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FORM 10-Q
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 April 30, 2004
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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.
(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
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(Address of Principal Executive Offices) (Zip Code)
(212) 403-0500
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(Registrant's telephone number, including area code)
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(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
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Indicate by checkmark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
Yes No X
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As of June 1, 2004 there were 7,157,798 common shares outstanding.
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
April 30, 2004 and January 31, 2004...........................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended April 30, 2004 and 2003............4
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended April 30, 2004 and 2003............5
Notes to Condensed Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........11
Item 4. Controls and Procedures..............................................12
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................12
Exhibits:
31.1 Certification by Morris Goldfarb, Chief Executive Officer of
G-III Apparel Group, Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, in connection with G-III Apparel Group, Ltd.'s Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2004.
31.2 Certification by Wayne S. Miller, Chief Financial Officer of
G-III Apparel Group, Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, in connection with G-III Apparel Group, Ltd.'s Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2004.
32.1 Certification by Morris Goldfarb, Chief Executive Officer of
G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection
with G-III Apparel Group, Ltd.'s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 2004.
32.2 Certification by Wayne S. Miller, Chief Financial Officer of
G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection
with G-III Apparel Group, Ltd.'s Quarterly Report on Form 10-Q for the
quarter ended April 30, 2004.
-2-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
APRIL 30, JANUARY 31,
2004 2004
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,731 $ 16,072
Accounts receivable, net of allowance for doubtful accounts
and sales discounts of $5,647 and $8,922, respectively 10,155 19,304
Inventories, net 26,588 28,361
Income taxes receivable 2,382 -
Deferred income taxes 5,895 5,895
Prepaid expenses and other current assets 4,783 2,928
-------- -------
Total current assets 65,534 72,560
PROPERTY, PLANT AND EQUIPMENT, NET 1,842 1,969
DEFERRED INCOME TAXES 1,940 1,940
OTHER ASSETS 4,059 4,227
-------- --------
$ 73,375 $ 80,696
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 770 $ 770
Current maturities of obligations under capital leases 52 82
Income taxes payable - 1,659
Accounts payable 7,351 6,155
Accrued expenses 4,179 6,506
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Total current liabilities 12,352 15,172
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LONG-TERM LIABILITIES 247 252
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STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.01 par value; 20,000,000 shares
authorized; 7,402,615 and 7,347,815 shares issued 74 73
Additional paid-in capital 27,651 27,325
Accumulated other comprehensive income 51 47
Retained earnings 33,970 38,797
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61,746 66,242
Treasury stock - 244,817 shares at cost (970) (970)
-------- -------
60,776 65,272
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$ 73,375 $ 80,696
======== =======
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 APRIL 30,
----------------------------
(Unaudited)
2004 2003
---- ----
Net sales $ 16,521 $ 18,712
Cost of goods sold 14,759 14,358
-------- --------
Gross profit 1,762 4,354
Selling, general and administrative expenses 10,157 8,759
-------- --------
Operating loss (8,395) (4,405)
Interest and financing charges, net 73 48
-------- --------
Loss before income tax benefit (8,468) (4,453)
Income tax benefit (3,641) (1,826)
-------- --------
Net loss $ (4,827) $ (2,627)
========= ========
LOSS PER COMMON SHARE:
Basic and Diluted:
- -----------------
Net loss per common share $ (0.68) $ (0.38)
========= =========
Weighted average number of shares outstanding 7,118,871 6,875,830
========= =========
The accompanying notes are an integral part of these statements.
-4-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED APRIL 30,
----------------------------
(Unaudited)
-----------
2004 2003
---- ----
Cash flows from operating activities
Net loss $ (4,827) $ (2,627)
--------- ---------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities
Depreciation and amortization 312 322
Changes in operating assets and liabilities:
Accounts receivable 9,149 7,389
Inventories, net 1,773 (253)
Income taxes, net (4,041) (2,352)
Prepaid expenses and other current assets (1,855) (1,121)
Other assets 47 (35)
Accounts payable and accrued expenses (1,131) (964)
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4,254 2,986
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Net cash (used in) provided by operating activities (573) 359
--------- ---------
Cash flows from investing activities
Capital expenditures (64) (223)
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Net cash used in investing activities (64) (223)
--------- ---------
Cash flows from financing activities
Payments for capital lease obligations (35) (28)
Proceeds from exercise of stock options 327 1
--------- ---------
Net cash provided by (used in) financing activities 292 (27)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 4 20
--------- ---------
Net (decrease) increase in cash and cash equivalents (341) 129
Cash and cash equivalents at beginning of period 16,072 3,408
--------- ---------
Cash and cash equivalents at end of period $ 15,731 $ 3,537
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net $ 179 $ 236
Income taxes, net $ 385 $ 506
The accompanying notes are an integral part of these statements.
-5-
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
three month period ended April 30, 2004 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 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, 2004.
Note 2 - Inventories
- --------------------
Inventories consist of:
APRIL 30, January 31,
2004 2004
---- ----
(in thousands)
Finished goods $ 18,995 $ 21,777
Work-in-process 618 125
Raw materials 6,975 6,459
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$ 26,588 $ 28,361
====== ======
Note 3 - Net Loss per Common Share
- ----------------------------------
Basic net loss per share has been computed using the weighted average number of
common shares outstanding during each period. When applicable, diluted income
per share amounts are computed using the weighted average number of common
shares and potential dilutive common shares, consisting of stock options,
outstanding during the period.
-6-
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 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:
Three Months ended April 30,
----------------------------
2004 2003
---- ----
(in thousands,
except per share amounts)
Net loss - as reported $ (4,827) $ (2,627)
Deduct: Stock-based employee compensation
expense determined under fair value method,
net of related tax effects 86 50
-------- --------
Pro forma net loss $ (4,913) $ (2,677)
========= =========
Loss per share:
Basic and Diluted - as reported $ (0.68) $ (0.38)
Basic and Diluted - adjusted $ (0.69) $ (0.39)
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
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 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. There was no loan
balance outstanding at either April 30, 2004 or January 31, 2004 under this
agreement.
Notes payable represent foreign notes payable by PT Balihides, the Company's
Indonesian subsidiary.
-7-
Note 6 - Non-recurring Charge
- -----------------------------
The non-recurring charge associated with the Indonesian manufacturing facility
closed in December 2002 is included in "Accrued expenses" on the Consolidated
Balance Sheet. The status of the components of the non-recurring charge is as
follows:
RESERVE
Reserve APRIL 30,
January 31, 2004 Utilized 2004
---------------- -------- -------
----------------(in thousands)--------------
Severance $ 81 $ 81
Accrued expenses and other 431 47 384
---- ---- ----
$ 512 $ 47 $ 465
==== ==== ====
Based on current estimates, management believes that existing accruals are
adequate.
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-month periods indicated below:
THREE MONTHS ENDED APRIL 30,
----------------------------
2004 2003
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NON- Non-
LICENSED LICENSED Licensed Licensed
Net sales $ 14,243 $ 2,278 $ 16,352 $ 2,360
Cost of goods sold 11,965 2,794 11,783 2,575
------- ------ -------- -------
Gross profit (loss) 2,278 (516) 4,569 (215)
Selling, general and administrative 7,395 2,762 6,404 2,355
------- ------ -------- -------
Operating loss (5,117) (3,278) (1,835) (2,570)
Interest expense, net 43 30 23 25
------- ------ -------- -------
Loss before income taxes $ (5,160) $ (3,308) $ (1,858) $ (2,595)
======== ======= ======= ======
-8-
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 licensed product, reliance on foreign manufacturers, risks of
doing business abroad, the nature of the apparel industry, including changing
consumer demand and tastes, 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.
OVERVIEW
G-III designs, manufactures, imports and markets an extensive range of outerwear
and sportswear including coats, jackets, pants, skirts and other sportswear
items under licensed labels, our own proprietary labels and private retail
labels. Our products are distributed through a broad mix of retail partners at a
variety of price points. We sell to approximately 3,000 retail customers in the
United States, including most major department stores, mass merchants and
specialty retail stores.
We operate our business in two segments, licensed apparel and non-licensed
apparel. The licensed apparel segment includes sales of apparel brands licensed
by us from third parties. 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.
Since the beginning of fiscal 2005, we have added licenses with NASCAR for
active wear and outerwear for men and women, and with World Poker Tour for men's
and women's casual sportswear and outerwear. We have also become the men's and
women's licensee for The Yard, a branding program launched by the Collegiate
Licensing Company dedicated to the tradition and culture of historically black
colleges and universities. In addition, we have entered into a two year renewal
of our license with the National Football League through March 31, 2007.
RESULTS OF OPERATIONS
Historically, we have our lowest net sales during our first fiscal quarter. Net
sales for the three months ended April 30, 2004 decreased to $16.5 million from
$18.7 million in the same period last year. Net sales of licensed apparel
decreased $2.1 million compared to the same quarter last year, primarily as a
result of decreased sales of fashion sports apparel partially offset by
increased sales of our Cole Haan products. We expect that sales of fashion
sports apparel will continue to decrease in the quarter ending July 31, 2004.
Net sales of our non-licensed apparel were comparable for both periods as
increased net sales of women's apparel sold under G-III-owned brands were offset
by decreased net sales of men's apparel sold under G-III-owned brands.
-9-
Gross profit decreased to $1.8 million, or 10.7% of net sales, for the three
month period ended April 30, 2004 from $4.4 million, or 23.3% of net sales, in
the same period last year. Gross profit as a percentage of net sales decreased
primarily due to less regular priced shipments and increased clearance activity
in fashion sports apparel. The decrease in the gross profit percentage for sales
of licensed apparel from 27.9% in the prior period to 16.0% in the current
period was the result primarily of this clearance activity. The negative gross
profit in our non-licensed segment resulted from the sale of products at a
greater discount from cost this quarter compared to the same period last year.
Selling, general and administrative expenses increased to $10.2 million in the
three-month period ended April 30, 2004 from $8.8 million in the same period
last year. The increase is primarily the result of higher personnel expenses
($783,000), outside warehousing expenses ($400,000) and advertising and
promotional expenses ($249,000), partially offset by a decrease in sales
commissions ($324,000). Personnel expenses increased primarily due to an
increase in the number of employees hired to support the expansion of our
fashion sports apparel business last year and growth in our Cole Haan divisions.
With the reduction in our fashion sports apparel business this year, we expect
to utilize these employees in our new license programs for NASCAR, World Poker
Tour, and The Yard. Outside warehousing increased during the quarter due to a
higher number of units being shipped from third party warehouses. Advertising
and promotional expenses increased primarily due to higher trade show and
in-store promotional costs. The decrease in sales commissions is a result of the
decrease in sales of fashion sports apparel which is primarily sold by
independent sales representatives.
Interest and finance charges, net for the three-month period ended April 30,
2004 was $73,000 compared to $48,000 for the comparable period last year.
Income tax benefit of $3.6 million reflects an estimated effective tax rate of
43.0% for the three months ended April 30, 2004 compared to an income tax
benefit of $1.8 million which reflected a 41.0% effective tax rate in the
comparable period last year. The estimated effective tax rate in the three-month
period ended April 30, 2004 reflects higher anticipated state and local income
taxes.
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 over-advances 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.
Direct borrowings under the line of credit bear interest at our option at the
prevailing prime rate (4.0% at June 1, 2004) or LIBOR plus 225 basis points
(3.4% as of June 1, 2004). 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 debt covenants as of April 30, 2004.
-10-
The amount borrowed under the line of credit varies based on our seasonal
requirements. As of April 30, 2004, we had open letters of credit of
approximately $13.4 million compared to $17.1 million as of April 30, 2003.
There were no direct borrowings under the line of credit for either period.
For the period ended April 30, 2004, we incurred no direct borrowings. We had
cash and cash equivalents of $15.7 million as of April 30, 2004. We used
$573,000 of cash in operating activities resulting primarily from our net loss
of $4.8 million, income tax benefit of $4.0 million, increase in prepaid
expenses of $1.9 million and a decrease in accounts payable and accrued expenses
of $1.1 million, which more than offset a decrease of $9.1 million in accounts
receivable and $1.8 million in inventories. Cash flows generated by financing
activities were primarily from the exercise of stock options in the amount of
$327,000. Capital expenditures were not significant.
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,
2004 are those that depend most heavily on these judgments and estimates. As of
April 30, 2004, there have been no material changes to any of these critical
accounting policies.
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. In December 2003, the FASB
deferred the effective date of FIN 46 for certain variable interest entities
(i.e. non-special purpose entities) until the first interim or annual period
ending March 31, 2004. The adoption of the provisions of FIN 46 did not have any
effect on our consolidated results of operations or financial position for the
quarter ended April 30, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure made with respect to these
matters in our Annual Report on Form 10-K for the year ended January 31, 2004.
-11-
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our 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 our
disclosure controls and procedures are effective in alerting them to material
information, on a timely basis, required to be included in our periodic SEC
filings. During our last fiscal quarter, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 Certification by Morris Goldfarb, Chief Executive Officer of
G-III Apparel Group, Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, in connection with G-III Apparel Group, Ltd.'s Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2004.
31.2 Certification by Wayne S. Miller, Chief Financial Officer of
G-III Apparel Group, Ltd., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, in connection with G-III Apparel Group, Ltd.'s Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2004.
32.1 Certification by Morris Goldfarb, Chief Executive Officer of
G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection
with G-III Apparel Group, Ltd.'s Quarterly Report on Form 10-Q for the
fiscal quarter ended April 30, 2004.
32.2 Certification by Wayne S. Miller, Chief Financial Officer of
G-III Apparel Group, Ltd., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection
with G-III Apparel Group, Ltd.'s Quarterly Report on Form 10-Q for the
quarter ended April 30, 2004.
-12-
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: June 8, 2004 By: /s/ Morris Goldfarb
------------ ---------------------------
Morris Goldfarb
Chief Executive Officer
Date: June 8, 2004 By: /s/ Wayne Miller
------------ ---------------------------
Wayne S. Miller
Chief Financial Officer