10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended July 31, 2003

OR

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

Commission File Number 0-21764

PERRY ELLIS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida	59-1162998
(State or other jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

3000 N.W. 107 Avenue
Miami, Florida	33172
(Address of Principal Executive Offices)	(Zip Code)

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

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

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

The number of shares outstanding of the registrant’s common stock is 8,382,198 (as of September 8, 2003).

PERRY ELLIS INTERNATIONAL, INC.

INDEX

	PAGE
PART I: FINANCIAL INFORMATION
Item 1:
Consolidated Balance Sheets (Unaudited) as of July 31, 2003 and January 31, 2003	1
Consolidated Statements of Income (Unaudited) for the three and six months ended July 31, 2003 and 2002	2
Consolidated Statements of Cash Flows (Unaudited) for the six months ended July 31, 2003 and 2002	3
Notes to Unaudited Consolidated Financial Statements	4
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3:
Quantitative and Qualitative Disclosures About Market Risk	31
Item 4:
Controls and Procedures	33
PART II: OTHER INFORMATION	33
Item 1:
Legal Proceedings	33
Item 2:
Changes in Securities	33
Item 3:
Defaults Upon Senior Securities	34
Item 4:
Submission of Matters to a Vote of Security Holders	34
Item 5:
Other Information	36
Item 6:
Exhibits and Reports of Form 8-K	36

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	July 31, 2003		January 31, 2003
ASSETS
Current Assets:
Cash and cash equivalents	$	5,324,290	$	4,683,177
Accounts receivable, net		82,192,001		79,489,739
Inventories, net		92,779,915		51,306,474
Deferred income taxes		17,859,581		2,957,765
Prepaid income taxes		2,341,760		3,361,650
Other current assets		8,884,358		4,104,767
Total current assets		209,381,905		145,903,572
Property and equipment, net		35,511,845		31,048,876
Intangible assets, net		150,326,989		142,186,062
Deferred income taxes		29,575,359		—
Other		11,286,354		12,098,835
TOTAL	$	436,082,452	$	331,237,345
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	26,374,026	$	12,820,168
Accrued expenses		16,575,736		5,058,748
Accrued interest payable		4,525,588		4,674,929
Unearned revenues		1,189,048		1,994,554
Other current liabilities		2,940,468		1,457,422
Total current liabilities		51,604,866		26,005,821
Senior subordinated notes payable, net		99,282,693		99,180,580
Senior secured notes payable, net		59,927,130		60,729,796
Senior credit facility		43,286,273		22,922,287
Real estate mortgage		11,600,000		11,600,000
Deferred pension obligation		18,483,041		—
Deferred income tax		11,810,532		10,694,595
Total long-term liabilities		244,389,669		205,127,258
Total liabilities		295,994,535		231,133,079
Commitments and Contingencies
Minority Interest		728,588		702,480
Stockholders’ Equity:
Preferred stock $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock $.01 par value; 30,000,000 shares authorized; 8,382,198 shares issued and outstanding as of July 31, 2003 and 6,425,641 shares issued and outstanding as of January 31, 2003		83,822		64,257
Additional paid-in-capital		63,888,586		27,198,094
Retained earnings		75,176,080		72,182,529
Accumulated other comprehensive income		210,841		(43,094	)
Total stockholders’ equity		139,359,329		99,401,786
TOTAL	$	436,082,452	$	331,237,345

See Notes to Unaudited Consolidated Financial Statements

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended July 31,						Six Months Ended July 31,
	2003			2002			2003		2002
Revenues
Net sales	$	87,065,654		$	56,394,030		$	188,932,498	$	135,013,122
Royalty income		5,699,508			7,600,633			12,110,685		13,677,426
Total revenues		92,765,162			63,994,663			201,043,183		148,690,548
Cost of sales		64,851,770			42,535,834			136,396,885		100,467,933
Gross profit		27,913,392			21,458,829			64,646,298		48,222,615
Operating expenses
Selling, general and administrative expenses		27,296,885			13,483,861			48,906,298		27,994,247
Depreciation and amortization		1,413,295			743,090			2,525,306		1,402,828
Total operating expenses		28,710,180			14,226,951			51,431,604		29,397,075
Operating income (loss)		(796,788	)		7,231,878			13,214,694		18,825,540
Interest expense		3,391,141			3,786,193			8,354,452		7,652,924
Income (loss) before minority interest and income taxes (benefit)		(4,187,929	)		3,445,685			4,860,242		11,172,616
Minority interest		(20,369	)		(22,176	)		26,108		9,844
Income taxes (benefit)		(1,533,090	)		1,286,608			1,840,583		4,215,319
Net income (loss)	$	(2,634,470	)	$	2,181,253		$	2,993,551	$	6,947,453
Net income (loss) per share
Basic	$	(0.36	)	$	0.34		$	0.43	$	1.09
Diluted	$	(0.36	)	$	0.34		$	0.40	$	1.08
Weighted average number of shares outstanding
Basic		7,372,519			6,384,932			6,919,491		6,386,341
Diluted		7,372,519			6,449,468			7,511,877		6,451,341

See Notes to Unaudited Consolidated Financial Statements

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended July 31,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,993,551		$	6,947,453
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,004,735			1,073,142
Amortization of debt issue cost		557,128			393,698
Amortization of bond discount		182,770			165,973
Deferred income taxes		1,377,762			1,837,737
Minority interest		26,108			9,844
Other		180,986			20,710
Changes in operating assets and liabilities (net of effects of acquisition transaction):
Accounts receivable, net		11,057,738			(3,020,536	)
Inventories		5,240,559			14,407,999
Other current assets and prepaid income taxes		(1,839,701	)		(2,742,217	)
Other assets		(633,962	)		(2,212,635	)
Accounts payable and accrued expenses		(8,138,113	)		4,883,846
Income taxes payable		—			(1,381,551	)
Accrued interest payable		(149,341	)		1,052,963
Other current liabilities and unearned revenues		677,540			721,593
Net cash provided by operating activities		13,537,760			22,158,019
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(3,267,639	)		(17,025,684	)
Payment on purchase of intangible assets		—			(18,737	)
Payment for acquired businesses		(31,221,289	)		(25,050,474	)
Net cash used in investing activities		(34,488,928	)		(42,094,895	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) from senior credit facility		20,363,986			(21,756,094	)
Net proceeds from senior secured notes		—			55,589,250
Net proceeds from real estate mortgage		—			11,600,000
Proceeds from exercise of stock options		1,155,346			1,237,005
Net cash provided by financing activities		21,519,332			46,670,161
Effect of exchange rate changes on cash and cash equivalents		72,949			—
NET INCREASE IN CASH		641,113			26,733,285
CASH AT BEGINNING OF YEAR		4,683,177			1,303,978
CASH AT END OF PERIOD	$	5,324,290		$	28,037,263
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	7,721,248		$	6,759,806
Income taxes	$	205,293		$	4,929,500
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Change in fair value of mark-to-market interest rate swap/option	$	883,823		$	4,990,177
Issuance of stock as merger consideration	$	35,554,711		$	—

See Notes to Unaudited Consolidated Financial Statements

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PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The accompanying unaudited consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (“Perry Ellis” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the requirements of Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP. These consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended January 31, 2003. Certain amounts in the prior period have been reclassified to conform to the current period’s presentation.

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

2. INVENTORIES

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

3. LETTER OF CREDIT FACILITIES

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

	July 31, 2003			January 31, 2003
Total letter of credit facilities	$	62,675,896		$	54,453,386
Outstanding letters of credit		(52,263,067	)		(31,966,591	)
Total credit available	$	10,412,829		$	22,486,795

4. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or estimated useful lives of the improvements. The useful lives range from three to thirty-nine years:

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Asset Class	Avg. Useful Lives in Years
Furniture, fixtures and equipment	3-7
Vehicles	7
Leasehold improvements	11
Buildings	39

5. INTANGIBLE ASSETS

Intangible assets primarily represent costs capitalized in connection with the acquisitions of brand names and license rights. Under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” identifiable intangible assets with an indefinite useful life are not amortized but are tested for impairment annually on February 1st of each year.

6. LONG-LIVED ASSETS

Management reviews long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to reduce the asset to its estimated fair value. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning future conditions. There has not been any material impairment to long-lived assets.

7. ADVERTISING AND RELATED COSTS

The Company’s accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising and related costs were approximately $3.6 million and $1.1 million for the three months ended July 31, 2003 and July 31, 2002, respectively, and $6.3 million and $2.6 million for the six months ended July 31, 2003 and July 31, 2002, respectively, and are included in selling, general and administrative expenses.

8. ACCOUNTING FOR STOCK BASED COMPENSATION

The Company has chosen to account for stock-based compensation to employees and non-employee members of the Board using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees, and related interpretations. As required by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company presents certain pro forma and other disclosures related to stock-based compensation

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plans as if compensation cost for options granted had been determined in accordance with the fair value provisions of SFAS No. 123.

	Three Months Ended July 31,					Six Months Ended July 31,
	2003			2002		2003		2002
Net income (loss) as reported	($	2,634,470	)	$	2,181,253	$	2,993,551	$	6,947,453
Add : Total stock based employee compensation expense included in reported net income, net		—			—		—		—
Deduct : Total stock based employee compensation expense not included in reported net income, net		87,329			58,511		188,432		128,707
Pro forma net income (loss)	($	2,721,799	)	$	2,122,742	$	2,805,119	$	6,818,746
Pro forma net income (loss) per share:
Basic	$	(0.37	)	$	0.33	$	0.41	$	1.07
Diluted	$	(0.37	)	$	0.33	$	0.37	$	1.06

9. 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 as determined using the treasury stock method.

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The following table sets forth the computation of basic and diluted income per share:

	Three Months Ended July 31,					Six Months Ended July 31,
	2003			2002		2003		2002
Numerator:
Net income (loss)	$	(2,634,470	)	$	2,181,253	$	2,993,551	$	6,947,453
Denominator:
Basic income per share—weighted average shares		7,372,519			6,384,932		6,919,491		6,386,341
Dilutive effect: stock options		—			64,536		592,386		65,000
Diluted income per share—weighted average shares		7,372,519			6,449,468		7,511,877		6,451,341
Basic income (loss) per share	$	(0.36	)	$	0.34	$	0.43	$	1.09
Diluted income (loss) per share	$	(0.36	)	$	0.34	$	0.40	$	1.08
Antidilutive effect: stock options(1)		607,175			226,395		112		212,973

(1) Represents weighted average stock options to purchase shares of common stock that were not included in computing diluted income per share because their effects were antidilutive for the respective periods.

10. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net income (loss) and the effect of foreign currency translation. Comprehensive income (loss) was ($2,540,436) and $2,189,335 for the three months ended July 31, 2003 and 2002, respectively and was $3,247,486 and $6,968,163 for the six months ended July 31, 2003 and 2002, respectively.

11. SEGMENT INFORMATION

In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and RelatedInformation,” our principal business segments are grouped into the generation of revenues from sale of products and royalties from licensing activity. These segments are identified and managed by the Company based on the products and services offered by each. The product segment derives its revenues from the design, importation and distribution of apparel to various retail channels, which include department stores, national and regional chain stores, mass merchants, and other specialty retail stores, principally throughout the United States, Puerto Rico and Canada. The licensing segment derives its revenues from royalties associated with the licensing of its trademarks to third parties, principally Perry Ellis^®, John Henry^®, Manhattan^® and Munsingwear^®. Trademark costs have been allocated among the segments where the brands are shared. Shared selling, general and administrative expenses are allocated amongst the segments based upon department utilization rates.

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	Three Months Ended July 31,					Six Months Ended July 31,
	2003			2002		2003		2002
Revenues:
Product	$	87,065,654		$	56,394,030	$	188,932,498	$	135,013,122
Licensing		5,699,508			7,600,633		12,110,685		13,677,426
Total Revenues	$	92,765,162		$	63,994,663	$	201,043,183	$	148,690,548
Operating Income (Loss):
Product	$	(4,347,047	)	$	707,501	$	5,316,546	$	6,833,602
Licensing		3,550,259			6,524,377		7,898,148		11,991,938
Total Operating Income (Loss)	$	(796,788	)	$	7,231,878	$	13,214,694	$	18,825,540

12. SALANT ACQUISITION

On June 19, 2003, the Company acquired Salant Corporation. The aggregate merger consideration paid by the Company was approximately $91.0 million, comprised of approximately $35.8 million worth of newly issued Perry Ellis common stock, $51.9 million in cash, and approximately $3.3 million in merger costs. The cash portion of the consideration was funded from Salant’s available cash reserves and through borrowings under the Company’s senior credit facility.

Salant licensed the Perry Ellis brand from the Company for men’s sportswear, dress shirts, dress bottoms and accessories, and derived approximately $164.3 million or 65% of its 2002 revenues from the sale of Perry Ellis products. Salant was the Company’s largest licensee of Perry Ellis branded apparel. The remaining $87.7 million of Salant’s 2002 revenue was made up of sales of product under Salant’s owned brands such as Axis^® and Tricots St. Raphael^®, sales under license agreements for use of the JNCO^® and Ocean Pacific^® brands, as well as several private label programs.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third party valuations of certain intangible assets; thus the allocation of the purchase price may be subject to change.

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	(Dollars in Thousands)
Total purchase price
Market value of stock issued	$	35,805
Cash consideration paid		51,906
Total purchase price		87,711
Total direct merger costs		3,155
Total adjusted purchase price	$	90,866
Net assets of Salant based on amounts as of June 19, 2003	$	77,054
Increase(decrease) in net assets to reflect estimated fair value adjustments under the purchase method of accounting:
Deferred taxes, current and long-term, net		39,738
Property, plant and equipment		(8,319	)
Other assets
Retail stores fixtures		(3,070	)
Deferred rental income		(456	)
License agreements		(5,479	)
Intangible assets, net		(8,545	)
Deferred rental expense		1,492
Net pension liability		(1,549	)
Fair value of net assets acquired	$	90,866

13. PRO FORMA FINANCIAL INFORMATION

The pro forma financial information presented below, gives effect to the Salant acquisition, as if it occurred as of the beginning of the fiscal year for the three and six months ended July 31, 2003 and 2002. The information presented below is for illustrative purposes only and is not indicative of results, which would have been achieved, or results, which may be achieved in the future.

	Three Months Ended July 31,					Six Months Ended July 31,
	2003			2002		2003		2002
	(in thousands, except per share data)
Total revenues	$	125,240		$	113,180	$	298,649	$	258,694
Net income (loss)1	$	(611	)	$	3,329	$	6,697	$	9,070
Net income (loss) per share
Basic	$	(0.07	)	$	0.41	$	0.81	$	1.11
Diluted	$	(0.07	)	$	0.40	$	0.75	$	1.10

¹ Net income (loss) includes $0.34 million and $0.92 million, net of tax, of non-recurring direct merger related costs recorded by Salant during the three and six months ended July 31, 2003

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14. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections,” which all but eliminates the presentation in income statements of debt extinguishments as extraordinary items. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 as of February 1, 2003. SFAS No. 145 did not have a material impact on the financial position or results of operations of the Company.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit of Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. SFAS No. 146 is not expected have a significant impact on the financial position or results of operations of the Company.

In November 2002, the FASB issued FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. However, the disclosure requirements in FIN No. 45 are effective for financial statements of interim or annual periods after December 15, 2002. Perry Ellis is not a party to any agreement in which it is a guarantor of indebtedness of others. Accordingly, adoption of this pronouncement did not have an impact effect on Perry Ellis’ consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” to require disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ended after December 15, 2002 and for the interim financial statements beginning after December 15, 2002. The adoption of the disclosure provisions of SFAS No. 148 is not expected to have a significant effect on the financial position or results of operations of the Company.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51” (“FIN No. 46”). FIN No. 46 addresses consolidation by business enterprises of variable interest entities (formerly special purpose entities or SPEs). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The objective of FIN No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Company adopted the provisions of FIN No. 46

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for variable interests in variable interest entities created after January 31, 2003, and in the quarter ending April 30, 2003 for variable interests in variable interest entities created before February 1, 2003. The Company does not have any variable interest entities as defined in FIN No. 46. Accordingly, the Company has determined that it is not reasonably possible that it will be required to consolidate or disclose information about a variable interest entity upon the adoption of FIN No. 46.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made (a) as part of the Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, (b) in connection with other Board projects dealing with financial instruments, and (c) regarding implementation issues raised in relation to the application of the definition of a derivative, particularly regarding the meaning of an “underlying” and the characteristics of a derivative that contains financing components. The amendments set forth in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before May 2003 and still existing at the beginning of the interim period of adoption, transition will be accomplished by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 is not expected to have a material impact on the financial position or results of operations of the Company.

15. DERIVATIVES FINANCIAL INSTRUMENTS

The Company has entered into derivative financial instruments in order to manage the overall borrowing costs associated with its senior subordinated notes and senior secured notes.

At July 31, 2003, the Company had an interest rate swap agreement (the “August Swap Agreement”) with a notional amount of $40.0 million maturing on April 1, 2006. The swap is a fair value hedge as it has been designated against the senior subordinated notes carrying a fixed rate of interest and converts such notes to variable rate debt. The interest rate swap contracts are reflected at fair value in the Company’s consolidated balance sheet.

At July 31, 2003, the Company also had an interest rate cap (the “October Swap Agreement”) maturing on April 1, 2006 with a notional amount of $40.0 million. The Company also had a basis swap with a notional amount of $40.0 million that matured in April 2003. The interest rate cap effectively hedge against increases in the variable rate of interest paid on the interest rate swap and

11

the basis swap decreased the spread on the interest rate swap for 18 months through April 2003. Neither of these derivatives qualified for hedge accounting and accordingly, are reflected at fair value in the Company’s consolidated balance sheet with the offset being recognized in the consolidated statements of income for the periods presented. Interest expense for the three months ended July 31, 2003 and July 31, 2002 decreased by approximately $0.05 million and $0.1 million, respectively, as a result of the recognition of these derivatives. Interest expense for each of the six months ended July 31, 2003 and 2002 increased by approximately $0.2 million as a result of the recognition of these derivatives. In August 2003, the Company terminated the October Swap Agreement and the August Swap Agreement.

At July 31, 2003, the Company had an interest rate swap and option (the “March Swap Agreement”) for an aggregate notional amount of $57.0 million in order to minimize the debt servicing costs associated with the senior secured notes. The March Swap Agreement is a fair value hedge as it has been designated against the senior secured notes carrying a fixed rate of interest and converts such notes to variable rate debt. The interest rate swap contracts are reflected at fair value in the Company’s consolidated balance sheet. The fair value of the March Swap Agreement recorded on the Company’s consolidated balance sheet was $4.1 million as of July 31, 2003.

In December 2002, the Company entered into an interest rate floor agreement (the “December Floor Agreement”) for an aggregate notional amount of $57.0 million associated with the senior secured notes. The December Floor Agreement is scheduled to terminate on March 15, 2005. Under the December Floor Agreement, the Company must pay the difference between the three-month LIBOR rate and 1.50% for all rate resets in which the LIBOR is below 1.50%. When the LIBOR is equal to or greater than 1.50%, the Company makes no payments under the Floor.

The December Floor Agreement did not qualify for hedge accounting treatment, resulting in $0.1 million decrease of recorded interest expense on the consolidated statement of income for the three and sixth months ended July 31, 2003, respectively. The fair value of the December Floor Agreement recorded on the Company’s consolidated balance sheet was ($0.2) million as of July 31, 2003.

In April 2003, the Company entered into an interest rate cap agreement (the “April Cap Agreement”) for an aggregate notional amount of $57.0 million associated with the senior secured notes. The April Cap Agreement is scheduled to terminate on March 15, 2009. The April Cap Agreement caps the interest rate on the $57.0 million senior secured notes at 10%.

The April Cap Agreement did not qualify for hedge accounting treatment, resulting in $0.7 million and a $0.4 million decrease of recorded interest expense on the consolidated statement of income for the three and six months ended July 31, 2003, respectively. The fair value of the April Cap Agreement recorded on the Company’s consolidated balance sheet was $0.4 million as of July 31, 2003.

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.

12

16. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS

Perry Ellis International, Inc. and several of its subsidiaries have fully and unconditionally guaranteed the senior secured notes and senior subordinated notes on a joint and several basis. As such, the following consolidating condensed financial statements, which present, in separate columns: Perry Ellis, the guarantors on a combined and the non-guarantors on a consolidated basis are required to be presented. Additional columns present eliminating adjustments and consolidated totals as of July 31, 2003 and January 31, 2003, and for the three months and six months ended July 31, 2003 and 2002. The Company has not presented separate financial statements and other disclosures concerning the combined guarantors because management has determined that such information is not material to investors.

13

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF JULY 31, 2003

	Parent Only			Guarantors		Non-Guarantors		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	(1,191,313	)	$	4,051,857	$	2,463,746	$	—		$	5,324,290
Accounts receivable, net		(22,965	)		101,318,807		1,757,886		(20,861,727	)		82,192,001
Intercompany receivable—Guarantors		—			79,196,881		—		(79,196,881	)		—
Intercompany receivable—Non Guarantors		—			885,100		—		(885,100	)		—
Inventories, net		—			92,390,639		389,276		—			92,779,915
Deferred income taxes		—			17,859,581		—		—			17,859,581
Prepaid income taxes		—			2,341,760		—		—			2,341,760
Other current assets		568,224			8,270,116		46,018		—			8,884,358
Total current assets		(646,054	)		306,314,741		4,656,926		(100,943,708	)		209,381,905
Property and equipment, net		9,118			35,478,726		24,001		—			35,511,845
Intangible assets, net		—			128,614,203		21,712,786		—			150,326,989
Deferred income taxes		—			29,575,359		—		—			29,575,359
Investment in subsidiaries		95,420,303			—		—		(95,420,303	)		—
Other		857,918			10,428,436		—		—			11,286,354
TOTAL	$	95,641,285		$	510,411,465	$	26,393,713	$	(196,364,011	)	$	436,082,452
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	83,083		$	26,040,321	$	250,622	$	—		$	26,374,026
Accrued expenses		228,463			16,347,273		—		—			16,575,736
Intercompany payable—Parent		(40,518,481	)		134,786,487		1,757,980		(96,025,986	)		—
Income taxes payable		(1,311,617	)		771,908		539,709		—			—
Accrued interest payable		—			4,525,588		—		—			4,525,588
Unearned revenues		—			988,749		200,299		—			1,189,048
Other current liabilities		—			2,813,762		126,706		—			2,940,468
Total current liabilities		(41,518,552	)		186,274,088		2,875,316		(96,025,986	)		51,604,866
Senior subordinated notes payable, net		(2,199,492	)		101,482,185		20,861,727		(20,861,727	)		99,282,693
Senior secured notes payable, net		—			59,927,130		—		—			59,927,130
Senior credit facilities		—			43,286,273		—		—			43,286,273
Real estate mortgage		—			11,600,000		—		—			11,600,000
Deferred income tax		—			11,810,532		—		—			11,810,532
Deferred pension obligation		—			18,483,041		—		—			18,483,041
Total long-term liabilities		(2,199,492	)		246,589,161		20,861,727		(20,861,727	)		244,389,669
Total liabilities		(43,718,044	)		432,863,249		23,737,043		(116,887,713	)		295,994,535
Commitments and Contingencies
Long-term debt		—			—		631,475		(631,475	)		—
Minority interest		—			—		728,557		31			728,588
Stockholders’ Equity:
Preferred stock $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding		—			—		—		—			—
Common stock $.01 par value; 30,000,000 shares authorized; 8,382,198 shares issued and outstanding as of July 31, 2003		83,822			100		63		(163	)		83,822
Additional paid-in-capital		63,888,586			—		—		—			63,888,586
Contributing capital		—			3,997,338		—		(3,997,338	)		—
Retained earnings		75,176,080			73,538,299		1,172,766		(74,711,065	)		75,176,080
Accumulated other comprehensive income		210,841			12,479		123,809		(136,288	)		210,841
Total stockholders’ equity		139,359,329			77,548,216		1,296,638		(78,844,854	)		139,359,329
TOTAL	$	95,641,285		$	510,411,465	$	26,393,713	$	(196,364,011	)	$	436,082,452

14

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF JANUARY 31, 2003

	Parent Only			Guarantors			Non-Guarantors			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	(148,681	)	$	3,533,055		$	1,298,803		$	—		$	4,683,177
Accounts receivable, net		21,784			78,161,200			1,306,755			—			79,489,739
Intercompany receivable—Guarantors		—			53,636,456			—			(53,636,456	)		—
Intercompany receivable—Non Guarantors		—			582,410			—			(582,410	)		—
Inventories, net		—			50,908,167			398,307			—			51,306,474
Deferred income taxes		—			2,957,765			—			—			2,957,765
Prepaid income taxes		—			3,361,650			—			—			3,361,650
Other current assets		285,385			3,819,382			—			—			4,104,767
Total current assets		158,488			196,960,085			3,003,865			(54,218,866	)		145,903,572
Property and equipment, net		—			31,019,320			29,556			—			31,048,876
Intangible assets, net		—			126,695,276			15,490,786			—			142,186,062
Investment in subsidiaries		74,705,213			—			—			(74,705,213	)		—
Other		837,500			11,261,335			—			—			12,098,835
TOTAL	$	75,701,201		$	365,936,016		$	18,524,207		$	(128,924,079	)	$	331,237,345
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	123,969		$	12,501,910		$	194,289		$	—		$	12,820,168
Accrued expenses		242,248			4,812,742			3,758			—			5,058,748
Intercompany payable—Parent		(21,635,693	)		59,034,006			16,863,647			(54,261,960	)		—
Income taxes payable		(231,617	)		123,305			108,312			—			—
Accrued interest payable		—			4,674,929			—			—			4,674,929
Unearned revenues		—			1,865,100			129,454			—			1,994,554
Other current liabilities		—			1,449,615			7,807			—			1,457,422
Total current liabilities		(21,501,093	)		84,461,607			17,307,267			(54,261,960	)		26,005,821
Senior subordinated notes payable, net		(2,199,492	)		101,380,072			—			—			99,180,580
Senior secured notes payable, net		—			60,729,796			—			—			60,729,796
Senior credit facilities		—			22,922,287			—			—			22,922,287
Real estate mortgage		—			11,600,000			556,922			(556,922	)		11,600,000
Deferred income tax		—			10,694,595			—			—			10,694,595
Total long-term liabilities		(2,199,492	)		207,326,750			556,922			(556,922	)		205,127,258
Total liabilities		(23,700,585	)		291,788,357			17,864,189			(54,818,882	)		231,133,079
Commitment and Contingencies
Minority interest		—			—			702,449			31			702,480
Stockholders’ Equity:
Preferred stock $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding		—			—			—			—			—
Common stock $.01 par value; 30,000,000 shares authorized; 6,425,641 shares issued and outstanding as of January 31, 2003		64,257			100			63			(163	)		64,257
Additional paid-in-capital		27,198,094			—			—			—			27,198,094
Contributing capital		—			3,997,338			—			(3,997,338	)		—
Retained earnings		72,182,529			70,252,092			(101,271	)		(70,150,821	)		72,182,529
Accumulated other comprehensive income		(43,094	)		(101,871	)		58,777			43,094			(43,094	)
Total stockholders' equity		99,401,786			74,147,659			(42,431	)		(74,105,228	)		99,401,786
TOTAL	$	75,701,201		$	365,936,016		$	18,524,207		$	(128,924,079	)	$	331,237,345

15

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the Three Months Ended July 31, 2003

	Parent Only			Guarantors			Non-Guarantors			Eliminations			Consolidated
Revenues
Net sales	$	—		$	86,593,183		$	472,471		$	—		$	87,065,654
Royalty income		—			4,110,304			1,589,204			—			5,699,508
Total revenues		—			90,703,487			2,061,675			—			92,765,162
Cost of sales		—			64,531,685			320,085			—			64,851,770
Gross profit		—			26,171,802			1,741,590			—			27,913,392
Operating expenses
Selling, general and administrative expenses		1,277,488			25,530,077			489,320			—			27,296,885
Depreciation and amortization		77			1,410,609			2,609			—			1,413,295
Total operating expenses		1,277,565			26,940,686			491,929			—			28,710,180
Operating income		(1,277,565	)		(768,884	)		1,249,661			—			(796,788	)
Interest expense		6			3,256,475			134,660			—			3,391,141
Income before minority interest and income taxes		(1,277,571	)		(4,025,359	)		1,115,001			—			(4,187,929	)
Minority interest		—			—			(20,369	)		—			(20,369	)
Equity in earnings of subsidiaries, net		1,829,600			—			—			(1,829,600	)		—
Income taxes		(472,701	)		(1,431,546	)		371,157			—			(1,533,090	)
Net income (loss)	$	(2,634,470	)	$	(2,593,813	)	$	764,213		$	1,829,600		$	(2,634,470	)

16

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the Three Months Ended July 31, 2002

	Parent Only			Guarantors		Non-Guarantors			Eliminations			Consolidated
Revenues
Net sales	$	—		$	56,340,355	$	53,675		$	—		$	56,394,030
Royalty income		1,330,073			6,270,560		—			—			7,600,633
Total revenues		1,330,073			62,610,915		53,675			—			63,994,663
Cost of sales		—			42,483,904		51,930			—			42,535,834
Gross profit		1,330,073			20,127,011		1,745			—			21,458,829
Operating expenses
Selling, general and administrative expenses		714,645			13,088,937		(319,721	)		—			13,483,861
Depreciation and amortization		—			743,811		(721	)		—			743,090
Total operating expenses		714,645			13,832,748		(320,442	)		—			14,226,951
Operating income		615,428			6,294,263		322,187			—			7,231,878
Interest expense		(15,145	)		3,801,061		277			—			3,786,193
Income before minority interest and income taxes		630,573			2,493,202		321,910			—			3,445,685
Minority interest		—			—		(22,716	)		—			(22,716	)
Equity in earnings of subsidiaries, net		(1,785,884	)		—					1,785,884			—
Income taxes		235,204			927,636		123,768			—			1,286,608
Net income (loss)	$	2,181,253		$	1,565,566	$	220,318		$	(1,785,884	)	$	2,181,253

17

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the Six Months Ended July 31, 2003

	Parent Only			Guarantors		Non-Guarantors		Eliminations			Consolidated
Revenues
Net sales	$	—		$	187,329,533	$	1,602,965				$	188,932,498
Royalty income		—			9,304,161		2,806,524					12,110,685
Total revenues		—			196,633,694		4,409,489		—			201,043,183
Cost of sales		—			135,400,297		996,588		—			136,396,885
Gross profit		—			61,233,397		3,412,901		—			64,646,298
Operating expenses
Selling, general and administrative expenses		2,486,739			45,382,489		1,037,070		—			48,906,298
Depreciation and amortization		77.00			2,518,596		6,633		—			2,525,306
Total operating expenses		2,486,816			47,901,085		1,043,703		—			51,431,604
Operating income		(2,486,816	)		13,332,312		2,369,198		—			13,214,694
Interest expense		6			7,999,063		355,383		—			8,354,452
Income before minority interest and income taxes		(2,486,822	)		5,333,249		2,013,815		—			4,860,242
Minority interest		—			—		26,108		—			26,108
Equity in earnings of subsidiaries, net		(4,560,248	)		—		—		4,560,248			—
Income taxes		(920,125	)		2,047,042		713,666		—			1,840,583
Net income (loss)	$	2,993,551		$	3,286,207	$	1,274,041	$	(4,560,248	)	$	2,993,551

18

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the Six Months Ended July 31, 2002

	Parent Only			Guarantors		Non-Guarantors			Eliminations			Consolidated
Revenues
Net sales	$	—		$	134,311,767	$	701,355		$	—		$	135,013,122
Royalty income		2,806,523			10,870,903		—			—			13,677,426
Total revenues		2,806,523			145,182,670		701,355			—			148,690,548
Cost of sales		—			99,850,232		617,701			—			100,467,933
Gross profit		2,806,523			45,332,438		83,654			—			48,222,615
Operating expenses
Selling, general and administrative expenses		1,483,695			26,366,031		144,521			—			27,994,247
Depreciation and amortization		—			1,401,683		1,145			—			1,402,828
Total operating expenses		1,483,695			27,767,714		145,666			—			29,397,075
Operating income		1,322,828			17,564,724		(62,012	)		—			18,825,540
Interest expense		(30,612	)		7,682,567		969			—			7,652,924
Income before minority interest and income taxes		1,353,440			9,882,157		(62,981	)		—			11,172,616
Minority interest		—			—		9,844			—			9,844
Equity in earnings of subsidiaries, net		(6,104,260	)		—		—			6,104,260			—
Income taxes		510,247			3,722,916		(17,844	)		—			4,215,319
Net income (loss)	$	6,947,453		$	6,159,241	$	(54,981	)	$	(6,104,260	)	$	6,947,453

19

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Six Months Ended July 31, 2003

	Parent Only			Guarantors			Non-Guarantors			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	2,993,551		$	3,286,207		$	1,274,041		$	(4,560,248	)	$	2,993,551
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		77			1,999,051			5,607			—			2,004,735
Amortization of debt issue cost		—			557,128			—			—			557,128
Amortization of bond discount		—			182,770			—			—			182,770
Deferred income taxes		—			1,377,762			—			—			1,377,762
Minority interest		—			—			26,108			—			26,108
Equity in earnings of subsidiaries, net		(4,560,248	)		—			—			4,560,248			—
Other		253,935			—			(72,949	)		—			180,986
Changes in operating assets and liabilities
Accounts receivable, net		(34,992,881	)		40,606,105			5,444,514			—			11,057,738
Inventories		—			5,231,528			9,031			—			5,240,559
Other current assets and prepaid income taxes		(282,839	)		(1,510,844	)		(46,018	)		—			(1,839,701	)
Other assets		(20,418	)		(613,544	)		—			—			(633,962	)
Accounts payable and accrued expenses		(54,671	)		(8,136,013	)		52,571			—			(8,138,113	)
Income taxes payable		(1,080,000	)		648,603			431,397			—			—
Accrued interest payable		—			(149,341	)		—			—			(149,341	)
Other current liabilities and unearned revenues		—			487,796			189,744			—			677,540
Net cash provided by (used) in operating activities		(37,743,494	)		43,967,208			7,314,046			—			13,537,760
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(9,195	)		2,963,608			(6,222,052	)		—			(3,267,639	)
Payment for acquired businesses, net of cash acquired		35,554,711			(66,776,000	)		—			—			(31,221,289	)
Net cash (used in) provided by investing activities:		35,545,516			(63,812,392	)		(6,222,052	)		—			(34,488,928	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from senior credit facility		—			20,363,986			—			—			20,363,986
Proceeds from exercise of stock options		1,155,346			—			—			—			1,155,346
Net cash provided by financing activities:		1,155,346			20,363,986			—			—			21,519,332
Effect of exchange rate changes on cash and cash equivalents		—			—			72,949			—			72,949
NET (DECREASE) INCREASE IN CASH		(1,042,632	)		518,802			1,164,943			—			641,113
CASH AT BEGINNING OF YEAR		(148,681	)		3,533,055			1,298,803			—			4,683,177
CASH AT END OF YEAR		(1,191,313	)		4,051,857			2,463,746			—			5,324,290

20

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Six Months Ended July 31, 2002

	Parent Only			Guarantors			Non-Guarantors			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	6,947,453		$	6,159,241		$	(54,981	)	$	(6,104,260	)	$	6,947,453
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			1,071,997			1,145			—			1,073,142
Amortization of debt issue cost		—			393,698			—			—			393,698
Amortization of bond discount		—			165,973			—			—			165,973
Deferred income taxes		—			1,837,737			—						1,837,737
Minority interest		—			—			9,844			—			9,844
Equity in earnings of subsidiaries, net		(6,104,260	)		—			—			6,104,260			—
Other		20,710			—			—			—			20,710
Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable, net		(1,464,420	)		(2,111,958	)		391,421			164,421			(3,020,536	)
Inventories		—			14,597,168			(189,169	)		—			14,407,999
Other current assets and prepaid income taxes		(134,502	)		(2,552,284	)		(55,431	)		—			(2,742,217	)
Other assets		(543,892	)		(1,668,743	)					—			(2,212,635	)
Accounts payable and accrued expenses		(124,017	)		5,159,730			12,554			(164,421	)		4,883,846
Income taxes payable		—			(1,221,446	)		(160,105	)		—			(1,381,551	)
Accrued interest payable		—			1,052,963			—			—			1,052,963
Other current liabilities and unearned revenues		18,812			778,546			(75,765	)		—			721,593
Net cash provided by (used in) operating activities		(1,384,116	)		23,662,622			(120,487	)		—			22,158,019
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		—			(17,025,684	)		—			—			(17,025,684	)
Payment on purchase of intangible assets, net		—			(18,737	)		—			—			(18,737	)
Payment for acquired businesses, net of cash acquired		—			(25,050,474	)		—						(25,050,474	)
Net cash (used in) investing activities:		—			(42,094,895	)		—			—			(42,094,895	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from senior credit facility		—			(21,819,334	)		—			—			(21,819,334	)
Net proceeds from senior secured notes		—			55,589,250			63,240			—			55,652,490
Net proceeds from real estate mortgage		—			11,600,000			—			—			11,600,000
Proceeds from exercise of stock options		1,237,005			—			—			—			1,237,005
Net cash provided by financing activities:		1,237,005			45,369,916			63,240			—			46,670,161
NET (DECREASE) INCREASE IN CASH		(147,111	)		26,937,643			(57,247	)					26,733,285
CASH AT BEGINNING OF YEAR		—			124,998			1,178,980			—			1,303,978
CASH AT END OF YEAR	$	(147,111	)	$	27,062,641		$	1,121,733		$	—		$	28,037,263

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

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and our subsidiaries. References in this report to the Jantzen acquisition refer to our acquisition of the Jantzen swimwear business from subsidiaries of VF Corporation in March 2002. References in this report to the Salant acquisition refer to our acquisition of Salant Corporation that was completed in June 2003. This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K/A for the year ended January 31, 2003.

Forward-Looking Statements

We caution that this report includes forward-looking statements. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology.

We have based these 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, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ from our expectations are:

• general economic conditions,

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

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

• our ability to contain costs,

• our future capital needs and the ability to obtain financing,

• our ability to integrate acquired businesses, trademarks, tradenames and licenses, including the Salant acquisition,

• our ability to predict consumer preferences,

• anticipated trends and conditions in our industry, including future consolidation,

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

• 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,

• our ability to compete,

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

• the seasonality of our swimwear business,

• exposure to foreign currency risks,

• competition among department and specialty stores,

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

• other factors set forth in this report and in our other Securities and Exchange Commission filings.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements, which are valid only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or, to publicly announce the results of any revisions to any such statements to reflect future events or developments.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K/A for the year ended January 31, 2003 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”). Several of our accounting policies involve significant judgments and uncertainties. The policies with the greatest effect on our results of operation and financial position include the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory and the impairment on long-lived assets, including trademarks.

Revenue Recognition. Sales are recognized at the time legal title to the product passes to the customer, generally free on board (“FOB”) Perry Ellis’ distribution facilities, net of trade allowances and a provision for estimated returns and other allowances. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. We believe that our revenue recognition policies conform to Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.”

Accounts Receivable. We maintain an allowance for doubtful accounts receivable for estimated trade discounts, co-op advertising, allowances provided to retail customers to flow goods through the retail channel, and losses resulting from the inability of our retail customers to make required payments considering historical and anticipated trends. Judgment is critical because some retail customers are currently operating in bankruptcy or have experienced financial difficulties. Additional allowances might be required if their financial condition were to worsen.

Inventories. Our inventories are valued at the lower of cost or market value. We evaluate all of our inventory style-size-color stock keeping units, or SKUs, to determine excess or slow-moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, we estimate their market value or net sales value based on current realization trends. If the projected net sales value is less than cost, on an individual SKU basis, we provide an allowance to reflect the lower value of that inventory. This methodology

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recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.

Intangible Assets. We have, at the present time, only one class of indefinite lived assets, trademarks. We review our intangible assets with indefinite useful lives for possible impairments on an annual basis in accordance with SFAS No. 142 and perform impairment testing as of February 1st of each year. We evaluate the “fair value” of our identifiable intangible assets for purposes of recognition and measurement of impairment losses. Evaluating indefinite useful life assets for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of our operations and other factors. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected.

Results of Operations

The following is a discussion of the results of operations for the second quarter of the fiscal year ended January 31, 2004 (“fiscal 2004”) compared with the second quarter of the fiscal year ended January 31, 2003 (“fiscal 2003”).

Three Months and Six Months Ended July 31, 2003 compared to Three Months and Six Months Ended July 31, 2002.

Total revenues. Total revenues consist of net sales and royalty income. Total revenues for the second quarter of fiscal 2004 were $92.8 million, an increase of 45.0%, or $28.8 million, from $64.0 million for the second quarter of fiscal 2003. The increase was due mainly to an increase of $30.7 million in net sales generated by the Salant business, which we acquired in the middle of the second quarter of fiscal 2004, and an increase of $7.2 million in net sales generated by our swimwear business, which generated minimal sales in the second quarter of fiscal 2003. This increase was offset in part by a $7.2 million reduction in net sales in our men’s sportswear business, described below, and a decrease in royalty income of $1.9 million described below.

Total revenues for the six months ended July 31, 2003 increased 35.2%, or $52.4 million, to $201.0 million from $148.7 for the six months ended July 31, 2002. The increase was due mainly to the increases in net sales generated by the Salant business, and an increase of $34.5 million in net sales generated by our swimwear business, which increases were offset in part by an $11.2 million reduction in net sales in our men’s sportswear business described below and a $1.6 million reduction in royalty income described below.

Net sales. Net sales increased $30.7 million, or 54.4%, to $87.1 million for the second quarter of fiscal 2004 from $56.4 million in the second quarter of fiscal 2003. The increase in net sales is primarily attributable to the increase in net sales generated by the Salant business and by our swimwear business. This increase in net sales was offset in part by a decrease in net sales in our men’s sportswear business as compared to the same period of fiscal 2003. The decrease in our men’s sportswear business was due to our planned reduction in low margin private label sales.

Net sales increased $53.9 million, or 39.9%, to $188.9 million for the six months ended July 31, 2003 from $135.0 million for the six months ended July 31, 2002. The increase was due mainly

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to the increases in net sales generated by the Salant business and by our swimwear business. This increase in net sales was offset in part by the lower net sales in our men’s sportswear business described above.

Royalty income. Royalty income for the second quarter of fiscal 2004 was $5.7 million, a decrease of 25.0% from $7.6 million for the comparable second quarter of fiscal 2003. Royalty income is derived from agreements entered into by us with our licensees, which average three to five years in length. The vast majority of our license agreements require licensees to pay us a royalty, based on net sales and require licensees to pay a guaranteed minimum royalty. Approximately 75% and 70% of our royalty income was attributable to guaranteed minimum royalties with the balance attributable to royalty income in excess of the guaranteed minimums for the second quarter of fiscal 2004 and 2003, respectively.

Royalty income for the six months ended July 31, 2003 decreased 11.5%, to $12.1 million, from $13.7 million for the six months ended July 31, 2002. The decrease in royalty income for both the second quarter of fiscal 2004 and the six months ended July 31, 2004 was due primarily to the decrease in royalty income in excess of guaranteed minimums for certain of the licensees of the Perry Ellis brand and lower royalties due to the acquisition of Salant, which was our largest licensee.

Cost of sales. Cost of sales for the second quarter of fiscal 2004 increased $22.3 million, or 52.5%, to $64.8 million from $42.5 million in the comparable second quarter of fiscal 2003 due mainly to the increase in net sales for the period as described above.

Cost of sales for the six months ended July 31, 2003, increased $35.9 million to $136.4 million, or 35.8%, compared to $100.5 million for the six months ended July 31, 2002. This increase was due mainly to the increase in net sales for the period as described above.

As a percentage of revenues, cost of sales increased from 66.5% in the second quarter of fiscal 2003 to 69.9% in the second quarter of fiscal 2004, and from 67.6% in the six months ended July 31, 2002 to 67.8% in the comparable period of 2004. The increase in cost of sales as a percentage of total revenues was due to lower royalty income as a result of the Salant acquisition, partially offset by a shift in our sales mix to more branded sales. Cost of sales includes only costs relating to sale of product and excludes costs relating to royalty income, which are immaterial.

Gross profit was $27.9 million in the second quarter of fiscal 2004, or 30.1% of total revenues, as compared to $21.5 million, or 33.5% of revenues, in the second quarter of fiscal year 2003. For the six months of fiscal 2004, gross profit increased by 34.1% to $64.6 million from $48.2 million for the comparable fiscal 2003 period. The increase in gross profit for the three and six months ended July 31, 2003 as compared to the comparable fiscal 2003 periods is primarily attributed to (1) lower royalty income as described above, (2) our planned increased focus on branded label sales, which accounted for more than 90% of our net sales in the first six months of fiscal 2004 as compared to less than 75% in the first six months of fiscal 2003, contributed to greater gross profit since branded label sales typically generate higher gross margins, and (3) incremental gross profit contributed by Salant from acquisition date to the end of the second quarter of fiscal 2004.

Our gross profit percentage for branded label sales typically is 3% to 5% higher than our gross margin percentage for private label sales depending on customer and product mix. Our gross profit percentage may not be

25

comparable to others in our industry, because our gross profit includes royalty income and others in the apparel industry may not have such income.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $13.8 million, or 102.4%, to $27.3 million for the second quarter of fiscal 2004 from $13.5 million for the second quarter of fiscal 2003. As a percentage of total revenues, selling, general and administrative expenses were 29.4% in the second quarter of fiscal 2004 compared to 21.1% in the comparable fiscal 2003 quarter. The increase in selling, general and administrative costs is primarily attributable to the additional $5.4 million in expenses incurred in connection with the Salant acquisition, $3.8 million in expenses incurred by our swimwear business, which expenses were immaterial in the comparable prior year period, an additional $4.6 million incurred by our men’s sportswear business as a result of our increased focus on branded label sales, which generally result in greater design, marketing and advertising expenses, and increased employee costs in anticipation of the integration of the Salant acquisition.

Selling, general and administrative expenses increased $20.9 million, or 74.7%, to $48.9 million for the first six months of fiscal 2004 from $28.0 million for the comparable fiscal 2003 period. As a percentage of total revenues, selling, general and administrative expenses were 24.3% in the six months ended July 31, 2003 compared to 18.8% in the comparable 2003 fiscal period. The increase in selling, general and administrative costs for the six-months ended July 31, 2003 is primarily attributable to the additional $5.4 million in expenses incurred in connection with the Salant acquisition, $8.9 million in expenses incurred by our swimwear business, which were also immaterial in the comparable prior year period, an additional $6.6 million incurred by our men’s sportswear business, and increased employee costs in anticipation of the integration of the Salant acquisition.

Depreciation and amortization. Depreciation and amortization increased $0.67 million for the second quarter of fiscal 2004 to $1.4 million from $0.7 million in the comparable quarter of fiscal 2003. Depreciation and amortization increased $1.1 million for the six months ended July 31, 2003 to $2.5 million from $1.4 million in the comparable fiscal 2003 period. The increase is due to the increase in property, plant and equipment purchases in fiscal 2003 and the purchase of the principal executive and administrative office, warehouse and distribution facility in Miami and the distribution center in Seneca, South Carolina. As of July 31, 2003, we owned approximately $35.5 million of property, plant and equipment compared to $27.4 million of property, plant and equipment as of July 31, 2002.

Interest expense. Interest expense decreased $0.39 million, or 10.4%, for the second quarter of fiscal 2004 to $3.4 million from $3.8 million in the comparable fiscal 2003 quarter. The decrease is mainly due to lower interest rates and the impact of certain derivative hedging transactions from the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003.

Interest expense increased $0.7 million, or 9.2%, for the six months ended July 31, 2003 to $8.4 million from $7.7 million in the comparable fiscal 2003 period. The increase is mainly due to an increase in long-term debt for the six months ended July 31, 2003 compared to the six months ended July 31, 2002. As of July 31, 2003, we had $214.1 million in long-term debt compared to $171.4 million in July 31, 2002 as a result of long-term debt incurred from the Salant acquisition. In addition, the $57.0 million senior secured notes due 2009 were outstanding for the entire first six months of fiscal 2004 compared to only four and one half months of fiscal 2003. The interest expense on higher outstanding debt was offset in part, however, by lower interest rates and the

26

impact of certain derivative hedging transactions described in “Item 3: Quantitative and Qualitative Disclosures about Market Risks.”

Income taxes. For the second quarter of fiscal 2004, our effective tax rate was 36.6% as compared to 37.3% for the comparable fiscal 2003 period. For the six months ended July 31, 2003, our effective tax rate was 37.9% as compared to 37.7% for the comparable 2002 period.

Net income (loss). Our net loss for second quarter of fiscal 2004 was ($2.6) million, a decrease of $4.8 million compared to net income of $2.2 million for the comparable fiscal 2003 quarter. Net income for the six months ended July 31, 2003 decreased $3.9 million to $3.0 million from $6.9 million for the comparable fiscal 2003 period. The decrease in net income was due to the changes described above.

Liquidity and Capital Resources

We rely primarily upon cash flow from operations and borrowings under our senior credit facility to finance our operations and expansion. Net cash provided by operating activities was $13.6 million in the six months ended July 31, 2003, compared to cash provided by operating activities of $22.2 million in the comparable fiscal 2003 period. The decrease of $8.6 million in the level of cash provided by operating activities is attributable to a decrease in accounts receivable, inventory, accounts payable and accrued expenses, and a lower net income.

Net cash used in investing activities was $34.5 million for the six months ended July 31, 2003, which primarily reflects the acquisition of Salant, net of cash acquired, and purchases of property and equipment made during the period. Net cash used in investing activities was $42.1 million for the six months ended July 31, 2002, which reflects the $25.1 million purchase price of the Jantzen acquisition and purchases of computer equipment and related software enhancements cost of $0.8 million. In addition, during the six months ended July 31, 2002, we used $17.0 million for the purchase of property, plant and equipment, which included the $14.5 million contingent rental payment that was required by the termination of the synthetic lease.

Net cash provided by financing activities for the six months ended July 31, 2003 totaled $21.5 million, which primarily reflects the proceeds from our senior credit facility of $20.4 million and the proceeds from the exercise of employee stock options of $1.2 million. Net cash provided by financing activities for the six months ended July 31, 2002 totaled $46.7 million, which reflects the net proceeds from our offering of the senior secured notes of $55.6 million, net of repayments of borrowings under our senior credit facility of $21.8 million, the proceeds from the exercise of employee stock options of $1.2 million and the mortgage of $11.6 million on our principal executive main administrative office, warehouse and distribution facility.

On June 19, 2003, we acquired Salant, which was our largest licensee. The aggregate merger consideration paid by us was approximately $91.0 million, comprised of approximately $51.9 million in cash, approximately $35.8 million worth of our newly issued common stock and approximately $3.3 million in merger costs. The cash portion of the merger consideration was funded from Salant’s available cash reserves and through borrowings under our senior credit facility.

Salant licensed the Perry Ellis brand from us for men’s sportswear, dress shirts, dress bottoms and accessories and derived approximately $164.3 million, or 65% of its fiscal 2002

27

revenues, from the sale of Perry Ellis products. Salant was our largest licensee of Perry Ellis branded apparel. The remaining $87.7 million of Salant’s fiscal 2002 revenues was made up of Salant’s owned brands such as Axis^® and Tricots St. Raphael^®, sales under license agreements for use of the JNCO^® and Ocean Pacific^® brands, as well as several private label programs.

Senior Credit Facility

Our amended senior credit facility with Congress Financial Corporation (Florida), as agent for a syndicate of lenders, provides us with a revolving credit facility of up to an aggregate amount of $110.0 million. The senior credit facility expires in September 2005 and the indebtedness thereunder ranks ahead of the 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 the provisions of the senior credit facility.

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

Borrowing Base. Borrowings under the senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of our eligible factored accounts receivables up to $20.0 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 the our option, at either (a) 0.25% above our bank prime lending rate with adjustments depending upon our quarterly average excess availability plus excess cash or leverage ratio or (b) 2.25% above the rate quoted by our bank as the average Eurodollar Rate (“Eurodollar”) for 1-, 2-, 3- and 6-month Eurodollar deposits with one-quarter percentage point adjustments depending upon the our quarterly average excess availability plus excess cash and leverage ratio at the time of borrowing.

Security. As security for the indebtedness under the senior credit facility, we granted the lenders a first priority security interest in substantially all of our existing and future assets other than

28

our trademark portfolio existing as of March 2002, including, without limitation, accounts receivable, inventory deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries. Lenders under the senior credit facility have a second priority security interest in our trademark portfolio as of March 2002 and a first priority lien on the rest of our trademarks.

Senior Secured Notes

On March 22, 2002, we completed a private offering of $57.0 million 9½% senior secured notes due 2009. The proceeds of the private offering were used to finance the Jantzen acquisition, to reduce the amount of outstanding debt under the previous senior credit facility and as additional working capital. The proceeds to us were $55.6 million yielding an effective interest rate of 9.74% after deduction of discounts. We entered into certain derivative hedging transaction described in “Item 3: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior secured notes.

The senior secured notes are secured by a first priority security interest granted in our existing portfolio of trademarks and licenses as of the closing date of the Jantzen acquisition, including the trademarks, licenses and all income, royalties and other payments acquired in the Jantzen acquisition. The senior secured notes are senior secured obligations of ours and rank pari passu in right of payment with all of our existing and future senior indebtedness. The senior secured notes are effectively senior to all of our unsecured indebtedness to the extent of the value of the assets securing the senior secured notes.

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

Letter of Credit Facilities

As of July 31, 2003, we maintained three U.S. dollar letter of credit facilities totaling $60.0 million and one letter of credit facility totaling $2.7 million utilized by the our Canadian joint venture. 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, including but not limited to the capital stock or membership interests, as the case may be, of certain of our subsidiaries. As of July 31, 2003, there was $10.4 million available under existing letter of credit facilities.

Senior Subordinated Notes

We 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

29

outstanding balance of the senior credit facility at that time. The notes mature on April 1, 2006 and bear interest at the rate of 12¼% payable on April 1 and October 1 in each year. The proceeds to us were $98,852,000 yielding an effective interest rate of 12.39% after deduction of discounts. We entered into certain derivative hedging transaction described in “Item 3: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior subordinated notes. In November 2002, we repurchased, but did not retire, $2.2 million of the senior subordinated notes.

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

Real Estate Financing

We occupied our principal executive and administrative office, warehouse and distribution facility under a synthetic operating lease for a 230,000 square foot facility in Miami, Florida. The lease, as amended, expired on June 30, 2002, and required a final payment at termination of $14.5 million.

On June 30, 2002, we made the required payment under the synthetic operating lease and partially refinanced the acquisition of the facility with an $11.6 million mortgage. The mortgage contains certain covenants. We believe we are currently in compliance with all of our covenants under the mortgage. We could be materially harmed if we violate any covenants because the lender under the mortgage could declare all amounts outstanding thereunder to be immediately due and payable which we may not be able to satisfy. In addition, a violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and indentures relating to our senior secured notes and senior subordinated notes resulting in all our of debt obligations becoming immediately due and payable.

On September 13, 2002, we purchased a distribution center in Seneca, South Carolina for $2.5 million in cash. We had secured the option to purchase the facility as part of the Jantzen acquisition.

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Contractual Obligations and Commercial Commitments

The following tables illustrate our contractual obligations and commercial commitments as of July 31, 2003 and include the effects of the Salant acquisition and related amendments discussed above that occurred during the second quarter ended July 31, 2003.

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Senior subordinated notes	$	100,000,000	$	—	$	100,000,000	$	—	$	—
Senior secured notes	$	57,000,000	$	—	$	—	$	—	$	57,000,000
Real estate mortgage	$	11,600,000	$	—	$	243,615	$	332,378	$	11,024,007
Operating leases	$	54,442,172	$	7,953,953	$	15,016,424	$	11,864,067	$	19,607,728
Total contractual cash obligations	$	223,042,172	$	7,953,953	$	115,260,039	$	12,196,445	$	87,631,735
	Amount of Commitment Expiration Per Period
Other Commercial Commitments	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Letter of credit	$	36,456,189	$	36,456,189	$	—	$	—	$	—
Stand by letters of credit	$	34,929,878	$	34,929,878	$	—	$	—	$	—
Total commercial commitments	$	71,386,067	$	52,263,067	$	—	$	19,123,000	$	—

Management believes that the combination of the borrowing availability under the amended senior credit facility, the 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.

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 months ended July 31, 2003.

Item 3: Quantitative and Qualitative Disclosures about Market Risks

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates 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 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 our debt servicing costs associated with our $100.0 million of 12¼% 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

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interest payments on October 1 and April 1 at a fixed rate of 12¼% 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 18-month period from October 1, 2001 through March 31, 2003 (per October Swap Agreement); and three-month LIBOR rate plus 750 basis points for the period from 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 August 2001 swap and the option component of the Swap Agreement recorded on our consolidated balance sheet was ($0.5) million and $2.4 million as of July 31, 2003, respectively. The interest rate cap and basis swap component of the Swap Agreement did not qualify for hedge accounting treatment, resulting in $0.05 million and $0.1 million increase in interest expense for the second quarter of fiscal 2004 and fiscal 2003, respectively and an increase of $0.2 million in interest expense on the statement of operations for each of the six months ended July 31, 2003 and 2002, respectively. In August 2003, we terminated the October Swap Agreement and the August Swap Agreement.

In conjunction with our March 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 (the “March Swap Agreement”) for an aggregate notional amount of $57.0 million in order to minimize the debt servicing costs associated with the senior secured notes. The March Swap Agreement is scheduled to terminate on March 15, 2009. Under the March 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 March Swap Agreement has optional call provisions with trigger dates of March 15, 2005, March 15, 2006 and March 15, 2007, which contain premium requirements in the event the call is exercised.

The March Swap Agreement is a fair value hedge as it has been designated against the 9 ¹/2% senior secured notes carrying a fixed rate of interest and converts such notes to variable rate debt. The interest rate swap contracts are reflected at fair value in our consolidated balance sheet. The fair value of the March 2002 swap and the option component of the March Swap Agreement recorded on the consolidated balance sheet was $4.6 million and ($0.6) million respectively, as of July 31, 2003.

In December 2002, we entered into an interest rate floor agreement (the “December Floor Agreement”) for an aggregate notional amount of $57.0 million. The December Floor Agreement is scheduled to terminate on March 15, 2005. Under the December Floor Agreement, we must pay the difference between the three-month LIBOR rate and 1.50% for all rate resets in which the LIBOR is below 1.50%. When the LIBOR is equal to or greater than 1.50%, we make no payments under the Floor.

The December Floor Agreement did not qualify for hedge accounting treatment under the SFAS No. 133, resulting in $0.1 million decrease of recorded interest expense in the consolidated statement of income for the three and six months ended July 31, 2003 respectively. The fair value of the December Floor Agreement recorded on our consolidated balance sheet was ($0.2) million as of July 31, 2003.

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In April 2003, we entered into an interest rate cap agreement (the “April Cap Agreement”) for an aggregate notional amount of $57.0 million associated with the senior secured notes. The April Cap Agreement is scheduled to terminate on March 15, 2009. The April Cap Agreement caps the interest rate on the $57.0 million senior secured notes at 10%.

The April Cap Agreement did not qualify for hedge accounting treatment, resulting in $0.7 million and a $0.4 million decrease of recorded interest expense on the consolidated statement of income for the three and six months ended July 31, 2003 respectively. The fair value of the April Cap Agreement recorded on our consolidated balance sheet was $0.4 million as of July 31, 2003.

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

Item 4: Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the fiscal quarter covered by this report was carried out by the Company under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A control system, no matter how well designed and operated, cannot provide absolute assurance that the objective of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in internal controls.

Subsequent to the date of the most recent evaluation of the Company’s internal controls, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

Not applicable

Item 2: Changes in Securities

Not applicable

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Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

(a) The annual meeting of shareholders was held on Tuesday, June 17, 2003.

(b) The following individuals were elected directors until the 2006 Annual Meeting of Shareholders and until their successors are duly elected and qualified.

	FOR	AGAINST
Oscar Feldenkreis	5,870,946	483,157
Allan Zwerner	5,865,796	488,307
Joseph P. Lacher	6,044,488	309,615

The term of office of each of the following directors continued after the meeting:

George Feldenkreis	Gary Dix
Ronald L. Buch	Leonard Miller
Salomon Hanono	Marc Balmuth

(c) The following additional proposals were voted upon at the meeting:

(1) The shareholders approved the issuance by the Company of up to 3,250,000 shares of common stock to Salant’s shareholders pursuant to the terms and subject to the conditions of the Agreement and Plan of Merger dated February 3, 2003, among Perry Ellis, Salant Corporation and Connor Acquisition Corp., a wholly owned subsidiary of Perry Ellis.

FOR	AGAINST	WITHHELD
5,122,273	11,225	4,325

(2) The shareholders approved the amendment to Perry Ellis’ articles of incorporation to increase the number of shares of common stock that Perry Ellis is authorized to issue from 30,000,000 to 100,000,000.

FOR	AGAINST	ABSTAIN
3,910,569	1,222,729	4,525

(3) The shareholders approved the amendment to Perry Ellis’ articles of incorporation to increase the number of shares of preferred stock that Perry Ellis is authorized to issue from 1,000,000 to 5,000,000.

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FOR	AGAINST	ABSTAIN
3,911,295	1,222,138	4,390

(4) The shareholders approved the amendment to Perry Ellis’ articles of incorporation to eliminate the ability of Perry Ellis’ shareholders to take action by written consent in lieu of a shareholder meeting.

FOR	AGAINST	ABSTAIN
3,900,955	1,230,028	6,840

(5) The shareholders approved the amendment to Perry Ellis’ articles of incorporation to require shareholders seeking to nominate directors for election to Perry Ellis’ board of directors to first comply with certain advance notice and disclosure procedures.

FOR	AGAINST	ABSTAIN
4,190,958	941,860	5,005

(6) The shareholders did not approve the amendment to Perry Ellis’ articles of incorporation to require the affirmative vote of not less than 66-2/3% of Perry Ellis’ outstanding common stock to effect certain future amendments to Perry Ellis’ articles of incorporation.

FOR	AGAINST	ABSTAIN
3,881,042	1,251,291	5,490

(7) The shareholders approved the amendment and restatement of Perry Ellis’ 2002 Stock Option Plan to (a) allow shares of Perry Ellis’ common stock to be granted under the plan in the form of restricted stock, (b) increase from 1,000,000 to 1,500,000 the number of shares of Perry Ellis’ common stock reserved for issuance pursuant to stock options and restricted stock granted under the plan, (c) limit the maximum number of options that may be awarded to any participant in any fiscal year to 250,000, (d) limit the maximum number of shares of restricted stock that may be granted to any participant in any fiscal year to 250,000 and (e) make certain other technical changes to the plan.

FOR	AGAINST	ABSTAIN
3,865,919	1,264,354	7,550

(8) The shareholders ratified the appointment by the Audit Committee of Perry Ellis’ board of directors of Deloitte & Touche LLP to serve as Perry Ellis’ independent auditors for the fiscal year ending January 31, 2004.

FOR	AGAINST	ABSTAIN
6,337,488	16,515	100

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ITEM 5. Other Information

We issued a press release today to announce our intention to sell, subject to market and other conditions $150 million aggregate principal amount of senior subordinated notes due 2013, in a private offering pursuant to an exemption from registration requirements under the Securities Act of 1933, as amended. The notes, if issued, will be guaranteed on an unsecured senior subordinated basis by all of our current and certain of our future material domestic subsidiaries. We plan to use the net proceeds from the proposed offering to redeem our existing 12 1/4% senior subordinated notes due 2006 and reduce amounts outstanding under our existing senior credit facility.

Because the notes will not be registered under the Securities Act or and state securities laws, they will not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Index to Exhibits

Exhibit Number	Description
10.57	Amendment No. 1 to Loan and Security Agreement dated June 19, 2003.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Section 1350.
99.1	Press Release dated September 9, 2005.

(b) Reports on Form 8-K:

1) On May 22, 2003, Perry Ellis filed a report on Form 8-K to report its first quarter April 30, 2003 results of operations.

2) On June 20, 2003, Perry Ellis filed a report on Form 8-K to report that Perry Ellis consummated the merger with Salant Corporation in which Salant became a wholly-owned subsidiary of Perry Ellis.

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SIGNATURE

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

Date: September 9, 2003	By: /s/ Timothy B. Page
	Timothy B. Page, Chief Financial Officer

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Exhibit Index

Exhibit Number	Description
10.57	Amendment No. 1 to Loan and Security Agreement dated June 19, 2003.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Section 1350.
99.1	Press Release dated September 9, 2003.

EX-10.57

EXHIBIT 10.57

AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT

AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT, dated June 19, 2003, entered into by and among Congress Financial Corporation (Florida), a Florida corporation, in its capacity as agent acting for and on behalf of the parties to the Loan Agreement (as hereinafter defined) as lenders (in such capacity, “Agent”), the parties to the Loan Agreement as lenders (individually a “Lender” and collectively, “Lenders”), Supreme International, Inc., a Delaware corporation (“Supreme”) and Jantzen, Inc., a Delaware corporation (“Jantzen”, and together with Supreme, each individually an “Existing Borrower” and collectively, “Existing Borrowers”), Salant Corporation, a Delaware corporation (“Salant”), Salant Holding Corporation, a Delaware corporation (“Salant Holding”, and together with Salant, each individually a “New Borrower” and collectively, “New Borrowers”), Perry Ellis International, Inc., a Florida corporation (“Parent”), PEI Licensing, Inc., a Delaware corporation (“PEI Licensing”), Jantzen Apparel Corp., a Delaware corporation (“Jantzen Apparel”), BBI Retail, L.L.C., a Florida limited liability company (“BBI”), Supreme I Real Estate, LLC, a Florida limited liability company (“Supreme I”), Supreme II Real Estate, LLC, Florida limited liability company (“Supreme II”), Supreme Realty, LLC, a Florida limited liability company (“Supreme Realty”), Supreme Munsingwear Canada Inc., a Canada corporation (“Supreme Canada”), and Perry Ellis Real Estate Corporation, a Delaware corporation (“PE Real Estate”, and together with Parent, PEI Licensing, Jantzen Apparel, BBI, Supreme I, Supreme II, Supreme Realty and Supreme Canada, each individually a “Guarantor” and collectively, “Guarantors”).

W  I  T  N  E  S  S  E  T  H :

WHEREAS, Agent, Lenders, Existing Borrowers and Guarantors have entered into financing arrangements pursuant to which Lenders (or Agent on behalf of Lenders) have made and may make loans and advances and provide other financial accommodations to Existing Borrowers as set forth in the Loan and Security Agreement, dated October 1, 2002, by and among Agent, Lenders, Existing Borrowers and Guarantors (as amended hereby and as the same may hereafter be further amended, modified, supplemented, extended, renewed, restated or replaced, the “Loan Agreement”, and together with all agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, as from time to time amended, modified, supplemented, extended, renewed, restated, or replaced, collectively, the “Financing Agreements”);

WHEREAS, Parent has created a newly formed wholly owned subsidiary, Connor Acquisition Corp. (“Connor” as hereinafter further defined), which is to merge with and into Salant with Salant as the surviving corporation, with the shares of capital stock of Connor converted into the shares of the surviving corporation (so that the surviving corporation shall be a wholly owned subsidiary of Parent) and the shares of Salant as the surviving corporation converted into the right to receive certain merger consideration consisting of cash and shares of capital stock of Parent, all as set forth in, and pursuant to, the Merger Agreements (as hereinafter defined);

WHEREAS, Existing Borrowers, New Borrowers and Guarantors have requested that Agent and Lenders amend the Loan Agreement to provide for Agent and Lenders to make loans and advances and provide other financial accommodations to each New Borrower under the terms and conditions of the Loan Agreement and that each New Borrower becomes an additional Borrower under the Loan Agreement, as amended hereby, and in connection therewith have requested that the Loan Agreement be amended in order to (1) consent to the formation by Parent of Connor, (2) consent to the merger of Connor with and into Salant, (3) add each New Borrower as an additional Borrower, subject to the provisions set forth herein and in the Loan Agreement, (4) add the grant by New Borrower and New Guarantor to Agent, for itself and the benefit of Lenders, of a security interest in and lien upon the assets and properties of such New Borrower to secure the payment and performance of all obligations of each of them to Agent and Lenders, and (5) make certain other amendments to the Loan Agreement; and

WHEREAS, by this Amendment No. 1, Agent, Lenders, Existing Borrowers, New Borrowers and Guarantors desire and intend to evidence such consent and amendments.

NOW, THEREFORE, In consideration of the foregoing, the mutual agreements and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Definitions.

1.1 Additional Definitions. As used herein, the following terms shall have the meanings given to them below, and the Loan Agreement and the other Financing Agreements are hereby amended to include, in addition and not in limitation, the following definitions:

(a) “Amendment No. 1” shall mean Amendment No. 1 to Loan and Security Agreement as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

(b) “Commercial Letter of Credit” shall mean any Letter of Credit Accommodation consisting of a letter of credit issued for the purpose of providing the primary manner of payment for the purchase price of goods or services by a Borrower in the ordinary course of the business of such Borrower.

(c) “Connor” shall mean Connor Acquisition Corp., a Delaware corporation, and its successors and assigns.

(d) “Existing Salant Lenders” shall mean the lenders to a New Borrower listed on Exhibit A hereto (and including The CIT Group/Commercial Services, Inc. in its capacity as agent acting for such lenders) and their respective predecessors, successors and assigns; sometimes referred to herein individually as an “Existing Salant Lender”.

(e) “Existing Salant Letters of Credit” shall mean, collectively, the letters of credit issued for the account of a New Borrower or for which such New Borrower is otherwise liable, as listed on Exhibit B hereto, as the same now exist or may hereafter be amended, modified,

2

supplemented, extended, renewed, restated or replaced; sometimes referred to herein individually as an “Existing Salant Letter of Credit”.

(f) “LC Indemnification Agreement” shall mean the Letter of Credit Indemnification Agreement, dated of even date herewith, between Agent and The CIT Group/ Commercial Services, Inc. in its capacity as agent for the Existing Salant Lenders with respect to certain of the Existing Salant Letters of Credit, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

(g) “Merger” shall mean the merger of Connor with and into Salant, with Salant as the surviving corporation, pursuant to and in accordance with the terms of the Merger Agreements.

(h) “Merger Agreements” shall mean, collectively, the following (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated, or replaced): (i) the Agreement and Plan of Merger dated February 3, 2003, by and among Connor, Salant and Parent and (ii) all other agreements, documents or instruments executed or delivered in connection therewith.

(i) “Salant” shall mean Salant Corporation, a Delaware corporation, and its successors and assigns.

(j) “Salant Holding” shall mean Salant Holding Corporation, a Delaware corporation, and its successors and assigns.

(k) “Salant Supplemental Financing Agreements” shall mean, collectively, the following (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated, or replaced): (i) the Guarantee by Existing Borrowers, Salant Holding and Guarantors in favor of Agent, for itself and the benefit of Lenders, with respect to the Obligations of Salant, (ii) the Guarantee by Existing Borrowers, Salant and Guarantors in favor of Agent, for itself and the benefit of Lenders, with respect to the Obligations of Salant Holding, (iii) the Pledge and Security Agreement by Parent in favor of Agent with respect to all of the issued and outstanding shares of Salant, (iv) the Pledge and Security Agreement by Salant in favor of Agent with respect to all of the issued and outstanding shares of Salant Holding, (v) the Trademark Collateral Assignment and Security Agreement by Salant in favor of Agent, (vi) the Trademark Collateral Assignment and Security Agreement by Salant Holding in favor of Agent, (vii) the Deposit Account Control Agreements by and among Agent, each New Borrower and the depository bank at which the deposit accounts of such New Borrower are maintained, and (viii) all other agreements, documents and instruments executed and/or delivered in connection with this Amendment No.1 and any of the foregoing.

(l) “Special Reserve” shall mean a Reserve in the amount of $1,000,000 established by Agent as of the date hereof.

1.2 Amendments to Definitions.

3

(a) All references to the term “Applicable Margin” in the Loan Agreement and each such reference is hereby amended to mean, at any time, as to the Interest Rate for Prime Rate Loans and the Interest Rate for Eurodollar Rate Loans the applicable percentage (on a per annum basis) set forth below if either (i) the sum of: (A) the Quarterly Average Excess Availability for the immediately preceding fiscal quarter plus (B) the Excess Cash as of the last day of the immediately preceding fiscal quarter is at or within the amounts indicated for such percentage or (ii) the Leverage Ratio as of the last day of the immediately preceding fiscal quarter (which ratio for this purpose shall be calculated based on the four (4) immediately preceding fiscal quarters) is at or within the levels indicated for such percentage:

Tier	Quarterly Average Excess Availability plus Excess Cash	Leverage Ratio	Applicable Prime Rate Margin		Applicable Eurodollar Rate Margin
1	$45,000,000 or more	2.00 to 1.00 or less	0	%	2	%
2	Greater than or equal to $35,000,000 and less than $45,000,000	Greater than 2.00 to 1.00 but equal to or less than 3.00 to 1.00	0	%	2 1/4	%
3	Greater than or equal to $25,000,000 and less than $35,000,000	Greater than 3.00 to 1.00 but equal to or less than 4.00 to 1.00	1/4	%	2 1/2	%
4	Less than $25,000,000	Greater than 4.00 to 1.00	1/2	%	2 3/4	%

provided, that, (A) the Applicable Margin shall be calculated and established once each fiscal quarter (commencing with the fiscal quarter ending on October 31, 2003) and shall remain in effect until adjusted thereafter at the end of the next quarter and (B) the Applicable Margin shall be the lower percentage set forth above based on (1) the sum of the Quarterly Average Excess Availability and the Excess Cash as provided above or (2) the Leverage Ratio.

(b) All references to the term “Borrower” or “Borrowers” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to include, in addition and not in limitation, each New Borrower.

(c) All references to the term “Collateral” in the Loan Agreement and each such reference is hereby amended to include, in addition and not in limitation, the assets and properties of New Borrowers at any time subject to the security interest or lien of Agent for itself and the benefit of Lenders, including the assets and properties described in Section 9 of this Amendment No. 1.

(d) The reference to the amount of “$5,000,000” in the definition of the term “Eligible Factor Receivables” in the Loan Agreement is hereby deleted and the amount of “$20,000,000” substituted therefor.

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(e) All references to the term “Factoring Agreements” in the Loan Agreement and any of the other Financing Agreements and each such reference is hereby amended to include, in addition and not in limitation, the following in each case as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced: (i) the Non-Notification Factoring Agreement, dated on or about the date hereof, between The CIT Group/Commercial Services, Inc. and Salant, and all agreements, documents and instruments at any time executed and/or delivered by any Borrower or Guarantor in connection therewith; and (ii) the Non-Notification Factoring Agreement, dated on or about the date hereof, between The CIT Group/Commercial Services, Inc. and Salant Holding, and all agreements, documents and instruments at any time executed and/or delivered by any Borrower or Guarantor in connection therewith.

(f) All references to the term “Fee Letter” in the Loan Agreement and any of the other Financing Agreements and each such reference is hereby amended to include, in addition and not in limitation, the letter agreement, dated January 17, 2003, by and among Existing Borrowers, Guarantors and Agent, setting forth certain fees payable by Borrowers to Agent for the benefit of itself and Lenders, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

(g) All references to the term “Financing Agreements” in the Loan Agreement and any of the other Financing Agreements and each such reference is hereby amended to include, in addition and not in limitation, collectively, this Amendment No. 1 and the Salant Supplemental Financing Agreements.

(h) All references to the term “Information Certificate” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to mean the Amended and Restated Information Certificate with respect to Borrowers (including New Borrowers) and Guarantors included with this Amendment No. 1 as Exhibit C hereto.

(i) All references to the term “Interest Rate” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to mean:

(i) Prior to June 19, 2003, subject to clauses (ii) and (iii) below:

(A) as to Prime Rate Loans, a rate equal to one-quarter ( ¹/4%) percent in excess of the Prime Rate;

(B) as to Eurodollar Rate Loans, a rate equal to two and one-half (2 ¹/2%) percent per annum in excess of the Adjusted Eurodollar Rate (in each case, based on the Eurodollar Rate applicable for the relevant Interest Period, whether such rate is higher or lower than any rate previously quoted to a Borrower).

(ii) Subject to clause (iii) below, effective as of the first (1st) day of the second month of each fiscal quarter (commencing with the fiscal quarter ending on October 31, 2003), the Interest Rate payable by each Borrower shall be increased or decreased, as the case may be, (A) as to Prime Rate Loans, to the rate equal to the Applicable Margin for Prime Rate Loans on a

5

per annum basis in excess of the Prime Rate, and (B) as to Eurodollar Rate Loans, to the rate equal to the Applicable Margin for Eurodollar Rate Loans on a per annum basis in excess of the Adjusted Eurodollar Rate.

(iii) Notwithstanding anything to the contrary contained in clauses (i) or (ii) above, the Applicable Margin otherwise used to calculate the Interest Rate for Prime Rate Loans and Eurodollar Rate Loans shall be the highest percentage set forth in the definition of the term Applicable Margin for each category of Loans (without regard to the amount of Quarterly Average Excess Availability or the Leverage Ratio) plus two (2%) percent per annum, at Agent’ s option, (A) for the period (1) from and after the effective date of termination or non-renewal of the Loan Agreement until Agent and Lenders have received full and final payment of all outstanding and unpaid Obligations which are not contingent and cash collateral or letter of credit, as Agent may specify, in the amounts and on the terms required under Section 13.1 of the Loan Agreement for contingent Obligations (notwithstanding entry of a judgment against any Borrower or Guarantor) and (2) from and after the date of the occurrence of an Event of Default and for so long as such Event of Default is continuing and (B) on Loans to a Borrower at any time outstanding in excess of the Borrowing Base of such Borrower (whether or not such excess(es) arise or are made with or without the knowledge or consent of Agent or any Lender and whether made before or after an Event of Default).

(j) All references to the term “Inventory Loan Limit” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to mean $60,000,000.

(k) All references to the term “Letter of Credit Facility Agreements” in the Loan Agreement and any of the other Financing Agreements and each such reference is hereby amended to include, in addition and not in limitation, the following in each case as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced: (i) the Letter of Credit and Security Agreement, dated on or about the date hereof, by New Borrowers and Israel Discount Bank of New York and the General Security Agreement, dated on or about the date hereof, between New Borrowers and Israel Discount Bank of New York; (ii) the Commitment Letter, dated on or about the date hereof, by and among New Borrowers and CommerceBank, N.A. and the Commercial Security Agreement, dated on or about the date hereof, by New Borrowers in favor of CommerceBank, N.A.; and (iii) the Continuing Letter of Credit Agreement, dated on or about the date hereof, by and among New Borrowers and HSBC Bank USA and the General Security Agreement, dated on or about the date hereof, by and among New Borrowers and HSBC Bank USA.

(l) All references to the term “Maximum Credit” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to mean $110,000,000.

(m) All references to the term “Reserves” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to include, in addition and not in limitation, the Special Reserve, except that for purposes of calculating the Excess Availability

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as such term is used in the Loan Agreement, the Special Reserve shall not be considered in such calculation.

(n) All references to the term “The CIT Group/Commercial Services, Inc. (as successor to Congress Talcott Corporation)” in the Loan Agreement or any of the other Financing Agreements and each such reference is hereby amended to mean The CIT Group/Commercial Services, Inc. and its successors and assigns.

1.3 Interpretation. For purposes of this Amendment No. 1, unless otherwise defined herein, all capitalized terms used herein which are defined in the Loan Agreement shall have the meanings given to such terms in the Loan Agreement.

2. Consent. Subject to the terms and conditions contained herein, to the extent such consent is or may be required under the Loan Agreement, Agent and Lenders hereby consent to: (a) the formation by Parent of Connor as a wholly-owned Subsidiary of Parent formed solely for the purpose of merging with Salant pursuant to the Merger and (b) the Merger.

3. Assumption of Obligations; Amendments to Guarantees and Financing Agreements.

3.1 Each New Borrower hereby expressly (a) assumes and agrees to be directly liable to Agent and Lenders, jointly and severally with Existing Borrowers, for all Obligations under, contained in, or arising pursuant to the Loan Agreement or any of the other Financing Agreements applicable to Existing Borrowers and as applied to such New Borrower as a Borrower, (b) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Loan Agreement and the other Financing Agreements applicable to Existing Borrowers as applied to such New Borrower, with the same force and effect as if such New Borrower had originally executed and been an original Borrower signatory to the Loan Agreement and the other Financing Agreements, (c) each New Borrower is deemed to make as to itself and the Existing Borrowers, and is, in all respects, bound by all representations and warranties made by Existing Borrowers to Agent and Lenders set forth in the Loan Agreement or in any of the other Financing Agreements, and (d) agrees that Agent, for itself and the benefit of Lenders, shall have all rights, remedies and interests, including security interests in and liens upon the Collateral granted to Agent pursuant to Section 9 hereof, under and pursuant to the Loan Agreement and the other Financing Agreements, with respect to such New Borrower and its properties and assets with the same force and effect as Agent, for itself and the benefit of Lenders, has with respect to Existing Borrowers and their respective assets and properties, as if such New Borrower had originally executed and had been an original Borrower signatory, as the case may be, to the Loan Agreement and the other Financing Agreements.

3.2 Each Existing Borrower, in its capacity as a Guarantor of the payment and performance of the Obligations of the other Existing Borrowers, and each Guarantor hereby agrees that each of the Guarantees, dated October 1, 2002, by the Existing Borrowers and Guarantors in favor of Agent (collectively, the “Existing Guarantees”) is hereby amended to include New Borrowers as additional guarantor party signatories thereto, and each New Borrower hereby agrees that the Existing Guarantees are hereby amended to include such New Borrower as additional guarantor party signatories thereto. Each New Borrower hereby expressly (a) assumes and agrees to be

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directly liable to Agent and Lenders, jointly and severally with Guarantors and Existing Borrowers signatories thereto, for payment and performance of all Obligations (as defined in the Existing Guarantees), (b) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Existing Guarantees with the same force and effect as if such New Borrower had originally executed and been an original party signatory to each of the Existing Guarantees as a Guarantor, and (c) agrees that Agent and Lenders shall have all rights, remedies and interests with respect to such New Borrower and its property under the Existing Guarantees with the same force and effect as if such New Borrower had originally executed and been an original party signatory as a Guarantor to each of the Existing Guarantees.

4. Loans. Section 2.1(b)(iii) of the Loan Agreement is hereby amended by deleting the reference therein to “$40,000,000” and substituting the amount of “$60,000,000” therefor.

5. Letter of Credit Accommodations.

5.1 Section 2.2(b) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor:

“(b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrowers shall pay to Agent, for the benefit of Lenders, (i) a letter of credit fee at a rate equal to one (1%) percent per annum on the daily outstanding balance of the Letter of Credit Accommodations consisting of Commercial Letters of Credit for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month and (ii) a letter of credit fee at a rate equal to two (2%) percent per annum on the daily outstanding balance of all other Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month, except that Agent may, and upon the written direction of Required Lenders shall, require Borrowers to pay to Agent for the benefit of Lenders such letter of credit fee at a rate equal to three (3%) percent per annum on the daily outstanding balance of the Letter of Credit Accommodations consisting of Commercial Letters of Credit and at a rate equal to four (4%) percent per annum on the daily outstanding balance of all other Letter of Credit Accommodations for: (A) the period from and after the date of termination hereof until Agent and Lenders have received full and final payment of all Obligations (notwithstanding entry of a judgment against any Borrower) and (B) the period from and after the date of the occurrence of an Event of Default for so long as such Event of Default is continuing as determined by Agent. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrowers to pay such fee shall survive the termination of this Agreement.”

5.2 Section 2.2(e) of the Loan Agreement is hereby amended to delete the reference to the amount of “$30,000,000” therein and substitute the amount of “$60,000,000” therefor.

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6. Fees. Section 3.2(a) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor:

“(a) Borrowers shall pay to Agent for the benefit of Lenders monthly an unused line fee at a rate equal to the percentage (on a per annum basis) set forth below calculated upon the amount by which $45,000,000 prior to June 19, 2003 and $80,000,000 on and after June 19, 2003 exceeds the average daily principal balance of the outstanding Loans and Letter of Credit Accommodations during the immediately preceding month (or part thereof) while this Agreement is in effect and for so long thereafter as any Obligations are outstanding. Such fee shall be payable on the first day of each month in arrears. The percentage used for determining the unused line fee shall be one-quarter ( ¹/4%) percent until April 30, 2003 and three-eighths ( ³/8%) percent thereafter, provided, that, effective as of the first (1^st) day of the second month of each fiscal quarter (commencing with the fiscal quarter ending on October 31, 2003), the percentage used for determining the unused line fee shall be as set forth below if either (i) the sum of the Quarterly Average Excess Availability for the immediately preceding fiscal quarter plus the Excess Cash as of the last day of the immediately preceding fiscal quarter is at or within the amounts indicated for such percentage or (ii) the Leverage Ratio as of the last day of the immediately preceding fiscal quarter (which ratio for this purpose shall be calculated based on the four (4) immediately preceding fiscal quarters) is at or within the levels indicated for such percentage:

Quarterly Average Excess Availability plus Excess Cash	Leverage Ratio	Unused Line Fee Percentage
$45,000,000 or more	2.00 to 1.00 or less	1/4	%
Greater than or equal to $35,000,000 and less than $45,000,000	Greater than 2.00 to 1.00 but equal to or less than 3.00 to 1.00	1/4	%
Greater than or equal to $25,000,000 and less than $35,000,000	Greater than 3.00 to 1.00 but equal to or less than 4.00 to 1.00	3/8	%
Less than $25,000,000	Greater than 4.00 to 1.00	3/8	%

provided, that, (A) the unused line fee percentage shall be calculated and established once each fiscal quarter (commencing with the fiscal quarter ending on or after October 31, 2003) and (B) the unused line fee percentage shall be the lower percentage set forth above based on (1) the sum of the Quarterly Average Excess Availability plus the Excess Cash as provided above or (2) the Leverage Ratio.”

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7. Collection of Accounts. Section 6.3(a)(ii) of the Loan Agreement is hereby amended to delete the amount of “$20,000,0000” referred to therein and substitute “$35,000,000” therefor.

8. Sharing of Payments, Etc. Section 6.9 of the Loan Agreement is hereby amended to add a new Section 6.9(e) at the end thereof as follows:

“(e) Nothing contained in this Section 6.9 shall be construed to require that a Lender acting in its capacity as a Factor to the extent permitted hereunder who has purchased any accounts receivable owing by a Borrower or Guarantor to a third party share any payments received by it as a Factor in respect of such accounts receivable with any other Lender pursuant to the terms of this Section 6.9.”

9. Grant of Security Interest by New Borrowers.

9.1 Without limiting the provisions of Section 3 hereof, the Loan Agreement and the other Financing Agreements, to secure payment and performance of all of its Obligations, each New Borrower hereby grants to Agent, for itself and the benefit of Lenders, a continuing security interest in, a lien upon, and a right of set off against, and each New Borrower hereby assigns to Agent, for itself and the benefit of Lenders, as security all personal property and interests in personal property of such New Borrower, whether now owned or hereafter acquired or existing, and wherever located, including:

(a) all Accounts;

(b) all general intangibles, including, without limitation, all Intellectual Property;

(c) all goods, including, without limitation, Inventory and Equipment;

(d) all chattel paper, including, without limitation, all tangible and electronic chattel paper;

(e) all instruments, including, without limitation, all promissory notes;

(f) all documents;

(g) all deposit accounts;

(h) all letters of credit, banker’s acceptances and similar instruments for which such New Borrower is a beneficiary or otherwise entitled to any payment (contingent or otherwise), and including all letter-of-credit rights;

(i) all supporting obligations and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Receivables and other Collateral, including (i) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (ii) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured

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party, (iii) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Receivables or other Collateral, including returned, repossessed and reclaimed goods, and (iv) deposits by and property of account debtors or other persons securing the obligations of account debtors;

(j) all (i) investment property (including securities, whether certificated or uncertificated, securities accounts, security entitlements, commodity contracts or commodity accounts) and (ii) monies, credit balances, deposits and other property of such New Borrower now or hereafter held or received by or in transit to Agent, any Lender or its Affiliates or at any other depository or other institution from or for the account of such New Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise;

(k) all commercial tort claims, including, without limitation, those identified in the Information Certificate;

(l) to the extent not otherwise described above, all Receivables;

(m) all Records; and

(n) all products and proceeds of the foregoing, in any form, including insurance proceeds and all claims against third parties for loss or damage to or destruction of or other involuntary conversion of any kind or nature of any or all of the other Collateral.

9.2 Notwithstanding anything to the contrary contained in this Section 9 above, the types or items of Collateral described in this Section 9 shall not include any rights or interest in any contract, license or license agreement covering personal property of New Borrowers, if under the terms of such contract, license or license agreement, or applicable law with respect thereto, the grant of a security interest or lien therein to Agent is prohibited and such prohibition has not been or is not waived or the consent of the other party to such contract, license or license agreement has not been or is not otherwise obtained; provided, that, the foregoing exclusion shall in no way be construed (a) to apply if any such prohibition is unenforceable under the UCC or other applicable law or (b) so as to limit, impair or otherwise affect Agent’s unconditional continuing security interests in and liens upon any rights or interests of such New Borrower in or to monies due or to become due under any such contract, license or license agreement (including any Receivables).

9.3 In the event that Agent has not received evidence in form and substance satisfactory to Agent that each of the Subsidiaries of Salant set forth on Exhibit D hereto have been liquidated and dissolved to the extent permitted hereunder and the assets thereof validly transferred and assigned to a Borrower or Guarantor by October 31, 2003, promptly upon the request of Agent, as to any such Subsidiary which shall not have been so liquidated and dissolved and assets transferred and assigned: (a) Borrowers and Guarantors shall cause each of such Subsidiaries of Salant to execute and deliver to Agent, in form and substance satisfactory to Agent, (i) an absolute and unconditional guarantee of payment of any and all Obligations, (ii) a security agreement granting to Agent a first priority security interest and lien upon all of the assets of such Subsidiary (except as otherwise consented to in writing by Agent), (iii) related Uniform

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Commercial Code Financing Statements and the authorization to file the same, and (b) the Borrowers and Guarantors that are the owner or holder of the Capital Stock of such Subsidiaries of Salant shall execute and deliver to Agent, in form and substance satisfactory to Agent, (i) a pledge and security agreement granting to Agent a first priority pledge of, security interest in and lien upon, all of the issued and outstanding shares of Capital Stock of such Subsidiary, and (ii) the original stock certificates or other instruments evidencing the Capital Stock of such Subsidiary, together with such stock powers with respect to such Capital Stock as Agent may request, and (c) Borrowers and Guarantors shall execute and deliver, or shall cause to be executed and delivered, such other agreements, documents and instruments as Agent may require, including, but not limited to, supplements and amendments hereto and other loan agreements or instruments evidencing indebtedness of such Subsidiary to Agent, including such opinion letters of counsel with respect to such guarantee, security agreements and related matters as Agent may request.

9.4 In the event that Agent does not receive evidence, in form and substance satisfactory to Agent, that all of the deposit accounts of New Borrower maintained at SunTrust Bank have been closed and are no longer receiving any checks or other items, by October 31, 2003, promptly upon Agent’s request, Borrowers and Guarantors shall cause to be executed and delivered Deposit Account Control Agreements with respect to any such deposit accounts, duly authorized, executed and delivered by SunTrust Bank and such New Borrower.

9.5 In the event that Agent does not receive evidence, in form and substance satisfactory to Agent, that all of the deposit accounts of each New Borrower maintained at JPMorgan Chase Bank as set forth in the Information Certificate or otherwise have been closed and are no longer receiving any checks or other items, by October 31, 2003, promptly upon Agent’s request, Borrowers and Guarantors shall cause to be executed and delivered Deposit Account Control Agreements with respect to any such deposit accounts, duly authorized, executed and delivered by JPMorgan Chase Bank and such New Borrower.

10. Use of Proceeds. Notwithstanding anything to the contrary contained in the Loan Agreement, Borrowers shall use a portion of the proceeds of the Loans for payments of the merger consideration required to be paid to the shareholders of Salant pursuant to and in accordance with the terms of the Merger Agreements as in effect on the date hereof and cost, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Amendment No. 1.

11. Priority of Liens. Notwithstanding anything to the contrary contained in Section 5.2 or Section 8.4 of the Loan Agreement, the security interests and liens granted to Agent under this Amendment No. 1 or any of the other Financing Agreements in the deposit accounts of Salant and Salant Holding used for retail store locations, the deposit accounts at SunTrust Bank, N.A. and JPMorgan Chase Bank of Salant and the deposit accounts of the Subsidiaries of Salant organized under the laws of a jurisdiction outside of the United States of America, in each case as listed on the Information Certificate shall be valid but not perfected security interests in and liens upon such deposit accounts.

12. Sale of Assets, Consolidation, Merger, Dissolution, Etc.

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12.1 Section 9.7(c) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor:

“(c) wind up, liquidate or dissolve except that any Guarantor (other than Parent) or any Subsidiary of Salant (other than Salant Holding) may wind up, liquidate and dissolve, provided, that, each of the following conditions is satisfied, (i) the winding up, liquidation and dissolution of such Guarantor or Subsidiary shall not violate any law or any order or decree of any court or other Governmental Authority in any material respect and shall not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, or any other agreement or instrument to which any Borrower, Guarantor or Subsidiary is a party or may be bound, (ii) such winding up, liquidation or dissolution shall be done in accordance with the requirements of all applicable laws and regulations, (iii) effective upon such winding up, liquidation or dissolution, all of the assets and properties of such Guarantor or Subsidiary shall be duly and validly transferred and assigned to a Borrower or another Guarantor, free and clear of any liens, restrictions or encumbrances other than the security interest and liens of Agent (and Agent shall have received such evidence thereof as Agent may reasonably require) and Agent shall have received copies of such deeds, assignments or other agreements as Agent may request to evidence and confirm the transfer of such assets of such Guarantor or Subsidiary to a Borrower or Guarantor, (iv) Agent shall have received all documents and agreements that any Borrower, Guarantor or Subsidiary has filed with any Governmental Authority or as are otherwise required to effectuate such winding up, liquidation or dissolution, (v) no Borrower or Guarantor shall assume any Indebtedness, obligations or liabilities as a result of such winding up, liquidation or dissolution, or otherwise become liable in respect of any obligations or liabilities of the entity that is winding up, liquidating or dissolving, unless such Indebtedness is otherwise expressly permitted hereunder, (vi) Agent shall have received not less than ten (10) Business Days prior written notice of the intention of such Guarantor or Subsidiary (other than any Subsidiary of Salant except Salant Holding) to wind up, liquidate or dissolve, and (vii) as of the date of such winding up, liquidation or dissolution and after giving effect thereto, no Default or Event of Default shall exist or have occurred; or”

13. Minimum EBITDA. Section 9.17 of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor:

“9.17 Minimum EBITDA. At any time that the aggregate amount of the Excess Availability is less than $20,000,000, (a) the EBITDA of Parent and its Subsidiaries (on a consolidated basis) for the preceding twelve (12) consecutive months (treated as a single accounting period) as of the end of the most recent fiscal month for which Agent or any Lender has received financial statements of Borrowers or Guarantors, shall be not less than $40,000,000 (after giving effect to the EBITDA of Salant and its Subsidiaries on a pro forma basis in a manner satisfactory to Agent) and (b) the EBITDA of Parent and its Subsidiaries (on a consolidated basis) as of

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the end of the most recent two (2) fiscal months, on a combined basis, for which Agent or any Lender has received financial statements of Borrowers or Guarantors shall be positive.”

14. Assignments; Participations. Agent hereby confirms that its consent to the assignment by a Lender of a portion of such Lender’s rights and obligations under the Loan Agreement to one or more Eligible Transferees as required under Section 13.7(a) of the Loan Agreement shall not be unreasonably withheld.

15. Existing Salant Letters of Credit.

15.1 Borrowers and Guarantors confirm and acknowledge that Agent, on behalf of Lenders, and for the account of Borrowers and Guarantors, has agreed to indemnify and reimburse the Existing Salant Lenders for certain liabilities of the Existing Salant Lenders in connection with or related to certain of the Existing Salant Letters of Credit as set forth in the LC Indemnification Agreement. Without limiting any other rights of Agent and Lenders or other obligations and liabilities of Borrowers and Guarantors, each Borrower shall reimburse Agent on demand (or, at its option, Agent may charge the loan account of any Borrower or Guarantor) for all liability, loss, costs, damage or expense (including, but not limited to, attorneys’ fees and expenses) which Agent or any Lender may suffer or incur by reason of any reimbursement or payment to any Existing Salant Lender in connection with the Existing Salant Letters of Credit or any other cause or matter arising out of or relating to the LC Indemnification Agreement. The Existing Salant Letters of Credit that are subject to the LC Indemnification Agreement shall constitute Letter of Credit Accommodations and shall be subject to a Reserve in the full amount of the liability of Agent to the Existing Salant Lenders (contingent or otherwise) pursuant to the LC Indemnification Agreement. The Reserve shall be reduced to the extent of any payment by Agent to an Existing Salant Lender in respect of or in connection with an Existing Salant Letter of Credit and, except as Agent may otherwise determine, shall not terminate as to any undrawn amounts under an Existing Salant Letter of Credit (and interest and fees related thereto) until Agent shall receive the written agreement of Existing Salant Lenders (or the agent on their behalf), in form and substance satisfactory to Agent, that Agent and Lenders have no further liability to Existing Salant Lenders in respect thereof.

15.2 Agent is irrevocably authorized to pay any Existing Salant Lender any amounts demanded by such Existing Salant Lender under the LC Indemnification Agreement without regard to any dispute or claim that any Borrrower or Guarantor may have or assert against any Existing Salant Lender or any issuer of any Existing Salant Letter of Credit, Agent or any party to any Existing Salant Letter of Credit and Borrowers and Guarantors shall indemnify and pay to Agent as set forth above, without offset, defense or counterclaim of any kind, nature or description.

15.3 In addition, Agent is transferring the liability to the issuer of certain of the Existing Salant Letters of Credit from the Existing Salant Lenders to Agent (on behalf of Lenders and for the account of Salant) as set forth in the letter agreement, dated of even date herewith, by and among such issuer, The CIT Group/Commercial Services, Inc. as agent for the other Existing Salant Lenders, Agent, Salant and Salant Holding. The Existing Salant Letters of Credit that are

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so transferred shall constitute Letter of Credit Accommodations and shall be subject to a Reserve in the full amount of the liability of Agent to the issuer thereof (contingent or otherwise).

16. Representations, Warranties and Covenants. Borrowers (including New Borrowers) and Guarantors jointly and severally, represent, warrant and covenant with and to Agent and Lenders as follows, which representations, warranties and covenants shall survive the execution and delivery hereof:

16.1 This Amendment No. 1 and the Salant Supplemental Financing Agreements have been duly authorized, executed and delivered by all necessary action on the part of each Borrower and Guarantor which is a party hereto and thereto and, if necessary, their respective stockholders, and is in full force and effect as of the date hereof, as the case may be, and the agreements and obligations of Borrowers and Guarantors contained herein and therein constitute legal, valid and binding obligations of Borrowers and Guarantors enforceable against them in accordance with their terms except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors’ rights and (ii) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

16.2 No action of, or filing with, or consent of any Governmental Authority, other than the filing of UCC financing statements, and no approval or consent of any other party, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment No. 1 and the Salant Supplemental Financing Agreements.

16.3 None of the transactions contemplated by this Amendment No. 1 or the Salant Supplemental Financing Agreements are in contravention of any applicable law, or the terms of any agreement to which any Borrower or Guarantor is a party or by which any property of any Borrower or Guarantor is bound.

16.4 As of the date hereof, except as otherwise provided in Section 11 above, Agent has and will have a valid and perfected first priority security interest in the assets of New Borrowers, subject only to the liens indicated on Schedule 8.4 to the Information Certificate and the other liens permitted under Section 9.8 of the Loan Agreement.

16.5 After giving effect to the amendments provided for herein, including the new Information Certificate included with this Amendment No. 1, all of the representations and warranties set forth in the Loan Agreement and the other Financing Agreements, each as amended hereby, are true and correct in all material respects on and as of the date hereof as if made on the date hereof, except to the extent any such representation or warranty is made as of an earlier specified date, in which case such representation or warranty shall have been true and correct as of such date.

16.6 After giving effect to the amendments provided for herein and the Merger and other transactions contemplated hereby and in the Merger Agreements, each Borrower (including each New Borrower) is not insolvent (as such term is defined in the US Bankruptcy Code and any applicable state law) or will not become insolvent, and does not have unreasonably small

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capital after the consummation of the transactions contemplated hereby and thereby to continue to engage in its business and has not incurred liabilities as a result of the transactions contemplated hereby and thereby that are beyond its ability to pay as such liabilities mature.

16.7 The Merger Agreements and the transactions contemplated thereby have been duly executed, delivered and performed in accordance with their terms, including the fulfillment (not the waiver, except as disclosed and consented to by Agent) of all conditions precedent set forth therein. Pursuant to the Merger Agreements and the transactions contemplated thereby, Parent has acquired and has good and marketable title to all of the issued and outstanding shares of Capital Stock of Salant and Salant has good and marketable title to all of the issued and outstanding shares of Capital Stock of Salant Holding and each of Salant Caribbean, S.A., Birdhill Limited and Salant Far East Limited (except for 5 shares in the case of Salant Caribbean, S.A., which are issued to Erick Sterkel Caal and one share in the case of each of Birdhill Limited and Salant Far East Limited, which are issued to Descona Ltd., a solicitor for the trustee of Salant), free and clear of all claims, liens, pledges and encumbrances of any kind, except as permitted under Section 9.8 of the Loan Agreement. The total amount of the purchase price and other consideration required to be paid by Parent for all of the issued and outstanding shares of Capital Stock of Salant does not exceed $92,000,000.

16.8 All actions and proceedings required by the Merger Agreements, applicable law or regulation (including, but not limited to, compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended and all applicable securities laws) have been taken and the transactions contemplated thereby have been duly and validly taken and consummated.

16.9 Agent has, on or before the date hereof, received from Borrowers, true, complete and correct copies of the Merger Agreements, and all notices, instruments, documents and agreements related thereto, including all exhibits and schedules thereto.

16.10 Borrowers and Guarantors shall take such steps and execute and deliver, and cause to be executed and delivered, to Agent, such additional UCC financing statements and termination statements, and other and further agreements, documents and instruments as Agent may require in order to more fully evidence, perfect and protect Agent’s first priority security interest in the Collateral (including the Collateral of New Borrowers).

16.11 Each of the Subsidiaries of Salant set forth on Exhibit D hereto, other than Salant Caribbean, S.A., Birdhill Limited and Salant Far East Ltd., are and shall continue to be inactive and are not engaged in, and shall not engage in, any business or commercial activity or hold or own any assets or properties.

16.12 On or before the date hereof, Ocean Bank has ceased to be a Letter of Credit Issuer. On or before July 31, 2003, (a) all Letter of Credit Facility Agreements with Ocean Bank shall be terminated and of no further force and effect and Ocean Bank shall not have any security interest in or lien upon any of the assets or properties of any Borrower or Guarantor and (b) all UCC financing statements between Ocean Bank as secured party and any Borrower or Guarantor, as debtor filed with any Governmental Authority prior to the date hereof shall have been

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terminated of record pursuant to termination statements the filing of which were duly authorized by Ocean Bank.

16.13 As of the date hereof, no Default or Event of Default exists or has occurred and is continuing.

17. Conditions Precedent. The effectiveness of the consent and amendments contained herein shall only be effective upon the satisfaction of each of the following conditions precedent in a manner satisfactory to Agent:

17.1 Agent shall have received an executed original or executed original counterparts of this Amendment No. 1 (including all schedules and exhibits hereto) and the Salant Supplemental Financing Agreements, duly authorized, executed and delivered by the respective party or parties hereto;

17.2 Agent shall have received, in form and substance satisfactory to Agent, (a) amendments to the Letter of Credit Intercreditor Agreements providing for the addition of the New Borrowers thereto, and related matters, duly authorized, executed and delivered by the Letter of Credit Issuers and (b) amendments to the Factor Assignment Agreements providing for the addition of the New Borrowers thereto (to the extent that the New Borrowers have been added to or are included in the arrangements with a Factor), and related matters, duly authorized, executed and delivered by the Factors and Borrowers and Guarantors;

17.3 each of the Merger Agreements and the transactions contemplated thereby shall have been or shall be duly authorized, executed and delivered by the respective parties thereto prior to or contemporaneously with the effectiveness thereof;

17.4 all conditions precedent to the obligations of the parties to the Merger Agreements shall have been fulfilled (and not merely waived, except if approved in writing by Agent), at or before the consummation of the Merger;

17.5 all actions and proceedings required by the Merger Agreements, applicable law or regulation and the transactions contemplated thereby shall have been duly and validly taken in accordance with the terms thereof, and all required consents thereto under any agreement, document or instrument to which Borrowers, Salant, Salant Holdings or any of their affiliates is a party or by which any of its or their properties are bound, and all applicable consents or approvals of each Governmental Authority, shall have been obtained and be in full force and effect;

17.6 no court of competent jurisdiction shall have issued any injunction, restraining order or other order which prohibits the consummation of the transactions described in the Merger Agreements or the Financing Agreements or modifies such transactions, and no governmental or other action or proceeding shall have been commenced, seeking any injunction, restraining order or other order which seeks to void or otherwise modify the transactions described in the Merger Agreements or the Financing Agreements;

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17.7 Agent shall have received UCC, Federal and State tax lien and judgment searches with respect to New Borrowers in all relevant jurisdictions, as determined by Agent;

17.8 Agent shall have received evidence of insurance and loss payee endorsements required under the Loan Agreement and under the other Financing Agreements with respect to New Borrowers, in form and substance satisfactory to Agent, and certificates of insurance policies and/or endorse-ments naming Agent as loss payee;

17.9 the aggregate amount of the Excess Availability of Borrowers as determined by Agent, as of the date hereof, shall be not less than $40,000,000 after giving effect to the Loans made or to be made and Letter of Credit Accommodations issued or to be issued in connection with the Merger and the other transactions contemplated hereunder and the amount of any fees and expenses payable in connection therewith (except that for purposes of this Section 17.9, the calculation of Excess Availability shall be without regard to the limitations of the Maximum Credit and the Loan Limits as to any Borrower for up to the aggregate amount of $10,000,000);

17.10 Agent shall have received, in form and substance satisfactory to Agent, all releases, terminations and such other documents as Agent may request to evidence and effectuate the termination by the Existing Salant Lenders of their respective financing arrangements with Salant and its Subsidiaries and the termination and release by it or them, as the case may be, of any interest in and to any assets and properties of Salant and its Subsidiaries, duly authorized, executed and delivered by it or each of them, including, but not limited to, UCC termination statements for all UCC financing statements previously filed by it or any of them or their predecessors, as secured party and Salant or any of its Subsidiaries, as debtor;

17.11 no material adverse change shall have occurred in the assets, business or prospects of Borrowers and Guarantors since the date of Agent’s latest field examination (not including for this purpose the field review referred to in Section 17.12 below) and no change or event shall have occurred which would impair the ability of any Borrower or Guarantor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Agent or any Lender to enforce the Obligations or realize upon the Collateral;

17.12 Agent shall have completed a field review of the Records and such other information with respect to the Collateral of Salant and its Subsidiaries as Agent may require to determine the amount of Loans available to Salant and Salant Holding (including, without limitation, current perpetual inventory records and/or roll-forwards of Accounts and Inventory through the date of closing and test counts of the Inventory in a manner satisfactory to Agent, together with such supporting documentation as may be necessary or appropriate, and other documents and information that will enable Agent to accurately identify and verify the Collateral), the results of which in each case shall be satisfactory to Agent, not more than three (3) Business Days prior to the date hereof;

17.13 Agent shall have received evidence, in form and substance satisfactory to Agent, that Agent has a valid perfected first priority security interest in all of the Collateral (other than the Senior Note Priority Collateral, the Letter of Credit Issuer Priority Collateral and certain deposit accounts to the extent set forth in Section 11 hereof) and a valid perfected second priority

18

security interest in all other Collateral (other than certain deposit accounts to the extent set forth in Section 11 hereof);

17.14 Agent shall have received Borrowers’ projected financial statements for the period from the date hereof through January 31, 2004, which shall be prepared on a monthly basis, together with a certificate, dated the date hereof, of the chief financial officer or chief executive officer of Parent stating that such projected financial statements were prepared by such officer of Parent in good faith and are based on assumptions that are believed by such officer in good faith to be reasonable in light of all facts and circumstances known to Parent at such time, all of which shall be reasonably satisfactory to Agent;

17.15 Agent shall have received, in form and substance satisfactory to Agent, all consents, waivers, acknowledgments and other agreements from third persons which Agent may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral (including the Collateral of New Borrowers) or to effectuate the provisions of this Amendment No.1 and the other Financing Agreements;

17.16 Agent shall have received, in form and substance satisfactory to Agent, the Information Certificate duly authorized, executed and delivered by Borrowers and Guarantors;

17.17 New Borrowers shall have authorized Agent to prepare and file such Uniform Commercial Code financing statements and other documents and instruments which Agent has determined are necessary to perfect or continue perfecting the security interests of Agent in all of the assets now or hereafter owned by New Borrowers;

17.18 Agent shall have received originals of the shares of the stock certificates representing one hundred percent (100%) of the issued and outstanding shares of the Capital Stock of the direct and indirect Subsidiaries of a Borrower or Guarantor which are organized under the laws of a jurisdiction within the United States of America (in each case together with stock powers duly executed in blank with respect thereto);

17.19 Agent shall have received, in form and substance satisfactory to Agent, Deposit Account Control Agreements by and among Agent, each New Borrower and each bank where such New Borrower has a deposit account (other than deposit accounts used exclusively in connection with an individual retail store location and for the deposit accounts of New Borrower currently maintained at SunTrust Bank and JPMorgan Chase Bank), in each case, duly authorized, executed and delivered by such bank and New Borrower;

17.20 Agent shall have received, in form and substance satisfactory to Agent, true, correct and complete copies of the Merger Agreements, duly executed, authorized and delivered by each of the parties thereto;

17.21 Agent shall have received (i) a copy of the Certificate of Incorporation (or comparable document), and all amendments thereto, for each New Borrower certified by the Secretary of State of its jurisdiction of incorporation as of a recent date certifying that each of the foregoing documents remains in full force and effect and has not been modified or amended,

19

except as described therein and (ii) a certificate from an officer of each Borrower and Guarantor dated the date hereof certifying that its Certificate of Incorporation (or comparable document) and all amendments thereto for it remains in full force and effect and has not been modified or amended as to Existing Borrowers and Guarantors since the date of the certified copy thereof previously delivered to Agent prior to the date hereof and as to New Borrowers except as described therein;

17.22 Agent shall have received, in form and substance satisfactory to Agent, the Officer’s Certificate of Directors’ Resolutions, Corporate By-Laws, Incumbency and Shareholder’s Consent of each Borrower and each Guarantor (except as to Parent, without the Shareholder’s Consent) evidencing the adoption and subsistence of resolutions approving the execution, delivery and performance by each Borrower and Guarantor of this Amendment No. 1 and the Salant Supplemental Financing Agreements to which it is a party;

17.23 Agent shall have received original good standing certificates (or its equivalent) from the Secretary of State (or comparable official) from each jurisdiction where each Borrower and Guarantor conducts business;

17.24 Agent shall have received, in form and substance satisfactory to Agent, a legal opinion of counsel to Borrowers and Guarantors with respect to the matters contemplated by this Amendment No. 1, the Salant Supplemental Financing Agreements and the Merger Agreements, and including opinions of counsel qualified in such jurisdictions as Agent may specify; and

17.25 No Default or Event of Default shall exist or have occurred and be continuing.

18. Effect of this Amendment. This Amendment No.1 and the instruments and agreements delivered pursuant hereto constitute the entire agreement of the parties with respect to the subject matter hereof and thereof, and supersede all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof and thereof. Except as expressly amended pursuant hereto and except for the consent expressly granted herein, no other changes or modifications or waivers to the Financing Agreements are intended or implied, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements are inconsistent with the provisions of this Amendment No.1, the provisions of this Amendment No.1 shall control.

19. Further Assurances. Each Borrower and Guarantor shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Agent or Lenders to effectuate the provisions and purposes of this Amendment No.1.

20. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of Florida (but excluding any principles of conflicts of law or other rule of law that would cause the application of the law of any jurisdiction other than the laws of the State of Florida).

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21. Binding Effect. This Amendment No.1 shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns.

22. Counterparts. This Amendment No.1 may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment No.1, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Delivery of an executed counterpart of this Amendment No.1 by telecopier shall have the same force and effect as delivery of an original executed counterpart of this Amendment No.1. Any party delivering an executed counterpart of this Amendment No.1 by telecopier also shall deliver an original executed counterpart of this Amendment No.1, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment No.1 as to such party or any other party.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered by their authorized officers as of the day and year first above written.

SUPREME INTERNATIONAL, INC
By:	Rosemary B. Trudeau
Title:	Treasurer
JANTZEN, INC.
By:	Rosemary B. Trudeau
Title:	Treasurer
SALANT CORPORATION
By:	Rosemary B. Trudeau
Title:	Treasurer
SALANT HOLDING CORPORATION
By:	Rosemary B. Trudeau
Title:	Treasurer
PERRY ELLIS INTERNATIONAL, INC.
PEI LICENSING, INC.
JANTZEN APPAREL CORP.
SUPREME REAL ESTATE I, LLC
SUPREME REAL ESTATE II, LLC
SUPREME REALTY, LLC
BBI RETAIL, L.L.C.
PERRY ELLIS REAL ESTATE CORPORATION
By:	Rosemary B. Trudeau
Title:	Secretary, Treasurer, V.P. or Manager, as applicable

[SIGNATURES CONTINUE ON FOLLOWING PAGE]

[SIGNATURES CONTINUED FROM PRECEDING PAGE]

SUPREME MUNSINGWEAR CANADA INC.
By:	Rosemary B. Trudeau
Title:	Treasurer

AGREED:
CONGRESS FINANCIAL CORPORATION (FLORIDA), as Agent
By:	[ILLEGIBLE]
Title:	A.V.P

EXHIBIT A

TO

AMENDMENT NO. 1

Existing Salant Lenders

The CIT Group/Commercial Services, Inc.

A-1

EXHIBIT B

TO

AMENDMENT NO. 1

Existing Letters of Credit

See Attached

B-1

EXHIBIT C

TO

AMENDMENT NO. 1

Information Certificate

See Attached

C-1

EXHIBIT D

TO

AMENDMENT NO. 1

List of Salant Subsidiaries

Salant Caribbean, S.A.

Birdhill Limited

Salant Far East Ltd.

D-1

EX-31.1

Exhibit 31.1

Certification

I, George Feldenkreis, certify that:

1) I have reviewed this Form 10-Q quarterly report for the period ended July 31, 2003 (the “Report”) of Perry Ellis International, Inc. (the “Registrant”);

2) Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report;

3) Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in the Report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly Report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report based on such evaluations; and

(c) Disclosed in the Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

September 9, 2003	/s/ George Feldenkreis
	Name: George Feldenkreis
	Title: Chairman and Chief Executive Officer
	(Chief Executive Officer)

EX-31.2

Exhibit 31.2

Certification

I, Timothy B. Page, certify that:

1) I have reviewed this Form 10-Q quarterly report for the period ended July 31, 2003 (the “Report”) of Perry Ellis International, Inc. (the “Registrant”);

2) Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report;

3) Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in the Report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly Report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report based on such evaluations; and

(c) Disclosed in the Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

September 9, 2003

/s/    TIMOTHY B. PAGE

Name: Timothy B. Page

Title:   Chief Financial Officer

(Chief Financial Officer)

EX-32.1

Exhibit 32.1

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Perry Ellis International, Inc., a Florida corporation (the “Company”), hereby certifies that the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 9, 2003		/s/    George Feldenkreis
	Name: Title:	George Feldenkreis Chairman and Chief Executive Officer (Chief Executive Officer)

EX-32.2

Exhibit 32.2

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Perry Ellis International, Inc., a Florida corporation (the “Company”), hereby certifies that the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2003 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 9, 2003		/s/    Timothy B. Page
	Name: Title:	Timothy B. Page Chief Financial Officer (Chief Financial Officer)

EX-99.1

Perry Ellis International, Inc. Announces Proposed Offering Of Senior Subordinated Notes

MIAMI— (BUSINESS WIRE)—Sept. 9, 2003 – Perry Ellis International, Inc. (Nasdaq: PERY) today announced its intention to sell, subject to market and other conditions, $150 million aggregate principal amount of Senior Subordinated Notes due 2013, in a private placement pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended. The notes will be guaranteed on an unsecured senior subordinated basis by all of Perry Ellis’ current, and certain of its future, material domestic subsidiaries.

Perry Ellis plans to use the net proceeds from the offering to redeem its existing 12 1/4% Senior Subordinated Notes due 2006 and to reduce the amount outstanding under its senior credit facility.

This announcement is neither an offer to sell nor a solicitation of an offer to buy any of these notes and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful.

The notes being offered have not been registered under the Securities Act, or any state securities laws, and may not be offered or sold in the United States, absent registration under, or an applicable exemption from, the registration requirements of the Securities Act and applicable state securities laws.