Acquired Indebtedness;
(f) Liens securing Indebtedness permitted to be incurred under
Interest Rate Agreements or otherwise incurred to hedge
interest rate risk;
(g) Liens for taxes, assessments, governmental charges or claims
that have not yet become delinquent or are being contested in
good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or
other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made;
(h) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being
contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(i) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation,
unemployment insurance and other types of social security;
(j) Liens incurred or deposits made to secure the performance of
tenders, bids, trade contracts, leases, statutory or
regulatory obligations, bankers' acceptances, surety and
appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar
nature incurred in the ordinary course of business (exclusive
of obligations for the payment of borrowed money);
(k) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other
irregularities that do not materially interfere with the
ordinary course of business of the Company or any of its
Restricted Subsidiaries;
(l) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company
and its Restricted Subsidiaries, taken as a whole;
(m) Liens (including extensions and renewals thereof) upon real or
personal property, provided that:
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(i) such Lien is created solely for the purpose
of securing Indebtedness incurred in accordance
with the "Limitation on Indebtedness" covenant
(A) to finance the cost (including the cost of
improvement or construction) of the item of
property or assets subject thereto and such Lien
is created prior to, at the time of, or within
six months after the later of the acquisition,
the completion of construction or the
commencement of full operation of such property;
or (B) to refinance any Indebtedness previously
so secured; and
(ii) the principal amount of the Indebtedness secured
by such Lien does not exceed 100% of such costs.
(n) any interest or title of a lessor in the property subject
to any Capitalized Lease Obligation or operating lease;
(o) Liens arising from filing Uniform Commercial Code
financing statements regarding leases;
(p) Liens arising from any judgment, decree or order of any
court against the Company or any Restricted Subsidiary, so long as the Lien is
adequately bonded and any appropriate legal proceedings which may have been duly
initiated for the review of such judgment, decree or order shall not have been
finally terminated or the period within which such proceedings may be initiated
shall have expired;
(q) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating
to such letters of credit and the products and proceeds thereof;
(r) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into
by the Company or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of the Company
and its Restricted Subsidiaries prior to the date of the Indenture;
(s) Liens on shares of Capital Stock of any Unrestricted
Subsidiary to secure Indebtedness of such Unrestricted Subsidiary; and
(t) Any extension, renewal or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) to (s);
provided that such extension, renewal or replacement does not extend to
any additional property or assets.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, Capital Stock of
any class or classes (however designated) of such Person which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over the Capital Stock of any other class of such Person whether now
outstanding, or issued after the date of the Indenture, and including, without
limitation, all classes and series of preferred or preference stock of such
Person.
"Public Equity Offering" means an offer and sale of common stock (which
is Qualified Capital Stock) of the Company made on a primary basis by the
Company pursuant to a registration statement that has been declared effective by
the SEC pursuant to the Securities Act (other than a registration statement
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on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"Qualified Capital Stock" of any Person means any and all Capital Stock
of such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed prior
to the final Stated Maturity of the notes or is redeemable at the option of the
holder thereof at any time prior to such final Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
final Stated Maturity.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which the Company or a Restricted Subsidiary
sells or transfers any property or asset in connection with the leasing of such
property or asset to the seller or transferor.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw-
Hill, Inc. and its successors.
"Senior Credit Facility" means the Amended and Restated Loan and
Security Agreement dated March 26, 1999, among the Company and certain of its
Subsidiaries, as borrowers, Bank of America, N.A., as agent, and the banks party
thereto from time to time, together with the related documents thereto
(including, without limitation, any guarantee agreements permitted under the
Indenture and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including,
subject to the covenants of the Indenture, adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement in
compliance with the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that, together with its Subsidiaries, (i) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated revenues of the Company
and its Restricted Subsidiaries, (ii) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year or (iii)
was organized or acquired after the beginning of such fiscal year and would have
been a Significant Subsidiary if it had been owned during the entire fiscal
year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness or any installment of interest
thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is expressly subordinated in right of payment to the notes or the
Subsidiary Guarantee of such Guarantor, as the case may be.
"Subsidiary" means any Person a majority of the equity ownership or
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries or by the Company and one or more
other Subsidiaries.
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"Subsidiary Guarantee" means any guarantee of the obligations of the
Company under the Indenture and the notes by any Restricted Subsidiary in
accordance with the provisions of the Indenture.
"Unrestricted Subsidiary" means each Subsidiary of the Company
designated as such pursuant to and in compliance with the "Limitation on
Unrestricted Subsidiaries" covenant.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act), as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt, provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary,
all of the outstanding Capital Stock (other than directors' qualifying shares or
shares of foreign Restricted Subsidiaries required to be owned by foreign
nationals pursuant to applicable law) of which are owned by the Company or by
one or more other Wholly Owned Restricted Subsidiaries or by the Company and one
or more other Wholly Owned Restricted Subsidiaries.
Form Denomination, Book-Entry Procedures and Transfer
The exchange notes will be issued in the form of one or more global
securities (collectively, the "Global Notes"). The Global Notes will be
deposited with, or on behalf of, DTC and registered in the name of DTC or its
nominee. Except as set forth below, the Global Notes may be transferred, in
whole but not in part, only to DTC or another nominee of DTC. The information in
this section concerning DTC and its book-entry systems has been obtained from
sources we believe to be reliable.
Depository Procedures
DTC has advised us that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodian relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
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DTC has also advised us that, pursuant to procedures established by it,
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants with the respective principal amount of the individual beneficial
interests represented by such Global Notes owned by them and (2) ownership of
such interests in the Global Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC (with
respect to the Participants) or records maintained by the Participants (with
respect to other owners of beneficial interests in the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Participants in such system, or indirectly through
organizations that are Participants in such system.
The laws of some states require that certain persons take physical
delivery in certificated form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to such persons will
be limited to that extent. Because DTC can only act on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Note to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing such interest. For certain other
restrictions on the transferability of the notes, see "Exchange of Book-Entry
Notes for Certificated Notes."
Except as described below, owners of interests in the Global Notes will
not have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Payments in respect of the Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, the trustee will treat
the persons in whose names the notes, including the Global Notes, are registered
as the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the trustee nor any agent
thereof has or will have any responsibility or liability for:
103
. any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes, or
. maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes, or
. any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any
payment in respect of securities such as the notes, is to credit the accounts of
the relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
the Participants and the Indirect Participants to the beneficial owners of the
notes will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the trustee or our company. Neither we nor the
trustee will be liable for any delay by DTC or any of its Participants
identifying the beneficial owners of the notes, and we and the trustee may
conclusively rely on, and will be protected in relying on, instructions from DTC
or its nominee for all purposes.
Interests in the Global Notes will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity and such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its Participants. Transfers between Participants
in DTC will be effected in accordance with DTC's procedures, and will be settled
in same-day funds.
DTC has advised us that it will take any action permitted to be taken
by a holder of notes only at the direction of one or more Participants to whose
account interests in the Global Notes are credited and only in respect to such
portion of the principal amount of the notes as to which such Participant or
Participants has or have given such direction. However, if there is an Event of
Default under the indenture, DTC reserves the right to exchange the Global Notes
for legended notes in certified form and to distribute such notes to its
Participants.
Although DTC agreed to the foregoing procedures to facilitate transfers
of interest in the Global Notes among Participants, DTC is under no obligation
to perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither we nor the trustee will have any
responsibility for the performance by DTC, or its respective Participants or
Indirect Participants, of their respective obligations under the rules and
procedures governing DTC's operations.
Exchange of Book-Entry Notes for Certified Notes
A beneficial interest in a Global Note may not be exchanged for a
security in certificated form unless:
. DTC notifies us that it is unwilling or unable to continue as
Depository for such Global Notes and we fail to appoint a
successor Depository within 90 days of such event,
104
. at our option, we notify the trustee in writing that we elect
to cause the issuance of the notes in certificated form, or
. there shall have occurred and be continuing an Event of Default
with respect to the notes.
In all cases, certificated notes delivered in exchange for any Global
Note or beneficial interests therein will be registered in the names, and issued
in any approved denominations, requested by or on behalf of DTC in accordance
with its customary procedures. Any such exchange will be effected through the
DWAC System and an appropriate adjustment will be made in the records of the
applicable security registrar to reflect a decrease in the principal amount of
the relevant Global Note.
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REGISTRATION RIGHTS
Perry Ellis, the guarantors and the initial purchaser entered into the
registration rights agreement on March 15, 2002, pursuant to which Perry Ellis
and the guarantors agreed, for the benefit of the holders of the existing notes,
that they will, at their own expense, (i) file an exchange offer registration
statement with the SEC with respect to an offer to exchange the existing notes
for the exchange notes having substantially identical terms in all material
respects to the existing notes (except that the exchange notes will not contain
terms with respect to transfer restrictions or interest rate increases as
described herein) within 65 calendar days after the issue date of the existing
notes, (ii) use their best efforts to cause the exchange offer registration
statement to be declared effective by the SEC under the Securities Act within
135 calendar days after the issue date and (iii) use their best efforts to
consummate the exchange offer within 160 calendar days after the issue date.
Upon the exchange offer registration statement being declared effective, Perry
Ellis will offer the exchange notes in exchange for surrender of the existing
notes. Perry Ellis and the guarantors will keep the exchange offer open for at
least 30 days (or longer if required by applicable law) after the date that
notice of the exchange offer is mailed holders of the existing notes.
In the event that (i) any changes in law or the applicable
interpretations of the staff of the SEC do not permit Perry Ellis to effect the
exchange offer, (ii) for any other reason the exchange offer is not consummated
within 160 days after the issue date, (iii) under certain circumstances, if the
initial purchaser shall so request or (iv) any holder of existing notes (other
than the initial purchaser) is not eligible to participate in the exchange
offer, Perry Ellis and the guarantors will, at their expense, (a) as promptly as
practicable, file with the SEC a shelf registration statement covering resales
of the existing notes, (b) use their best efforts to cause the shelf
registration statement to be declared effective under the Securities Act on or
prior to 150 days after the issue date and (c) use their best efforts to keep
effective the shelf registration statement until the earlier of two years after
its issue date or such shorter period ending when all notes covered by the shelf
registration statement have been sold in the manner set forth and as
contemplated in the shelf registration statement or when the notes become
eligible for resale pursuant to Rule 144 under the Securities Act without volume
restrictions, if any. Perry Ellis, will, in the event of the filing of the shelf
registration statement, provide to each holder of the notes copies of the
prospectus which is a part of the shelf registration statement, notify each such
holder when the shelf registration statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
notes. A holder of notes that sells its notes pursuant to the shelf registration
statement generally will be required to be named as a selling securityholder in
the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
registration rights agreement that are applicable to such a holder (including
certain indemnification rights and obligations thereunder). In addition, each
holder of the notes will be required to deliver information to be used in
connection with the shelf registration statement and to provide comments on the
shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the shelf
registration statement and to benefit from the provisions regarding liquidated
damages set forth in the following paragraph.
In the event that either (a) the exchange offer registration statement
has not been declared effective on or prior to the 135th calendar day following
the issue date or (b) the exchange offer is not consummated or a shelf
registration statement is not declared effective on or prior to the 160th
calendar day following the issue date, the interest rate borne by the notes
shall be increased by one-quarter of one percent per annum following such
135-day period in the case of clause (a) above or following such 160-day period
in the case of clause (b) above, which rate will be increased by an additional
one-quarter of one percent per annum for each 90-day period that any additional
interest continues to accrue; provided that the aggregate increase in such
annual interest rate may in no event exceed one percent. Upon (x) the
effectiveness of the
106
exchange offer registration statement after the 135-day period described in
clause (a) above or (y) the consummation of the exchange offer or the
effectiveness of a shelf registration statement, as the case may be, after the
160-day period described in clause (b) above, the interest rate borne by the
notes from the date of such filing, effectiveness or consummation, as the case
may be, will be reduced to the original interest rate if Perry Ellis and the
guarantors are otherwise in compliance with this paragraph; provided, however,
that if, after any such reduction in interest rate, a different event specified
in clause (a) or (b) above occurs, the interest rate may again be increased
pursuant to the foregoing provisions. The registration rights agreement is also
attached as an exhibit to this registration statement. In addition, the
information set forth above concerning certain interpretations of and positions
taken by the staff of the SEC is not intended to constitute legal advice, and
prospective investors should consult their own advisors with respect to such
matters.
PLAN OF DISTRIBUTION
Based on positions taken by the staff of the SEC set forth in no-action
letters issued to third parties, we believe that the exchange notes issued in
exchange for existing notes pursuant to this exchange offer may be offered for
resale, resold or otherwise transferred by holders thereof, other than any
holder which is
. an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act;
. a broker-dealer who acquired exchange notes directly from us;
or
. a broker-dealer who acquired exchange notes as a result of
market-making or other trading activities.
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such exchange notes are acquired in the
ordinary course of such holders' business, and such holders are engaged in and
do not intend to engage in, and have no arrangement or understanding with any
person to participate in, a distribution of such exchange notes.
Each holder of existing notes who wishes to exchange its existing notes
for exchange notes in the exchange offer will be required to make
representations to us as set forth in "The Exchange Offer." Holders who tender
existing notes in the exchange offer with the intention of participating in a
distribution of the exchange notes may not rely upon no-action letters issued to
third parties, including "Exxon Capital Holdings Corporation" (available May 13,
1988), "Morgan Stanley & Co. Incorporated" (available June 5, 1991), "Mary Kay
Cosmetics, Inc." (available June 5, 1991), "Warnaco, Inc." (available October
11, 1991) and Shearman & Sterling" (available July 2, 1993) or similar no-action
letters.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for existing notes where such existing notes were acquired as a result
of market-making activities or other trading activities. In addition, until
July 14, 2002 all dealers effecting transactions in the exchange notes may be
required to deliver a prospectus. We have agreed that, for a period of 180 days
after the date of this prospectus, we will make this prospectus, and any
amendment, supplement or documents incorporated in this prospectus, available to
any broker-dealer for use in connection with such resale. In addition, until 90
days after consummation of the exchange offer all dealers effecting transactions
in the exchange notes may be required to deliver a prospectus.
107
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such person may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter", within the meaning of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the existing notes),
other than commissions or concessions of any broker-dealers, and will indemnify
the holders of the notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
CERTAIN FEDERAL TAX CONSIDERATIONS
Effect of Exchange of Existing Notes for Exchange Notes
The following discussion is based on the current provisions of the
Internal Revenue Code of 1986, as amended, applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service will not take a contrary view, and
no ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United States)
may be subject to special rules not discussed below. Supreme recommends that
each holder consult such holder's own tax advisor as to the particular tax
consequences of exchanging such holder's existing notes for exchange notes,
including the applicability and effect of any state, local or foreign tax laws.
We believe that the exchange of the existing notes for notes pursuant
to the exchange offer will not be treated as an "exchange" for federal income
tax purposes because the exchange notes will not be considered to differ
materially in kind or extent from the exchange notes. Rather, the exchange notes
received by a holder will be treated as a continuation of the existing notes in
the hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging outstanding notes for exchange notes pursuant
to the exchange offer.
General
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of notes by initial holders of notes who acquire the notes for their "issue
price" within the meaning of Section 1273 of the Internal Revenue Code. This
discussion is based upon the United States federal tax law now in effect, which
is subject to change, possibly retroactively. For purposes of this discussion, a
"United States Holder" means a holder of a note that is not, for United States
federal income tax purposes:
108
. a citizen or individual of the United States;
. a corporation, or other entity treated as corporation, created
in or under the laws of the United States or of any state
(including the District of Columbia);
. an estate the income of which is subject to United States
federal income taxation regardless of its source;
. a trust if a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more United States persons have the authority
to control all substantial decisions of the trust, or a trust
in existence on August 20, 1996 and treated as a United States
person before this date that timely elected to continue to be
treated as a United States person; or
. a partnership, or other entity treated as a partnership,
created or organized in or under the laws of the United States
or of any state (including the District of Columbia), except
as Treasury regulations may provide.
A "Non-United States Holder" means a holder that is not a United States Holder.
The tax treatment of the holders of the notes may vary depending upon,
their particular situations. In addition, certain other holders (including
insurance companies, tax-exempt organizations, financial institutions, dealers
in securities or currencies, and persons holding the notes as part of a hedging
or constructive sale transaction, "straddle" conversion transaction or other
integrated transaction) may be subject to special rules not discussed below.
Prospective investors are urged to consult their tax advisors regarding the
United States federal tax consequences of acquiring, holding and disposing of
notes, as well as any tax consequences that may arise under the laws of any
foreign, state, local, or other taxing jurisdiction.
Tax Consequences to United States Holders
Stated Interest Income. The gross amount of stated interest paid in
respect of the notes generally will be taxable to a United States Holder as
ordinary income at the time it is accrued or paid in accordance with such
holder's regular method of tax accounting for United States federal income tax
purposes.
Original Issue Discount. The notes will be issued with original issue
discount for United States federal income tax purposes. The amount of OID on a
note equals the excess of a note's "stated redemption price at maturity" over
its "issue price." The stated redemption price at maturity of a note is the
total of all payments on the note other than "qualified stated interest"
payments. The term "qualified stated interest" generally means stated interest
that is unconditionally payable in cash or property (other than debt instruments
of the issuer) at least annually at a single fixed rate. The stated interest
payable on the notes will be qualified stated interest. The "issue price" of a
note is equal to the first price at which a substantial amount of notes are sold
(excluding sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers).
United States Holders of notes generally much include OID in gross
income for United States income tax purposes on an annual basis under a constant
yield accrual method regardless of their regular method of tax accounting. Thus,
a United States Holder would be required to include OID in income in advance of
the receipt of the cash to which such OID is attributable. The amount of OID
includible in income by a United States Holder of a note is the sum of the
"daily portions" of OID with respect to the note for each day during the taxable
year or portion thereof in which such United States Holder holds such note. A
daily portion is determined by allocating to each day in an accrual period
(generally, the period between interest payments or compounding dates) a pro
rata portion of the OID that accrued in such period. The amount of OID that
accrues with respect to any accrual period is the product of the
109
note's "adjusted issue price" at the beginning of such accrual period and its
yield to maturity, less the amount of qualified stated interest allocable to
such accrual period. The adjusted issue price of a note at the start of any
accrual period is equal to its issue price, increased by the accrued OID for
each prior accrual period and reduced by any prior payments made on such note
other than qualified stated interest. The yield to maturity is the discount rate
that, when used in computing the present value of all payments to be made under
the notes, produces an amount equal to the issue price of the notes.
Sale, Exchange or Other Disposition of the Notes. United States Holders
will generally recognize capital gain or loss equal to the difference between
the amount realized (not including any amounts received that are attributable to
accrued and unpaid interest, which are taxable as ordinary interest income) and
the United States Holder's tax basis in the notes on the sale, exchange or other
taxable disposition of notes. A United States Holder's tax basis in the notes
will, in general, be such holder's cost for the notes, increased by the amount
of the OID previously included in such holder's income. Such gain or loss will
be long-term capital gain or loss if the notes have been held for more than one
year. The deduction of capital losses is subject to limitations.
Information Reporting and Backup Withholding. In general, information
reporting requirements will apply to payments of principal and interest on a
note and the proceeds received on the disposition of notes paid within the
United States (and in certain cases, outside the United States) to United States
Holders other than certain exempt recipients (such as corporations), and 30%
backup withholding (which rate will be reduced periodically in 28% for payments
made in 2006) may apply to such amounts if the United States Holder fails to
provide an accurate taxpayer identification number or is otherwise subject to
backup withholding.
Backup withholding is not an additional tax. Any amount withheld under
the backup withholding rules may be refunded or credited against the United
States Holder's United States federal income tax liability provided that the
required information is furnished to the Internal Revenue Service.
Tax Consequences to Non-United States Holders
Interest. Interest paid by Perry Ellis on the notes (including accrued
OID) to a Non-United States Holder will not be subject to United States federal
income or withholding tax if such interest is not effectively connected with the
conduct of a trade or business within the United States by such Non-United
States Holder and, if a tax treaty applies, is not attributable to a U.S.
permanent establishment maintained by such Non-United States Holder and such
Non-United States Holder (a) does not actually or constructively own 10% of the
total combined voting power of stock of all classes of stock of Perry Ellis; (b)
is not a controlled foreign corporation with respect to which Perry Ellis
directly or indirectly is a "related person" within the meaning of the Code; (c)
is not a bank making a loan in its ordinary course of business; and (d) either
(A) the beneficial owner of the Note certifies to Perry Ellis or its agent,
under penalties of perjury, that such owner is not a United States person and
provides its name and address (which certification can be made on IRS Form W-8
IMY or Form W-8BEN) or (B) a securities clearing organization, bank or other
financial institution that holds Customers' securities in the ordinary course of
its trade or business certifies to Perry Ellis or to its agent, under penalties
of perjury, that the certification described in clause (A) hereof has been
received from the beneficial owner or by another financial institution acting
for the beneficial owner. The certification requirements set forth above
generally will be fulfilled if beneficial owners (including partners of certain
foreign partnerships), as well as certain foreign partnerships, meet the two
conditions set forth in the preceding sentence. However, certain beneficial
owners including foreign estates or trusts (or a fiduciary thereof) and foreign
partnerships that have entered into a withholding agreement with the IRS will be
required to provide their "taxpayer identification number" in addition to their
name and address on Form W-8BEN or Form W-8 IMY. Foreign partnerships and their
partners should consult their tax advisors regarding possible additional
reporting requirements.
110
Sale, Exchange or Other Disposition of the Notes. A Non-United States
Holder will generally not be subject to United States federal income tax on a
gain recognized on a sale, exchange, redemption or other disposition of a note
unless (a) the gain is effectively connected with the conduct of a trade or
business within the Unites States by the Non-United States Holder and, if a tax
treaty applies, the gain is attributable to a U.S. permanent establishment
maintained by the Non-United States Holder, or (b) in the case of a Non-United
States Holder who is a nonresident alien individual and holds the note as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of disposition and certain other requirements are met.
If interest (including accrued OID) on a note or gain realized on the
sale, exchange or disposition of a note is effectively connected with the
conduct of a trade or business within the United States by a Non-United States
Holder, and, if a tax treaty applies, is attributable to a U.S. permanent
establishment maintained by such holder, the Non-United States Holder, although
exempt from the withholding tax discussed in the preceding paragraphs, will
generally be subject to regular United States income tax on such interest or
gain on a net income basis in the same manner as if it were a United States
person. Instead of the certificate described in the preceding paragraphs, such a
holder will be required to provide to the withholding agent a properly executed
IRS Form W-8ECI or successor form, or other appropriate certification form to
claim an exemption from withholding tax. In addition, if the Non-United States
Holder is a foreign corporation, it may be subject to a 30% branch tax for the
taxable year, subject to adjustments.
Federal Estate Taxes. If interest on the notes is exempt from
withholding of United States federal income tax under the rules described above,
the notes generally will not be included in the estate of a deceased Non-United
States Holder for United States federal estate tax purposes.
Information Reporting and Backup Withholding. In general, information
reporting requirements will apply to interest paid on the notes in each calendar
year and the tax withheld, if any, with respect to such payments.
In the case of payments of interest to Non-United States Holders,
Treasury regulations provide that the backup withholding tax at a rate of 30%
(which rate will be reduced periodically to 28% for payments made in 2006) and
certain information reporting will not apply to such payments with respect to
which either the requisite certification, as described above, has been received
or an exemption has otherwise been established; provided that neither Perry
Ellis nor its paying agent has actual knowledge that the holder is a United
States person or that the conditions of any other exemption are not in fact
satisfied. Under these Treasury regulations, information reporting and backup
withholding will apply, however, to the gross proceeds paid to a Non-United
States Holder on the disposition of the notes by or through a United States
office of a United States or foreign broker, unless the holder certifies to the
broker under penalties of perjury as to its name, address and status as a
foreign person or the holder otherwise establishes an exemption. Information
reporting requirements, but not backup withholding, will also apply to a payment
of the proceeds of a disposition of the notes by or through a foreign office of
a United States broker or foreign brokers with certain types of relationships to
the United States unless such broker has documentary evidence in its file that
the holder of the notes is not a United States person, and such broker has no
actual knowledge to the contrary, or the holder establishes an exception.
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds of a disposition of the notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability provided that the
required information is furnished to the Internal Revenue Service.
111
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for us by
Broad and Cassel, a partnership including professional associations, Miami,
Florida.
EXPERTS
The consolidated financial statements of Perry Ellis International,
Inc. included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of The Jantzen Business included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
Perry Ellis is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information may be inspected and copied, without
charge, at the public reference facilities of the SEC located at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional office located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Such materials can also be obtained on the SEC's site on
the Internet at http://wwwsec.gov. Copies can also be obtained by mail at
prescribed rates. Requests for copies should be directed to the SEC's Public
Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Perry Ellis' common stock is traded on the Nasdaq National Market and, as
a result, the periodic reports, proxy statements and other information filed by
Perry Ellis with the SEC can be inspected at the offices of the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.
112
INDEX TO FINANCIAL STATEMENTS
Perry Ellis International, Inc. and Subsidiaries
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of January 31, 2002 and 2001 ............................. F-3
Consolidated Statements of Income for each of the three years
in the period ended January 31, 2002 ............................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended January 31, 2002 ................................... F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended January 31, 2002 ............................................... F-6
Notes to Consolidated Financial Statements .............................................. F-7
The Jantzen Business
Independent Auditors' Report ............................................................ F-31
Balance Sheets as of December 29, 2001 and December 30, 2000 ............................ F-32
Statements of Income and Net Investments of VF Corporation
for the years ended December 29, 2001, December 30, 2000
and January 1, 2000 ................................................................ F-33
Statement of Cash Flows for the years ended December 29, 2001,
December 30, 2000 and January 1, 2000 .............................................. F-34
Notes to Financial Statements ........................................................... F-35
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Perry Ellis International, Inc.:
We have audited the consolidated balance sheets of Perry Ellis International,
Inc. and subsidiaries (the "Company") as of January 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended January 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 19, 2002, except for Note 20,
As to which the date is March 22, 2002
F-2
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31,
2001 2002
---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 344,741 $ 1,303,978
Accounts receivable, net 58,821,622 50,370,245
Inventories 43,556,374 45,409,047
Deferred income taxes 1,951,553 2,384,316
Prepaid income taxes 136,718 -
Other current assets 2,305,283 1,886,163
---------------- ----------------
Total current assets 107,116,291 101,353,749
Property and equipment, net 9,820,628 10,897,334
Intangible assets, net 122,016,681 117,938,894
Other 4,159,482 3,870,703
---------------- ----------------
TOTAL $ 243,113,082 $ 234,060,680
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,712,859 $ 5,966,368
Accrued expenses 3,660,364 3,259,602
Income taxes payable - 1,381,551
Accrued interest payable 4,215,835 3,808,997
Current portion - senior credit agreement - 21,756,094
Unearned revenues 1,996,752 1,838,929
Other current liabilities 1,651,467 2,410,583
---------------- ----------------
Total current liabilities 18,237,277 40,422,124
Senior subordinated notes payable, net 99,152,667 99,071,515
Deferred income tax 4,930,829 6,749,832
Long term debt- senior credit agreement 37,913,126 -
---------------- ----------------
Total long-term liabilities 141,996,622 105,821,347
---------------- ----------------
Total liabilities 160,233,899 146,243,471
---------------- ----------------
Commitments and Contingencies (Note 19)
Minority Interest - 613,671
---------------- ----------------
Stockholders' Equity:
Preferred stock $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Class A common stock $.01 par value; 30,000,000 shares authorized;
no shares issued or outstanding - -
Common stock $.01 par value; 30,000,000 shares authorized;
6,739,374 shares issued and 6,579,374 shares outstanding as of
January 31, 2001 and 6,337,440 shares issued and 6,286,740 shares
Outstanding as of January 31, 2002 67,393 63,374
Additional paid-in-capital 29,063,407 26,286,040
Retained earnings 54,778,302 61,386,244
Accumulated other comprehensive income - (121,753)
---------------- ----------------
Total 83,909,102 87,613,905
Common stock in treasury at cost; 160,000 shares as of January 31,
2001 and 50,700 shares as of January 31, 2002 (1,029,919) (410,367)
---------------- ----------------
Total stockholders' equity 82,879,183 87,203,538
---------------- ----------------
TOTAL $ 243,113,082 $ 234,060,680
================ ================
See notes to consolidated financial statements.
F-3
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31
2000 2001 2002
------------------- ---------------- ----------------
Revenues
Net Sales $229,549,158 $ 261,626,463 $253,033,752
Royalty Income 22,839,698 25,789,975 26,680,987
------------------- ---------------- ----------------
Total Revenues 252,388,856 287,416,438 279,714,739
Cost of Sales 171,412,946 200,883,860 191,601,211
------------------- ---------------- ----------------
Gross Profit 80,975,910 86,532,578 88,113,528
Operating Expenses
Selling, General and Administrative Expenses 44,479,497 52,146,750 57,170,447
Depreciation and Amortization 5,181,286 6,130,708 6,662,158
------------------- ---------------- ----------------
Total Operating Expenses 49,660,783 58,277,458 63,832,605
------------------- ---------------- ----------------
Operating Income 31,315,127 28,255,120 24,280,923
Interest Expense 13,905,498 15,766,461 13,549,746
------------------- ---------------- ----------------
Income Before Minority Interest and Income Tax
Provision 17,409,629 12,488,659 10,731,177
Minority Interest - - 83,240
Income Tax Provision 6,529,681 4,662,655 4,039,995
------------------- ---------------- ----------------
Net Income $ 10,879,948 $ 7,826,004 $ 6,607,942
=================== ================ ================
Net Income per Share
Basic $ 1.62 $ 1.17 $ 1.01
=================== ================ ================
Diluted $ 1.59 $ 1.16 $ 1.01
=================== ================ ================
Weighted Average Number of Shares Outstanding
Basic 6,725,722 6,689,476 6,516,807
Diluted 6,856,538 6,745,441 6,534,749
See notes to consolidated financial statements.
F-4
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS ENDED JANUARY 31
ACCUMULATED
OTHER
ADDITIONAL COMPRE- COMPRE-
COMMON STOCK PAID-IN TREASURY HENSIVE HENSIVE RETAINED
---------------------
SHARES AMOUNT CAPITAL STOCK INCOME INCOME EARNINGS TOTAL
--------- -------- ----------- ---------- ------------ --------- ----------- ------------
BALANCE, JANUARY 31, 1999 6,712,374 $ 67,123 $28,806,455 $ - $ - $ - $36,072,350 $ 64,945,928
Exercise of stock options 19,500 195 163,333 - - - - 163,528
Exercise of warrants - - - - - - - -
Net income - - - - - - 10,879,948 10,879,948
Tax benefit for exercise
of non-qualified stock
options - - 30,867 - - - - 30,867
--------- -------- ----------- ---------- ------------ --------- ----------- ------------
BALANCE, JANUARY 31, 2000 6,731,874 67,318 29,000,655 - - - 46,952,298 76,020,271
Exercise of stock options 7,500 75 57,425 - - - - 57,500
Net income - - - - - - 7,826,004 7,826,004
Tax benefit for exercise
of non-qualified stock
options - - 5,327 - - - - 5,327
Purchase of treasury
stock (160,000) (1,029,919) - - - (1,029,919)
--------- -------- ----------- ---------- ------------ --------- ----------- ------------
BALANCE, JANUARY 31, 2001 6,579,374 67,393 29,063,407 (1,029,919) - - 54,778,302 82,879,183
Exercise of stock options 2,666 27 15,395 - - - - 15,422
Net income - - - - - 6,607,942 6,607,942 6,607,942
Foreign currency
translation adjustment (121,753) (121,753) (121,753)
----------
Comprehensive income $6,486,189
==========
Tax benefit for exercise
of non-qualified stock
options - - - - - - -
Purchase of treasury
stock (295,300) - - (2,177,256) - - (2,177,256)
Retirement of treasury
stock (4,046) (2,792,762) 2,796,808 - - -
--------- -------- ----------- ---------- ------------ ----------- ------------
BALANCE, JANUARY 31, 2002 6,286,740 $ 63,374 $26,286,040 $ (410,367) $ (121,753) $61,386,243 $ 87,203,538
========= ======== =========== ========== ============ =========== ============
See notes to consolidated financial statements.
F-5
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31
2000 2001 2002
----------------- ----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,879,948 $ 7,826,004 $ 6,607,942
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,181,286 5,521,762 6,190,801
Provision for bad debts 450,541 330,435 1,575,000
Provision for deferred taxes 1,412,735 2,098,295 1,386,240
Amortization of debt issue cost 299,711 608,946 614,347
Amortization of bond discount 136,667 164,000 164,000
Minority Interest - - 83,240
Other 32,758 67,234 (64,250)
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (6,662,205) (13,174,087) 7,048,510
Inventories (3,037,630) (7,579,495) (1,528,619)
Other current assets and prepaid income taxes (1,291,628) 1,728,313 586,446
Other assets 509,924 (265,952) (701,044)
Accounts payable and accrued expenses 1,686,981 603,704 (1,160,561)
Income taxes payable - - 1,385,210
Accrued interest payable 4,233,183 (194,796) (604,768)
Other current liabilities and unearned revenues 214,260 153,951 792,354
----------------- ----------------- ----------------
Net cash provided by (used in) operating activities 14,046,531 (2,111,686) 22,374,847
----------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,331,513) (2,711,741) (2,921,930)
Payment on purchase of intangible assets (1,025,185) (3,472,001) (98,928)
Proceeds from sale of trademark - 750,000 -
Payment for acquired businesses, net of cash acquired (100,734,467) - -
----------------- ----------------- ----------------
Net cash used in investing activities: (104,091,165) (5,433,742) (3,020,858)
----------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) in borrowings under term loan 11,250,000 (11,250,000) -
Net (payments) proceeds from senior credit facility (15,479,661) 19,881,630 (16,157,032)
Net proceeds from senior subordinated notes 98,852,000 - -
Debt issuance costs (4,719,962) - -
Tax benefit for exercise of non-qualified stock options 30,867 5,327 -
Purchase of treasury stock - (1,029,919) (2,177,256)
Proceeds from exercise of stock options 163,528 57,500 15,421
----------------- ----------------- ----------------
Net cash provided by (used in) financing activities: 90,096,772 7,664,538 (18,318,867)
----------------- ----------------- ----------------
Effect of exchange rate changes on cash and cash equivalents - - (75,886)
----------------- ----------------- ----------------
NET INCREASE IN CASH 52,138 119,110 959,237
CASH AT BEGINNING OF YEAR 173,493 225,631 344,741
----------------- ----------------- ----------------
CASH AT END OF YEAR $ 225,631 $ 344,741 $ 1,303,978
================= ================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 9,672,315 $ 15,961,257 $ 14,028,640
================= ================= ================
Income taxes $ 8,556,537 $ 750,000 $ 1,608,192
================= ================= ================
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Change in fair value of Mark-to-Market interest rate
swap/option $ - $ - $ (245,152)
================= ================= ================
See notes to consolidated financial statements.
F-6
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 2002
1. General
The Company is a leading licensor, designer and marketer of a broad
line of high quality men's sportswear, including sport and dress shirts, golf
sportswear, sweaters and casual dress pants and shorts, which sells to all
levels of retail distribution. The Company licenses its trademark portfolio
domestically and internationally for apparel and other products that it does not
sell including dress sportswear, outerwear, fragrances and accessories. The
Company has built a broad portfolio of brands through selective acquisitions and
the establishment of its own brands over its 35-year operating history. The
Company's distribution channels include regional, national and international
upscale department stores, mid-tier department stores, chain stores, mass
merchants, specialty stores and corporate wear distributors throughout the
United States, Puerto Rico and Canada.
2. Summary of Significant Accounting Policies
The following is a summary of the Company's significant accounting
policies:
PRINCIPLES OF CONSOLIDATION- The consolidated financial statements
include the accounts of Perry Ellis International, Inc., its wholly owned
subsidiaries and an entity in which the Company has a controlling interest. The
ownership interest of the noncontrolling owner in such entity is reflected as
minority interest. All intercompany transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts in the consolidated financial statements and the accompanying notes.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-term
nature. The carrying amount of the senior credit facility approximates fair
value due to the relatively frequent resets of its floating interest rate. The
fair value of the 12 1/4% senior subordinated notes is approximately $104.0
million, based on quoted market prices. These estimated fair value amounts have
been determined using available market information or other appropriate
valuation methodologies.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Due to the short maturity period of cash equivalents, the
carrying amount of these instruments approximates fair value.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Cost consists of the purchase price, customs,
duties, freight, insurance and commissions to buying agents.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the lease term or estimated
useful lives of the improvements. The useful lives per asset class range as
follows:
F-7
Avg. Useful
Asset Class Lives in Years
----------------------------------- ---------------------
Furniture, fixtures and equipment 7
Vehicles 7
Leasehold Improvements 11
INTANGIBLE ASSETS - Intangible assets primarily represent costs
capitalized in connection with acquisitions, registration and protection of
brand names and license rights. Intangibles are amortized over their estimated
useful lives, which range from eight to forty years with a weighted average of
31.7 years.
Avg. Useful
Asset Class Lives in Years
----------------------------------- ---------------------
Trademarks and Licensing Rights 15 - 40
Legal Costs 8
Goodwill 15
DEFERRED DEBT ISSUE COSTS - Costs incurred in connection with the
financing are capitalized and amortized on a straight-line basis, which
approximates the interest method, over the term of the related financing. Such
amounts are included in other long-term assets in the consolidated balance
sheet.
LONG-LIVED ASSETS - Management reviews long-lived assets, including
intangible assets, for possible impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. If there
is an indication of impairment, management prepares an estimate of future cash
flows (undiscounted and without interest charges) expected to result from the
use of the asset and its eventual disposition. If these cash flows are less than
the carrying amount of the asset, an impairment loss is recognized to reduce the
asset to its estimated fair value. Preparation of estimated expected future cash
flows is inherently subjective and is based on management's best estimate of
assumptions concerning future conditions. At January 31, 2002, management
believes there was no significant impairment to long-lived assets.
ADVERTISING AND RELATED COSTS - The Company's accounting policy
relating to advertising and related costs is to expense these costs in the
period incurred. Advertising and related costs were $7.1 million, $8.2 million
and $7.7 million for the years ended January 31, 2000, 2001 and 2002,
respectively.
REVENUE RECOGNITION - Sales are recognized upon transfer of legal title
and risk of loss to the customer (at shipment), net of trade allowances and a
provision for estimated returns and other allowances. Royalty income is
recognized when earned on the basis of the terms specified in the underlying
contractual agreements. Royalties collected prior to being earned are deferred
and recognized as earned. The Company believes that its revenue recognition
policies conform to Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. The Company operates predominantly in North America, with
over 90% of its sales in the domestic market. One customer accounted for
approximately 14% of net sales for fiscal year 2000; two customers accounted for
approximately 14% and 11% of net sales for fiscal year 2001; and three customers
accounted for approximately 12%, 11% and 11% of net sales for fiscal year 2002.
The Company does not believe that these concentrations of sales and credit risk
represent a material risk of loss with respect to its financial position as of
January 31, 2002.
F-8
FOREIGN CURRENCY TRANSLATION - For the Company's international
operations, local currencies are considered their functional currencies. The
Company translates assets and liabilities to their U.S. dollar equivalents at
rates in effect at the balance sheet date and revenue and expenses are
translated at average monthly exchange rates. Translation adjustments resulting
from this process are recorded in Stockholders' Equity as a component of
Accumulated Other Comprehensive Income.
INCOME TAXES - Deferred income taxes result primarily from timing
differences in the recognition of expenses for tax and financial reporting
purposes and are accounted for in accordance with Financial Accounting Standards
Board Statement ("SFAS") No. 109, Accounting for Income Taxes, which requires
the liability method of computing deferred income taxes. Under the liability
method, deferred taxes are adjusted for tax rate changes as they occur.
NET INCOME PER SHARE - Basic net income per share is computed by
dividing net income by the weighted average shares of outstanding common stock.
The calculation of diluted net income per share is similar to basic earnings per
share except that the denominator includes potential dilutive common stock. The
potential dilutive common stock included in the Company's computation of diluted
net income per share includes the effects of the stock options and warrants
described in Note 17, as determined using the treasury stock method. The effect
of these dilutive securities amounted to 17,942 shares in 2002, 55,956 shares in
2001 and 130,816 shares in 2002.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company has chosen to
account for stock-based compensation to employees and non-employee members of
the Board using the intrinsic value method prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As required by SFAS No. 123, "Accounting for tock-Based
Compensation," the Company has presented certain pro forma and other disclosures
related to stock-based compensation plans.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company utilizes derivative
financial instruments to reduce interest rate risk. In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended in June 2000
by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and hedging activities. They require that
an entity recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and measure those instruments at fair value. Changes
in the fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. Derivative financial instruments that do not
qualify for hedge accounting will be reported in earnings.
RECLASSIFICATIONS - Certain amounts in the prior years' financial
statements may have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENT - In November, the Financial Accounting
Standards Board ("FASB") Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Product)." This issue addresses the
recognition, measurement and income statement classification of consideration
from a vendor to a customer in connection with the customer's purchase or
promotion of the vendor's products. This consensus is expected to only impact
revenue and expense classifications and not change reported income. In
accordance with the consensus reached, the Company will adopt the required
accounting beginning with the fiscal year beginning February 1, 2002. The
Company's adoption of EITF No. 01-9 will result in reclassification of certain
marketing expenses to reflect them as reduction of revenues. The
reclassification will have no effect on net income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, SFAS No. 133
establishes accounting and reporting
F-9
standards for derivative instruments and for hedging activities. It also
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133, as amended by SFAS No. 138, is effective for
financial statements for fiscal years beginning after June 15, 2000. The Company
adopted the provisions of SFAS No. 133 effective February 1, 2001. On the date
of adoption, SFAS No. 133 did not have a significant impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS No. 141 also addresses the recognition and
measurement of goodwill and other intangibles assets acquired in a business
combination.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which changes the accounting treatment as it applies to
goodwill and other identifiable intangible assets with indefinite useful lives
from an amortization method to an impairment-only approach. Under SFAS No. 142,
proper accounting treatment requires annual assessment for any impairment of the
carrying value of the assets based upon an estimation of the fair value of the
identifiable intangible asset with an indefinite useful life, or in the case of
goodwill of the reporting unit to which the goodwill pertains. Under SFAS No.
142, goodwill and identifiable intangible assets with an indefinite useful live
are no longer subject to amortization. Impairment losses, if any, arising from
the initial application of SFAS No. 142 are to be reported as a cumulative
effect of a change in accounting principle. The effective date of this statement
is for fiscal years beginning after December 15, 2001. The Company intends to
adopt SFAS No. 142 for its fiscal year beginning February 1, 2002.
In accordance with SFAS No. 142, the Company has obtained a preliminary
valuation and estimated useful life report of all its trademarks from a
third-party independent valuation firm. Preliminary results of this analysis,
which the Company is still evaluating, would indicate no significant impairment
in the carrying value of its trademarks upon adoption of the standard and the
trademarks have indefinite useful lives. Under the new pronouncement,
amortization expense relating to identifiable intangible assets with indefinite
useful lives, which amounted to approximately $3,584,000, $3,955,000 and
$4,912,000 for fiscal January 31, 2000, 2001 and 2002, respectively, will not be
required in future years.
On October 3, 2001, the FASB issued SFAS No. 144. "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," it retains many of
the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations---Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The effective date
of SFAS No.144 is for fiscal years beginning after December 15, 2001. SFAS No.
144 is not expected to have a significant effect on the financial position or
the results of operation of the Company.
3. Shares Repurchase
On July 11, 2000, the Board of Directors of the Company approved a
share repurchase program in which up to 500,000 shares of common stock may be
purchased from time to time during the following 12 months. On July 11, 2001,
the Board of Directors extended the current share repurchase program for an
additional year, and on September 25, 2001 increased the number of shares
authorized for repurchase to 750,000 shares. The shares may be purchased in the
open market or in privately negotiated transactions.
F-10
For the fiscal year ended January 31, 2002, the Company had repurchased
295,300 additional shares at an average price of $7.37 per share. On March 2,
2001 and October 29, 2001, the Company retired 160,000 and 244,600 shares held
in the treasury, respectively.
4. Accounts Receivable
Accounts receivable consist of the following as of January 31:
2001 2002
------------ ------------
Trade accounts $51,848,737 $47,778,539
Royalties and other receivables 7,400,850 4,506,696
------------ ------------
Total 59,249,587 52,285,235
Less: Allowance for doubtful accounts (427,965) (1,914,990)
------------ ------------
Total $58,821,622 $50,370,245
============ ============
The activity for the allowance for doubtful account is as follows:
2000 2001 2002
------------- ------------- -------------
Allowance for doubtful accounts
Beginning balance $ 609,874 $1,014,576 $ 427,965
Provision 450,541 330,435 1,575,000
Write-offs, net of recoveries (45,839) (917,046) (87,975)
------------- ------------- -------------
Ending balance $1,014,576 $ 427,965 $1,914,990
============= ============= =============
The Company carries accounts receivable at the amount it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best estimates.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that become uncollectible could differ from those
estimates.
5. Inventories
Inventories consist of the following as of January 31:
2001 2002
----------- -----------
Finished goods $37,960,098 $40,467,911
Raw materials and in process 1,063,772 -
Merchandise in transit 4,532,504 4,941,136
----------- -----------
Total $43,556,374 $45,409,047
=========== ===========
6. Property and Equipment
Property and equipment consists of the following as of January 31:
2001 2002
-------------- --------------
Furniture, fixture and equipment $11,509,202 $11,615,513
Vehicles 188,906 167,940
Leasehold improvements 2,458,947 3,209,254
Land 1,581,702 1,581,702
-------------- --------------
Total 15,738,757 16,574,409
Less: accumulated depreciation
and amortization (5,918,129) (5,677,075)
-------------- --------------
Total $ 9,820,628 $10,897,334
============== ==============
F-11
Depreciation expense relating to property and equipment amounted to
approximately $1,241,000, $1,567,000 and $1,849,000 for the fiscal years ended
January 31, 2000, 2001 and 2002, respectively.
7. Intangible Assets
Intangible assets consisted of the following as of January 31:
2001 2002
------------- -------------
Trademarks and licenses $132,216,093 $132,315,018
Goodwill 16,165 16,165
------------- -------------
Total 132,232,258 132,331,183
Less: Accumulated amortization (10,215,577) (14,392,289)
------------- -------------
Balance, net $122,016,681 $117,938,894
============= =============
Amortization expense relating to the intangible assets amounted to
approximately $3,584,000, $3,955,000 and $4,342,000 for the fiscal years ended
January 31, 2000, 2001 and 2002, respectively.
8. Accrued Expenses
Accrued expenses consists of the following as of January 31:
2001 2002
------------ ------------
Salaries and commissions $1,808,047 $1,735,024
Royalties 318,325 281,280
Buying commissions 401,787 287,944
Other 1,132,205 955,354
------------ ------------
Total $3,660,364 $3,259,602
============ ============
9. Other Current Liabilities
Other current liabilities consists of the following as of January 31:
2001 2002
------------ ------------
Unearned advertising reimbursements $1,334,969 $2,059,667
Other 316,498 350,916
------------ ------------
Total $1,651,467 $2,410,583
============ ============
10. Derivatives Financial Instruments
The Company has an interest rate risk management policy with the
objective of managing its interest costs. To meet this objective the Company
employs hedging and derivatives strategies to limit the effects of changes in
interest rates on its operating income and cash flows, and to lower its overall
fixed rate interest cost on its senior subordinated notes.
The Company believes its interest rate risk management policy is
generally effective. Nonetheless, the Company's profitability may be adversely
affected during particular periods as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve risks such
as counter-party credit risk and risks regarding the legal enforceability of
hedging contracts. The counter-parties to the Company's arrangements are lenders
of the hedged debt instruments or are major financial institutions.
F-12
In August 2001, the Company entered into an interest rate swap, option
and interest rate cap agreements (the "August Swap Agreement") for an aggregate
notional amount of $40.0 million in order to minimize its debt servicing costs
associated with its $100.0 million of 12 1/4% senior subordinated notes due
April 1, 2006. The August Swap Agreement was subsequently modified through a
basis swap entered into in October 2001 (the "October Swap Agreement," and
collectively with the August Swap Agreement, the "Swap Agreement"). The Swap
Agreement is scheduled to terminate on April 1, 2006. Under the Swap Agreement,
the Company is entitled to receive semi-annual interest payments on October 1,
and April 1, at a fixed rate of 12 1/4% and is obligated to make semi-annual
interest payments on October 1, and April 1, at a floating rate based on the
6-month LIBOR rate plus 715 basis points for the 18 months period October 1,
2001 through March 31, 2003 (per October Swap Agreement); and 3-month LIBOR rate
plus 750 basis point for the period April 1, 2003 through April 1, 2006 (per the
August Swap Agreement). The Swap Agreement has optional call provisions with
trigger dates of April 1, 2003, April 1, 2004 and April 1, 2005, which contain
certain premium requirements in the event the call is exercised.
The fair value of the interest rate swap and option are recorded on the
Company's Consolidated Balance Sheet was ($0.245) million as of January 31,
2002. The interest rate cap and basis swap did not qualify for hedge accounting
treatment under the SFAS No. 133, resulting in $0.7 million reduction of
recorded interest expense in results of operations for the fiscal year ended
January 31, 2002.
The Company does not currently have a significant exposure to foreign
exchange risk and accordingly, has not entered into any transactions to hedge
against those risks. See summary of "Significant Accounting Policies" for policy
description of foreign currency translation.
11. Borrowings under Letter of Credit Facilities
The Company maintains two letter of credit facilities totaling $42.0
million. Each letter of credit is secured by the consignment of merchandise in
transit under that letter of credit. As of January 31, 2002, there was $31.0
million available under then existing letter of credit facilities.
Amounts outstanding under letter of credit facilities consist of the
following as of January 31:
2001 2002
--------------- ---------------
Total letter of credit facilities $ 52,000,000 $ 42,000,000
Outstanding letters of credit (27,923,927) (11,035,880)
--------------- ---------------
Available $ 24,076,073 $ 30,964,120
=============== ===============
12. Long Term Debt-Senior Credit Facility
The Company amended its senior credit facility on March 26, 1999 with a
group of banks consisting of a revolving credit facility of up to an aggregate
amount of $75.0 million. The weighted average interest rate on the senior credit
facility was 8.7% and 7.3% for the fiscal years ending January 31, 2001 and
2002, respectively. The facility contains covenants which require the Company to
maintain certain financial and net worth ratios and restricts the payment of
dividends. As of January 31, 2002, the Company was not in compliance with a
certain funded indebtedness to EBITDA financial covenant which noncompliance has
been waived subsequent to January 31, 2002. The senior credit facility is
secured by the assets of the Company.
The senior credit facility expires on October 1, 2002 and as such the
Company has classified its credit facility as current in the consolidated
balance sheet as of January 31, 2002. The Company is currently in active
discussions to renew or replace its existing senior credit facility. Management
believes this discussion will be successfully completed prior to the October 1,
2002 expiration date.
F-13
13. Senior Subordinated Notes Payable
The Company issued $100.0 million senior subordinated notes on April 6,
1999, the proceeds of which were used to acquire the Perry Ellis, John Henry and
Manhattan brands and to pay down the outstanding balance of the senior credit
facility. The notes mature on April 1, 2006, and bear interest at the rate of
12 1/4 % payable on April 1 and October 1 in each year. The proceeds to the
Company were $98,852,000, yielding an effective interest rate of 12.39% after
deduction of discounts.
The notes are unsecured senior subordinated obligations and are
subordinated to all of the Company's existing and future senior indebtedness.
The notes rank equally with all of the Company's future senior subordinated
indebtedness.
The indenture agreement contains certain covenants which requires the
Company to maintain certain financial ratios and restricts the payment of
dividends. As of January 31, 2002, the Company was in compliance with its debt
covenants of the senior subordinated notes.
Optional Redemption. The notes are redeemable at the option of the
Company, as a whole or in part from time to time, at any time on or after April
1, 2003 at the redemption prices (expressed as percentages of principal amount)
set forth below, together with accrued interest, if any, to the date of
redemption, if redeemed during the 12-month period beginning on April 1 of the
years indicated below (subject to the right of holders of record on relevant
record dates to receive interest due on an interest payment date):
Year Redemption Price
---- ----------------
2003 ........................................... 106.125%
2004 ........................................... 103.063%
2005 and thereafter ............................ 100.000%
In addition, at any time or from time to time before April 1, 2002, the
Company may redeem up to 35% of the aggregate principal amount of the notes
within 60 days of one or more public equity offerings with the net proceeds of
such offering at a redemption price equal to 112.25% of the principal amount
thereof, together with accrued interest, if any, to the date of redemption
(subject to the right of holders of record on relevant record dates to receive
interest due on relevant interest payment dates); provided that, after giving
effect to any such redemption, at least 65% of the aggregate principal amount of
the notes initially issued remains outstanding. The Company did not exercise the
redemption option before April 1, 2002.
14. Income Taxes
The income tax provision consists of the following for each of the
years ended January 31:
2000 2001 2002
------------- ------------- ------------
Current income taxes:
Federal $4,677,353 $2,450,203 $2,115,199
State 528,929 242,627 300,810
Foreign (89,337) (128,460) 237,746
------------- ------------- ------------
Total 5,116,945 2,564,370 2,653,755
Deferred income taxes:
Federal and state 1,412,735 2,098,295 1,386,240
------------- ------------- ------------
Total $6,529,680 $4,662,665 $4,039,995
============= ============= ============
F-14
The following table reconciles the statutory federal income tax rate to
the Company's effective income tax rate for each of the years ended January 31:
2000 2001 2002
----------- ----------- -----------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from
State income taxes, net of federal
Income tax benefit 2.9 2.5 2.7
Benefit of graduated rate (1.0) (0.6) (0.6)
Other (2.5) 0.6 0.8
----------- ----------- -----------
Total 34.4% 37.5% 37.9%
=========== =========== ===========
Deferred income taxes are provided for the temporary differences
between financial reporting basis and the tax basis of the Company's assets and
liabilities under SFAS No. 109. The tax effects of temporary differences as of
January 31 are as follows:
2001 2002
--------------- ----------------
Deferred Tax Assets
Inventory $ 855,394 $ 909,481
Allowance for doubtful accounts 155,168 698,971
Accrued expenses 26,458 104,655
Unearned revenue 723,966 671,209
Other 190,567 -
--------------- ----------------
Subtotal 1,951,553 2,384,316
--------------- ----------------
Deferred Tax Liabilities
Fixed assets (1,419,643) (1,635,853)
Intangible assets (3,410,355) (4,889,857)
Other 100,831 (224,122)
--------------- ----------------
Subtotal (4,930,829) (6,749,832)
--------------- ----------------
Net deferred tax asset (liability) $(2,979,276) $(4,365,516)
=============== ================
Management believes that a valuation allowance for deferred income tax
assets is not deemed necessary as the assets are expected to be recovered.
Deferred taxes have not been recognized on unremitted earnings of the Company's
foreign subsidiaries based on the "indefinite reversal" criteria of APB Opinion
No. 23.
15. Retirement Plan
The Company has a 401(k) Profit Sharing Plan (the "Plan") in which
eligible employees may participate. Employees are eligible to participate in the
Plan upon the attainment of age 21, and completion of one year of service.
Participants may elect to contribute up to 15% of their annual compensation, not
to exceed amounts prescribed by statutory guidelines. The Company is required to
contribute an amount equal to 50% of each participant's eligible contribution up
to 6% of the participant's annual compensation. The Company may elect to
contribute additional amounts at its discretion. The Company's contributions to
the Plan were approximately $128,000, $173,000 and $199,000 for the fiscal years
ended January 31, 2000, 2001 and 2002, respectively.
F-15
16. Related Party Transactions
The Company leases certain office and warehouse space owned by the
Chairman of the Board of Directors and Chief Executive Officer under certain
lease arrangements, most of which are month-to-month. Rent expense, including
taxes, for these leases amounted to $265,000, $316,000 and $537,000, for the
years ended January 31, 2000, 2001 and 2002, respectively.
The Company entered into licensing agreements (the "License
Agreements") with Isaco International, Inc. ("Isaco"), pursuant to which Isaco
was granted the exclusive license to use the Natural Issue, Perry Ellis and
Career Club brand names in the United States and Puerto Rico to market a line of
men's underwear, hosiery and loungewear. The principal shareholder of Isaco is
the father-in-law of the Company's President and Chief Operating Officer.
Royalty income earned from the License Agreements amounted to $438,000, $834,000
and $1,230,000 for the years ended January 31, 2000, 2001 and 2002,
respectively.
17. Stock Options and Warrants
Stock Options - The Company adopted a 1993 Stock Option Plan (the "1993
Plan") and a Directors Stock Option Plan (the "Directors Plan") (collectively,
the "Stock Option Plans"), under which shares of common stock are reserved for
issuance upon the exercise of the options. The number of shares issuable under
the Directors Plan is 150,000. The number of shares issuable under the 1993 plan
is 1,500,000. The Stock Option Plans are designed to serve as an incentive for
attracting and retaining qualified and competent employees, directors,
consultants, and independent contractors of the Company. The 1993 Plan provides
for the granting of both incentive stock options and nonstatutory stock options.
Incentive stock options may only be granted to employees. Only non-employee
directors are eligible to receive options under the Directors Plan. All matters
relating to the Directors Plan are administered by a committee of the Board of
Directors consisting of two or more employee directors, including selection of
participants, allotment of shares, determination of price and other conditions
of purchase, except that the per share exercise price of options granted under
the Directors Plan may not be less than the fair market value of the common
stock on the date of grant.
Options can be granted under the 1993 Plan on such terms and at such
prices as determined by the Board of Directors, or a committee thereof, except
that the per share exercise price of incentive stock options granted under the
1993 Plan may not be less than the fair market value of the common stock on the
date of grant, and in the case of an incentive stock option granted to a 10%
shareholder, the per share exercise price will not be less than 110% of such
fair market value.
F-16
A summary of the stock option activity for options issued under the
1993 Plan and the Directors Plan is as follows for the years ended January 31:
Option Price Per Share Options Exercisable
------------------------------------- --------------------------------
Number Number Weighted Average
of Shares Low High Weighted of Shares Exercise Price
-------------- ----------- ------------ ------------ ----------- -------------------
Outstanding January 31, 1999 566,000 $ 6.67 $ 15.75 $ 11.95 410,375 $ 12.66
Granted 2000 501,000 $ 8.81 $ 13.50 $ 9.26
Exercised 2000 (19,500) $ 6.67 $ 10.07 $ 8.39
Cancelled 2000 (15,000) $ 6.50 $ 15.25 $ 9.59
-------------
Outstanding January 31, 2000 1,032,000 $ 7.67 $ 15.75 $ 10.69 833,459 $ 10.73
Granted 2001 167,000 $ 5.13 $ 13.00 $ 8.41
Exercised 2001 (7,500) $ 7.67 $ 7.67 $ 7.67
Cancelled 2001 (78,500) $ 9.63 $ 14.25 $ 10.13
-------------
Outstanding January 31, 2001 1,113,550 $ 5.13 $ 15.75 $ 10.44 940,616 $ 10.41
Granted 2002 71,667 $ 5.13 $ 8.85 $ 7.37
Exercised 2002 (2,666) $ 5.13 $ 6.88 $ 5.79
Cancelled 2002 (88,750) $ 5.13 $ 13.44 $ 10.40
-------------
Outstanding January 31, 2002 1,093,801 $ 5.13 $ 15.75 $ 10.27 980,774 $ 10.40
=============
The following table summarizes information about options outstanding as
of January 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Life Average Number Average
Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
--------------------------- --------------- ----------------- -------------- ----------- ---------------
$ 5.13 - $ 7.50 88,501 6.4 $ 5.57 62,666 $ 5.21
$ 7.51 - $ 10.00 663,750 4.3 $ 8.80 621,292 $ 8.80
$ 10.01 - $ 12.00 78,550 1.0 $ 10.56 42,149 $ 10.56
$ 12.01 - $ 15.75 263,000 6.7 $ 15.49 254,667 $ 15.56
As described in Note 2, we account for stock-based compensation using
the provisions of APB No. 25 and related interpretations. No compensation
expense has been recognized in the years ended January 31, 2000, 2001 and 2002
as the exercise prices for the stock options granted were equal to their fair
market value at the time of grant. Had compensation cost for options granted
been determined in accordance with the fair value provisions of SFAS No. 123,
our net income and net income per share would have been reduced to the pro forma
amounts presented below for the years ended January 31:
2000 2001 2002
------------------ ----------------- -------------------
Pro forma net income $10,150,643 $7,078,649 $6,185,478
================== ================= ===================
Pro forma net income per share:
Basic $ 1.51 $ 1.08 $ 0.95
================== ================= ===================
Diluted $ 1.48 $ 1.05 $ 0.95
================== ================= ===================
F-17
The fair value of these options was estimated at the date of grant
using the Black-Scholes Option Pricing Model with the following weighted-average
assumptions for 2000, 2001 and 2002:
2000 2001 2002
---------------------------------------------
Risk free interest 6.5% 6.5% 3.3%
Dividend Yield 0.0% 0.0% 0.0%
Volatility factors 64.0% 67.9% 67.3%
Weighted average life (years) 9.0 4.5 1.9
Using the Black-Scholes Option Pricing Model, the estimated
weighted-average fair value per option granted in 1999, 2000 and 2001 was $6.99,
$4.43 and $2.75, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our stock options.
The pro forma amounts may not be representative of the future effects
on reported net income and net income per share that will result from the future
granting of stock options, since the pro forma compensation expense is allocated
over the periods in which options become exercisable and new option awards are
granted each year.
18. Segment Information
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," the Company's principal segments are
grouped between the generation of revenues from products and royalties. The
Licensing segment derives its revenues from royalties associated from the use of
its brand names, principally Perry Ellis, John Henry, Manhattan and Munsingwear.
The Product segment derives its revenues from the design, import and
distribution of apparel to department stores and other retail outlets,
principally throughout the United States. Trademark assets and costs have been
allocated among the divisions where the brands are shared.
2000 2001 2002
--------------------- --------------------- ---------------------
Revenues:
Product $ 229,549,158 $ 261,626,463 $ 253,033,752
Licensing 22,839,698 25,789,975 26,680,987
--------------------- --------------------- ---------------------
Total Revenues $ 252,388,856 $ 287,416,438 $ 279,714,739
===================== ===================== =====================
Operating Income
Product $ 15,065,942 $ 10,772,903 $ 7,882,648
Licensing 16,249,185 17,482,217 16,398,275
--------------------- --------------------- ---------------------
Total Operating Income $ 31,315,127 $ 28,255,120 $ 24,280,923
===================== ===================== =====================
Interest Expense
Product $ 3,417,678 $ 3,353,726 $ 1,630,120
F-18
Licensing 10,487,820 12,412,735 11,919,626
--------------------- --------------------- ---------------------
Total Interest Expense $ 13,905,498 $ 15,766,461 $ 13,549,746
===================== ===================== =====================
Income Tax Provision
Product $ 4,368,823 $ 2,721,285 $ 2,637,938
Licensing 2,160,858 1,941,370 1,402,057
--------------------- --------------------- ---------------------
Total Income Tax Provision $ 6,529,681 $ 4,662,655 $ 4,039,995
===================== ===================== =====================
Depreciation and Amortization
Product $ 1,493,055 $ 1,824,137 $ 2,181,229
Licensing 3,688,231 4,306,571 4,480,929
--------------------- --------------------- ---------------------
Total Depreciation and Amortization $ 5,181,286 $ 6,130,708 $ 6,662,158
===================== ===================== =====================
Identifiable Assets
Product $ 113,454,814 $ 120,506,469
Licensing 127,685,408 111,057,137
Corporate 1,972,860 2,497,074
--------------------- ---------------------
Total Identifiable Assets $ 243,113,082 $ 234,060,680
===================== =====================
19. Commitments and Contingencies
The Company has licensing agreements, as licensee, for the use of
certain branded and designer labels. The license agreements expire on varying
dates through December 31, 2003. Total royalty payments under these license
agreements amounted to $1,105,716, $1,198,106 and $1,635,239 for the years ended
January 31, 2000, 2001 and 2002, respectively, and were classified as cost of
sales.
The Company's administrative offices, warehouse and distribution
facility are located in a 240,000 square foot leased facility in Miami, which
was built to our specifications and completed in 1997. The facility is occupied
pursuant to a synthetic lease, which has an initial term expiring in August
2002, annual rental payment of approximately $900,000 and a minimum contingent
rental payment of $14.5 million at the end of the 5-year term. The synthetic
lease will not be renewed and the Company is in the process of arranging new
financing for its facilities through a mortgage lender.
The synthetic lease was entered into with a group of financial
institutions to finance the acquisition and construction of the Company's
corporate headquarters. The financial institutions assumed the Company's
obligation to purchase the facility and, in turn, leased the facility to us. The
obligations under the synthetic lease are secured by a security interest in
substantially all the Company's existing and future assets, whether tangible or
intangible, including, without limitation, accounts receivable, inventory
deposit accounts, general intangibles, intellectual property and equipment.
In addition to customary covenants found in secured lending agreements,
the synthetic lease also contains various restrictive financial and other
covenants including, without limitation, (a) prohibitions on the incurrence of
additional indebtedness or guarantees, (b) restrictions on the creation of
additional liens, (c) certain limitations on dividends and distributions or
capital expenditures by the Company, (d) restrictions on mergers or
consolidations, sales of assets, investments and transactions with affiliates
and (e) certain financial maintenance tests. Such financial maintenance tests,
include, among others, (i) a maximum funded indebtedness to EBITDA ratio, (ii) a
minimum current ratio, (iii) a minimum net worth and (iv) a minimum fixed charge
coverage ratio. As of January 31, 2002, the Company was not in compliance with
the funded indebtedness to EBITDA financial covenant. The lessor under, and the
financial institutions which financed, the synthetic lease have waived the
noncompliance with this financial covenant.
F-19
The Company leases three warehouse facilities in Miami totaling
approximately 103,000 square feet from our Chairman and CEO and partnerships
controlled by him, to handle the overflow of bulk shipments and the specialty
division and PING operations. All leases are on a month-to-month basis at market
prices.
The Company leases two locations in New York City totaling
approximately 8,500 square feet each, these leases expire in December 2007 and
2012. These locations are used for offices and showrooms.
The Company leases a retail store in the Sawgrass Mills outlet mall in
Sunrise, Florida with 11,240 square feet. This lease expires in September 2005.
Since the Company began leasing this facility in May 2001, the location have
been used as a test retail outlet store to sell our brands, principally Perry
Ellis America.
In order to monitor production of the Company's products in the Far
East, we maintain offices in South Korea, and China, and also lease offices
jointly with GFX Corporation, a privately held company, in Beijing, China and
Taipei, Taiwan.
Minimum aggregate annual commitments for all of the Company's
non-cancelable operating lease commitments, including the minimum contingent
rental payment described above, are as follows.
Year Ending January 31,
-----------------------
2003 $ 15,951,620 (A)
2004 465,650
2005 461,725
2006 461,725
2006 453,142
Future 1,017,125
----------------
Total $ 18,810,987
================
(A) Includes synthetic lease payments of $15.4 million
Rent expense for these operating leases, including the related party
rent payments discussed in Note 16 amounted to $1,946,000, $1,660,632 and
$2,526,293 for fiscal years ending January 31, 2000, 2001 and 2002,
respectively.
The Company is subject to claims and suits, and is the initiator of
claims and suits against others, in the ordinary course of business. The Company
does not believe that the resolution of any pending claims will have a material
adverse effect on its financial position, results of operations or cash flows.
20. Subsequent Events
Senior Secured Notes
On March 22, 2002, the Company completed a private offering of $57.0
million 9 1/2% senior secured notes due March 15, 2009. The proceeds of the
private offering were used to fund the Jantzen acquisition, to reduce the amount
of outstanding debt under the Company's senior credit facility and as additional
working capital. The senior secured notes are secured by a security interest
granted in the Company's existing portfolio of trademarks and licenses, and the
trademarks and licenses acquired in connection with the Jantzen acquisition (see
below); all license agreements with respect to these trademarks; and all income,
royalties and other payments with respect to such licenses. The senior secured
notes are senior secured obligations of the Company and will rank pari passu in
right of payment with all of the Company's existing and future senior
indebtedness. The senior secured notes are effectively senior to all unsecured
indebtedness of the Company to the extent of the value of the assets securing
the notes.
Consolidating Condensed Financial Statements
The following are consolidating condensed financial statements, which
present, in separate columns: Perry Ellis International, Inc., the Guarantors on
a combined, or where appropriate, consolidated basis, and the Non-Guarantors on
a consolidated basis. Additional columns present eliminating adjustments and
consolidated totals as of January 31, 2002 and 2001 and for the years ended
January 31, 2002, 2001 and 2000. The combined Guarantors are wholly owned
subsidiaries of Perry Ellis International, Inc., and have fully and
unconditionally guaranteed the senior secured notes on a joint and several
basis. The Company has not presented separate financial statements an other
disclosures concerning the combined Guarantors because management has determined
that such information is not material to investors.
F-20
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
AS OF JANUARY 31, 2001
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantors Eliminations Inc.
-------------- ------------- -------------- ------------ --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 65,843 $ 278,898 $ 344,741
Accounts receivable, net 58,627,472 194,150 58,821,622
Intercompany Receivable - Guarantors 763,884 (763,884) --
Inventories 43,491,170 65,204 43,556,374
Deferred income taxes 1,951,553 1,951,553
Prepaid income taxes (391,371) 528,089 136,718
Other current assets 2,296,759 8,524 2,305,283
-------------- ------------- -------------- ------------ --------------
Total current assets 106,805,310 1,074,865 (763,884) 107,116,291
Property and equipment, net 9,780,372 40,256 9,820,628
Intangible assets, net 122,016,681 -- 122,016,681
Investment in subsidiaries 278,688 (278,688) --
Other 4,153,182 6,300 4,159,482
-------------- ------------- -------------- ------------ --------------
TOTAL $ 243,034,233 $ 1,121,421 $ (1,042,572) $ 243,113,082
============== ============= ============== ============ ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,638,269 $ 74,590 $ 6,712,859
Accrued expenses 3,656,105 4,259 3,660,364
Intercompany Payable - Parent 763,884 (763,884) --
Income taxes payable --
Accrued interest payable 4,215,835 4,215,835
Current portion - senior credit agreement --
Unearned Revenues 1,651,467 1,651,467
Other current liabilities 1,996,752 1,996,752
-------------- ------------- -------------- ------------ --------------
Total current liabilities 18,158,428 842,733 (763,884) 18,237,277
Senior subordinated notes payable, net 99,152,667 99,152,667
Deferred income tax 4,930,829 4,930,829
Long term debt- senior credit agreement 37,913,126 37,913,126
Long term debt- term loan --
-------------- ------------- -------------- ------------ --------------
Total long-term liabilities 141,996,622 -- 141,996,622
-------------- ------------- -------------- ------------ --------------
Total liabilities 160,155,050 842,733 (763,884) 160,233,899
-------------- ------------- -------------- ------------ --------------
Minority Interest --
-------------- ------------- -------------- ------------ --------------
Stockholders' Equity:
Preferred stock $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding --
Class A Common Stock $.01 par value; 30,000,000
shares authorized; no shares issued or
outstanding --
Common stock $.01 par value; 30,000,000 shares
authorized; 6,739,374 shares issued and
6,579,374 shares outstanding as of
January 31, 2001. 67,393 100 (100) 67,393
Additional paid-in-capital 29,063,407 29,063,407
Retained earnings 54,778,302 278,588 (278,588) 54,778,302
Accumulated other comprehensive income -- --
-------------- ------------- -------------- ------------ --------------
Total 83,909,102 278,688 (278,688) 83,909,102
Common stock in treasury at cost;
and 160,000 shares as of January 31, 2001 (1,029,919) (1,029,919)
-------------- ------------- -------------- ------------ --------------
Total stockholders' equity 82,879,183 278,688 (278,688) 82,879,183
-------------- ------------- -------------- ------------ --------------
TOTAL $ 243,034,233 $ 1,121,421 1,042,572 $ 243,113,082
============== ============= ============== ============ ==============
See notes to consolidated financial statements
F-21
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
AS OF JANUARY 31, 2002
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantors Eliminations Inc.
-------------- ------------- -------------- ------------ --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 115,441 $ 9,557 $ 1,178,980 $ 1,303,978
Accounts receivable, net 49,636,377 21,064 712,804 50,370,245
Intercompany Receivable - Guarantors 915,506 (915,506) --
Intercompany Receivable - Non Guarantors 698,854 (698,854)
Inventories 45,110,440 206,686 91,921 45,409,047
Deferred income taxes 2,384,316 2,384,316
Prepaid income taxes --
Other current assets 1,729,653 156,510 1,886,163
-------------- ------------- -------------- ------------ --------------
Total current assets 100,590,587 393,817 1,983,705 (1,614,360) 101,353,749
Property and equipment, net 10,862,844 34,490 10,897,334
Intangible assets, net 117,938,894 117,938,894
Investment in subsidiaries 128,354 (128,354) --
Other 3,866,993 3,710 3,870,703
-------------- ------------- -------------- ------------ --------------
TOTAL $ 233,387,672 $ 397,527 $ 2,018,195 $ (1,742,714) $ 234,060,680
============== ============= ============== ============ ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,760,265 $ 34,504 $ 171,599 $ 5,966,368
Accrued expenses 3,202,176 27,426 30,000 3,259,602
Intercompany Payable - Parent 915,506 698,854 (1,614,360) --
Income taxes payable 1,617,168 (395,722) 160,105 1,381,551
Accrued interest payable 3,808,997 3,808,997
Current portion - senior credit agreement 21,819,334 (63,240) 21,756,094
Unearned Revenues 1,838,929 1,838,929
Other current liabilities 2,315,918 3,704 90,961 2,410,583
-------------- ------------- -------------- ------------ --------------
Total current liabilities 40,362,787 585,418 1,088,279 (1,614,360) 40,422,124
Senior subordinated notes payable, net 99,071,515 99,071,515
Deferred income tax 6,749,832 6,749,832
Long term debt - senior credit agreement -- --
-------------- ------------- -------------- ------------ --------------
Total long-term liabilities 105,821,347 -- -- 105,821,347
-------------- ------------- -------------- ------------ --------------
Total liabilities 146,184,134 585,418 1,088,279 (1,614,360) 146,243,471
-------------- ------------- -------------- ------------ --------------
Minority Interest 613,671 613,671
-------------- ------------- -------------- ------------ --------------
Stockholders' Equity:
Preferred stock $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding --
Class A Common Stock $.01 par value; 30,000,000
shares authorized; no shares issued or
outstanding --
Common stock $.01 par value; 30,000,000 shares
authorized; 6,337,440 shares issued and
6,286,740 shares outstanding as of January 31,
2002. 63,374 100 556,954 (557,054) 63,374
Additional paid-in-capital 26,286,040 26,286,040
Retained earnings 61,386,244 (187,991) (240,709) 428,700 61,386,244
Accumulated other comprehensive income (121,753) (121,753)
-------------- ------------- -------------- ------------ --------------
Total 87,613,905 (187,891) 316,245 (128,354) 87,613,905
Common stock in treasury at cost; 50,700 shares
as of January 31, 2002 (410,367) (410,367)
-------------- ------------- -------------- ------------ --------------
Total stockholders' equity 87,203,538 (187,891) 316,245 (128,354) 87,203,538
-------------- ------------- -------------- ------------ --------------
TOTAL $ 233,387,672 $ 397,527 $ 2,018,195 $ (1,742,714) $ 234,060,680
============== ============= ============== ============ ==============
F-22
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE YEAR ENDED JANUARY 31, 2000
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantor Eliminations Inc.
-------------- ------------- -------------- ------------ --------------
Revenues
Net Sales $ 226,253,926 $ 3,295,232 $ 229,549,158
Royalty Income 22,839,698 - 22,839,698
-------------- ------------- -------------- ------------ --------------
Total Revenues 249,093,624 3,295,232 252,388,856
Cost of Sales 168,541,173 2,871,773 171,412,946
-------------- ------------- -------------- ------------ --------------
Gross Profit 80,552,451 423,459 80,975,910
Operating Expenses
Selling, General and Administrative Expenses 43,666,245 813,252 44,479,497
Depreciation and Amortization 5,181,286 - 5,181,286
-------------- ------------- -------------- ------------ --------------
Total Operating Expenses 48,847,531 813,252 49,660,783
-------------- ------------- -------------- ------------ --------------
Operating Income 31,704,920 (389,793) 31,315,127
Interest Expense 13,870,732 34,766 13,905,498
-------------- ------------- -------------- ------------ --------------
Income Before and Income Tax
Provision 17,834,188 (424,559) 17,409,629
Equity in earnings of subsidiaries, net 394,019 (394,019) -
Income Taxes 6,560,221 (30,540) 6,529,681
-------------- ------------- -------------- ------------ --------------
Net Income $ 10,879,948 $ (394,019) (394,019) $ 10,879,948
============== ============= ============== ============ ==============
F-23
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE YEAR ENDED JANUARY 31, 2001
Consolidated
Perry Ellis
Parent Only Guarantors Non-Guarantors Eliminations International, Inc.
------------- ------------- ---------------- ------------ -------------------
Revenues
Net Sales $ 259,463,687 $ 2,162,776 $ 261,626,463
Royalty Income 25,789,975 - 25,789,975
------------- ------------- ---------------- ------------ ---------------
Total Revenues 285,253,662 2,162,776 287,416,438
Cost of Sales 198,906,423 1,977,437 200,883,860
------------- ------------- ---------------- ------------ ---------------
Gross Profit 86,347,239 185,339 86,532,578
Operating Expenses
Selling, General and Administrative Expenses 51,446,157 700,593 52,146,750
Depreciation and Amortization 6,130,708 - 6,130,708
------------- ------------- ---------------- ------------ ---------------
Total Operating Expenses 57,576,865 700,593 58,277,458
------------- ------------- ---------------- ------------ ---------------
28,255,120
Operating Income 28,770,374 (515,254)
Interest Expense 15,761,441 5,020 15,766,461
------------- ------------- ---------------- ------------ ---------------
Income Before and Income Tax Provision 13,008,933 (520,274) 12,488,659
Equity in earning of subsidiaries, net 391,788 (391,788) -
Income Taxes 4,791,141 (128,486) 4,662,655
------------- ------------- ---------------- ------------ ---------------
Net Income $ 7,826,004 $ (391,788) $ (391,788) $ 7,826,004
============= ============= ================ ============ ===============
F-24
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
FOR THE YEAR ENDED JANUARY 31, 2002
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantors Eliminations Inc.
-------------- ------------- -------------- ------------ --------------
Revenues
Net Sales $ 243,297,438 $ 675,470 $ 9,060,844 $ 253,033,752
Royalty Income 26,680,987 - - 26,680,987
-------------- ------------- -------------- ------------ --------------
Total Revenues 269,978,425 675,470 9,060,844 279,714,739
Cost of Sales 184,848,858 627,031 6,125,322 191,601,211
-------------- ------------- -------------- ------------ --------------
Gross Profit 85,129,567 48,439 2,935,522 88,113,528
Operating Expenses
Selling, General and Administrative Expenses 53,560,499 591,742 3,018,206 57,170,447
Depreciation and Amortization 6,474,902 49,459 137,797 6,662,158
-------------- ------------- -------------- ------------ --------------
Total Operating Expenses 60,035,401 641,201 3,156,003 63,832,605
-------------- ------------- -------------- ------------ --------------
Operating Income 25,094,166 (592,762) (220,481) 24,280,923
Interest Expense 13,530,715 19,031 - 13,549,746
-------------- ------------- -------------- ------------ --------------
Income Before Minority Interest and Income Tax
Provision 11,563,451 (611,793) (220,481) 10,731,177
Minority Interest - - 83,240 83,240
Equity in earnings of subsidiaries, net 707,285 (707,285)
Income Taxes 4,248,224 (145,217) (63,012) 4,039,995
-------------- ------------- -------------- ------------ --------------
Net Income $ 6,607,942 $ (466,576) $ (240,709) (707,285) $ 6,607,942
============== ============= ============== ============ ==============
F-25
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 2000
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantors Eliminations Inc.
------------- ----------- -------------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,640,132 $ (394,019) 394,019 $ 10,879,948
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,181,286 5,181,286
Provision for bad debts 450,541 450,541
Provision for deferred taxes 1,412,735 1,412,735
Amortization of debt issue cost 299,711 299,711
Amortization of bond discount 136,667 136,667
Equity in earnings of subsidiaries, net 394,019 -- -- (394,019) --
Other -- 32,758 32,758
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (8,257,557) 1,595,352 (6,662,205)
Inventories (3,306,453) 268,823 (3,037,630)
Other current assets and prepaid income taxes 2,424,881 (3,716,510) (1,291,629)
Other assets (3,779,720) 4,289,644 509,924
Accounts payable and accrued expenses 2,686,924 (999,943) 1,686,981
Income taxes payable (1,651,390) 1,651,390 --
Accrued interest payable 4,233,184 4,233,184
Other current liabilities and unearned revenues 3,028,663 (2,814,403) 214,260
------------- ----------- -------------- ------------ -------------
Net cash provided by operating activities 14,133,439 (86,908) 14,046,531
------------- ----------- -------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,331,513) (2,331,513)
Payment on purchase of intangible assets (1,025,185) (1,025,185)
Payment for acquired businesses, net of cash acquired (100,734,467) -- (100,734,467)
------------- ----------- -------------- ------------ -------------
Net cash used in investing activities: (104,091,165) -- (104,091,165)
------------- ----------- -------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) in borrowings under term loan 11,250,000 11,250,000
Net (payments) proceeds from senior credit facility (15,479,661) (15,479,661)
Net proceeds from senior subordinated notes 98,852,000 -- 98,852,000
Debt issuance costs (4,719,962) -- (4,719,962)
Tax benefit for exercise of non-qualified stock options 30,867 30,867
Proceeds from exercise of stock options 163,528 163,528
------------- ----------- ------------- ------------ -------------
Net cash provided by financing activities: 90,096,772 -- 90,096,772
------------- ----------- ------------- ------------ -------------
NET (DECREASE) INCREASE IN CASH (100,770) 152,908 52,138
CASH AT BEGINNING OF YEAR 275,039 (101,546) 173,493
------------- ----------- -------------- ------------ -------------
CASH AT END OF YEAR $ 174,269 $ 51,362 $ 225,631
============= =========== ============== ============ =============
F-26
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 2001
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantors Eliminations Inc.
------------ ------------ -------------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,826,004 $ (391,788) 391,788 $ 7,826,004
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,521,762 - 5,521,762
Provision for bad debts 330,435 330,435
Provision for deferred taxes 2,098,295 2,098,295
Amortization of debt issue cost 608,946 608,946
Amortization of bond discount 164,000 164,000
Equity in earnings of subsidiaries, net 391,788 (391,788) -
Other (57,503) 124,737 67,234
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net (13,859,130) 685,043 (13,174,087)
Inventories (7,745,849) 166,354 (7,579,495)
Other current assets and prepaid income taxes 2,056,220 (327,907) 1,728,313
Other assets (259,652) (6,300) (265,952)
Accounts payable and accrued expenses 481,341 122,363 603,704
Accrued interest payable (194,797) - (194,797)
Other current liabilities and unearned revenues 206,051 (52,100) 153,951
------------ ------------ -------------- ------------ --------------
Net cash provided by (used in)
operating activities (2,432,089) 320,402 (2,111,687)
------------ ------------ -------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,711,740) (2,711,740)
Payment on purchase of intangible assets (3,379,135) (92,866) (3,472,001)
Proceeds from sale of trademark 750,000 750,000
------------ ------------ -------------- ------------ --------------
Net cash used in investing activities: (5,340,875) (92,866) (5,433,741)
------------ ------------ -------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) in borrowings under term loan (11,250,000) (11,250,000)
Net (payments) proceeds from senior credit facility 19,881,630 19,881,630
Tax benefit for exercise of non-qualified stock options 5,327 5,327
Purchase of treasury stock (1,029,919) (1,029,919)
Proceeds from exercise of stock options 57,500 57,500
------------ ------------ -------------- ------------ --------------
Net cash provided by financing activities: 7,664,538 - 7,664,538
------------ ------------ -------------- ------------ --------------
NET (DECREASE) INCREASE IN CASH (108,426) 227,536 119,110
CASH AT BEGINNING OF YEAR 174,269 51,362 225,631
------------ ------------ -------------- ------------ --------------
CASH AT END OF YEAR $ 65,843 $ 278,898 $ 344,741
============ ============ ============== ============ ==============
F-27
PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 2002
Consolidated
Perry Ellis
International,
Parent Only Guarantors Non-Guarantors Eliminations Inc.
------------ ---------- -------------- ------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,607,942 $ (466,576) $ (240,709) 707,285 $ 6,607,942
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,012,953 40,051 137,797 6,190,801
Provision for bad debts 1,575,000 -- 1,575,000
Provision for deferred taxes 1,386,240 -- 1,386,240
Amortization of debt issue cost 614,347 -- 614,347
Amortization of bond discount 164,000 -- 164,000
Minority Interest -- -- 83,240 83,240
Other (64,250) -- (64,250)
Equity in earnings of subsidiaries, net 707,285 707,285
Changes in operating assets and liabilities
(net of effects of acquisitions):
Accounts receivable, net 6,565,619 173,086 309,805 7,048,510
Inventories (1,619,270) (141,482) 232,133 (1,528,619)
Other current assets and prepaid income taxes 225,735 528,089 (167,378) 586,446
Other assets (1,260,588) (180,447) 739,991 (701,044)
Accounts payable and accrued expenses (1,326,196) 134,703 30,932 (1,160,561)
Income taxes payable 1,617,168 (395,722) 163,764 1,385,210
Accrued interest payable (406,838) -- (197,930) (604,768)
Other current liabilities and unearned revenues 506,328 3,704 282,322 792,354
------------ ---------- -------------- ------------ --------------
Net cash provided by (used in) operating
activities 21,305,475 (304,594) 1,373,967 22,374,848
------------ ---------- -------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,916,774) 35,257 (40,413) (2,921,930)
Payment on purchase of intangible assets (20,539) -- (78,389) (98,928)
------------ ---------- -------------- ------------ --------------
Net cash used in investing activities: (2,937,313) 35,257 (118,802) (3,020,858)
------------ ---------- -------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from senior credit facility (16,157,032) -- (16,157,032)
Purchase of treasury stock (2,177,256) -- (2,177,256)
Proceeds from exercise of stock options 15,421 -- 15,421
------------ ---------- -------------- ------------ --------------
Net cash used in financing activities: (18,318,867) -- (18,318,867)
------------ ---------- -------------- ------------ --------------
Effect of exchange rate changes on cash and cash
equivalents (75,886) (75,886)
NET (DECREASE) INCREASE IN CASH 49,295 (269,337) 1,179,279 959,237
CASH AT BEGINNING OF YEAR 65,843 278,898 344,741
------------ ---------- -------------- ------------ --------------
CASH AT END OF YEAR $ 115,138 $ 9,561 $ 1,179,279 $ 1,303,978
============ ========== ============== ============ ==============
F-28
Jantzen Acquisition
On March 22, 2002, the Company completed the acquisition from
subsidiaries of VF Corporation of certain assets of the Jantzen swimwear
business for approximately $24.0 million, excluding fees related to the
transaction. The Jantzen brand has a history of over 90 years and its products
are sold in upscale department stores, mid-tier department stores, chain stores,
mass merchants and specialty shops. The acquisition was financed with a portion
of the proceeds from a $57.0 million private offering of 9 1/2% senior secured
notes due March 15, 2009, which we closed simultaneously with the acquisition.
The Company has, through the acquisition of Jantzen, a lease agreement
for the Jantzen's Portland, Oregon office space for an initial six-month period.
This facility totals approximately 83,900 square feet. The Company has entered
into a lease for a portion of Jantzen's Seneca, South Carolina distribution
center facility for a one-year period, commencing March 22, 2002. This facility
totals approximately 279,000 square feet. The Seneca, South Carolina facility
carries an option to acquire the facility, which the Company can exercise within
60 days of the March 22, 2002 commencement date. The Company has been assigned a
lease agreement for office and showroom space in New York City totaling 8,200
square feet through August 2006, which contains certain renewal provisions. In
addition, the Company has entered into a lease agreement with Tommy Hilfiger to
occupy approximately 200 square feet of space in Tommy Hilfiger's facility
located in New York City through 2005.
Interest Rate Swap and Option Agreement
On March 15, 2002, the Company entered into interest rate swap and
option agreements for an aggregate notional amount of $57.0 million in order to
minimize the debt servicing costs associated with the senior secured notes. The
swap agreement is scheduled to terminate on March 15, 2009. Under the swap
agreement, the Company is entitled to receive semi-annual interest payments on
September 15 and March 15 at a fixed rate of 9 1/2% and are obligated to make
semi-annual interest payments on September 15 and March 15 at a floating rate
based on the three-month LIBOR rate plus 369 basis points for the period from
March 22, 2002 through March 15, 2009. The swap agreement has optional call
provisions with trigger dates of March 15, 2005, March 15, 2006 and March 15,
2007, which contain premium requirements in the event the call is exercised.
Senior Credit Facility
In March 2002, the Company amended its existing senior credit facility
with the Company's group of banks, which as amended, provides the Company with a
revolving credit facility of up to an aggregate amount of $60.0 million. This
amendment was done concurrently with the $57.0 million senior secured notes
offering discussed above. Borrowings are limited under the terms of a borrowing
base calculation, which generally restricts the outstanding balance to the sum
of (a) 80% of eligible receivables plus, (b) 90% of eligible factored accounts
receivable plus 60% of eligible inventories, as defined. Interest on borrowings
is variable, based upon the Company's option of selecting the bank's prime rate,
or a short term LIBOR rate plus an additional amount based on the Company's debt
coverage and other financial ratios.
Letters of Credit
Subsequent to January 31, 2002, the Company added two additional letter
of credit facilities for an aggregate amount of $25.0 million. Concurrently with
adding the additional facilities, the Company lowered one of its two existing
facilities by the amount of $5.0 million. The Company now has four facilities
totaling $62.0 million.
F-29
Synthetic Lease
In March 2002, the Company amended its synthetic lease with the lessor
and the financial institution that financed the synthetic lease, which as
amended provides that the Company shall exercise the purchase option of the
lease on or prior to June 30, 2002, increased the amount of stand-by letter of
credit to $5.5 million and waived the noncompliance of a certain financial
covenant the Company was not in compliance as of January 31, 2002. The Company
is in the process of arranging new financing to replace the synthetic lease
through a mortgage lender and the Company received a satisfactory financing
offer from such lender, subject to additional due diligence. The transaction
will result in the recognition of both an asset and a related liability on the
Company's balance sheet.
21. Summarized Quarterly Financial Data
(Unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------
(Dollars in thousands)
FISCAL YEAR ENDED JANUARY 31, 2002
Net Sales $ 80,866 $ 58,926 $ 60,511 $ 52,731 $ 253,034
Royalty Income 6,065 6,858 6,403 7,355 26,681
----------------------------------------------------------------------------------
Total Revenues 86,931 65,784 66,914 60,086 279,715
Gross Profit 26,150 20,673 19,542 21,749 88,114
Net Income $ 3,198 $ 1,487 $ 970 $ 952 $ 6,608
Income per share:
Basic $ 0.49 $ 0.23 $ 0.15 $ 0.15 $ 1.01
Diluted $ 0.49 $ 0.23 $ 0.15 $ 0.15 $ 1.01
FISCAL YEAR ENDED JANUARY 31, 2001
Net Sales $ 78,232 $ 58,941 $ 64,356 $ 60,097 $ 261,626
Royalty Income 6,093 6,747 6,275 6,675 25,790
----------------------------------------------------------------------------------
Total Revenues 84,325 65,688 70,631 66,772 287,416
Gross Profit 25,453 20,923 19,121 21,036 86,533
Net Income $ 3,590 $ 1,818 $ 351 $ 2,067 $ 7,826
Income per share:
Basic $ 0.53 $ 0.27 $ 0.05 $ 0.31 $ 1.17
Diluted $ 0.53 $ 0.27 $ 0.05 $ 0.31 $ 1.16
FISCAL YEAR ENDED JANUARY 31, 2000
Net Sales $ 59,479 $ 45,273 $ 66,618 $ 58,179 $ 229,549
Royalty income 2,316 6,744 6,454 7,326 22,840
----------------------------------------------------------------------------------
Total revenues 61,795 52,017 73,072 65,505 252,389
Gross Profit 17,623 18,707 23,210 21,435 80,975
Net Income $ 2,892 $ 1,607 $ 3,964 $ 2,417 $ 10,880
Net income per share:
Basic $ 0.43 $ 0.24 $ 0.59 $ 0.36 $ 1.62
Diluted $ 0.43 $ 0.23 $ 0.58 $ 0.35 $ 1.59
F-30
INDEPENDENT AUDITORS' REPORT
To the Management of The Jantzen Business:
We have audited the accompanying balance sheets of The Jantzen Business
("Jantzen"), a business unit owned by VF Corporation, as of December 29, 2001
and December 30, 2000, and the related statements of income and net investment
of VF Corporation and of cash flows for each of the three years in the period
ended December 29, 2001. These financial statements are the responsibility of
Jantzen's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The Jantzen financial statements have been derived from the accounts of VF
Corporation and its subsidiaries as described in Note 1. Moreover, as indicated
in Note 1, Jantzen relies on VF Corporation for treasury, legal and other
services. The financial position, results of operations, and cash flows of
Jantzen could differ from those that would have resulted had Jantzen operated
autonomously or as an entity independent of VF Corporation.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Jantzen as of December 29, 2001 and December
30, 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 29, 2001 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
May 10, 2002
F-31
THE JANTZEN BUSINESS
(A business unit owned by VF Corporation)
BALANCE SHEETS (In thousands)
--------------------------------------------------------------------------------
Fiscal Year Ended
----------------------------
December 29, December 30,
ASSETS 2001 2000
----------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 445 $ 241
Accounts receivable, less allowances of $1,231 in 2001
and $1,263 in 2000 11,536 12,078
Inventories 23,456 28,740
Deferred income taxes 3,065 702
Prepaid income taxes and other current assets 4,931 958
------- -------
Total current assets 43,433 42,719
Property, plant and equipment, net 5,768 6,773
Goodwill, net 17,737 18,421
Other 467 283
------- -------
$67,405 $68,196
======= =======
LIABILITIES AND NET INVESTMENT OF VF CORPORATION
CURRENT LIABILITIES:
Accounts payable $ 5,368 $ 8,878
Accrued liabilities 8,716 4,545
------- -------
Total current liabilities 14,084 13,423
Other liabilities 588 295
------- -------
Total liabilities 14,672 13,718
NET INVESTMENT OF VF CORPORATION 52,733 54,478
------- -------
$67,405 $68,196
======= =======
See notes to financial statements.
F-32
THE JANTZEN BUSINESS
(A business unit owned by VF Corporation)
STATEMENTS OF INCOME AND NET INVESTMENT OF VF CORPORATION (In thousands)
--------------------------------------------------------------------------------
Fiscal Year Ended
-----------------------------------------
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
REVENUES:
Net sales $ 94,159 $ 111,524 $ 140,331
Royalty income, net 1,683 1,055 1,740
--------- --------- ---------
95,842 112,579 142,071
--------- --------- ---------
COSTS AND OPERATING EXPENSES:
Cost of sales 73,007 72,033 103,652
Selling, general and administrative expenses 32,611 35,664 41,810
Amortization of goodwill 684 684 684
--------- --------- ---------
106,302 108,381 146,146
--------- --------- ---------
OPERATING INCOME (LOSS) (10,460) 4,198 (4,075)
--------- --------- ---------
OTHER INCOME:
Interest income 41 15 20
Miscellaneous, net 13 405 182
--------- --------- ---------
54 420 202
--------- --------- ---------
Income (loss) before income tax expense (benefit) and
cumulative effect of change in accounting principle (10,406) 4,618 (3,873)
Income tax expense (benefit) (3,782) 1,789 (1,356)
--------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle (6,624) 2,829 (2,517)
Cumulative effect on prior years of change
in accounting principle, net of income taxes -- (124) --
--------- --------- ---------
Net income (loss) (6,624) 2,705 (2,517)
Net investment of VF Corporation, beginning of year 54,478 57,137 66,752
Increase (decrease) in net investment of
VF Corporation 4,879 (5,364) (7,098)
--------- --------- ---------
Net investment of VF Corporation, end of year $ 52,733 $ 54,478 $ 57,137
========= ========= =========
See notes to financial statements.
F-33
THE JANTZEN BUSINESS
(A business unit owned by VF Corporation)
STATEMENTS OF CASH FLOWS (In thousands)
--------------------------------------------------------------------------------
Fiscal Year Ended
----------------------------------------
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(6,624) $ 2,705 $(2,517)
Adjustments to reconcile net income (loss)
to cash provided by operations:
Provision for restructuring costs 4,993
Depreciation and amortization 1,943 2,140 2,654
Deferred income tax expense (benefit) (2,547) (902) 1,808
Provision for bad debts 61 93 755
Changes in current assets and liabilities:
Accounts receivable 6,783 (3,987) (908)
Inventories 3,932 1,172 8,870
Prepaid income taxes and other current assets (3,973) 262 (931)
Accounts payable and accrued expenses (4,332) (1,254) (9,161)
Other liabilities, net 293 162 23
------- ------- -------
Net cash provided by operating activities 529 391 593
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (325) (604) (634)
------- ------- -------
Net cash used in investing activities (325) (604) (634)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 204 (213) (41)
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 241 454 495
------- ------- -------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 445 $ 241 $ 454
======= ======= =======
See notes to financial statements.
F-34
THE JANTZEN BUSINESS
(A business unit owned by VF Corporation)
NOTES TO FINANCIAL STATEMENTS (Dollars in thousands)
--------------------------------------------------------------------------------
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
The accompanying financial statements have been prepared to present the
financial position, results of operations and cash flows of The Jantzen
Business ("Jantzen"), a business unit owned by VF Corporation ("VF"). On
March 15, 2002, VF and Perry Ellis International, Inc. ("Perry Ellis")
entered into an asset purchase agreement (the "Agreement"). As a result of
the Agreement, financial statements related to Jantzen are required to be
filed by Regulation S-X, promulgated by the Securities and Exchange
Commission. The financial statements include all the operations of the
business unit, which do not necessarily represent the assets and business
acquired by Perry Ellis. The financial position, results of operations and
cash flows as presented herein may not be the same as would have occurred
had Jantzen operated autonomously or as an entity independent of VF
Corporation during the periods presented and may not be indicative of
future financial results.
Perry Ellis acquired trademarks and trade names owned by Jantzen, certain
operating assets and the capital stock of Jantzen Apparel Corporation. The
Agreement also included the assignment to Perry Ellis of the NIKE(R) and
Tommy Hilfiger(R) licenses for the manufacture and sale of swimwear. The
Agreement did not include working capital related to the 2002 product
lines (primarily accounts receivable and inventories) and real estate
assets, which will be retained by VF. VF expects to complete the sale of
Jantzen's 2002 product lines during the second quarter of 2002 and to
substantially liquidate the remaining net assets of Jantzen through the
end of the third quarter of 2002. The purchase price approximated $24,000
and the transaction closed on March 22, 2002.
Jantzen's operations consist of the design, manufacture and sale of
swimwear and sportswear under the Jantzen(R) and other brands, as well as
swimwear under the licensed NIKE and Tommy Hilfiger brands. The entities
comprising Jantzen are not a separate legal entity and, as a result, net
investments of VF Corporation is shown in lieu of stockholder's equity in
the financial statements and include the accumulation of transactions
between Jantzen and VF described below. All intercompany accounts and
transactions have been eliminated. Fiscal years are 52/53-week periods
ending on the Saturday closest to the end of December of each year.
The Jantzen business is comprised of the following:
. Jantzen Inc., a wholly owned subsidiary of VF. Jantzen Inc. is the
operating company. All net operating assets (working capital, fixed
assets, etc.) are owned and operated through this legal entity. This
legal entity holds the NIKE and Tommy Hilfiger licenses and owns
Jantzen Apparel Corporation and VF Canada, Inc.
. Jantzen Apparel Corporation, a wholly owned subsidiary of Jantzen
Inc., owns the Jantzen and other trade names and trademarks.
. The portion of the business of VF Canada, Inc., a wholly owned
subsidiary of Jantzen Inc., that is directly related to the Jantzen
trademark. VF Canada is substantially a sales operation that sells
exclusively to Canadian customers. The portion of VF Canada, Inc. not
related to the Jantzen trademark is directly related to other
trademarks owned by an affiliated entity within VF and thus not
considered part of Jantzen.
F-35
. The operating results directly related to Jantzen products that are
sold to consumers through factory outlet stores operated by an
affiliate of VF ("VFFO").
. The goodwill resulting from VF's 1986 acquisition of Jantzen Inc. and
the related amortization expense.
Transactions with VF and its other subsidiaries are described below:
. VF operates a chain of retail outlet stores across the United States.
Jantzen transfers primarily excess quantities of first quality
swimwear and sportswear inventories to the outlet stores at Jantzen's
cost. When the VF outlet stores sell these products to retail
consumers, the actual customer sales, cost of sales and marketing
costs incurred are recorded by Jantzen. These operating results are
presented as a separate reportable segment in Note 9. Sales, costs of
sales and selling and distribution expenses were $23,777, $20,838 and
$4,993, respectively, in 2001, $33,930, $23,817 and $6,524,
respectively, in 2000 and $35,105, $21,962 and $6,524, respectively,
in 1999.
. Approximately 18%, 22% and 18% in 2001, 2000 and 1999, respectively,
of products sold by Jantzen were manufactured by VF affiliates at
amounts that approximate VF's cost. The balance of production
requirements was manufactured in Jantzen plants or contracted with
independent parties.
. The financial statements include certain VF corporate expenses
directly related to Jantzen. Corporate expenses for pension,
insurance, audit, information systems and other costs directly related
to Jantzen are based on the actual costs incurred by VF. Jantzen
management believes that amounts for these services are a reasonable
representation of the services performed or benefits received.
. Jantzen does not maintain stand-alone treasury, legal and other
corporate support functions. Included in marketing, administrative and
general expenses are management fees charged by VF of $3,298, $3,386
and $3,367 in 2001, 2000 and 1999, respectively. Jantzen management
believes that amounts for these services are a reasonable
representation of the services performed or benefits received.
. VF uses a centralized approach to cash management and the financing of
its operations. The Jantzen cash accounts are swept on a daily basis
and are netted against the net investments of VF Corporation accounts.
As a result, none of the VF cash and cash equivalents or debt at the
corporate level has been allocated to Jantzen in the financial
statements. Cash in the financial statements represents amounts not
swept by VF. Included in net investments of VF Corporation are
intercompany receivables of $39,294 and $43,934 at December 30, 2001
and December 29, 2000, respectively.
. VF does not charge interest expense on its net investments of VF
Corporation to Jantzen. Accordingly, Jantzen's interest expense and
financing costs as a separate entity may be different than that
presented in the financial statements.
. Jantzen is included in VF's consolidated federal income tax returns.
Income tax provisions (benefits) and related balance sheet accounts in
the financial statements have been computed on a separate tax return
basis.
F-36
2. ACCOUNTING POLICIES
Cash and Cash Equivalents - Jantzen considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents. Due to the short maturity period of cash equivalents,
the carrying amount of these instruments approximates fair value.
Inventories are stated at the lower of cost or market on the last-in,
first-out method. The current cost of inventories stated on the last-in,
first-out method is not significantly different from their value
determined under the first-in, first-out method.
Property and Depreciation - Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, ranging from 10 to 20 years for
buildings and ranging from 3 to 10 years for machinery and equipment.
Jantzen's principle is to evaluate property for possible impairment
whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. An impairment loss may be
recorded if undiscounted future cash flows are not expected to be adequate
to recover the carrying value of the asset. An impairment loss is
recognized based on the fair value of the asset less any costs of
disposition.
Goodwill represents the excess amount of VF's cost over the fair value of
Jantzen Inc.'s net tangible assets at the 1986 acquisition date. Amounts
are net of accumulated amortization of $11,379 and $10,694 in 2001 and
2000, respectively. These assets are amortized using the straight-line
method over 40 years. Also, whenever events or changes in circumstances
indicated that the carrying amount of goodwill might not be recoverable,
Jantzen had evaluated its recoverability using forecasted net cash flows
on an undiscounted basis. An impairment loss is recognized based on the
fair value of the asset less any costs of disposition.
Revenue Recognition - During the fourth quarter of 2000, Jantzen changed
its accounting principle for recognizing sales in accordance with the
SEC's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements. Previously, sales were recorded upon shipment of goods to the
customer. The new principle recognizes that the risks of ownership in some
transactions do not substantively transfer to customers until they have
received the product, without regard to when legal title has transferred.
The cumulative effect of this change in principle for periods prior to
January 2000 of $219 is shown in the statements of income. Sales to VFFO
accounted for 25%, 30% and 25% of net sales in 2001, 2000 and 1999,
respectively.
Royalty Income from independent licensees is recognized when earned on the
basis of the terms specified in the underlying contractual agreements and
are presented net of directly related expenses of $127, $121 and $68 in
2001, 2000 and 1999, respectively.
Advertising Costs are expensed as incurred and were $3,945 in 2001, $5,449
in 2000 and $5,145 in 1999 and are included in marketing, administrative
and general expenses.
Shipping Costs to customers are included in marketing, administrative and
general expenses and were $231 in 2001, $208 in 2000 and $482 in 1999.
Revenues generated from shipping fees are included in net sales for all
periods presented.
Trademark Costs - All costs of trademark applications and renewals, as
well as costs of trademark defense, are expensed as incurred.
F-37
Income Taxes - Jantzen accounts for income taxes in accordance with
Financial Accounting Standards Board Statement No. 109, Accounting for
Income Taxes ("SFAS 109"). SFAS 109 requires the asset and liability
method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion of the deferred
tax assets will not be realized.
New Accounting Pronouncements - At the end of 2001, Jantzen has $17,737 of
net goodwill arising from the acquisition of Jantzen Inc., by VF in 1986.
Under the accounting rules in effect through the end of 2001, the goodwill
was being amortized over its estimated useful lives, limited to a maximum
period of 40 years. Also, whenever events or changes in circumstances
indicated that the carrying amount of goodwill might not be recoverable,
Jantzen evaluated their recoverability using forecasted net cash flows on
an undiscounted basis.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets, which is
effective for Jantzen at the beginning of 2002 and may not be applied
retroactively to financial statements of prior periods. Under this
Statement, goodwill, including previously existing goodwill, and
intangible assets with indefinite useful lives will not be amortized but
must be tested at least annually for impairment. Other intangible assets
will be amortized over their estimated useful lives. The new Statement
also requires an initial test for impairment of existing goodwill and
intangible assets to determine if the existing carrying value exceeds its
fair value. Any transitional impairment determined upon adoption of the
new Statement must be recognized as the cumulative effect of a change in
accounting principle in the statement of income at the beginning of 2002.
Under the new Statement, amortization of goodwill, which totaled $684 for
2001, 2000 and 1999, will not be required in future years. Jantzen has
completed the initial test of existing goodwill and was not required to
record impairment upon adoption of this Statement.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement supersedes
Statement 121 but retains many of its fundamental provisions.
Additionally, this Statement expands the scope of discontinued operations
to include more disposal transactions. The provisions of this Statement
are effective for Jantzen beginning in fiscal 2002. Management does not
anticipate a significant impact to Jantzen's results of operations from
adoption of this Statement.
Fair Value of Financial Instruments - The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their
short-term nature.
Use of Estimates - In preparing financial statements in accordance with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results may differ
from those estimates.
F-38
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at:
2001 2000
In thousands
Trade accounts $ 11,774 $ 11,665
Royalties and other receivables 993 1,676
-------- --------
12,767 13,341
Less: allowance for doubtful accounts (1,231) (1,263)
-------- --------
Total $ 11,536 $ 12,078
======== ========
The activity for the allowance account is as follows:
Allowance for doubtful accounts:
2001 2000 1999
Allownce for doubtful accounts:
Beginning balance $ 1,263 $ 1,157 $ 1,289
Provision 61 93 755
Write-offs, net of recoveries (93) 13 (887)
-------- -------- --------
Ending balance $ 1,231 $ 1,263 $ 1,157
======== ======== ========
Jantzen carries accounts receivable at the amount it deems to be
collectible. Accordingly, Jantzen provides allowances for accounts
receivable it deems to be uncollectible based on management's best
estimates. Recoveries are recognized in the period they are received. The
ultimate amount of accounts receivable that become uncollectible could
differ from those estimates. No single customer accounted for more than
10% of the trade accounts receivable balance at December 29, 2001 and
December 30, 2000.
4. INVENTORIES
2001 2000
In thousands
Finished products $ 15,806 $ 15,446
Work in process 4,675 6,606
Materials and supplies 2,975 6,688
-------- --------
$ 23,456 $ 28,740
======== ========
F-39
5. PROPERTY, PLANT AND EQUIPMENT
2001 2000
In thousands
Land $ 1,699 $ 1,699
Buildings 10,306 10,224
Machinery and equipment 7,592 8,456
-------- --------
19,597 20,379
Less accumulated depreciation (13,829) (13,606)
-------- --------
$ 5,768 $ 6,773
======== ========
Depreciation expense for 2001, 2000 and 1999 was $1,259, $1,455 and
$1,813, respectively.
6. ACCRUED LIABILITIES
2001 2000
In thousands
Compensation $ 1,376 $ 1,118
Restructuring costs (Note 11) 4,993 --
Environmental contamination contingency, net 990 990
Advertising expense -- 796
Other 1,357 1,641
-------- --------
$ 8,716 $ 4,545
======== ========
The environmental contamination contingency is net of $811 representing the
carrying value of the contaminated building at December 29, 2001 and
December 30, 2000.
7. INCOME TAXES
Jantzen is part of an affiliated group of corporations that files a
consolidated federal income tax return. Jantzen reports its share of the
consolidated liability on a separate return basis for financial reporting
purposes. The income tax expense (benefit) for Jantzen for the years
presented, excluding the cumulative effect of the change in accounting
principle, consists of the following:
2001 2000 1999
In thousands
Current:
Federal and state $ (1,785) $ 2,892 $ (3,724)
Foreign 549 (201) 560
-------- -------- --------
(1,236) 2,691 (3,164)
-------- -------- --------
Deferred:
Federal and state (2,558) (870) 1,811
Foreign 12 (32) (3)
-------- -------- --------
(2,546) (902) 1,808
-------- -------- --------
Total $ (3,782) $ 1,789 $ (1,356)
======== ======== ========
F-40
Jantzen is a party to a tax sharing agreement with its affiliated group
members. Based on the agreement, Jantzen is entitled to receive
compensation for the tax benefits it contributed to the consolidated group
or must remit compensation for the tax burden it contributed to the
consolidated group. These amounts are recorded using intercompany
receivable and payable accounts.
The reasons for the difference between income taxes computed by applying
the statutory federal income tax rate and income tax expense in the
financial statements are as follows:
2001 2000 1999
In thousands
Tax at federal statutory rate $(3,642) $ 1,616 $(1,356)
State income taxes,
net of federal tax benefit (408) 30 (271)
Amortization of intangible assets 239 239 239
Other, net 29 (96) 32
------- ------- -------
$(3,782) $ 1,789 $(1,356)
======= ======= =======
Deferred income tax assets and liabilities consist of the following:
2001 2000
In thousands
Deferred income tax assets:
Employee benefits $ 424 $ 517
Other accrued expenses 3,015 1,507
Operating loss carryforwards 921 778
Other 428 586
------ ------
Deferred income tax assets 4,788 3,388
------ ------
Deferred income tax liabilities:
Depreciation 971 1,137
Inventory 285 1,266
------ ------
Deferred income tax liabilities 1,256 2,403
------ ------
Net deferred income tax assets $3,532 $ 985
====== ======
2001 2000
In thousands
Amount included in:
Current assets $3,065 $ 702
Other assets 467 283
------ ------
$3,532 $ 985
====== ======
F-41
8. RETIREMENT PLAN
VF has a 401(k) Profit Sharing Plan (the "Plan") in which eligible
employees may participate. Employees are eligible to participate in the
Plan beginning the first of the month following 30 days of employment.
Participants may elect to contribute 15% of their annual compensation, not
to exceed amounts prescribed by statutory guidelines. VF is required to
contribute an amount equal to 50% of each participant's eligible
contribution up to 6% of the participant's annual compensation. VF's
contributions to the Plan were $225, $186 and $257 in 2001, 2000 and 1999,
respectively.
9. BUSINESS SEGMENT INFORMATION
Jantzen designs, manufactures and markets apparel products under Jantzen
and other owned brand names, and under the licensed NIKE and Tommy
Hilfiger brand names. Customers include department and specialty stores
throughout the United States.
Jantzen manages its business in two segments - - wholesale customers and
VF outlet customers. The wholesale business consists of sales to
retailers, who in turn resell the Jantzen merchandise to their consumers.
The VF outlet business consists of sales of Jantzen's products through
VF's retail factory outlet stores directly to consumers.
Accounting policies for the wholesale segment are those stated in Note 2.
In the VF outlet segment, Jantzen transfers inventory to VF's outlet
affiliate at cost. When these products are sold to retail consumers, the
actual sales, cost of sales and marketing expenses are recorded at
Jantzen. Because there is no allocation of outlet assets to Jantzen, there
is no asset base in this segment. Financial information for Jantzen's
reportable segments is as follows:
2001 2000 1999
In thousands
Revenues:
Wholesale and royalty income $ 72,065 $ 78,649 $ 106,966
VF outlet 23,777 33,930 35,105
--------- --------- ---------
Total revenues $ 95,842 $ 112,579 $ 142,071
========= ========= =========
Operating income (loss):
Wholesale and royalty income $ (8,406) $ 634 $ (10,694)
VF outlet (2,054) 3,564 6,619
--------- --------- ---------
Total operating income (loss) $ (10,460) $ 4,198 $ (4,075)
========= ========= =========
10. COMMITMENTS AND CONTINGENCIES
Jantzen leases certain facilities and equipment under noncancelable
operating leases. Future minimum lease payments are $439, $402, $402, $402
and $365 for the years 2002 through 2006 and $0 thereafter. Rent expense
associated with these leases was $1,257, $1,180 and $2,011 in 2001, 2000
and 1999, respectively.
Jantzen enters into licensing agreements that provide Jantzen rights to
market products under NIKE and Tommy Hilfiger trademarks owned by other
parties. Royalty expense under these agreements were $2,636, $2,536 and
$2,401 in 2001, 2000 and 1999, respectively, and is recognized in cost of
sales in the statements of income. Certain of these agreements contain
provisions for the payment of a guaranteed
F-42
minimum royalty on anticipated sales at the beginning of each quarter and a
minimum percentage royalty based on annual sales. Future minimum royalty
payments are $1,131, $1,345, $858, $910 and $0 for the years 2002 through
2006 and $0 thereafter. Future minimum advertising payments are $775,
$1,000, $1,000, $1,000 and $0 for the years 2002 through 2006 and $0
thereafter.
Jantzen is subject to claims and suits, and is the initiator of claims and
suits against others, in the ordinary course of business. Management does
not believe that the resolution of any pending claims will have a material
adverse effect on its financial position, results of operations or cash
flows.
11. RESTRUCTURING EXPENSE
In the fourth quarter of 2001, VF management informed the employees of
Jantzen that VF intended to sell or otherwise dispose of Jantzen.
Accordingly, substantially all of the 494 employees were notified that
their employment would be terminated during 2002. Jantzen accrued a
restructuring charge of $4,993 in 2001 for severance and related benefits
for these employees. Of the total charge, $1,373 was recorded in cost of
sales and $3,620 in selling, general and administrative expenses.
* * * * * *
F-43
PERRY ELLIS INTERNATIONAL, INC.
Offer to Exchange
9 1/2% Series B Secured Notes Due 2009
For Any and All Outstanding
9 1/2% Series A Secured Notes Due 2009
($57,000,000 Aggregate Principal Amount Outstanding)
------------------
PROSPECTUS
------------------
June 13, 2002
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and, if given or made, such information or misrepresentations must
not be relied upon as having been authorized by Perry Ellis International, Inc.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates or any
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of Perry Ellis International, Inc. since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.