PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2006
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Only
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
|
|
|
$
|
553,133
|
|
|
$
|
45,126
|
|
|
$
|
|
|
|
$
|
598,259
|
|
Gross profit
|
|
|
|
|
|
|
172,385
|
|
|
|
24,368
|
|
|
|
|
|
|
|
196,753
|
|
Operating income
|
|
|
|
|
|
|
28,034
|
|
|
|
8,855
|
|
|
|
|
|
|
|
36,889
|
|
Costs on early extinguishment of debt
|
|
|
|
|
|
|
2,963
|
|
|
|
|
|
|
|
|
|
|
|
2,963
|
|
Interest, minority interest and income taxes
|
|
|
283
|
|
|
|
18,735
|
|
|
|
3,210
|
|
|
|
|
|
|
|
22,228
|
|
Equity in earnings of subsidiaries, net
|
|
|
11,981
|
|
|
|
676
|
|
|
|
|
|
|
|
(12,657
|
)
|
|
|
|
|
Net income
|
|
|
11,698
|
|
|
|
7,012
|
|
|
|
5,645
|
|
|
|
(12,657
|
)
|
|
|
11,698
|
|
PERRY ELLIS INTERNATIONAL, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2007
(amounts in
thousands)
|
|
|
|
Parent Only
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash used in provided by operating activities
|
|
$
|
(618
|
)
|
|
$
|
51,491
|
|
|
$
|
(356
|
)
|
|
$
|
2,154
|
|
|
$
|
52,671
|
|
Net cash used in investing activities
|
|
|
(31
|
)
|
|
|
(11,603
|
)
|
|
|
(563
|
)
|
|
|
|
|
|
|
(12,197
|
)
|
Net cash provided by (used in) financing activities
|
|
|
644
|
|
|
|
(38,656
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
(38,078
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,964
|
|
|
|
|
|
|
|
2,154
|
|
|
|
(2,154
|
)
|
|
|
1,964
|
|
Net increase in cash and cash equivalents
|
|
|
1,959
|
|
|
|
1,232
|
|
|
|
1,169
|
|
|
|
|
|
|
|
4,360
|
|
Cash and cash equivalents at beginning of period
|
|
|
(4,140
|
)
|
|
|
2,648
|
|
|
|
6,006
|
|
|
|
|
|
|
|
4,514
|
|
Cash and cash equivalents at end of period
|
|
|
(2,181
|
)
|
|
|
3,880
|
|
|
|
7,175
|
|
|
|
|
|
|
|
8,874
|
|
PERRY ELLIS INTERNATIONAL, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED OCTOBER 31, 2006
(amounts in
thousands)
|
|
|
|
Parent Only
|
|
|
Guarantors
|
|
|
Non-Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(2,020
|
)
|
|
$
|
28,763
|
|
|
$
|
314
|
|
|
$
|
(221
|
)
|
|
$
|
26,836
|
|
Net cash used in investing activities
|
|
|
(2,864
|
)
|
|
|
(10,865
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
(14,159
|
)
|
Net cash provided by (used in) financing activities
|
|
|
2,106
|
|
|
|
(19,659
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
(17,615
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(221
|
)
|
|
|
|
|
|
|
765
|
|
|
|
221
|
|
|
|
765
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,999
|
)
|
|
|
(1,761
|
)
|
|
|
587
|
|
|
|
|
|
|
|
(4,173
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
6
|
|
|
|
3,568
|
|
|
|
5,838
|
|
|
|
|
|
|
|
9,412
|
|
Cash and cash equivalents at end of period
|
|
|
(2,993
|
)
|
|
|
1,807
|
|
|
|
6,425
|
|
|
|
|
|
|
|
5,239
|
|
14
I
tem 2:
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Unless the context otherwise requires, all references to Perry Ellis, the Company, we, us or
our include Perry Ellis International, Inc. and its subsidiaries. This managements discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 31, 2007.
ForwardLooking Statements
We caution readers
that this report includes forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are
indicated by words or phrases such as anticipate, could, may, might, potential, predict, should, estimate, expect, project,
believe, intend, plan, envision, continue, target, contemplate, or will and similar words or phrases or corporate terminology. We have based such
forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and
involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such
forward-looking statements, many of which are beyond our control.
Some of the factors that could affect our financial performance, cause
actual results to differ from our estimates, or underlie such forward-looking statements, are set forth in various places in this report. These factors include, but are not limited to:
|
|
|
general economic conditions,
|
|
|
|
a significant decrease in business from or loss of any of our major customers or programs,
|
|
|
|
anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,
|
|
|
|
the effectiveness of our planned advertising, marketing and promotional campaigns,
|
|
|
|
our ability to contain costs,
|
|
|
|
disruptions in the supply chain,
|
|
|
|
our future capital needs and our ability to obtain financing,
|
|
|
|
our ability to integrate acquired businesses, trademarks, tradenames and licenses,
|
|
|
|
our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,
|
|
|
|
the termination or non-renewal of any material license agreements to which we are a party,
|
|
|
|
changes in the costs of raw materials, labor and advertising,
|
|
|
|
our ability to carry out growth strategies including expansion in international and direct to consumer retail markets,
|
|
|
|
the level of consumer spending for apparel and other merchandise,
|
15
|
|
|
our ability to compete,
|
|
|
|
exposure to foreign currency risk and interest rate risk,
|
|
|
|
possible disruption in commercial activities due to terrorist activity and armed conflict, and
|
|
|
|
other factors set forth in this report and in our other Securities and Exchange Commission (SEC) filings.
|
You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no
obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.
Critical Accounting Policies
Included in the footnotes to the consolidated financial statements in our Annual Report on
Form 10-K for the year ended January 31, 2007 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting
principles generally accepted in the United States of America (GAAP). In particular, our critical accounting policies and areas we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable,
the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets, the measurement of retirement related benefits and stock-based compensation. We believe
that there have been no significant changes to our critical accounting policies during the nine months ended October 31, 2007, as compared to those we disclosed in Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended January 31, 2007.
Results of Operations
The following is a discussion of the results of operations for the three and nine months periods in the third quarter of the fiscal year ending
January 31, 2008 (fiscal 2008) compared with the three and nine months periods in the third quarter of the fiscal year ended January 31, 2007 (fiscal 2007).
Results of Operations - three and nine months ended October 31, 2007 compared to three and nine months ended October 31, 2006.
Net sales
. Net sales for the three months ended October 31, 2007 were $220.9 million, an increase of $13.1 million, or 6.3%, from $207.8
million for the three months ended October 31, 2006. This increase was primarily driven by organic growth of several of our platformsgolf lifestyle, action sports, direct retail and international.
Net sales for the nine months ended October 31, 2007 were $632.4 million, an increase of $50.7 million, or 8.7%, from $581.7 million for the nine
months ended October 31, 2006. This increase was primarily driven by several of our growth platformsgolf lifestyle, Hispanic lifestyles, swimwear/action sports, direct retail and international.
Royalty income
. Royalty income for the three months ended October 31, 2007 was $6.6 million, an increase of $1.2 million, or 22.2%, from $5.4
million for the three months ended October 31, 2006. Royalty income for the nine months ended October 31, 2007 was $19.1 million, an increase of $2.6 million, or 15.8%, from $16.5 million for the nine months ended October 31, 2006.
The increases were due primarily to the benefit of new licenses added during the later half of fiscal 2007, including the Perry Ellis fragrance license.
16
Gross profit.
Gross profit was $76.9 million for the three months ended
October 31, 2007, an increase of $4.4 million, or 6.1%, from $72.5 million for the three months ended October 31, 2006. Gross profit was $216.4 million for the nine months ended October 31, 2007, as compared to $196.8 million for nine
months ended October 31, 2006, an increase of 10.0%.
As a percentage of total revenue, gross profit margins were 33.8% for
the three months ended October 31, 2007, as compared to 34.0% for the three months ended October 31, 2006, a decrease of 20 basis points. The gross profit margin remained essentially flat as compared to last year despite pricing pressures
from the weaker dollar and increased labor rates in certain foreign countries. As a percentage of total revenue, gross profit margins were 33.2% for the nine months ended October 31, 2007, as compared to 32.9% for the nine months ended
October 31, 2006, an increase of 30 basis points. The improvement in the gross profit percentage came from improved wholesale margins, as well as the impact of higher royalty income.
Wholesale gross profit margins (which exclude the impact of royalty income) decreased to 31.9% for the three months ended October 31, 2007 from
32.3% for the three months ended October 31, 2006. The decrease of 40 basis points is attributed to pricing pressures from the weaker dollar and increased labor rates in certain foreign countries. The wholesale gross profit margin percentage
increased for the nine months ended October 31, 2007, to 31.2%, as compared to 31.0% for the nine months ended October 31, 2006, with this improvement primarily attributable to improved margin performance including Perry Ellis,
international and direct to consumer business, as well as the impact of the increase in higher margin swimwear sales as a percentage of our total revenues.
Selling, general and administrative expenses
. Selling, general and administrative expenses for the three months ended October 31, 2007 was $56.1 million, an increase of $4.4 million, or 8.5%, from $51.7
million for the three months ended October 31, 2006. The increase in selling, general and administrative expenses, on a dollar basis, is attributed to additional costs incurred related to our continued investment into the boys, action sports,
and retail businesses, as well as certain costs associated with the implementation of the Oracle retail system. As a percentage of total revenues, selling, general and administrative expenses were 24.7% for the three months ended October 31,
2007, as compared to 24.3% for the three months ended October 31, 2006. As a percentage of total revenue during the third quarter of fiscal 2008, this slight increase was in line with our anticipated results and primarily due to the factors
explained above offset by our tight expense controls and the deferral of certain advertising spending.
Selling, general and administrative
expenses for the nine months ended October 31, 2007, were $164.1 million, an increase of $12.6 million, or 8.3%, from $151.5 million for the nine months ended October 31, 2006. The increase in selling, general and administrative expenses,
on a dollar basis, is attributed to the factors described above. As a percentage of total revenues, selling, general and administrative expenses were flat at 25.2% for the nine months ended October 31, 2007, as compared to 25.3% for the nine
months ended October 31, 2006.
Depreciation and amortization
. Depreciation and amortization for the three months ended
October 31, 2007 was $3.5 million, an increase of $0.6 million, or 20.7%, from $2.9 million for the three months ended October 31, 2006. Depreciation and amortization for the nine months ended October 31, 2007, was $9.6 million, an
increase of $1.2 million, or 14.3%, from $8.4 million for the nine months ended October 31, 2006. The increase is primarily due to an increase in property and equipment, primarily our Oracle retail system, purchased and implemented during the
second half of fiscal 2007 and the first half of fiscal 2008.
Interest expense
. Interest expense for the three months ended
October 31, 2007, was $4.1 million, a decrease of $0.9 million, or 18%, from $5.0 million for the three months ended October 31, 2006. Interest expense for the nine months ended October 31, 2007, was $13.9 million, a decrease of $1.8
million, or 11.5%, from $15.7 million for the nine months ended October 31, 2006. The overall decrease in interest expense is primarily attributable to the reduction of the balance in the senior credit facility from $65.1 million as of
October 31, 2006 to $23.0 million as of October 31, 2007, the impact of the elimination of our senior subordinated notes in March 2006 and the impact of the lower rate $15 million mortgage loan obtained during June 2006.
17
Cost on early extinguishment of debt.
We
incurred debt extinguishment costs of approximately $3.0 million during the nine months ended October 31, 2006, including call premium costs, write-off of bond issue costs and costs associated with the termination of derivatives related to our
9
1
/
2
% senior secured notes on March 15, 2006.
Income taxes
. The income tax provision for the three months ended October 31, 2007, was $4.6 million, a $0.1 million increase as compared to
$4.5 million for the three months ended October 31, 2006. For the three months ended October 31, 2007, our effective tax rate was 34.9%, essentially flat, as compared to 35.0% for the three months ended October 31, 2006.
Our income tax provision for the nine months ended October 31, 2007, was $10.2 million, a $3.9 million increase as compared to $6.3 million for
the nine months ended October 31, 2006. For the nine months ended October 31, 2007, our effective tax rate was 35.3% as compared to 34.7% for the nine months ended October 31, 2006. The primary reason for the increase in the effective
tax rate was due to an adjustment of our Federal net operating losses and the associated deferred tax asset, during the first quarter of fiscal 2008, partially offset by a lower tax rate experienced by our international operations.
Net income.
The net income for the three months ended October 31, 2007 was $8.5 million, an increase of $0.3 million, or 3.7%, as compared to
$8.2 million for the three months ended October 31, 2006. Net income for the nine months ended October 31, 2007 was $18.3 million, an increase of $6.6 million, or 56.4%, as compared to net income of $11.7 million for the nine months ended
October 31, 2006. The changes in operating results were due to the items described above.
Liquidity and Capital Resources
We rely primarily upon cash flow from operations and borrowings under our senior credit facility and letter of credit facilities to finance our
operations, acquisitions and capital expenditures. We believe that as a result of the growth in our business, our working capital requirements will increase during the last quarter of the fiscal year, as a result of planned increases in sales. As of
October 31, 2007, our total working capital was $235.5 million as compared to $229.7 million as of January 31, 2007. We believe that our cash flows from operations and available borrowings under our senior credit facility and letter of
credit facilities are sufficient to meet our working capital needs. We also believe that our real estate assets which have a net book value of $29 million at October 31, 2007, have a substantially higher market value of approximately $50
million. These real estate assets provide us with additional capital resources. Additional borrowings against these real estate assets, however would be subject to certain loan to value criteria established by lending institutions. Currently we have
mortgage loans on these properties totaling $26.7 million.
Net cash provided by operating activities was $52.7 million for the nine months
ended October 31, 2007, as compared to cash provided by operating activities of $26.8 million for the nine months ended October 31, 2006. The increase of $25.9 million in the level of cash provided by operating activities for the nine
months ended October 31, 2007, as compared to the nine months ended October 31, 2006, is primarily attributable to a decrease in accounts receivable of $10.4 million due to stronger collection efforts, a decrease in inventory of $17.1
million due to tighter controls in inventory planning and an anticipated reduction in certain replenishment programs, the increase of $16.8 million in unearned revenues; offset by the reduction of accounts payable, accrued expenses and other
liabilities in the amount of $17.9 million. For the nine months ended October 31, 2006, accounts receivable decreased by $11.6 million and inventory decreased by $27,000; this increase in operating cash flow was offset by the reduction of
accounts payable, accrued expenses and other liabilities in the amount of $9.0 million.
Net cash used in investing activities was $12.2
million for the nine months ended October 31, 2007, as compared to cash used in investing activities of $14.2 million for the nine months ended October 31, 2006. The net cash used during the first nine months of Fiscal 2008 primarily
reflects the purchase of property and equipment in the amount of $11.8 million and marketable securities in the amount of $0.7 million, offset by the proceeds from the sale of marketable securities in the amount of $0.3 million, as compared to net
cash used in the amount of $14.2 million during the same period in Fiscal 2007 for the purchase of intangibles, marketable securities and property and equipment. We anticipate capital expenditures during fiscal 2008 of $16 million to $17 million in
technology and systems, retail stores, and other expenditures.
18
Net cash used in financing activities for the nine months ended October 31, 2007, was $38.1 million,
as compared to net cash used in financing activities for the nine months ended October 31, 2006 of $17.6 million. The net cash used during the first nine months of Fiscal 2008 primarily reflects the net payments on our senior credit facility of
$38.3 million. The use of cash was offset by proceeds received from the exercise of stock options of $0.7 million. The net cash used in financing activities for the nine months ended October 31, 2006 primarily reflects the payments of $58.4
million to extinguish our senior secured notes, $24.7 million on our senior credit facility and $0.6 million in connection with the termination of the swap agreements. The use of cash was partially offset by our Tampa facility real estate mortgage
loan proceeds of $14.8 million, as well as proceeds from the exercise of stock options of $1.9 million. The Board of Directors has approved a new stock repurchase program, which authorizes us to repurchase up to $20 million of our common stock for
cash over the next twelve months. Although the Board of Directors allocated a maximum of $20 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares, and will reevaluate the program on an ongoing
basis.
Senior Credit Facility
The following is a description of the terms of the senior credit facility with Wachovia Bank, National Association, as amended, and does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the
provisions of the senior credit facility: (i) the line is up to $175 million, except for a short term increase to $210 million which expired on May 1, 2007 to accommodate the reacquisition of a license agreement in the fourth quarter of
fiscal 2007; (ii) the inventory borrowing limit is $90 million; (iii) the sublimit for letters of credit is up to $60 million; (iv) the amount of letter of credit facilities available outside of the facility is $100 million and
(v) the outstanding balance is due at the maturity date of February 1, 2009.
Certain Covenants.
The senior credit
facility contains certain covenants, which, among other things, require us to maintain a minimum EBITDA if availability falls below a certain minimum. It may restrict our ability and the ability of our subsidiaries to, among other things, incur
additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We are currently in compliance with all of our
covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately
due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under the indenture and mortgage, resulting in all of our debt obligations
becoming immediately due and payable, which we may not be able to satisfy.
Borrowing Base
. Borrowings under the senior credit
facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of our eligible factored
accounts receivables up to $50.0 million plus (c) the lesser of (i) the inventory loan limit, or (ii) the lesser of (A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (as defined in
the senior credit facility) of eligible inventory, or (2) the loan limit; and in each case minus (x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (y) the full amount of all other outstanding letters of
credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (z) licensing reserves for which we are the licensee of certain branded products.
Interest.
Interest on the principal balance under the senior credit facility accrues, at our option, at either (a) our bank prime lending
rate with adjustments depending upon our quarterly average excess availability plus excess cash or leverage ratio or (b) 1.05% above the rate quoted by our bank as the average monthly Eurodollar Rate for 1-month Eurodollar deposits with 20 to
25 basis point adjustments depending upon our quarterly average excess availability plus excess cash and leverage ratio at the time of borrowing.
19
Security
. As security for the indebtedness under the senior credit facility, we granted the
lenders a first priority security interest in substantially all of our existing and future assets other than our trademark portfolio, including, without limitation, accounts receivable, inventory deposit accounts, general intangibles, equipment and
capital stock or membership interests, as the case may be, of certain subsidiaries.
Letter of Credit Facilities
As of October 31, 2007, we maintained six U.S. dollar letter of credit facilities totaling $160.0 million, one letter of credit facility totaling
$3.9 million utilized by our Canadian joint venture, and one letter of credit facility totaling $0.6 million utilized by our United Kingdom subsidiary. Each letter of credit is secured primarily by the consignment of merchandise in transit under
that letter of credit and certain subordinated liens on our assets. As of October 31, 2007, there was $132.7 million available under existing letter of credit facilities.
$57 Million Senior Secured Notes Payable
In March 2002, we issued $57.0 million 9
1/2
% senior secured notes due March 15, 2009. On March 15, 2006, we exercised the call
provision of the $57.0 million 9
1/2
% senior secured notes. The call provision permitted the notes to be redeemed at a premium of 102.375%, and in
connection with this transaction, we incurred costs on early extinguishment of debt of approximately $3.0 million during the first quarter of fiscal 2007, including call premium costs, write-off of bond issue costs and costs associated with the
termination of derivatives related to the senior secured notes.
$150 Million Senior Subordinated Notes Payable
In fiscal 2004, we issued $150 million 8
7/8
% senior subordinated notes due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12
1/4
% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%.
Certain Covenants
. The indenture governing the senior subordinated notes contains certain covenants which restrict our
ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are currently in compliance with all of the
covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indentures trustee could declare the outstanding notes, together with
accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities, and the real estate mortgage
loan resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Real Estate Mortgage Loans
In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami and partially financed the
acquisition of the facility with an $11.6 million mortgage loan. The real estate mortgage loan contains certain covenants. We are currently in compliance with all of our covenants under this real estate mortgage loan. We could be materially harmed
if we violate any covenants because the lender under the real estate mortgage could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could constitute a
cross-default under our senior credit facility, the letter of credit facilities and indenture relating to our senior subordinated notes resulting in all our of debt obligations becoming immediately due and payable, which we may not be able to
satisfy. This mortgage loan matures on August 1, 2009. Interest is fixed at 7.123%.
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In October 2005, we acquired three administrative office units in a building in Beijing, China. The
aggregate purchase price was $2.3 million, including closing costs. These purchases were partially financed with three variable interest mortgage loans totaling $1.2 million dollars in the aggregate. These mortgage loans mature on October 12,
2015. Interest rate is at Prime.
In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan is
due on June 7, 2016. Principal and interest of $297,000 are due quarterly based on a 20 year amortization with the outstanding principal due at maturity. Interest is set at 6.25% for the first five years, after which it will be reset based on
the terms and conditions of the promissory note.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements as defined by applicable GAAP and SEC rules.
Effects of Inflation and Foreign Currency Fluctuations
We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three and nine months ended October 31, 2007.
I
tem 3:
|
Quantitative and Qualitative Disclosures about Market Risks
|
The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates. We manage this exposure through regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate. Our significant derivative
financial contracts are discussed below.
Derivatives on
$
57 Million Senior Secured Notes Payable
We had an interest rate swap and option (the $57 million Swap Agreement) for an
aggregate notional amount of $57 million in order to manage the overall borrowing costs associated with our 9
1/2
% senior secured notes. In
March 2006, we terminated the $57 million Swap Agreement. The $57 million Swap Agreement was a fair value hedge as it was designated against the 9
1/2
% senior secured notes carrying a fixed rate of interest and converted such notes to variable rate debt. The $57 million Swap Agreement was reflected at fair value in our consolidated balance sheet with a corresponding offset to the
designated item.
We also had an interest rate cap agreement (the
$57 million Cap Agreement) for an aggregate notional amount of $57 million associated with the 9
1/2
% senior secured notes. In March
2006, we terminated the $57 million Cap Agreement. The $57 million Cap Agreement capped the interest rate on the senior secured notes at 10%. The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in a $0 and $30,000
decrease of recorded interest expense on the unaudited condensed consolidated statement of operations for the three and nine months ended October 31, 2006, respectively.
Other
Our current exposure to foreign exchange risk is not significant and accordingly, we have not
entered into any transactions to hedge against those risks.
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I
tem 4:
|
Controls and Procedures
|
We carried out an
evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based upon this evaluation, our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures were
effective as of October 31, 2007 in timely alerting them to material information required to be included in our periodic SEC filings and that information required to be disclosed by us in these periodic filings was recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and that our internal controls were effective as of October 31, 2007 to provide reasonable assurance that our financial statements were fairly presented
in conformity with generally accepted accounting principles.
There were no changes in our internal control over financial reporting during
the quarter ended October 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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