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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended October 31, 2003
------------------------------
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.
(Exact name of registrant as specified in its charter)
Delaware 41-1590959
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
512 Seventh Avenue, New York, New York 10018
---------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 403-0500
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 checkmark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
Yes No X
--------- ------
As of December 1, 2003, there were 6,941,397 common shares outstanding.
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
October 31, 2003 and January 31, 2003..........................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended October 31, 2003 and 2002...........4
Condensed Consolidated Statements of Operations -
For the Nine Months Ended October 31, 2003 and 2002............5
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended October 31, 2003 and 2002............6
Notes to Condensed Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........15
Item 4. Controls and Procedures...........................................15
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................17
Exhibits
31 - Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(a)/15d-14(a).
32 - Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
-2-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
OCTOBER 31, JANUARY 31,
2003 2003
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,660 $ 3,408
Accounts receivable, net of allowance for doubtful accounts
and sales discounts of $10,042 and $7,711, respectively 87,794 19,157
Inventories 40,498 30,948
Deferred income taxes 5,795 5,795
Prepaid expenses and other current assets 2,300 2,847
---------- ----------
Total current assets 138,047 62,155
PROPERTY, PLANT AND EQUIPMENT, NET 1,948 2,065
DEFERRED INCOME TAXES 2,181 2,181
OTHER ASSETS 4,376 4,555
---------- ----------
$ 146,552 $ 70,956
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 43,418 $ 770
Current maturities of obligations under capital leases 96 115
Accounts payable 15,965 5,699
Accrued expenses 9,649 6,612
Income taxes payable 9,791 1,699
---------- ----------
Total current liabilities 78,919 14,895
LONG-TERM LIABILITIES 246 313
---------- ----------
Total liabilities 79,165 15,208
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.01 par value; authorized, 20,000,000 shares; 7,166,214 and
7,120,644 shares issued
at October 31, 2003 and January 31, 2003, respectively 72 71
Additional paid-in capital 26,340 26,190
Foreign currency translation adjustments 53 36
Retained earnings 41,892 30,421
---------- ----------
68,357 56,718
Less common stock held in treasury - 244,817 shares,
at cost (970) (970)
---------- ----------
67,387 55,748
---------- ----------
$ 146,552 $ 70,956
========== ==========
The accompanying notes are an integral part of these statements.
-3-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
THREE MONTHS ENDED OCTOBER 31,
------------------------------
(Unaudited)
2003 2002
---- ----
Net sales $ 125,547 $ 102,284
Cost of goods sold 88,208 74,324
--------- ---------
Gross profit 37,339 27,960
Selling, general and administrative expenses 16,785 13,181
--------- ---------
Operating income 20,554 14,779
Interest and financing charges, net 583 853
--------- ---------
Income before income taxes 19,971 13,926
Income tax expense 8,591 5,431
--------- ---------
Net income $ 11,380 $ 8,495
========= =========
INCOME PER COMMON SHARE:
Basic:
-----
Net income per common share $ 1.65 $1.25
========= =========
Weighted average number of shares outstanding 6,899,577 6,778,757
========= =========
Diluted:
-------
Net income per common share $1.50 $1.16
========= =========
Weighted average number of shares outstanding 7,571,172 7,292,321
========= =========
The accompanying notes are an integral part of these statements.
-4-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
(Unaudited)
2003 2002
---- ----
Net sales $ 189,558 $ 154,997
Cost of goods sold 132,184 115,321
--------- ---------
Gross profit 57,374 39,676
Selling, general and administrative expenses 36,388 30,148
--------- ---------
Operating income 20,986 9,528
Interest and financing charges, net 861 1,374
--------- ---------
Income before income taxes 20,125 8,154
--------- ---------
Income tax expense 8,654 3,252
--------- ---------
Net income $ 11,471 $ 4,902
========= =========
INCOME PER COMMON SHARE:
Basic:
-----
Net income per common share $1.67 $0.73
========= =========
Weighted average number of shares outstanding 6,885,211 6,732,107
========= =========
Diluted:
-------
Net income per common share $1.54 $0.67
========= =========
Weighted average number of shares outstanding 7,428,187 7,350,505
========= =========
The accompanying notes are an integral part of these statements.
-5-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
(Unaudited)
-----------
2003 2002
---- ----
Cash flows from operating activities
Net income $ 11,471 $ 4,902
---------- ---------
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization 960 1,109
Deferred income tax - 22
Changes in operating assets and liabilities:
Accounts receivable (68,637) (60,031)
Inventories (9,550) (10,061)
Income taxes, net 8,092 2,075
Prepaid expenses and other current assets 547 (93)
Other assets (185) (178)
Accounts payable and accrued expenses 13,303 11,856
Other long term liabilities - 49
---------- ---------
(55,470) (55,252)
---------- ---------
Net cash used in operating activities (43,999) (50,350)
---------- ---------
Cash flows from investing activities
Capital expenditures (479) (356)
Purchase of certain assets of Gloria Gay Coats, LLC - 19
---------- ---------
Net cash used in investing activities
(479) (337)
---------- ---------
Cash flows from financing activities
Increase in notes payable, net 42,648 48,929
Payments for capital lease obligations (86) (79)
Proceeds from exercise of stock options 151 333
---------- ---------
Net cash provided by financing activities
42,713 49,183
---------- ---------
Effect of exchange rate changes on cash and cash equivalents 17 -
---------- ---------
Net decrease in cash and cash equivalents (1,748) (1,504)
Cash and cash equivalents at beginning of period 3,408 2,481
---------- ---------
Cash and cash equivalents at end of period $ 1,660 $ 977
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 825 $ 1,069
Income taxes $ 542 $ 1,160
The accompanying notes are an integral part of these statements.
-6-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General Discussion
As used in these financial statements, the term "Company" refers to G-III
Apparel Group, Ltd. and its majority-owned subsidiaries. The results for the
nine month period ended October 31, 2003 are not necessarily indicative of the
results expected for the entire fiscal year, given the seasonal nature of the
Company's business. The accompanying financial statements included herein are
unaudited. In the opinion of management, all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods presented
have been reflected.
The Company consolidates the accounts of all its majority-owned subsidiaries.
All material intercompany balances and transactions have been eliminated.
The balance sheet at January 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission for the year ended
January 31, 2003.
Note 2 - Inventories
Inventories consist of:
OCTOBER 31, January 31,
2003 2003
---- ----
(in thousands)
Finished goods $ 33,944 $ 21,285
Work-in-process 815 208
Raw materials 5,739 9,455
-------- --------
$ 40,498 $ 30,948
======== ========
-7-
Note 3 - Net Income per Common Share
Basic net income per share amounts have been computed using the weighted average
number of common shares outstanding during each period. Diluted income per share
amounts have been computed using the weighted average number of common shares
and the dilutive potential common shares, consisting of stock options,
outstanding during the period. Options to acquire an aggregate of approximately
5,000 and 62,000 shares of common stock were not included in the computation of
diluted earnings per common share for the three and nine months ended October
31, 2003 as including them would have been anti-dilutive. Options to acquire an
aggregate of approximately 153,000 and 41,000 shares of common stock were not
included in the computation of diluted earnings per common share for the three
and nine months ended October 31, 2002, as including them would have been
anti-dilutive.
Note 4 - 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 stock options granted to
employees and directors.
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:
Three Months ended October 31, Nine Months ended October 31,
------------------------------ -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share amounts)
Net income - as reported $ 11,380 $ 8,495 $ 11,471 $ 4,902
Deduct: Stock-based employee compensation
expense determined under fair value
method, net of related tax effects
78 77 229 208
--------- -------- -------- --------
Pro forma net income $ 11,302 $ 8,418 $ 11,242 $ 4,694
========= ======== ======== ========
Basic income per share - as reported $ 1.65 $ 1.25 $ 1.67 $ 0.73
Pro-forma basic income per share $ 1.64 $ 1.24 $ 1.63 $ 0.70
Diluted income per share - as reported $ 1.50 $ 1.16 $ 1.54 $ 0.67
Pro-forma diluted income per share $ 1.49 $ 1.15 $ 1.51 $ 0.64
The effects of applying SFAS 123 on this pro forma disclosure may not be indicative of future results.
-8-
Note 5 - Notes Payable
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 a
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 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. There was $42.6 million outstanding at October 31, 2003 and no
balance outstanding at January 31, 2003 under this agreement.
Notes payable include foreign notes payable by PT Balihides, the Company's
Indonesian subsidiary. The foreign notes payable of approximately $770,000 at
October 31, 2003 and January 31, 2003 represent borrowings by PT Balihides under
a line of credit with an Indonesian bank. The loan is secured by the property,
plant, and equipment of the subsidiary. No other Company entity has guaranteed
this loan.
Note 6 - Nonrecurring Charges
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 year ended January 31, 2003 included charges aggregating $4.1 million ($3.4
million on an after-tax basis) in connection with this closedown.
The components of the nonrecurring charges are as follows:
RESERVE
Reserve OCTOBER 31,
January 31, 2003 Utilized 2003
---------------- -------- -------
-----------------(in thousands)-------------
Severance $ 927 $ 846 $ 81
Accrued expenses and other 570 115 455
Professional fees 420 420 -
------ ------ ------
$ 1,917 $ 1,381 $ 536
====== ====== ======
-9-
Note 7 - 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 three and nine month periods indicated below:
THREE MONTHS ENDED OCTOBER 31,
------------------------------
2003 2002
---- ----
NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $ 96,387 $ 29,160 $ 51,681 $ 50,603
Cost of goods sold 67,721 20,487 37,041 37,283
-------- -------- -------- --------
Gross profit 28,666 8,673 14,640 13,320
Selling, general and administrative 13,070 3,715 7,992 5,189
-------- -------- -------- --------
Operating income 15,596 4,958 6,648 8,131
Interest expense, net 378 205 466 387
-------- -------- -------- --------
Income before income taxes $ 15,218 $ 4,753 $ 6,182 $ 7,744
======== ======== ======== ========
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
2003 2002
---- ----
NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $146,174 $ 43,384 $ 77,449 $ 77,548
Cost of goods sold 101,454 30,730 56,468 58,853
-------- -------- -------- --------
Gross profit 44,720 12,654 20,981 18,695
Selling, general and administrative 27,730 8,658 17,851 12,297
-------- -------- -------- --------
Operating income 16,990 3,996 3,130 6,398
Interest expense, net 543 318 625 749
-------- -------- -------- --------
Income before income taxes $ 16,447 $ 3,678 $ 2,505 $ 5,649
======== ======== ======== ========
-10-
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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.
Statements in this Quarterly Report on Form 10-Q 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 matter, 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 the
Company's filings with the Securities and Exchange Commission, including this
Quarterly Report on Form 10-Q.
Results of Operations
Three months ended October 31, 2003 compared to three months ended October 31,
2002
Net sales for the three months ended October 31, 2003 increased 22.7% to $125.5
million from $102.3 million for the same period last year. The increase in net
sales during the quarter was attributable to a $44.7 million increase in sales
of licensed apparel, partially offset by a $21.4 million decrease in sales of
non-licensed apparel. Sales of licensed apparel increased to 76.8% of our net
sales in the three months ended October 31, 2003 from 50.5% of our net sales in
the comparable period last year. The increase in net sales of licensed apparel
was primarily the result of increased sales of our sports apparel ($18.8
million) and sales generated by new licenses ($16.4 million). The decrease in
net sales of non-licensed apparel was primarily the result of a decrease in
sales of our women's and men's leather outerwear. Net sales of non-licensed
apparel was also affected by the loss of approximately $2.8 million of sales to
foreign customers that had been directly serviced by our Indonesian facility
that we closed in the fourth quarter of fiscal 2003.
Gross profit increased 33.5% to $37.3 million, or 29.7% of net sales, for the
three months ended October 31, 2003 compared to $28.0 million, or 27.3% of net
sales, for the same period last year. The increase in our gross profit
percentage for the three month period ended October 31, 2003 was a result of the
higher gross margins for our sports apparel product compared to our other
divisions. Commission fee income, substantially all of which is generated in the
non-licensed apparel segment, was $2.5 million during the three months ended
October 31, 2003 and $2.4 million in the comparable period of the prior year.
There is no cost of goods sold component associated with commission
transactions. As a result, the gross profit percentage of our non-licensed
segment was favorably impacted in the three months ended October 31, 2003
because commission fee income constituted a higher percentage of sales in this
year's period compared to last year's period.
-11-
Selling, general and administrative expenses for the three months ended October
31, 2003 were $16.8 million compared to $13.2 million in the three months ended
October 31, 2002. This increase primarily resulted from increased expenses in
connection with the expansion of our sports apparel business. Personnel expenses
were $6.0 million, an increase of approximately $1.2 million compared to the
same period last year, reflecting an increase in the number of employees to
support the higher level of business. Facilities expense rose $1.0 million over
the same period last year to $3.2 million as we increased our utilization of
outside warehouses to accommodate our higher sales volumes. Our sports apparel
products are primarily sold to retailers by outside sales representatives who
earn a commission on sales. Sales commissions of $1.4 million for the three
month period, primarily from sales of sports apparel, represent an increase of
approximately $636,000 compared to the same period last year.
Interest expense and finance charges for the three months ended October 31, 2003
were $583,000 compared to $853,000 in the same period last year. The decrease in
interest expense in the three month period resulted primarily from lower average
debt levels as a result of carrying less inventory combined with lower interest
rates.
Income tax expense was $8.6 million for the three months ended October 31, 2003
compared to $5.4 million in the same period in the prior year. Our effective tax
rate was 43% in the three months ended October 31, 2003 compared to 39% for the
three month period ended October 31, 2002. The tax rate in the period ended
October 31, 2003 reflected increased state and local income taxes.
As a result of the foregoing, for the three months ended October 31, 2003, we
had net income of $11.4 million, or $1.50 per diluted share, compared to $8.5
million, or $1.16 per diluted share, for the same period in the prior year.
Nine months ended October 31, 2003 compared to nine months ended October 31,
2002
Net sales for the nine months ended October 31, 2003 increased 22.3% to $189.6
million from $155.0 million for the same period in the prior year. The increase
in net sales in the nine month period ended October 31, 2003 was attributable to
a $68.7 million increase in sales of licensed apparel partially offset by a
$34.2 million decrease in sales of non-licensed apparel. Sales of licensed
apparel increased to 77.1% of our net sales in the nine months ended October 31,
2003 from 50.0% of our net sales in the comparable period last year. The
increase in the net sales of licensed apparel was primarily the result of
increased sales of our sports apparel ($39.6 million) and sales generated by new
licenses ($19.3 million). The decrease in net sales of non-licensed apparel was
primarily the result of a decrease in sales of our women's and men's leather
outerwear. Net sales of non-licensed apparel was also affected by the loss of
approximately $4.6 million of sales to foreign customers that had been directly
serviced by our Indonesian facility that we closed in the fourth quarter of
fiscal 2003.
-12-
Gross profit increased 44.6% to $57.4 million, or 30.3% of net sales, for the
nine months ended October 31, 2003 compared to $39.7 million, or 25.6% of net
sales, for the same period last year. The increase in our gross profit
percentage for the nine month period ended October 31, 2003 was a result of
higher gross margins from our sports apparel product compared to our other
divisions. Commission fee income, substantially all of which is generated in the
non-licensed apparel segment, increased to $4.1 million during the nine months
ended October 31, 2003 from $3.3 million in the comparable period of the prior
year. The gross profit percentage in the nine months ended October 31, 2003 was
also favorably impacted by the reversal in the second quarter of fiscal 2004 in
the amount of $1.2 million of reserves for chargebacks and future anticipated
customer deductions. The gross profit percentage in the nine months ended
October 31, 2002 was favorably impacted by the reversal in the second quarter of
fiscal 2003 in the amount of $1.1 million in our inventory reserves.
Selling, general and administrative expenses for the nine months ended October
31, 2003 were $36.4 million compared to $30.1 million for the same period last
year. This increase primarily resulted from increased expenses in connection
with the expansion of our sports apparel business. Personnel expenses were $15.0
million, an increase of approximately $2.1 million compared to the same period
last year, reflecting an increase in the number of employees to support the
higher level of business. Sales commissions, primarily from sales of sports
apparel, were $2.6 million for the nine month period, an increase of
approximately $1.7 million compared to the same period last year. The other
major component of the increase in selling, general and administrative expenses
was a $1.5 million increase in facilities expense as we increased our
utilization of outside warehouses to accommodate our increased sales volume.
Interest expense and finance charges for the nine month period ended October 31,
2003 were $861,000 compared to $1.4 million in the same period last year. The
decrease in interest expense in the nine month period resulted primarily from
lower average debt levels as a result the transition to more third-party
sourcing due to the closing of our plant in Indonesia in the fourth quarter last
year.
Income tax expense was $8.7 million for the nine months ended October 31, 2003
compared to $3.3 million in the same period last year. Our effective tax rate
was 43.0% in the nine month period ended October 31, 2003 compared to 39.9% in
the same period last year. The tax rate in the period ended October 31, 2003
reflects increased state and local income taxes.
As a result of the foregoing, for the nine months ended October 31, 2003, we had
net income of $11.5 million, or $1.54 per diluted share, compared to $4.9
million, or $0.67 per diluted share, for the same period in the prior year.
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 a 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 also
includes a requirement that we have no loans outstanding for 45 consecutive days
during each year of the agreement.
-13-
Direct borrowings under the line of credit bear interest at our option at either
the prevailing prime rate (4.0% as of December 1, 2003) or LIBOR plus 225 basis
points (3.4% at December 1, 2003). Our assets collateralize all borrowings. 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 in compliance with all covenants as of October 31, 2003.
The amount borrowed under the line of credit varies based on our seasonal
requirements. As of October 31, 2003, there were direct borrowings of $42.6
million and open letters of credit in the amount of approximately $7.4 million
compared to direct borrowings of $48.9 million and open letters of credit of
approximately $8.5 million as of October 31, 2002. Our reduced borrowings are
primarily a result of our positive operating results. In addition, our inventory
levels are lower as a result of the transition to more third-party sourcing due
to the closing of our plant in Indonesia in the fourth quarter of fiscal 2003,
as well as lower finished product inventories resulting from our efforts to
produce and receive goods closer to scheduled shipments.
PT Balihides, our Indonesian subsidiary, had a separate credit facility with an
Indonesian bank. There were notes payable outstanding under this facility of
approximately $770,000 as of October 31, 2003 and 2002. The loan is secured by
the property, plant, and equipment of the subsidiary. No other G-III entity has
guaranteed this loan. In December 2002, we closed the manufacturing facility
operated by this subsidiary.
CRITICAL ACCOUNTING POLICIES
Our discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that investors need to
be aware of these policies and how they impact our financial statements as a
whole, as well as our related discussion and analysis presented herein. While we
believe that these accounting policies are based on sound measurement criteria,
actual future events can and often do result in outcomes that can be materially
different from these estimates or forecasts. The accounting policies and related
risks described in our Annual Report on Form 10-K for the year ended January 31,
2003 are those that depend most heavily on these judgments and estimates. As of
October 31, 2003, there have been no material changes to any of these critical
accounting policies.
-14-
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 requires an investor with a majority of the variable interests
(primary beneficiary) in a variable interest entity ("VIE") to consolidate the
entity and also requires majority and significant variable interest investors to
provide certain disclosures. A VIE is an entity in which the voting equity
investors do not have a controlling interest, or the equity investment at risk
is insufficient to finance the entity's activities without receiving additional
subordinated financial support from other parties. The provisions of FIN 46 were
effective immediately for all arrangements entered into with new VIEs created
after January 31, 2003. For arrangements entered into with VIE's created prior
to January 31, 2003, the provisions of FIN 46 were required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
In October 2003, the FASB deferred the effective date of FIN 46 to the first
interim or annual period ending after December 31, 2003 for those arrangements
entered into prior to February 1, 2003. We do not believe that the adoption of
this statement will have a material effect on our financial position or results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material changes to the disclosure made with respect to these
matters in the Company's Annual Report on Form 10-K for the year ended January
31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
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 as of the end
of the period covered by this report. Based on that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, 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 changes in the Company's internal control over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) EXHIBITS
31 - Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32 - Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
G-III APPAREL GROUP, LTD.
(Registrant)
Date: December 15, 2003 By: /s/ Morris Goldfarb
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Morris Goldfarb
Chief Executive Officer
Date: December 15, 2003 By: /s/ Wayne Miller
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Wayne S. Miller
Chief Financial Officer