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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-18183
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G-III APPAREL GROUP, LTD.
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(Exact name of registrant as specified in its charter)
Delaware 41-1590959
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
512 Seventh Avenue, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 403-0500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value. --------------
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
As of July 31, 2002, the aggregate market value of the registrant's voting
stock held by non-affiliates of the registrant (based on the last sale price
for such shares as quoted by the Nasdaq National Market) was $20,936,869.
Indicate by check mark if the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The number of outstanding shares of the registrant's Common Stock as of
March 31, 2003 was 6,875,827.
Documents incorporated by reference: Certain portions of the registrant's
definitive Proxy Statement relating to the registrant's Annual Meeting of
Stockholders to be held on or about June 12, 2003, to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934 with the Securities and
Exchange Commission, are incorporated by reference into Part III of this
Report.
ITEM 1. BUSINESS
Unless the context otherwise requires, "G-III", "us", "we" and "our" refer
to G-III Apparel Group, Ltd. and its subsidiaries. References to fiscal years
refer to the year ended or ending on January 31 of that year. Our Internet
address is "www.g-iii.com".
OVERVIEW
G-III designs, manufactures, imports and markets an extensive range of
leather and non-leather apparel including coats, jackets, pants, skirts and
other sportswear items under our own labels, licensed labels and private retail
labels. Our own labels include "G-III,"(TM) "Siena Studio,"(TM) "Colebrook &
Co,"(TM) "JLC,"(TM) "J.L. Colebrook,"(TM) and "ColeB"(TM). We have recently
launched a new women's label, "Black Rivet"(TM), with apparel bearing this label
expected to be in department stores for the fall 2003 season.
The sale of licensed products is a key element of our strategy. We
initiated our strategy of offering licensed product in 1993 and, between 1993
and 1999, we significantly expanded our offerings of licensed products. As a
result, we have licenses to design and market a line of women's leather and
woven outerwear under the Kenneth Cole New York and Reaction Kenneth Cole
labels and to design and market women's outerwear under the Nine West label. We
also secured licenses with the four major sports leagues (football, hockey,
basketball and baseball) to manufacture outerwear using NFL, NHL, NBA and MLB
team logos.
We have continued to expand our portfolio of licensed products during the
last three years. In February 2000, we entered into a license agreement with
Cole Haan to design and market men's and women's outerwear. In January 2001, we
acquired certain assets of Gloria Gay Coats, LLC and entered into a license
agreement with Jones Apparel Group to design and market women's wool outerwear
under the Jones New York and JNY Jones New York labels. In July 2001, we
entered into an expanded license with the NFL, which became effective in April
2002, to manufacture a comprehensive line of adult outerwear. In August 2001,
we entered into a license agreement to produce a men's outerwear line under the
Sean John brand name. In December 2001, we entered into a license agreement to
design and market men's leather outerwear under the Timberland brand.
In 2002, we targeted several different niche areas for expansion of our
licensed business. In May 2002, we started our "hot markets" sports business.
This business involves producing selected apparel for major sporting events and
hot sports teams in a very quick time frame. We also entered into licenses in
July 2002, to market and produce adult and youth apparel under the Louisville
Slugger brand name, in August 2002, to market and produce James Dean men's
outerwear, and in December 2002, to market and produce Blassport women's
leather outerwear collections and Bill Blass women's shearling outerwear
collections.
We operate our business in two segments, non-licensed apparel and licensed
apparel. The non-licensed apparel segment includes sales of apparel under our
own brands and private label brands, as well as commission fee income received
on sales that are financed by and shipped directly to our customers. The
licensed apparel segment includes sales of apparel brands licensed by us from
third parties. See Note M to our Consolidated Financial Statements for financial
information with respect to these segments.
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We are a Delaware corporation that was formed in 1989. We and our
predecessors have conducted our business since 1974.
PRODUCTS - DEVELOPMENT AND DESIGN
G-III manufactures and markets a full line of women's leather apparel and
an outerwear line of men's leather apparel at a wide range of retail sales
prices. Our product offerings also include textile outerwear, woolen coats,
raincoats and sportswear. We sell products under our own brand names, licensed
brand names and private retail labels.
G-III's non-licensed apparel consists of both men's and women's products.
The Colebrook & Co., JLC, J.L. Colebrook, and Black Rivet lines of women's
apparel consist of moderately priced women's leather apparel that typically
sell at retail prices from $40 for sportswear items to $300 for coats. Siena
Studio, our bridge-priced line of women's leather apparel, primarily consists
of jackets and skirts with retail prices from $100 for skirts to $600 for
outerwear. Products in our men's lines of leather outerwear, sold under the
G-III and Colebrook labels, typically have retail prices between $40 and $400.
Our moderately priced lines of women's textile outerwear and sportswear, sold
under the Colebrook & Co., JLC, J.L. Colebrook, ColeB, and Black Rivet labels
have retail prices in the range of $50 to $200.
G-III's licensed apparel also consists of both men's and women's products.
Our strategy is to seek licenses that will enable us to offer a range of
products targeting different price points and different tiers of distribution.
Women's licensed apparel includes leather and textile garments which typically
sell at retail prices from $100 for sportswear items to $2,500 for leather
coats. Men's licensed apparel consists of leather, leather and textile
combination and textile apparel that typically sell at retail prices from $50
for sportswear items to $2,000 for leather coats. Our new Hot Markets product
line consists of moderately priced apparel that typically sells at retail
prices from $18 for tee shirts to $475 for leather jackets.
We work closely with our licensors in creating designs and styles for each
licensed brand sold by us. Licensors generally must approve products to be sold
under their brand names prior to production by us.
We also work with retail chains in developing product lines sold under
private labels. With regard to private label sales, we meet frequently with
buyers who custom order products by color, fabric and style. These buyers may
provide samples to us or may select styles already available in our showrooms.
We believe we have established a reputation among these buyers for the ability
to arrange for the manufacture of apparel on a reliable, expeditious and
cost-effective basis.
Our in-house designers are responsible for the design and look of our
licensed and non-licensed products. We respond to style changes in the apparel
industry by maintaining a continuous program of style, color, leather and fabric
selection. In designing new products and styles, we attempt to incorporate
current trends and consumer preferences in our product offerings. We seek to
design products in response to trends in consumer preferences, rather than to
attempt to establish market trends and styles.
-3-
Design personnel meet regularly with our sales and merchandising
departments, as well as with the design and merchandising staffs of our
licensors, to review market trends, sales results and the popularity of our
latest products. In addition, our representatives regularly attend trade and
fashion shows and shop at fashion forward stores in the United States, Europe
and the Far East. They present sample items to us along with their evaluation
of the styles expected to be in demand in the United States. We also seek input
from selected customers with respect to product design. We believe that our
sensitivity to the needs of our retail customers, coupled with the flexibility
of our production capabilities and our continual monitoring of the retail
market, enables us to modify designs and order specifications in a timely
fashion.
LEATHER AND TEXTILE APPAREL
MANUFACTURING
G-III's products are imported from independent manufacturers located
primarily in China and, to a lesser extent, in South Korea, India, Indonesia,
the Philippines, Hong Kong, Mexico and Europe. In fiscal 2003, we manufactured
approximately 29% of our products at our wholly owned factory in Indonesia and
partially owned factory in Northern China. In December 2002, we elected to
close our Indonesian facility. Production in our Indonesian facility
represented approximately 15% of our products in fiscal 2003. We are arranging
for additional production by independent manufacturers to replace the
production that had been done at our Indonesian facility and believe that we
will have sufficient independent production capability available to meet our
requirements for fiscal 2004. Independent contractors located in the New York
City area also manufacture a selected number of garments for us.
We have a branch office in Seoul, South Korea which acts as a liaison
between us and various manufacturers located in China, South Korea and
Indonesia that produce leather and woven garments for us. G-III's headquarters
provides the liaison office with production orders stating the quantity,
quality and types of garments to be produced, and this liaison office
negotiates and places orders with one or more Chinese, South Korean or
Indonesian manufacturers. In allocating production among independent suppliers,
we consider a number of criteria, including quality, availability of production
capacity, pricing and ability to meet changing production requirements. At
January 31, 2003, the South Korean office employed 14 persons.
To facilitate better service for our textile and leather apparel customers
and accommodate and control the volume of manufacturing in the Far East, we
also have an office in Hong Kong. Similar to the South Korean office, the Hong
Kong office acts as a liaison between G-III and the various manufacturers of
textile and leather apparel located in Hong Kong and China. We utilize our
domestic and Hong Kong office employees to monitor production at each
manufacturer's facility to ensure quality control, compliance with our
specifications and timely delivery of finished garments to our distribution
facilities or customers. The Hong Kong office employed 6 persons as of January
31, 2003.
In connection with the foreign manufacture of our leather apparel,
manufacturers purchase skins and necessary "submaterials" (such as linings,
zippers, buttons and trimmings) according to parameters specified by us. Prior
to commencing the manufacture of garments, samples of the skins and
submaterials are sent to our South Korean liaison office and our New York
offices for approval. Employees of the liaison office regularly inspect and
supervise the
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manufacture of products for us in order to ensure timely delivery, maintain
quality control and monitor compliance with our manufacturing specifications.
They also inspect finished apparel for us.
Because of the nature of leather skins, the manufacture of leather apparel
is performed manually. A pattern is used in cutting hides to panels that are
assembled in the factory. All submaterials are also added at this time.
Products are inspected throughout this process to insure that the design and
quality specifications of the order provided by us are being maintained as the
garment is assembled. After pressing, cleaning and final inspection, the
garment is labeled and hung awaiting shipment. A final random inspection occurs
when the garments are packed for shipment.
We arrange for the production of apparel on a purchase order basis, with
each order to a foreign manufacturer generally backed by an irrevocable
international letter of credit. Substantially all letters of credit arranged by
us require as a condition, among others, of release of funds to the
manufacturer that an inspection certificate be signed by our representative.
Accordingly, if an order is not filled, the letter of credit is not paid and we
do not bear the risk of liability for the goods being manufactured. We assume
the risk of loss on a F.O.B. basis when goods are delivered to a shipper and
are insured against casualty losses arising during shipping.
We purchase skins for our partially-owned factory in China. We previously
purchased skins for our Indonesian facility as well, but have ceased these
purchases in connection with our closing of this facility. As a result, our
inventory of raw skins is expected to significantly decrease. The demand for
garment-type leather decreased in 2002 after increasing significantly over the
prior two years. However, prices for this type of leather rose moderately in
the past year. The supply of garment-type leather decreased as a result of the
occurrence of mad-cow and foot-and-mouth disease in Europe in 2000 and 2001.
The after effects of this disease resulted in a lower supply of leather skins
in 2002 as well. We believe we and our independent manufacturers will be able
to purchase a sufficient amount of leather skins to satisfy our production
requirements in the fiscal year ending January 31, 2004.
As is customary in the leather industry, we have not entered into any
long-term contractual arrangements with any contractor or manufacturer. We
believe that the production capacity of foreign manufacturers with whom we have
developed, or are developing, a relationship is adequate to meet our leather
apparel production requirements for the foreseeable future. We believe that
alternative foreign leather apparel manufacturers are readily available.
Our arrangements with textile manufacturers and suppliers are subject to
the availability of quota and other requisite customs clearances for textile
apparel and the imposition of export duties. United States customs duties on our
textile apparel presently range from 5% to 30%, depending upon the type of
fabric used and how the garment is constructed. We monitor duty, tariff and
quota-related developments and seek to minimize our potential exposure to
quota-related risks through, among other measures, geographical diversification
of manufacturing sources and shifts of production among countries and
manufacturers. Virtually all of our imported leather products are subject to
United States Customs duties of approximately 6%.
A majority of all finished goods manufactured abroad for us are shipped to
our New Jersey warehouse and distribution facility or to a designated third
party facility for final
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inspection and allocation and reshipment to customers. The goods are delivered
to our customers and us by independent shippers, choosing the form of shipment
(principally ship, truck or air) based upon a customer's needs, cost and time
considerations.
MARKETING AND DISTRIBUTION
G-III's products are sold primarily to department, specialty and mass
merchant retail stores in the United States. We sell to approximately 2,000
customers, ranging from national and regional chains of specialty retail and
depart-ment stores, whose annual purchases from us exceed $1,000,000, to small
specialty stores whose annual purchases from us are less than $1,000. Sales to
the Sam's Club and Wal-Mart divisions of Wal-Mart Stores, Inc. accounted for an
aggregate of 21.1% of our net sales in each of fiscal 2001 and fiscal 2002 and
21.0% of net sales in fiscal 2003. The loss of this customer, which primarily
purchases non-licensed apparel, could have a material adverse affect on our
non-licensed business segment, as well as on our results of operations as a
whole. No other customer accounted for more than 8% of our net sales during any
of these three fiscal years.
Almost all of our sales are made in the United States. We also market our
products in Canada and Europe.
Along with our foreign offices, our trading company subsidiary, Global
International Trading Company, located in Seoul, Korea, assists in providing
services to our customers. This office manages a sample room and assists in the
procurement of finished garments. As of January 31, 2003, Global International
Trading employed 24 persons.
G-III's products are sold primarily through a direct employee sales force
that consisted of 59 employees as of January 31, 2003. Our principal executives
are also actively involved in sales of our products. A limited amount of our
products are also sold by various retail buying offices located throughout the
United States. Final authorization of all sales of products is solely through
our New York showroom, enabling our management to deal directly with, and be
readily accessible to, major customers, as well as to more effectively control
our selling operations.
We primarily rely on our reputation and relationships to generate business
in our non-licensed segment. We believe we have developed a significant
customer following and positive reputation in the industry, as a result of,
among other things, standards of quality control, on-time delivery, competitive
pricing and willingness and ability to assist customers in their merchandising
of our products. In addition, we have, to a limited extent, advertised our own
labels and engaged in cooperative ad programs with retailers. We believe we
have developed brand awareness of our own labels, despite the absence of
general advertising, primarily through our reputation, consumer acceptance and
the fashion press.
Brand name products sold by us pursuant to a license agreement are
promoted by institutional and product advertisements placed by the licensor.
Our license agreements generally provide that we are required to pay the
licensor a fee, based on a percentage of net sales of licensed product, to pay
for a portion of these advertising costs. We may also be required to spend a
specified percentage of net sales of licensed product on advertising placed by
us. Our license agreements generally provide that we must pay a royalty based
on net sales of licensed products and that we must sell a specified minimum
amount of licensed product each year in order to retain the license.
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RAW MATERIALS
We purchase most products manufactured for us on a finished goods basis.
Raw materials used in the production of our apparel are available from numerous
sources. We are not aware of any manufacturer of our apparel not being able to
satisfy its requirements for any required raw materials due to an inadequacy of
supply.
The leather apparel industry competes with manufacturers of other leather
products for the supply of leather. Leather skins are a byproduct. Accordingly,
raw material costs are impacted by changes in meat consumption worldwide as
well as by the popularity of leather products. For example, the occurrences of
mad-cow and foot-and-mouth disease in Europe in 2000 and 2001 decreased the
consumption of meat and the supply of leather. It also resulted in an increase
in the price of leather skins in 2001. In 2002, the price of leather skins rose
moderately.
LICENSING
The sale of licensed products is a key element of our strategy and we have
significantly expanded our offerings of licensed products over the last several
years. We have licenses to produce products under the Kenneth Cole New York and
Reaction Kenneth Cole, Nine West, Cole Haan, Jones New York, JNY Jones New
York, Sean John, Timberland, Bill Blass, Blassport, and James Dean fashion
labels. We are also licensed to produce products containing trademarks of the
National Football League, National Hockey League, National Basketball
Association, Major League Baseball, Louisville Slugger and many universities
located in the United States. During the coming year, we expect to expand our
sales of vintage sports apparel with Cooperstown Collection baseball products
and Hardwood Classics basketball products.
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The following table sets forth for each of our principal licenses the date
on which the current term ends and the date on which any potential renewal term
ends:
DATE CURRENT DATE POTENTIAL
LICENSE TERM ENDS RENEWAL TERM ENDS
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Kenneth Cole NY/Reaction Kenneth Cole December 31, 2004 December 31, 2007
Nine West December 31, 2004 January 31, 2009
Cole Haan December 31, 2007 None
Jones New York/JNY Jones New York January 31, 2004 January 31, 2009
Sean John January 31, 2005 January 31, 2007
Timberland December 31, 2004 December 31, 2007
Bill Blass/Blassport January 31, 2006 January 31, 2009
James Dean December 31, 2003 December 31, 2006
National Football League March 31, 2005 March 31, 2007
National Hockey League June 30, 2005 June 30, 2006
National Basketball Association September 30, 2003 None
Major League Baseball December 31, 2003 None
Hardwood Classics September 30, 2005 None
Cooperstown Collection December 31, 2004 None
Our ability to extend the current term of a license agreement is usually
subject to attaining minimum sales and/or royalty levels and to our compliance
with all of the terms of the agreement. In addition, other criteria may also
impact our ability to renew a license.
We continue to seek other opportunities to enter into license agreements
in order to expand our product offerings under nationally recognized labels and
broaden the markets that we serve. Revenues from the sale of licensed products
accounted for 52.8% of net sales during fiscal 2003 compared to 42.7% of net
sales in fiscal 2002 and 37.9% of net sales in fiscal 2001. We expect that the
percentage of our revenues from the sale of licensed products will continue to
increase in fiscal 2004.
SEASONALITY
Retail sales of outerwear apparel have traditionally been seasonal in
nature. Although we sell our apparel products throughout the year, net sales in
the months of July through November accounted for approximately 75% of our net
sales in fiscal 2001, 74% of our net sales in fiscal 2002 and 76% of our net
sales in fiscal 2003. The July through November time frame is expected to
continue to provide a disproportionate amount of our net sales.
BACKLOG
A significant portion of our orders are short-term purchase orders from
customers who place orders on an as-needed basis. The amount of unfilled orders
at any time has not been indicative of future sales. Information relative to
open purchase orders at any date may also be materially affected by, among
other things, the timing of the initial showing of apparel to the trade, as
well as by the timing of recording of orders and shipments. As a result, we do
not believe that the amount of our unfilled customer orders at any time is
meaningful.
-8-
TRADEMARKS
Several trademarks owned by us have been granted federal trademark
protection through registration with the U.S. Patent and Trademark Office,
including G-III, G-III (& Design), J.L. Colebrook, JLC, Colebrook & Co.,
Sienna, Trouble Wanted (& Design), 58 Sports (& Design), and Ladies First by
G-III/Carl Banks. We have applications for several additional marks pending
before the U.S. Patent and Trademark Office.
We have been granted trademark registration for G-III in France, Canada,
Mexico, and the European Union, for J.L. Colebrook in Canada, Mexico, France,
Great Britain, and the European Union, and for J.L.C. (& Design) and JLC (&
Design) in Canada. We also have one application pending in Canada.
Although we regard our trademarks as valuable assets and intend to
vigorously enforce our trademark rights, we do not believe that any failure to
obtain federal trademark registrations for which we have applied would have a
material adverse effect on us.
COMPETITION AND OTHER RISKS
The apparel business is highly competitive. We have numerous competitors
with respect to the sale of leather and textile apparel, including distributors
that import leather apparel from abroad and domestic retailers with established
foreign manufacturing capabilities. Sales of our products are affected by
style, price, quality and general fashion trends. We also compete with
vertically integrated apparel manufacturers that also own retail stores. In
addition, we compete for supplies of raw materials and manufacturing and
tanning capacity.
Our ability to successfully compete depends on a number of factors,
including our ability to effectively anticipate, gauge and respond to changing
consumer demands and tastes, to translate market trends into attractive product
offerings and operate within substantial production and delivery constraints.
We cannot be sure we will be successful in this regard.
We are dependent on sales of licensed product for a substantial portion of
our revenues. In fiscal 2003, revenues from the sale of licensed product
accounted for 52.8% of our net sales compared to 42.7% of our net sales in
fiscal 2002 and 37.9% of our net sales in fiscal 2001. We expect that the
percentage of our revenues represented by sales of licensed product will
continue to increase in fiscal 2004.
We are generally required to achieve specified minimum net sales, pay
specified royalties and advertising payments and receive prior approval of the
licensor as to all elements of a garment prior to production. If we do not
satisfy any of these requirements, a licensor usually will have the right to
terminate our license. If a license contains a renewal provision, there are
usually minimum sales and other conditions that must be met in order to be able
to renew a license. Even if we comply with all the terms of a licensing
agreement, we cannot be sure that we will be able to renew an agreement when it
expires even if we desire to do so.
We often produce garments to hold in inventory in order to meet our
customers' delivery requirements and to be able to quickly fulfill reorders. If
we misjudge the market for our products, we may be faced with significant excess
inventories for some products and missed opportunities with others. In addition,
weak sales and resulting markdown requests from
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customers could have a material adverse effect on our business, results of
operations and financial condition. For example, the tragic events of September
11, 2001 and the unusually warm weather during that fall/winter season
aggravated a retail environment that had already begun to slow down due to the
economic downturn in the United States. Retailers responded to this environment
with increased promotional activity which required us to grant greater
allowances and discounts in order to sell our products. These factors had a
material adverse effect on our net sales and gross profit for the fiscal year
ended January 31, 2002.
The apparel industry is cyclical. Purchases of outerwear and other apparel
tend to decline during recessionary periods and sales of our products may
decline at other times as well for a variety of reasons, including changes in
fashion trends and the introduction of new products or pricing changes by our
competitors. Uncertainties regarding future economic prospects could affect
consumer-spending habits and have an adverse effect on our results of
operations. Uncertainty with respect to consumer spending as a result of weak
economic conditions during fiscal 2002 and 2003 caused our customers to delay
the placing of initial orders and to slow the pace of reorders during the
seasonal peak of our business. This had a material adverse effect on our
results of operations.
We are dependent on Morris Goldfarb and other key personnel. The loss of
the services of Mr. Goldfarb and any negative market or industry perception
arising from the loss of his services could have a material adverse effect on
us and the price of our shares. Our other executive officers have substantial
experience and expertise in our business and have made significant
contributions to our success. The unexpected loss of services of one or more of
these individuals could adversely affect us.
Our arrangements with foreign manufacturers are subject to the usual risks
of doing business abroad, including currency fluctuations, political
instability and potential import restrictions, duties and tariffs. Currently,
we do not maintain insurance for the potential lost profits due to disruptions
of our overseas factories. Indonesia has experienced significant currency
devaluation and political instability and South Korea has also experienced
currency devaluation and political unrest. Because our products are produced
abroad, political and/or economic instability in China, South Korea, Indonesia
or elsewhere, any substantial disruption in the business of foreign
manufacturers or our relationships with these manufacturers could materially
adversely affect our financial condition and results of operations. In December
2002, we decided to close our manufacturing facility in Indonesia due to
rapidly rising costs and losses associated with this facility, as well as the
political and economic instability in Indonesia. Our results of operations for
the fourth quarter and fiscal year ended January 31, 2003 reflect pre-tax
charges of $4.1 million in connection with closing this facility.
A substantial majority of our products in fiscal 2004 will be imported from
independent foreign manufacturers. Our dependence on independent manufacturers
has increased as a result of the closing of our Indonesian manufacturing
facility. The failure of these manufacturers to ship products to us in a timely
manner or to meet required quality standards could cause us to miss the delivery
date requirements of our customers. The failure to make timely deliveries could
cause customers to cancel orders, refuse to accept delivery of product or demand
reduced prices, any of which could have a material adverse effect on our
business. We are also dependent on these manufacturers for compliance with our
policies and the policies of our licensors and customers regarding labor
practices. In addition, since we negotiate our purchase orders with foreign
manufacturers in United States dollars, if the value of the United
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States dollar against local currencies were to go down, these manufacturers
might increase the United States dollar prices charged to us for products.
Legislation that would restrict the importation or increase the cost of
textiles and apparel produced abroad has been periodically introduced in
Congress. The enactment of new legislation or international trade regulation,
or executive action affecting international textile or trade agreements, could
adversely affect our business.
The continued growth of our business depends on our access to sufficient
funds to support our growth. Our primary source of working capital to support
our growth is our existing line of credit. We have had this line of credit for
over ten years and have been able to increase the maximum availability under
this line several times in the past few years. This line of credit expires on
May 31, 2005. Our growth is dependent on our ability to continue to extend and
increase this line of credit. If we are unable to do so, we cannot be sure we
will be able to secure alternative financing on satisfactory terms.
Fluctuations in the price, availability and quality of leather or other
raw materials used by us could have a material adverse effect on our cost of
goods sold and ability to meet customer demands. The outbreak of mad-cow and
foot-and-mouth disease in Europe decreased the supply of leather skins in 2000
and 2001. The after effects of this disease resulted in a lower supply of
leather skins in 2002 as well.
In addition to the factors described above, our business, including our
revenues and profitability, is influenced by and subject to a number of factors
that are inherently uncertain and difficult to predict including, among others:
the variability of our results in any period due to the seasonal nature of the
business; risks associated with consolidations, restructurings and other
ownership changes in the retail industry; changes in regional, national and
global economic conditions; and our ability to correctly balance the level of
our finished goods, leather and other raw material commitments with actual
orders.
As of March 31, 2003, Morris Goldfarb and Aron Goldfarb beneficially own
an aggregate of approximately 52% of our outstanding common stock. As a result,
they effectively have the ability to control the outcome on all matters
requiring stockholder approval including, but not limited to, the election of
directors and any merger, consolidation or sale of all or substantially all of
our assets. They also have the ability to control our management and affairs.
EMPLOYEES
As of January 31, 2003, we had 302 full-time employees, of whom 67 worked
in executive, administrative or clerical capacities, 90 worked in design and
manufacturing, 84 worked in warehouse facilities, 59 worked in sales and 2
worked in our retail outlet store. We employ both union and non-union personnel
and believe that our relations with our employees are good. We have not
experienced any interruption of any of our operations due to a labor
disagreement with our employees.
We are a party to an agreement with the Amalgamated Clothing and Textile
Workers Union, covering approximately 62 full-time employees as of January 31,
2003. This agreement, which is currently in effect through October 31, 2005,
automatically renews on an annual basis thereafter unless terminated by us or
the Union prior to September 1 of that year.
-11-
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
executive officers and significant employees.
EXECUTIVE OFFICER
OR SIGNIFICANT
NAME AGE POSITION EMPLOYEE SINCE
---- --- -------- -----------------
Morris Goldfarb 52 Co-Chairman of the Board, Chief 1974
Executive Officer, Director
Jeanette Nostra-Katz 50 President 1981
Wayne S. Miller 45 Senior Vice President, Chief 1998
Financial Officer, Treasurer and
Secretary
Frances Boller-Krakauer 37 Vice President -- Men's Division of 1993
G-III Leather Fashions
Deborah Gaertner 48 Vice President -- Women's Sales 1989
Division of G-III Leather Fashions
Keith Sutton Jones 54 Vice President -- Foreign 1989
Manufacturing of G-III Leather
Fashions
Philip H. Litwinoff 53 Vice President and Corporate 2001
Controller
Morris Goldfarb is our Co-Chairman of the Board and Chief Executive, as
well as one of our directors. Until April 1997, Mr. Goldfarb also served as our
President. He has served as either President or Vice President of our wholly
owned subsidiary, G-III Leather Fashions, Inc., since its formation in 1974.
Mr. Goldfarb is responsible for foreign manufacturing, marketing, merchandising
and finance. He also has overall responsibility for developing selling
programs, customer relations and administration. Mr. Goldfarb is also a
director of Lakes Gaming, Inc.
Jeanette Nostra-Katz became our President in April 1997. She had been our
Executive Vice President since March 1992. Ms. Nostra-Katz's responsibilities
for the Company include sales, marketing, public relations, and operations as
they relate to sales. Since August 1989, she has served as an Executive Vice
President of Siena. We have employed Ms. Nostra-Katz since 1981.
Wayne S. Miller has been our Chief Financial Officer and Senior Vice
President since April 1998. In November 1998, Mr. Miller was also elected
Secretary and Treasurer. Mr. Miller served as a consultant to Marketing
Management Group from September 1997 to April 1998.
-12-
Frances Boller-Krakauer is the Vice President -- Men's Division of G-III
Leather Fashions and has held this position since February 1993. Ms.
Boller-Krakauer's responsibilities include sales and merchandising for all
men's products lines. Prior to February 1993, she held various sales positions
in the Men's Division. Ms. Boller-Krakauer joined us in March 1989.
Deborah Gaertner is the Vice President -- Women's Non-Branded Sales of
G-III Leather Fashions and has held this position since March 1992. Ms.
Gaertner is responsible for sales and marketing of our women's non-licensed
apparel lines. She previously served as Vice President, Imports from June 1989
until March 1992, coordinating production and merchandising.
Keith Sutton Jones is the Vice President -- Foreign Manufacturing of G-III
Leather Fashions and has been employed in this capacity since January 1989. His
responsibilities include coordinating and controlling all aspects of our Far
Eastern sourcing and production.
Philip H. Litwinoff has been our Vice President and Corporate Controller
since April 2001. He had previously served as our Controller since November
1995.
Aron Goldfarb, one of our directors, and Morris Goldfarb are father and
son, respectively. Carl Katz, one of our directors, and Jeanette Nostra-Katz
are married to each other.
ITEM 2. PROPERTIES
Our executive offices, sales showrooms and support staff are located at
512 Seventh Avenue, which is one of the leading outerwear apparel buildings in
New York City. We lease an aggregate of approximately 42,500 square feet in
this building through March 31, 2011 at a current aggregate annual rent of
approximately $1.2 million.
Our warehouse and distribution facility, located in Secaucus, New Jersey,
contains approximately 107,000 square feet, plus a 3,000 square foot retail
outlet store. This facility is leased through February 2005 at an annual rent
increasing to $643,000. The lease provides for one optional renewal term of
five years with a rental for the renewal term based on market rates. A majority
of our finished goods are shipped to the New Jersey distribution facilities for
final reshipment to customers.
We maintain off-site storage at 345 West 37th Street in New York City.
This property was leased pursuant to a sublease from a corporation owned by
Morris Goldfarb and Aron Goldfarb for which we paid monthly rent, plus real
estate taxes. For fiscal 2003, the total payments for this building were
approximately $239,000 and for fiscal 2002, the total payments for this
building were approximately $295,000. We sublet a portion of the 345 West 37th
Street building to different tenants. The sublease terms ended in February
2003. The aggregate annual rental paid to us under these subleases was
approximately $190,000. Effective February 1, 2003, we lease one floor in this
building, as well as parking spaces and a billboard on top of the building. Our
aggregate monthly rental in fiscal 2004 is expected to be approximately $14,000
per month.
-13-
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-14-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our Common Stock is quoted on the Nasdaq Stock Market under the trading
symbol "GIII". The following table sets forth, for the fiscal periods shown,
the high and low sales prices for our Common Stock, as reported by the Nasdaq
Stock Market.
FISCAL 2002 HIGH PRICES LOW PRICES
----------- ----------- ----------
Fiscal Quarter ended April 30, 2001 $ 8.94 $ 6.50
Fiscal Quarter ended July 31, 2001 10.40 7.25
Fiscal Quarter ended October 31, 2001 10.30 5.80
Fiscal Quarter ended January 31, 2002 7.34 4.75
FISCAL 2003
-----------
Fiscal Quarter ended April 30, 2002 $ 8.33 $ 6.25
Fiscal Quarter ended July 31, 2002 $ 8.49 $ 5.81
Fiscal Quarter ended October 31, 2002 $ 7.75 $ 4.49
Fiscal Quarter ended January 31, 2003 $ 7.89 $ 4.91
FISCAL 2004
-----------
Fiscal Quarter ending April 30, 2003
(through March 31, 2003) $ 6.50 $ 4.62
The last sales price of our Common Stock as reported by the Nasdaq Stock
Market on March 31, 2003 was $6.05 per share.
On April 15, 2003, there were 64 holders of record and, we believe,
approximately 2,000 beneficial owners of our Common Stock.
DIVIDEND POLICY
Our Board of Directors currently intends to follow a policy of retaining
any earnings to finance the continued growth and development of our business
and does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to the payment of cash dividends will be dependent upon
our financial condition, results of operations and other factors deemed
relevant by the Board. Our loan agreement prohibits the payment of cash
dividends without the consent of the lenders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in Item 7 below.
-15-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended January 31, 1999, 2000, 2001, 2002 and 2003 have been derived from
our audited consolidated financial statements. Our audited financial statements
as of January 31, 1999, 2000, and 2001 and for the years ended January 31, 1999
and 2000 are not included in this filing. The selected consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Item 7 of this Report) and the
audited consolidated financial statements and related notes thereto included
elsewhere in this Annual Report on Form 10-K.
(In thousands, except share and per share data)
YEAR ENDED JANUARY 31, (1)
-------------------------------------------------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- -----------
INCOME STATEMENT DATA:
Net sales $ 121,644 $ 149,632 $ 187,057 $ 201,426 $ 202,651
Cost of goods sold 95,393 110,710 136,099 158,160 153,367
---------- ---------- ---------- ---------- ----------
Gross profit 26,251 38,922 50,958 43,266 49,284
Selling, general & administrative
expenses 27,698 28,145 29,860 35,814 41,551
Unusual or non-recurring charge (463) 1,200 (643) -- 3,556
---------- ---------- ---------- ---------- ----------
Operating profit (loss) (984) 9,577 21,741 7,452 4,177
Interest and financing charges, net 2,115 1,857 2,839 3,577 1,907
---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and income taxes (3,099) 7,720 18,902 3,875 2,270
Minority interest of joint venture 1,378 1,994 (312) -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (1,721) 9,714 18,590 3,875 2,270
Income taxes (benefit) (541) 3,934 7,436 1,511 1,888
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (1,180) $ 5,780 $ 11,154 $ 2,364 $ 382
========== ========== ========== ========== ==========
Basic earnings (loss) per share $ (0.18) $ 0.86 $ 1.70 $ 0.35 $ 0.06
========== ========== ========== ========== ==========
Weighted average shares
outstanding -- basic 6,539,128 6,712,051 6,561,537 6,676,270 6,764,398
Diluted earnings (loss) per share $ (0.18) $ 0.84 $ 1.57 $ 0.32 $ 0.05
========== ========== ========== ========== ==========
Weighted average shares
outstanding -- diluted 6,539,128 6,848,433 7,120,986 7,373,723 7,346,925
AS OF JANUARY 31, (1)
--------------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital $27,277 $31,066 $41,931 $46,140 $47,260
Total assets 44,870 59,601 71,952 67,701 70,956
Short-term debt 2,893 3,427 1,580 906 885
Long-term debt, excluding current
portion 180 64 0 203 88
Total stockholders' equity 35,615 40,944 52,142 54,813 55,748
- ----------
(1) Certain amounts have been reclassified to conform to the fiscal 2003
presentation.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this Annual Report on Form 10-K concerning our business
outlook or future economic performance; anticipated revenues, expenses or other
financial items; product introductions and plans and objectives related thereto;
and statements concerning assumptions made or expectations as to any future
events, conditions, performance or other matters, are "forward-looking
statements" as that term is defined under the Federal securities laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, reliance on foreign manufacturers, risks of doing business abroad, the
nature of the apparel industry, including changing consumer demand and tastes,
reliance on licensed product, seasonality, customer acceptance of new products,
the impact of competitive products and pricing, dependence on existing
management, general economic conditions, as well as other risks detailed in our
filings with the Securities and Exchange Commission, including this Annual
Report on Form 10-K.
The following presentation of management's discussion and analysis of our
financial condition and results of operations should be read in conjunction
with our Financial Statements, the accompanying notes and other financial
information appearing elsewhere in this Report.
References to fiscal years refer to the year ended or ending January 31 of
that year.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and revenues and expenses during the period.
Significant accounting policies employed by us, including the use of estimates,
are presented in the Notes to Consolidated Financial Statements.
Critical accounting policies are those that are most important to the
portrayal of our financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies, discussed below, pertain to
revenue recognition, accounts receivable, inventories and income taxes. In
applying these policies, management must use some amounts that are based upon
its informed judgments and best estimates. On an on-going basis, we evaluate
our estimates, including those related to customer allowances and discounts,
product returns, bad debts and inventories. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions.
-17-
Revenue Recognition
We recognize a sale at the time merchandise is shipped. We also act as an
agent in brokering sales between our customers and overseas factories. On these
transactions, we recognize commission fee income on the sales that are financed
by and shipped directly to our customers. This income is also recorded at the
time the merchandise is shipped. Net sales take into account reserves for
returns and allowances which are based on current and historical information and
trends. Sales are reported net of returns, discounts and allowances. Discounts,
allowances and estimates of future returns are recognized when the related
revenues are recognized.
Accounts Receivable
In the normal course of business, we extend credit to our customers based
on pre-defined credit criteria. Accounts receivable, as shown on our
consolidated balance sheet, are net of allowances and anticipated discounts. In
circumstances where we are aware of a specific customer's inability to meet its
financial obligation (such as in the case of bankruptcy filings or substantial
downgrading of credit sources), a specific reserve for bad debts is recorded
against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, an allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessments of
collectability based on historical trends and an evaluation of the impact of
economic conditions. An allowance for discounts is based on reviews of open
invoices where concessions have been extended to customers. Costs associated
with allowable deductions for customer advertising expenses are charged to
advertising expenses in the selling, general and administrative section of the
Statements of Income. Costs associated with markdowns and other operational
charge backs, net of historical recoveries, are included as a reduction of net
sales. All of these are part of the allowances included in accounts receivable.
We reserve against known charge backs, as well as for an estimate of potential
future customer deductions. These provisions result from divisional seasonal
negotiations, as well as historical deduction trends, net of historical
recoveries and the evaluation of current market conditions.
Inventories
Inventories are stated at lower of cost (using the first-in, first-out
method) or market. We continually evaluate the composition of our inventories,
assessing slow-turning, ongoing product as well as fashion product from prior
seasons. Market value of distressed inventory is valued based on historical
sales trends of our individual product lines, the impact of market trends and
economic conditions, and the value of current orders relating to the future
sales of this type of inventory.
Income Taxes
As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our actual current tax
exposure, together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet.
-18-
RESULTS OF OPERATIONS
The following table sets forth selected operating data as a percentage of
our net sales for the fiscal years indicated below:
2001 2002 2003
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 72.8 78.5 75.7
----- ----- -----
Gross profit 27.2 21.5 24.3
Selling, general and administrative expenses 15.9 17.8 20.5
Unusual or non-recurring charge (0.3) -- 1.8
----- ----- -----
Operating profit 11.6 3.7 2.0
Interest and financing charges, net 1.5 1.8 0.9
----- ----- -----
Income before minority interest and income
taxes 10.1 1.9 1.1
Minority interest in income of joint venture (0.2) -- --
----- ----- -----
Income before income taxes 9.9 1.9 1.1
Income taxes 3.9 0.7 0.9
----- ----- -----
Net income 6.0% 1.2% 0.2%
===== ===== =====
General
We operate our business in two segments, non-licensed apparel and licensed
apparel. The non-licensed apparel segment includes sales of apparel under our
own brands and private label brands, as well as commission fee income received
on sales that are financed by and shipped directly to our customers. The
licensed apparel segment includes sales of apparel brands licensed by us from
third parties. See Note M to our Consolidated Financial Statements for
financial information with respect to these segments.
In December 2002, due to rapidly rising costs and losses associated with
our Indonesian facility, as well as the political and economic instability in
Indonesia, we decided to close our factory in Indonesia. The loss from the
factory's operations prior to the closedown and the charge taken in connection
with the closing of our facility had a negative effect on our results of
operations for Fiscal 2003. The results for the fiscal quarter and year ended
January 31, 2003, include charges aggregating $4.1 million ($3.4 million on an
after-tax basis) in connection with this closedown. In our income statement,
$3.6 million of these charges is included in "Unusual or non-recurring charges"
and $554,000 of these charges is included in "Cost of goods sold."
The tragic events of September 11, 2001 aggravated a retail environment
that had already begun to slow down due to the economic downturn in the United
States. The resulting uncertainty with respect to consumer spending caused our
customers to slow the pace of reorders during what is the seasonal peak of our
business. Retailers responded to this environment with increased promotional
activity which required us to grant greater allowances and discounts in order
to sell our products. These factors, as well as the unseasonably warm weather
that continued throughout the fall and winter seasons had a negative effect on
our results of operations for fiscal 2002.
-19-
During fiscal 2000, together with Black Entertainment Television ("BET"),
our joint venture partner, we decided to discontinue the BET Design Studio
joint venture. We had originally entered into the joint venture with BET in
April 1997. We owned 50.1% of this joint venture and, accordingly, its entire
results of operations were consolidated with our results of operations. The
interest of BET in the joint venture was reflected in the "Minority Interest"
line item in our financial statements. The joint venture company was dissolved
effective January 31, 2001 and our financial statements for fiscal 2001 include
a $322,000 credit (net of minority interest) representing a reversal of the
remainder of a charge taken in fiscal 2000 following the disposition of the
remaining assets and liabilities of this joint venture.
Year ended January 31, 2003 ("fiscal 2003") compared
to year ended January 31, 2002 ("fiscal 2002")
Net sales were $202.7 million in fiscal 2003 compared to $201.4 million in
fiscal 2002. Net sales of licensed apparel increased to $106.9 million in
fiscal 2003 from $86.0 million in fiscal 2002. Sales of licensed apparel
constituted 52.8% of our net sales in fiscal 2003 compared to 42.7% of our net
sales in fiscal 2002. The increase in sales of licensed apparel was primarily
attributable to our sports apparel business and, to a lesser extent, to the
addition of a new license for Sean John apparel. Net sales of non-licensed
apparel decreased to $95.7 million in fiscal 2003 from $115.4 million in fiscal
2002. The decrease in sales of non-licensed apparel was primarily due to a
decrease in sales of women's leather apparel.
Gross profit increased to $49.3 million in fiscal 2003 from $43.3 million
in fiscal 2002. Commission fee income, for which there is no related cost of
goods sold, was $3.3 million in fiscal 2003 compared to $3.2 million in fiscal
2002. As a percentage of net sales, gross profit increased to 24.3% in fiscal
2003 compared to 21.5% in fiscal 2002.
Gross profit for licensed apparel was $28.4 million in fiscal 2003, or
26.6% of net sales of licensed apparel, compared to $20.5 million in fiscal
2002, or 23.8% of net sales of licensed apparel. The increase in the gross
profit margin percentage for licensed apparel was due to better inventory
management and sales of regular priced merchandise constituting a higher
proportion of goods sold. Gross profit for non-licensed apparel was $20.9
million in fiscal 2003, or 21.8% of net sales of non-licensed apparel, compared
to $22.8 million in fiscal 2002, or 19.7% of net sales of non-licensed apparel.
The decrease in gross profit for non-licensed apparel was primarily a result of
losses at the Indonesian facility prior to its closedown, and the portion
($554,000) of the aggregate charges relating to the closedown of the Indonesian
subsidiary that was included in cost of goods sold. The increase in gross
profit percentage for non-licensed apparel was due to the comparable level of
commission fee income in fiscal 2003 compared to fiscal 2002 while net sales of
non-licensed apparel decreased.
Selling, general and administrative expenses increased to $41.6 million,
or 20.5% of net sales, in fiscal 2003 from $35.8 million, or 17.8% of net
sales, in fiscal 2002. These increases resulted primarily from increases in
third party shipping costs ($1.5 million), expenses ($1.2 million) relating to
the addition of our Sean John license, advertising expenses ($1.0 million) and
the bad debt provision ($700,000). We expect that selling, general and
administrative expenses will continue to increase in fiscal 2004 due to the
new licenses entered into in the second half of fiscal 2003 that will require
overhead investments during fiscal 2004.
The non-recurring charge represents costs relating to the closedown of our
manufacturing facility in Indonesia. In December 2002, due to rapidly rising
costs and losses
-20-
associated with this facility, as well as the political and economic instability
in Indonesia, we decided to close our factory in Indonesia. The loss from the
factory's operations prior to the closedown and the charge taken in connection
with the closing of our facility had a negative effect on our results of
operations for fiscal 2003. The components of this charge include severance
($2,050,000), operating expenses of the subsidiary subsequent to the
announcement of the closing ($686,000), write-off of property, plant and
equipment ($385,000), and professional services incurred in closing the factory
($435,000).
Interest expense was $1.9 million in fiscal 2003 compared to $3.6 million
in fiscal 2002. The decrease in interest expense resulted primarily from lower
borrowings due to lower inventory levels, as well as due to lower interest
rates.
As a result of the foregoing, we had income before income taxes of $2.3
million in fiscal 2003 compared to income before income taxes of $3.9 million
in fiscal 2002.
Income taxes were $1.9 million in fiscal 2003 compared to $1.5 million in
fiscal 2002. Our effective tax rate for fiscal 2003 was 83.2% compared to 39.0%
in fiscal 2002. The tax rate in fiscal 2003 was adversely affected by certain
expenses relating to the closedown of the Indonesian subsidiary that we have
not taken benefit for tax purposes. The tax rate in fiscal 2002 included
benefits from the implementation of a strategic tax plan which reduced our
effective state income tax rate.
We had net income of $382,000, or $0.05 per share on a diluted basis, in
fiscal 2003 compared to net income of $2.4 million, or $0.32 per share on a
diluted basis, in fiscal 2002.
Year ended January 31, 2002 ("fiscal 2002") compared
to year ended January 31, 2001 ("fiscal 2001")
Net sales increased to $201.4 million in fiscal 2002 from $187.1 million
in fiscal 2001. Net sales increased as a result of increased sales of licensed
apparel. Net sales of licensed apparel increased by 21.3% to $86.0 million in
fiscal 2002 from $70.9 million in fiscal 2001. Net sales of non-licensed
apparel were $115.4 million in fiscal 2002 compared to $116.2 million in fiscal
2001. Sales of licensed apparel constituted 42.7% of our net sales in fiscal
2002 compared to 37.9% of our net sales in fiscal 2001. The increase in sales
of licensed apparel was primarily attributable to the addition of our license
with Jones New York to produce and sell women's wool outerwear under the Jones
New York and JNY Jones New York labels.
Gross profit decreased to $43.3 million in fiscal 2002 from $51.0 million
in fiscal 2001. Commission fee income, for which there is no related cost of
goods sold, was $3.2 million in fiscal 2002 compared to $6.2 million in fiscal
2001. As a percentage of net sales, gross profit was 21.5% in fiscal 2002
compared to 27.2% in fiscal 2001.
Gross profit for licensed apparel was $20.5 million in fiscal 2002, or
23.8% of net sales of licensed apparel, compared to $21.1 million in fiscal
2001, or 29.8% of net sales of licensed apparel. Gross profit for non-licensed
apparel was $22.8 million in fiscal 2002, or 19.7% of net sales of non-licensed
apparel, compared to $29.8 million in fiscal 2001, or 25.7% of net sales of
non-licensed apparel. The decrease in the gross profit margin percentage for
non-licensed apparel was partly attributable to commission fee income that was
$3.0 million lower in fiscal 2002. The gross profit margin percentages for both
licensed and non-licensed apparel were also negatively impacted by an increase
in our inventory reserve reflecting the effect of excess unsold inventory ($1.5
million for non-licensed and $500,000 for licensed apparel). In
-21-
addition, the gross profit percentages for both licensed and non-licensed
apparel were negatively impacted by higher allowances and discounts necessary to
sell products into the sluggish retail market.
Selling, general and administrative expenses increased to $35.8 million,
or 17.8% of net sales, in fiscal 2002 from $29.9 million, or 15.9% of net
sales, in fiscal 2001. These increases resulted primarily from increased
advertising expenses ($1.3 million), salary expenses ($949,000), facilities
expenses ($685,000), and expenses ($3.5 million) relating to the start-up of
the Cole Haan, Sean John, and Jones New York divisions. To reduce our expenses,
we terminated 15 employees in October 2001, with expected annualized cost
savings of approximately $1.1 million. We do, however, expect that selling,
general and administrative expenses will continue to increase in fiscal 2003 as
several of our new divisions that operated for only part of fiscal 2002 will be
in operation for all of fiscal 2003.
Interest expense was $3.6 million in fiscal 2002 compared to $2.8 million
in fiscal 2001. The increase in interest expense resulted primarily from
increased borrowings to support higher inventory investments, partially offset
by lower interest rates.
As a result of the foregoing, we had income before income taxes of $3.9
million in fiscal 2002 compared to income before income taxes of $18.6 million
in fiscal 2001.
Income taxes were $1.5 million in fiscal 2002 compared to $7.4 million in
fiscal 2001. Our effective tax rate for fiscal 2002 was 39.0% compared to 40.0%
in fiscal 2001. The tax rate in fiscal 2002 benefited from the implementation
of a strategic tax plan which reduced our effective state income tax rate. The
tax rate in fiscal 2001 included benefits from remaining net operating loss
carry forwards for state income tax purposes.
We had net income of $2.4 million, or $0.32 per share on a diluted basis,
in fiscal 2002 compared to net income of $11.2 million, or $1.57 per share on a
diluted basis, in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our loan agreement, which expires on May 31, 2005, is a collateralized
working capital line of credit with six banks that provides for an aggregate
maximum line of credit in amounts that range from $45 million to $90 million at
specific times during the year. The line of credit provides for maximum direct
borrowings ranging from $40 million to $72 million during the year. The balance
of the credit line may be used for letters of credit. All amounts available for
borrowing are subject to borrowing base formulas and overadvances specified in
the agreement.
Direct borrowings under the line of credit bear interest at our option at
either the prevailing prime rate (4.25% at April 1, 2002) or LIBOR plus 225
basis points (3.53% at April 1, 2003). The loan agreement requires us, among
other covenants, to maintain specified earnings and tangible net worth levels,
and prohibits the payment of cash dividends. We were not in compliance with the
covenant relating to earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the fiscal year ended January 31, 2003. On March 18,
2003, we received a waiver from our lenders relating to these covenants.
The amount borrowed under the line of credit varies based on our seasonal
requirements. The maximum amount outstanding (i.e., open letters of credit,
bankers acceptances and direct borrowings) under our loan agreement was
approximately $68.0 million
-22-
during fiscal 2001, $82.5 million during fiscal 2002, and $80.1 million during
fiscal 2003. As of January 31, 2003, there were no direct borrowings, no
banker's acceptances and $3.7 million of contingent liability under open letters
of credit. As of January 31, 2002, there were no direct borrowings, no bankers'
acceptances and $2.6 million of contin-gent liability under open letters of
credit.
PT Balihides, our Indonesian subsidiary, has a separate credit facility
with an Indonesian bank. The notes payable under this facility represent
maximum borrowings as of January 31, 2003 of approximately $770,000. The loan
is secured by the property, plant, and equipment of this subsidiary.
We had $1.9 million of cash provided in our operating activities in fiscal
2003 resulting primarily because of a decrease of $6.2 million in inventories,
$1.9 million of accounts payable and accrued expenses, $1.5 million in non-cash
depreciation and amortization expense, $268,000 from the write-off of the
Indonesian property plant and equipment, $902,000 of prepaid assets, and
$581,000 in income taxes payable, offset by an increase of $9.2 million in
accounts receivable. We used $3.8 million of cash in our operating activities
in fiscal 2002 resulting primarily because our net income of $2.4 million and a
decrease of $5.3 million in inventories was more than offset by a decrease of
$5.2 million in accounts payable and accrued expenses, an increase of $2.6
million in accounts receivable and an increase of $2.4 million in the deferred
income tax benefit. We had $2.2 million of cash provided by operating
activities in fiscal 2001 resulting primarily from net income of $11.2 million,
a decrease of $5.4 million in accounts receivable and an increase of $3.7
million in accounts payable and accrued expenses that were partially offset by
an increase of $19.0 million in inventories. In addition, our purchase of
certain assets of Gloria Gay Coats, LLC in January 2001 included $2.3 million
of inventory. Our inventories increased in fiscal 2001 primarily due to an
increase in raw materials inventory as a result of purchases of leather skins
to meet sales volumes that were anticipated to be higher in fiscal 2002.
We utilized $1.2 million of cash in investing activities during fiscal 2003
to pay an earn-out of $720,000 in connection with the acquisition of certain
assets of Gloria Gay, and $443,000 of capital expenditures. We utilized $2.7
million of cash in investing activities during fiscal 2002 primarily to pay an
earn-out of $1.5 million in connection with the acquisition of certain assets of
Gloria Gay and for capital expenditures of $1.2 million. We utilized $4.2
million of cash in investing activities during fiscal 2001 in connection with
the purchase of certain assets of Gloria Gay primarily for $3.4 million
(including $2.3 million of inventory) and $852,000 for capital expenditures.
Historically, our business has not required significant capital expenditures.
Capital expenditures were used primarily for new computer software, additional
computer upgrades, leasehold improvements, and furniture, fixtures and
equipment.
We had $249,000 of cash provided by financing activities in fiscal 2003
primarily due to $385,000 received in connection with the exercise of stock
options, partially offset by $106,000 in payments of capital lease obligations.
We used $323,000 of cash in during fiscal 2002 primarily due to a $700,000
decrease in notes payable offset in part by a net increase of $229,000 in
capital lease obligations and $148,000 received from the exercise of stock
options. We used $3.5 million of cash during fiscal 2001 in financing
activities primarily due to a $1.8 million decrease in notes payable and a $1.3
million investment in a joint venture, offset in part by the receipt of
$241,000 from the exercise of stock options. We also used $540,000 in fiscal
2001 to purchase shares of our common stock on the open market.
We believe that our cash on hand and cash generated by operations,
together with the funds available under our loan agreement, will be sufficient
to meet our capital and operating requirements through fiscal 2004.
-23-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMPACT OF INFLATION AND FOREIGN EXCHANGE
Our results of operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuation. We
negotiate our purchase orders with foreign manufacturers in United States
dollars. Thus, notwithstanding any fluctuation in foreign currencies, our cost
for any purchase order is not subject to change after the time the order is
placed. However, if the value of the United States dollar against local
currencies were to decrease, manufacturers might increase their United States
dollar prices for products.
INTEREST RATE EXPOSURE
We are subject to market risk from exposure to changes in interest rates
relating primarily to our line of credit. We borrow under the line of credit to
support general corporate purposes, including capital expenditures and working
capital needs. All of our debt is short-term with variable rates. We do not
expect changes in interest rates to have a material adverse effect on income or
cash flows in fiscal 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to this Item
begin on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Proposal No. 1 -- Election of
Directors" in our definitive Proxy Statement (the "Proxy Statement") relating
to our Annual Meeting of Stockholders to be held on or about June 12, 2002, to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with
the Securities and Exchange Commission is incorporated herein by reference. For
information concerning our executive officers and other significant employees,
see "Business-Executive Officers of the Registrant" in Item 1 above of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in
our Proxy Statement is incorporated herein by reference.
-24-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Common
Stock by Certain Stockholders and Management" in our Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Relationships and
Related Transactions" in our Proxy Statement is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in alerting them to
material information, on a timely basis, required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company's management carried out
its evaluation.
-25-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
2. Financial Statement Schedules.
The Financial Statements and Financial Statement Schedules are
listed in the accompanying index to financial statements beginning
on page F-1 of this report. All other schedules, for which
provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the
related instructions, are shown in the financial statements or are
not applicable and therefore have been omitted.
3. Exhibits:
3.1 Certificate of Incorporation.(1)
3.2 By-Laws, as amended, of G-III Apparel Group, Ltd. (the
"Company").(6)
10.1 Employment Agreement, dated February 1, 1994, between the
Company and Morris Goldfarb.(4)
10.1(a) Amendment, dated October 1, 1999, to the Employment
Agreement, dated February 1, 1994, between the Company and
Morris Goldfarb.(10)
10.3 Sixth Amended and Restated Loan Agreement, dated April 29,
2002, by and among G-III Leather Fashions, Inc. ("G-III"), the
banks signatories thereto (the "Banks"), and Fleet Bank, N.A.
("Fleet Bank"), as Agent.(12)
10.3(a) Amendment No. 1 and Waiver to Sixth Amended and Restated
Loan Agreement, dated March 18, 2003, by and among G-III,
the Banks and Fleet Bank
10.6 Lease, dated September 21, 1993, between Hartz Mountain
Associates and the Company.(3)
10.6(a) Lease renewal, dated May 27, 1999, between Hartz Mountain
Associates and the Company.(11)
10.7 Lease, dated June 1, 1993, between 512 Seventh Avenue
Associates ("512") and the Company.(4)
10.7(a) Lease amendment, dated July 1, 2000, between 512 and the
Company.(11)
-26-
10.8 Lease, dated January 31, 1994, between 512 and the Company.(5)
10.8(a) Lease amendment, dated July 1, 2000, between 512 the
Company.(11)
10.10 G-III Apparel Group, Ltd. 1989 Stock Option Plan, as amended.(4)
10.11 G-III Apparel Group, Ltd. Stock Option Plan for Non-Employee
Directors.(2)
10.12 G-III Apparel Group, Ltd. 1997 Stock Option Plan.(7)
10.13 Letter Agreement, dated December 2, 1998, between the
Company and Aron Goldfarb.(8)
10.14 G-III Apparel Group, Ltd. 1999 Stock Option Plan for Non-
Employee Directors.(10)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, dated April 25, 2003.
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
- ----------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (no. 33-31906), which exhibit is incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1991, which exhibit is incorporated
herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1992, which exhibit is incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1994, which exhibit is incorporated
herein by reference.
(5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1995, which exhibit is incorporated
herein by reference.
(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended April 30, 1997, which exhibit is
incorporated herein by reference.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 31,1997, which exhibit is
incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1999, which exhibit is incorporated
herein by reference.
-27-
(9) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 31, 1999, which exhibit is
incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 2000, which exhibit is incorporated
herein by reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 2001, which exhibit is incorporated
herein by reference.
(12) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 2002, which exhibit is incorporated
herein by reference.
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. We will provide, without charge, a copy of
these exhibits to each stockholder upon the written request of any such
stockholder therefor. All such requests should be directed to G-III Apparel
Group, Ltd., 512 Seventh Avenue, 35th floor, New York, New York 10018,
Attention: Mr. Wayne S. Miller, Secretary.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the under-signed, thereunto duly authorized.
G-III APPAREL GROUP, LTD.
By /s/ Morris Goldfarb
---------------------------
Morris Goldfarb,
Chief Executive Officer
April 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------- ------------------------------ ---------------
/s/ Morris Goldfarb Director, Co-Chairman of the April 24, 2003
- ----------------------------- Board and Chief Executive
Morris Goldfarb Officer (principal executive
officer)
/s/ Wayne Miller Senior Vice President and April 24, 2003
- ----------------------------- Chief Financial Officer
Wayne S. Miller (principal financial
and accounting officer)
/s/ Aron Goldfarb Director and Co-Chairman of April 24, 2003
- ----------------------------- the Board
Aron Goldfarb
Director April 24, 2003
- -----------------------------
Lyle Berman
/s/ Thomas J. Brosig Director April 24, 2003
- -----------------------------
Thomas J. Brosig
/s/ Alan Feller Director April 24, 2003
- -----------------------------
Alan Feller
/s/ Carl Katz Director April 24, 2003
- -----------------------------
Carl Katz
/s/ Willem van Bokhorst Director April 24, 2003
- -----------------------------
Willem van Bokhorst
/s/ Richard White Director April 24, 2003
- -----------------------------
Richard White
/s/ George J. Wincell Director April 24, 2003
- -----------------------------
George J. Winchell
-29-
CERTIFICATIONS
I, Morris Goldfarb, certify that:
I have reviewed this annual report on Form 10-K of G-III Apparel Group, Ltd.;
Based on my knowledge, this annual 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 this annual report;
Based on my knowledge, the financial statements, and other financial
information included in this annual 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 this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
designed such disclosure controls and procedures 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 annual report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
The registrant's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 24, 2003 /s/ Morris Goldfarb
-------------------
Morris S. Goldfarb
Chief Executive Officer
-30-
I, Wayne S. Miller, certify that:
I have reviewed this annual report on Form 10-K of G-III Apparel Group, Ltd.;
Based on my knowledge, this annual 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 this annual report;
Based on my knowledge, the financial statements, and other financial
information included in this annual 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 this annual report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
designed such disclosure controls and procedures 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 annual report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
The registrant's other certifying officers and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 24, 2003 /s/ Wayne Miller
----------------
Wayne S. Miller
Chief Financial Officer
-31-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 15(a))
Page
------
Report of Independent Auditors F-2
Financial Statements
Consolidated Balance Sheets - January 31, 2003 and 2002 F-3
Consolidated Statements of Income - Years Ended
January 31, 2003, 2002, and 2001 F-4
Consolidated Statements of Stockholders' Equity - Years
Ended January 31, 2003, 2002, and 2001 F-5
Consolidated Statements of Cash Flows - Years Ended
January 31, 2003, 2002, and 2001 F-6
Notes to Consolidated Financial Statements F-8 to F-28
Financial Statement Schedules
II -Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, accordingly, are omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of G-III APPAREL GROUP, LTD.
We have audited the accompanying consolidated balance sheets of G-III Apparel
Group, Ltd. and subsidiaries as of January 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended January 31, 2003. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of G-III Apparel
Group, Ltd. and subsidiaries at January 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 20, 2003
F-2
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
(in thousands, except share and per share amounts)
2003 2002
ASSETS ----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 3,408 $ 2,481
Accounts receivable, net of allowance for doubtful
accounts and sales discounts of $7,711 and $6,169,
respectively 19,157 9,922
Inventories 30,948 37,172
Deferred income taxes 5,795 5,286
Prepaid expenses and other current assets 2,847 3,749
------- -------
Total current assets 62,155 58,610
PROPERTY, PLANT AND EQUIPMENT, NET 2,065 3,021
DEFERRED INCOME TAXES 2,181 1,954
OTHER ASSETS 4,555 4,116
------- -------
$70,956 $67,701
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 770 $ 800
Current maturities of obligations under capital leases 115 106
Income taxes payable 1,699 1,118
Accounts payable 5,699 5,079
Accrued expenses 6,612 5,367
------- -------
Total current liabilities 14,895 12,470
OTHER LONG-TERM LIABILITIES 313 418
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; 1,000,000 shares authorized; no shares
issued and outstanding in all periods
Common stock - $.01 par value; authorized, 20,000,000
shares; 7,120,644 and 6,944,071 shares issued at
January 31, 2003 and 2002, respectively 71 69
Additional paid-in capital 26,190 25,581
Foreign currency translation adjustments 36 94
Retained earnings 30,421 30,039
------- -------
56,718 55,783
Less common stock held in treasury -- 244,817 shares,
at cost, at January 31, 2003 and 2002 (970) (970)
------- -------
55,748 54,813
------- -------
$70,956 $67,701
======= =======
The accompanying notes are an integral part of these statements.
F-3
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year ended January 31,
-------------------------------------------
2003 2002 2001
------------- ------------- -----------
Net sales $ 202,651 $ 201,426 $187,057
Cost of goods sold 153,367 158,160 136,099
--------- --------- --------
Gross profit 49,284 43,266 50,958
Selling, general and administrative expenses 41,551 35,814 29,860
Unusual or non-recurring charge 3,556 -- (643)
--------- --------- --------
Operating profit 4,177 7,452 21,741
Interest and financing charges, net 1,907 3,577 2,839
--------- --------- --------
Income before minority interest and income taxes 2,270 3,875 18,902
Minority interest in income of joint venture -- -- (312)
--------- --------- --------
Income before income taxes 2,270 3,875 18,590
Income tax 1,888 1,511 7,436
--------- --------- --------
NET INCOME $ 382 $ 2,364 $ 11,154
========= ========= ========
INCOME PER COMMON SHARE:
Basic:
Net income per common share $ .06 $ .35 $ 1.70
========= ========= ========
Weighted average number of shares outstanding 6,764 6,676 6,562
========= ========= ========
Diluted:
Net income per common share $ .05 $ .32 $ 1.57
========= ========= ========
Weighted average number of shares outstanding 7,347 7,374 7,121
========= ========= ========
The accompanying notes are an integral part of these statements.
F-4
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended January 31, 2003, 2002, and 2001
(in thousands, except share amounts)
Foreign Common
Additional currency stock
Common paid-in translation Retained held in
stock capital adjustments earnings Treasury Total
-------- ------------ ------------- ---------- ---------- ----------
Balance as of January 31, 2000 $68 $24,874 $ (89) $16,521 $ (430) $40,944
Employee stock options exercised 1 240 241
Tax benefit from exercise of options 181 181
Purchase of 126,242 shares, at cost (540) (540)
Foreign currency translation
adjustment 162 162
Net income for the year 11,154 11,154
--- ------- ------ ------- ------- -------
Balance as of January 31, 2001 69 25,295 73 27,675 (970) 52,142
Employee stock options exercised 148 148
Tax benefit from exercise of options 138 138
Foreign currency translation
adjustment 21 21
Net income for the year 2,364 2,364
--- ------- ------ ------- ------- -------
Balance as of January 31, 2002 69 25,581 94 30,039 (970) 54,813
Employee stock options exercised 2 383 385
Tax benefit from exercise of options 226 226
Foreign currency translation
adjustment (58) (58)
Net income for the year 382 382
--- ------- ------ ------- ------- -------
BALANCE AS OF JANUARY 31, 2003 $71 $26,190 $ 36 $30,421 $ (970) $55,748
=== ======= ====== ======= ======= =======
The accompanying notes are an integral part of these statements.
F-5
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended January 31,
----------------------------------------
2003 2002 2001
----------- ----------- ------------
Cash flows from operating activities
Net income $ 382 $ 2,364 $ 11,154
-------- -------- ---------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 1,489 1,216 1,160
Write off property plant and equipment of closed
subsidiary 268
Write off goodwill relating to closed subsidiary 61
Minority interest 312
Deferred income tax benefit (736) (2,351) (213)
Changes in operating assets and liabilities
Accounts receivable (9,235) (2,636) 5,419
Inventories 6,224 5,278 (19,027)
Income taxes payable 581 (1,194) (562)
Tax benefit from exercise of options 226 138 181
Prepaid expenses and other current assets 902 (1,268) (1,587)
Other assets (138) (80) 1,783
Accounts payable and accrued expenses 1,865 (5,179) 3,688
Other long-term liabilities 10 (78) (62)
-------- -------- ---------
1,517 (6,154) (8,908)
-------- -------- ---------
Net cash provided by (used in) operating activities 1,899 (3,790) 2,246
-------- -------- ---------
Cash flows from investing activities
Capital expenditures (443) (1,167) (852)
Capital dispositions 32 90
Purchase of certain assets of Gloria Gay Coats, LLC (720) (1,523) (3,402)
-------- -------- ---------
Net cash used in investing activities (1,163) (2,658) (4,164)
-------- -------- ---------
F-6
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
YEAR ENDED JANUARY 31,
----------------------------------------
2003 2002 2001
---------- ----------- -------------
Cash flows from financing activities
Decrease in notes payable, net $ (30) $ (700) $ (1,811)
Proceeds from capital lease obligations 381
Payments for capital lease obligations (106) (152) (100)
Proceeds from exercise of stock options 385 148 241
Investment in joint venture by Minority Partner (1,333)
Purchase of common stock for Treasury (540)
------ -------- ---------
Net cash provided by (used in) financing activities 249 (323) (3,543)
------ -------- ---------
Effect of exchange rate charges on cash and cash
equivalents (58) 21 162
------ -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 927 (6,750) (5,299)
Cash and cash equivalents at beginning of year 2,481 9,231 14,530
------ -------- ---------
Cash and cash equivalents at end of year $3,408 $ 2,481 $ 9,231
====== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,645 $ 3,235 $ 2,780
Income taxes $1,779 $ 3,488 $ 8,050
The accompanying notes are an integral part of these statements.
F-7
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
1. Business Activity and Principles of Consolidation
As used in these financial statements, the term "Company" or "G-III"
refers to G-III Apparel Group, Ltd. and its majority-owned
subsidiaries. The Company designs, manufactures, imports, and markets
an extensive range of leather and textile apparel which is sold to
retailers throughout the United States. The Company also operates one
retail outlet store.
The Company consolidates the accounts of all its majority-owned
subsidiaries. The fiscal year-end for the Company's Indonesian
subsidiary is December 31, and is included in the Company's
consolidation as of that date. The effect of the intervening period on
the results for prior years is not significant to the financial results
of the Company. All material intercompany balances and transactions
have been eliminated.
References to fiscal years refer to the year ended or ending on
January 31 of that year.
Certain reclassifications have been made to conform to the fiscal 2003
presentation.
2. Revenue Recognition
The Company recognizes sales when merchandise is shipped. In addition,
the Company acts as an agent in brokering sales between its customers
and overseas factories. On these transactions, the Company recognizes
commission fee income on the sales that are financed by and shipped
directly to its customers. This income is recorded at the time the
merchandise is shipped.
3. Returns and Allowances
The Company establishes reserves for returns and allowances based on
current and historical information and trends. Sales and accounts
receivable have been reduced by such amounts.
F-8
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. Inventories
Inventories are stated at the lower of cost (determined by the weighted
average method, which approximates the first-in, first-out method) or
market.
5. Intangibles
In January 2001, the Company purchased the operations and certain
assets of Gloria Gay Coats, LLC for $3.4 million. Approximately $1.1
million of the purchase price was allocated to a license agreement
acquired in connection with this transaction. The Company was also
contractually obligated to make certain contingent payments if the
division reached certain performance criteria in each of the two years
ending January 31, 2003. Pursuant to the purchase agreement, additional
payments of $720,000 and $1.5 million were paid or accrued as of
January 31, 2003 and 2002, respectively. These additional payments were
also allocated to the license agreement. The $2.9 million aggregate net
intangible is included in other assets on the balance sheet and is
being amortized using the straight-line method through 2009, the
expected life of this license.
6. Depreciation and Amortization
Depreciation and amortization are provided by straight-line methods in
amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives.
The following are the estimated lives of the Company's fixed assets:
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 years
Computer equipment 2 to 5 years
Building 20 years
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
F-9
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. Impairment of Long-Lived Assets
The Company annually evaluates the carrying value of its long-lived
assets to determine whether changes have occurred that would suggest
that the carrying amount of such assets may not be recoverable based on
the estimated future undiscounted cash flows of the businesses to which
the assets relate. Any impairment loss would be equal to the amount by
which the carrying value of the assets exceeded its fair value.
8. Income Taxes
Deferred income tax assets reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
9. Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
10. Joint Ventures
China
In fiscal 1995, the Company entered into a joint venture agreement with
a Chinese entity principally to operate a factory located in the
People's Republic of China. The Company invested $542,000 to obtain a
39% interest in the joint venture company. The joint venture company
has an initial term of twenty years. The Company accounts for the joint
venture operations, which are not material, using the equity method of
accounting.
BET Design Studio
In 1997, the Company formed BET Design Studio, LLC, a joint venture
with Black Entertainment Television, Inc. ("BET"). The Company had a
50.1% ownership interest in the joint venture and included the results
of the joint venture less the share of the minority interest in its
consolidated financial statements. Through March 31, 2000, the Company
and BET had each contributed $3.8 million to the joint venture. In
November 1999, the Company and BET agreed to cease the operations of
the joint venture (see Note F). The joint venture was dissolved
effective as of January 31, 2001.
F-10
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. Net Income Per Common Share
Basic earnings per share amounts have been computed using the weighted
average number of common shares outstanding during each year. Diluted
earnings per share amounts have been computed using the weighted
average number of common shares and the dilutive potential common
shares outstanding during the year.
A reconciliation between basic and diluted earnings per share is as
follows:
Year ended January 31,
------------------------------------------------
2003 2002 2001
--------- -------- --------
(in thousands, except per share amounts)
Net income $ 382 $ 2,364 $11,154
======= ======= =======
Basic EPS:
Basic common shares 6,764 6,676 6,562
======= ======= =======
Basic EPS $ 0.06 $ 0.35 $ 1.70
======= ======= =======
Diluted EPS:
Basic common shares 6,764 6,676 6,562
Plus impact of stock options 583 698 559
------- ------- -------
Diluted common shares 7,347 7,374 7,121
======= ======= =======
Diluted EPS $ 0.05 $ 0.32 $ 1.57
======= ======= =======
Excluded from the above calculations are stock options for 45,000,
6,000, and 217,000 shares which were deemed to be antidilutive for the
years ended January 31, 2003, 2002, and 2001, respectively.
F-11
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
12. Stock-based Compensation
The Company grants stock options for a fixed number of shares to
employees and directors with an exercise price equal to or greater than
the fair value of the shares at the date of grant. The Company has
adopted the disclosure-only provision of Statements of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which permits the Company to account for stock option
grants in accordance with Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, the
Company recognizes no compensation expense for the stock option grants.
Pro forma disclosures, as required by SFAS No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure," are computed as
if the Company recorded compensation expense based on the fair value
for stock-based awards at grant date. The following pro forma
information includes the effects of these options:
Year ended January 31,
------------------------------------------
2003 2002 2001
------- -------- --------
(in thousands, except per share amounts)
Net income - as reported $ 382 $ 2,364 $ 11,154
Deduct: Stock-based employee compensation
expense determined under fair value method,
net of related tax effects 297 335 254
----- ------- --------
Pro forma net income $ 85 $ 2,029 $ 10,900
====== ======= ========
Earnings per share:
Basic - as reported $ .06 $ .35 $ 1.70
Basic - adjusted $ .01 $ .30 $ 1.66
Diluted - as reported $ .05 $ .32 $ 1.57
Diluted - adjusted $ .01 $ .28 $ 1.53
The effects of applying SFAS 123 on this pro forma disclosure may not
be indicative of future results. SFAS 123 does not apply to grants
prior to 1995, and additional awards in future years may or may not be
granted.
F-12
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
13. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
14. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the
Company's short-term debt approximates the carrying value. Furthermore,
the carrying value of all other financial instruments potentially
subject to valuation risk (principally consisting of cash, accounts
receivable and accounts payable) also approximates fair value.
15. Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
charged to expense were $5.5 million, $4.5 million, and $2.4 million in
fiscal 2003, 2002, and 2001, respectively.
F-13
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
16. Foreign Currency Translation
The financial statements of subsidiaries outside the United States,
other than Indonesia are measured using local currency as the
functional currency. Assets and liabilities are translated at the rates
of exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange. Gains and losses from
foreign currency transactions of these subsidiaries are included in net
earnings.
The financial statements of the Indonesian subsidiary use the U.S.
dollar as the functional currency and have certain transactions
denominated in a local currency which are remeasured as if the
functional currency were the U.S. dollar. The remeasurement of local
currencies into U.S. dollars creates translation adjustments which are
included in net income. Exchange gains and losses in fiscal 2003, 2002,
and 2001 resulting from foreign currency transactions, including those
resulting from foreign currency translation losses, have not been
significant and are included in the respective statements of income.
17. Effects of Recently Issued Accounting Pronouncements
Business Combination and Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the
new guidelines, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to
annual impairment tests in accordance with these statements. Other
intangible assets will continue to be amortized over their useful
lives. The Company adopted these pronouncements effective as of
February 1, 2002. Adoption of this Statement did not have a material
impact on the Company's consolidated results of operations and
financial position.
F-14
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
17. Effects of Recently Issued Accounting Pronouncements (continued)
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes
Statement No. 121. Although this Statement retains many of the
fundamental provisions of Statement No. 121, it expands the scope of
discontinued operations and significantly changes the criteria for
classifying an asset as held-for-sale. The provisions of this statement
are effective for fiscal years beginning after December 15, 2001. The
Company adopted this pronouncement effective as of February 1, 2002.
Adoption of this Statement did not have a material impact on the
Company's consolidated results of operations and financial position.
Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at
the date of a commitment to an exit or disposal plan. Examples of costs
covered by SFAS 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal
activity. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company is currently
evaluating the requirements and impact of SFAS 146 and does not expect
that the adoption of SFAS 146 will have a material effect on its
consolidated results of operations or financial position.
F-15
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE B - INVENTORIES
Inventories consist of:
January 31,
----------------------------
2003 2002
-------- ---------
----------(000's)-----------
Finished goods $ 21,285 $ 18,240
Work-in-process 208 576
Raw materials 9,455 18,356
-------- --------
$ 30,948 $ 37,172
======== ========
Raw materials of $8.7 million and $8.2 million were maintained in China
at January 31, 2003 and January 31, 2002, respectively. Raw materials
of $8.0 million were maintained in Indonesia at January 31, 2002. There
were no raw materials in Indonesia at January 31, 2003.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost consist of:
January 31,
----------------------------
2003 2002
-------- --------
----------(000's)-----------
Machinery and equipment $ 1,498 $ 1,732
Leasehold improvements 5,166 5,061
Furniture and fixtures 1,408 1,752
Computer equipment 5,514 5,288
Land and building 969 969
Property under capital leases (Note H)
Computer equipment 180 180
Leasehold improvements 200 200
------- -------
14,935 15,182
Less accumulated depreciation and
amortization (including $138,000
and $43,000 on property under
capital leases at January 31, 2003
and 2002, respectively) 12,870 12,161
------- -------
$ 2,065 $ 3,021
======= =======
F-16
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE D - NOTES PAYABLE
Notes payable include foreign notes payable by PT Balihides, the Company's
Indonesian subsidiary. The foreign notes payable represent maximum
borrowings under a line of credit of approximately $770,000 and $800,000
with an Indonesian bank, as of January 31, 2003 and 2002. The loan is
secured by the property, plant, and equipment of the subsidiary and is not
the obligation of any G-III entity other than PT Balihides.
The Company's domestic loan agreement, which expires on May 31, 2005, is a
collateralized working capital line of credit with six banks that provides
for an aggregate maximum line of credit in amounts that range from $45
million to $90 million at specific times during the year. The line of
credit provides for maximum direct borrowings ranging from $40 million to
$72 million during the year. The unused balance may be used for letters of
credit. Amounts available for borrowing are subject to borrowing base
formulas and overadvances specified in the agreement. The loan agreement
contains financial covenants relating to earnings before interest, taxes,
depreciation and amortization ("EBITDA") and tangible net worth. The
Company was not in compliance with the EBITDA covenant for the year ended
January 31, 2003. A waiver was received on March 18, 2003 regarding this
covenant. There was no loan balance outstanding at either January 31, 2003
or 2002 under this agreement. The line of credit includes a requirement
that the Company have no loans and acceptances outstanding for 45
consecutive days each year of the lending agreement. The Company met this
requirement.
All borrowings under the agreement bear interest at the option of the
Company at either the prevailing prime rate (4.25% at April 1, 2003) or
LIBOR plus 225 basis points (3.53% at April 1, 2003) and are collateralized
by the assets of the Company. The loan agreement requires the Company,
among other covenants, to maintain certain earnings and tangible net worth
levels, and prohibits the payment of cash dividends.
The weighted average interest rates for amounts borrowed under the domestic
loan agreement and the PT Balihides notes were 4.4% and 6.0% for the years
ended January 31, 2003 and 2002, respectively.
At January 31, 2003 and 2002, the Company was contingently liable under
letters of credit in the amount of approximately $3.7 million and $2.6
million, respectively.
F-17
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE E - OTHER LIABILITIES
Other long-term liabilities consist of:
January 31,
--------------------------------
2003 2002
-------- --------
-------------(000's)------------
Non-recurring charges $ -- $ 27
Capital lease obligations 88 203
Supplemental employee retirement plan 225 188
----- -----
$ 313 $ 418
===== =====
NOTE F - NON-RECURRING CHARGES
The status of the components of the nonrecurring charges was:
RESERVE AT
Initial Utilized in JANUARY 31,
charge fiscal 2003 2003
------- ----------- -----------
-----------------------(000's)-----------------------
Severance $ 2,050 $ 1,123 $ 927
Accrued expenses and other 1,040 470 570
Professional fees 435 15 420
Net write-off of Indonesian assets 385 385 -
Inventory valuation impairment 200 200 -
------- ------- -------
$ 4,110 $ 2,193 $ 1,917
======= ======= =======
In December 2002, the Company announced its decision to close its
manufacturing facility in Indonesia due to rapidly rising costs and losses
associated with this facility, as well as the political and economic
instability in Indonesia. The fiscal quarter and year ended January 31,
2003 include charges aggregating $4.1 million ($3.4 million on an after-tax
basis) in connection with this closedown. In the Company's Consolidated
Statements of Income, $3.6 million of these charges are included in
"Unusual or non-recurring charges" and $554,000 of these charges are
included in "Cost of goods sold".
F-18
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE F - NON-RECURRING CHARGES (CONTINUED)
In November 1999, the Company formulated a plan to cease operations of the
BET Design Studio joint venture. The joint venture generated approximately
$2.4 million in revenues and incurred losses of approximately $2.0 million
in the year ended January 31, 2000. In connection with the plan, the
Company charged $1.6 million to unusual and non-recurring charges in the
year ended January 31, 2000. Following the disposition of the remaining
assets and liabilities, the excess amount of $643,000 was credited to
unusual and non-recurring charges in the year ended January 31, 2001.
Based on current estimates, management believes that existing accruals are
adequate.
F-19
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE G - INCOME TAXES
The income tax provision is comprised of the following:
Year ended January 31,
---------------------------------------------------
2003 2002 2001
-------- -------- --------
----------------------(000's)----------------------
Current
Federal $ 1,402 $ 3,127 $ 5,993
State and city 462 519 1,230
Foreign 760 216 426
------- ------- --------
2,624 3,862 7,649
Deferred benefit (736) (2,351) (213)
------- ------- --------
$ 1,888 $ 1,511 $ 7,436
======= ======= ========
Income (loss) before income taxes
United States $ 2,691 $ 3,216 $ 16,881
Non-United States (421) 659 1,709
The significant components of the Company's deferred tax asset at January 31,
2003 and 2002 are summarized as follows:
2003 2002
-------- --------
------------(000's)-----------
Supplemental employee retirement plan $ 117 $ 116
Officer bonus 63 120
Provision for bad debts and sales allowances 2,716 2,066
Depreciation and amortization 1,755 1,578
Inventory write-downs 748 1,648
Advertising allowance 568 381
Sales return accrual 758 888
Straight-line lease 297 260
Accrued non-recurring charges 702 84
Other 252 99
------- -------
$ 7,976 $ 7,240
======= =======
F-20
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE G - INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal income tax rate
to the effective rate reported in the financial statements:
YEAR ENDED Year ended Year ended
JANUARY 31, 2003 January 31, 2002 January 31, 2001
------------------------ ------------------------ -----------------------
PERCENT Percent Percent
OF of of
AMOUNT INCOME Amount income Amount income
-------- -------- -------- -------- -------- --------
(000'S) (000's) (000's)
Provision for Federal income taxes at
the statutory rate $ 794 35.0% $ 1,356 35.0% $ 6,507 35.0%
State and city income taxes,
net of Federal income tax benefit 218 9.6 33 .9 774 4.2
Effect of foreign taxable operations 827 36.4 42 1.1 (236) (1.3)
Effect of permanent differences resulting in
Federal taxable income 51 2.2 45 1.2 21 .1
Other, net (2) - 35 .8 370 2.0
-------- ------- ------- ------- ------- -----
Actual provision for income taxes $ 1,888 83.2% $ 1,511 39.0% $ 7,436 40.0%
======== ======= ======= ======= ======= =====
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $1.9 million at January 31, 2003. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. income taxes
has been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries, as applicable.
F-21
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases warehousing, executive and sales facilities, and
transportation equipment under operating leases with options to renew at
varying terms. Leases with provisions for increasing rents have been
accounted for on a straight-line basis over the life of the lease.
In addition, certain equipment leases have been treated as capital leases.
The present values of minimum future obligations are calculated based on
interest rates at the inception of the leases. The following schedule sets
forth the future minimum rental payments for operating leases having
noncancellable lease periods in excess of one year and future minimum lease
payments under capital leases at January 31, 2003:
(in thousands) Operating Capital
Leases Leases
------ ------
Year ending January 31,
2004 $ 2,308 $ 122
2005 2,138 90
2006 1,329 5
2007 1,196 -
2008 1,406 -
Thereafter 4,655 -
-------- ------
Net minimum lease payments $ 13,032 217
========
Less amount representing interest 15
------
Present values of minimum lease payments $ 202
======
Current portion $ 114
Noncurrent portion 88
------
$ 202
======
Rent expense on the above operating leases (including the lease with 345
West - see Note K) for the years ended January 31, 2003, 2002, and 2001 was
approximately $2,246,000, $2,114,000, and $1,768,000, respectively, net of
sublease income of $190,000, $196,000, and $289,000, respectively.
F-22
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE H - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into license agreements that provide for royalty
payments from 3.5% to 12% of net sales of licensed products. The Company
incurred royalty expense (included in cost of goods sold) of approximately
$8,982,000, $6,855,000, and $4,858,000 for the years ended January 31,
2003, 2002, and 2001, respectively. Based on minimum sales requirements,
future minimum royalty payments required under these agreements are:
Year ending January 31, Amount
----------------------- ------
2004 $ 7,252,000
2005 5,860,000
2006 1,343,000
2007 690,000
-----------
$15,145,000
===========
The Company has an employment agreement with its chief executive officer
which expires on January 31, 2006. The agreement provides for a base salary
and bonus payments that vary between 3% and 6% of pretax income in excess
of $2 million.
NOTE I - STOCKHOLDERS' EQUITY
Certain agreements entered into by the Company in connection with the loan
by the Authority relating to the building located at 345 West 37th Street
in New York City and the bank agreements prohibit the payment of cash
dividends without consent.
Stock Options
The Company's stock plans authorize the granting of 1,880,000 options to
executive and key employees and 81,500 to directors of the Company. It is
the Company's policy to grant stock options at prices not less than the
fair market value on the date of the grant. Option terms, vesting and
exercise periods vary, except that the term of an option may not exceed ten
years.
F-23
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average fair value at date of grant for options granted during
2003, 2002 and 2001 was $4.21, $5.25, and $4.24 per option, respectively.
The fair value of each option at date of grant was estimated using the
Black-Scholes option pricing model. Such compensation calculation may not
be representative of the future effects of applying SFAS 123. The following
weighted average assumptions were used in the Black-Scholes option pricing
model for grants in 2003, 2002, and 2001, respectively:
2003 2002 2001
-------- -------- --------
Expected stock price volatility 61.3% 65.9% 72.9%
Expected lives of options
Directors and officers 7 YEARS 7 years 7 years
Employees 6 YEARS 6 years 6 years
Risk-free interest rate 3.6% 4.9% 6.0%
Expected dividend yield 0% 0% 0%
F-24
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding these option plans for 2003, 2002, and 2001 is as
follows:
2003 2002 2001
---------------------- ----------------------- -----------------------
WEIGHTED Weighted Weighted
AVERAGE average average
EXERCISE exercise exercise
SHARES PRICE Shares price Shares price
------- --------- --------- --------- --------- ---------
Options outstanding at
beginning of year 1,182,650 $3.33 1,243,250 $3.23 1,279,800 $2.97
Exercised (176,598) 2.18 (65,900) 2.25 (110,250) 2.17
Granted 240,000 6.88 11,000 7.82 81,000 6.07
Cancelled or forfeited (6,032) 4.61 (5,700) 4.31 (7,300) 3.59
--------- --------- ---------
Options outstanding at
end of year 1,240,020 $4.17 1,182,650 $3.33 1,243,250 $3.23
========= ========= =========
Exercisable 813,280 $3.45 875,440 $3.14 818,736 $2.98
========== ========= =========
The following table summarizes information about stock options outstanding:
Weighted Number
Number out- average Weighted exercisable Weighted
standing as of remaining average as of average
Range of January 31, contractual exercise January 31, exercise
exercise prices 2003 life price 2003 price
--------------- -------------- ----------- ----------- ------------ -------
$1.62 - $3.00 555,932 4.1 years $2.30 461,196 $2.30
$3.01 - $6.00 342,088 4.8 years $4.62 296,684 $4.67
$6.01 - $9.55 342,000 8.6 years $6.76 55,400 $6.45
--------- -------
1,240,020 813,280
========= =======
Included in the above outstanding options as of January 31, 2003, 2002, and
2001 are 25,000 options with an exercise price of $6.50 and 25,000 options
with an exercise price of $5.50 for which the fair value at the date of
grant was $3.75. All other options were issued at an amount equal to the
fair market value at the date of grant.
F-25
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE J - MAJOR CUSTOMERS
For the years ended January 31, 2003, 2002, and 2001, one customer
accounted for 21.0%, 21.1%, and 21.1%, respectively, of the Company's net
sales, primarily for purchases of non-licensed apparel.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimate.
NOTE K - RELATED PARTY TRANSACTIONS
In April 1988, 345 West 37th Corp. ("345 West"), a property owned by two
principal stockholders, received a loan from the New York Job Development
Authority ("Authority") to assist 345 West in its renovation of the 345
West property. The loan is for a period of 15 years and is repayable in
monthly installments of $11,000, which includes interest at 8.25%. The loan
is financed by long-term bonds issued by the Authority. G-III and the two
principal stockholders of the Company have signed corporate and personal
guarantees for this loan. The outstanding principal of this debt was
approximately $33,000 and $159,000 as of January 31, 2003 and 2002,
respectively. The final payment under this loan was made in April, 2003.
During the years ended January 31, 2003, 2002, and 2001, G-III leased space
from 345 West. Operating expenses paid by G-III to 345 West during the
years ended January 31, 2003, 2002, and 2001, amounted to approximately
$161,000, $202,000, and $233,000, respectively.
An executive of the Company owns an approximate 5% equity interest on a
fully diluted basis in Wilsons the Leather Experts Inc. ("Wilsons"), a
customer of the Company. In addition, an outside director of the Company
owns an approximate 5% indirect equity interest on a fully diluted basis of
Wilsons. During the years ended January 31, 2003, 2002 and 2001, Wilsons
accounted for approximately $8,679,000, $11,590,000, and $13,121,000,
respectively, of the Company's net sales. Accounts receivable from Wilsons
at January 31, 2003 were approximately $213,000.
NOTE L - PENSION PLANS
The Company maintains a 401(k) profit-sharing plan and trust for nonunion
employees. At the discretion of the Company, the Company currently matches
50% of employee contributions up to 3% of the participant's compensation.
The Company's matching contributions amounted to approximately $186,000,
$200,000, and $157,000, for the years ended January 31, 2003, 2002, and
2001, respectively.
F-26
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE M - SEGMENTS
The Company's reportable segments are business units that offer different
products and are managed separately. The company operates in two segments,
licensed and non-licensed apparel. The following information is presented
for the fiscal years indicated below:
2003 2002 2001
-------------------- -------------------- -------------------
NON- Non- Non-
LICENSED LICENSED Licensed Licensed Licensed Licensed
-------- -------- -------- -------- -------- --------
Net sales $106,902 $ 95,749 $ 85,977 $115,449 $ 70,855 $116,202
Cost of goods sold 78,507 74,860 65,479 92,681 49,738 86,361
-------- -------- -------- -------- -------- --------
Gross profit 28,395 20,889 20,498 22,768 21,117 29,841
Selling, general and
administrative 24,808 16,743 19,510 16,304 13,687 16,173
Unusual or non-recurring charge 3,556 (643)
-------- -------- -------- -------- -------- --------
Operating profit 3,587 590 988 6,464 7,430 14,311
Interest and financing charges, net 886 1,021 1,792 1,785 1,150 1,689
-------- -------- -------- -------- -------- --------
Income (loss) before minority
interest and income taxes 2,701 (431) (804) 4,679 6,280 12,622
Minority interest in income of
joint venture (312)
-------- -------- -------- -------- -------- --------
Income (loss) before income
Taxes $ 2,701 $ (431) $ (804) $ 4,679 $ 6,280 $ 12,310
======== ======== ======== ======== ======== ========
Commission fee income was $3.3 million, $3.2 million, and $6.2 million for
fiscal 2003, 2002, and 2001, respectively. This fee income is included in
non-licensed net sales and gross profit. The Company allocates all expenses
to its two reportable segments.
2003 2002 2001
-------------------------- ------------------------- ----------------------
LONG-LIVED Long-Lived Long-Lived
REVENUES ASSETS Revenues Assets Revenues Assets
-------- ------ -------- ------ -------- ------
Geographic region
United States $200,205 $ 6,799 $194,921 $ 6,836 $181,215 $ 4,671
Non-United States 2,446 1,352 6,505 2,255 5,842 2,329
--------- -------- --------- ------- --------- --------
$202,651 $ 8,151 $201,426 $ 9,091 $187,057 $ 7,000
========= ======== ========= ======= ========= ========
F-27
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2003, 2002, and 2001
NOTE M - SEGMENTS (CONTINUED)
Included in finished goods inventory at January 31, 2003, 2002, and 2001
are $10.4 million and $10.6 million, $9.3 million and $8.9 million, and
$8.6 million and $9.0 million, respectively, of inventories for licensed
and non-licensed apparel, respectively. All other assets are commingled.
NOTE N - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data in thousands, except per share numbers,
for the fiscal years ended January 31, 2003 and 2002 are as follows:
Quarter ended
--------------------------------------------------------------
April 30, July 31, October 31, January 31,
2002 2002 2002 2003
--------- --------- ------------ -----------
January 31, 2003
Net sales $ 12,691 $ 40,022 $102,284 $ 47,654
Gross profit 903 10,813 27,960 9,608
Net income (loss) (4,169) 576 8,495 (4,520)(a)
Net income (loss) per common share
Basic $ (0.62) $ 0.09 $ 1.25 $ (0.66)(a)
Diluted (0.62) 0.08 1.16 (0.66)(a)
Quarter ended
--------------------------------------------------------------
April 30, July 31, October 31, January 31,
2001 2001 2001 2002
--------- --------- ------------ --------
January 31, 2002
Net sales $ 17,167 $ 62,913 $ 90,623 $ 30,723
Gross profit 2,950 16,615 20,718 2,983
Net income (loss) (2,892) 3,885 5,033 (3,662)
Net income (loss) per common share
Basic $ (0.44) $ 0.58 $ 0.75 $ (0.55)
Diluted (0.44) 0.52 0.68 (0.55)
(a) Includes a charge of $3.4 million, net of tax, or $0.50 per diluted share,
associated with expenses related to closing the Company's manufacturing
facility in Indonesia.
F-28
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
---------- ---------- ---------- ---------- ----------
Additions
-------------------------
(1) (2)
Balance at Charged to Charged Balance at
beginning costs and to other Deductions end of
Description of period expenses accounts (a) period
------------- ------------ ------------ ---------- ------------ -----------
Year ended January 31, 2003
Deducted from asset accounts
Allowance for doubtful accounts $ 614 $ 902 $ 204 $1,312
Allowance for sales discounts 5,555 5,303 4,459 6,399
------ ------ ------ ------
$6,169 $6,205 $4,663 $7,711
====== ====== ====== ======
Year ended January 31, 2002
Deducted from asset accounts
Allowance for doubtful accounts $ 466 $ 234 $ 86 $ 614
Allowance for sales discounts 3,776 6,370 4,591 5,555
------ ------ ------ ------
$4,242 $6,604 $4,677 $6,169
====== ====== ====== ======
Year ended January 31, 2001
Deducted from asset accounts
Allowance for doubtful accounts $ 806 $ 30 $ 370 $ 466
Allowance for sales discounts 3,086 4,937 4,247 3,776
------ ------ ------ ------
$3,892 $4,967 $4,617 $4,242
====== ====== ====== ======
(a) Accounts written off as uncollectible, net of recoveries.
S-1