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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 July 31, 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)
- --------------------------------------------------------------------------------
(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 September 1, 2004 there were 7,181,983 common shares outstanding.
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
July 31, 2004 and January 31, 2004.................................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended July 31, 2004 and 2003..................4
Condensed Consolidated Statements of Operations -
For the Six Months Ended July 31, 2004 and 2003....................5
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended July 31, 2004 and 2003....................6
Notes to Condensed Consolidated Financial Statements.......................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................17
Item 4. Controls and Procedures.....................................................17
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders.............................18
Item 6. Exhibits and Reports on Form 8-K............................................19
-2-
ITEM 1. FINANCIAL STATEMENTS
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
JULY 31, JANUARY 31,
2004 2004
--------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 680 $ 16,072
Accounts receivable, net of allowance for doubtful accounts
and sales discounts of $6,503 and $8,922, respectively 34,195 19,304
Inventories, net 50,507 28,361
Deferred income taxes 5,895 5,895
Prepaid expenses and other current assets 8,429 2,928
--------- ---------
Total current assets 99,706 72,560
PROPERTY, PLANT AND EQUIPMENT, NET 1,770 1,969
DEFERRED INCOME TAXES 1,940 1,940
OTHER ASSETS 3,021 4,227
--------- ---------
$ 106,437 $ 80,696
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 21,765 $ 770
Current maturities of obligations under capital leases 37 82
Income taxes payable 1,659
Accounts payable 19,916 6,155
Accrued expenses 5,330 6,506
--------- ---------
Total current liabilities 47,048 15,172
--------- ---------
LONG-TERM LIABILITIES 247 252
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.01 par value; 20,000,000 shares
authorized; 7,414,950 and 7,347,815 shares issued 74 73
Additional paid-in capital 27,672 27,325
Accumulated other comprehensive income 56 47
Retained earnings 32,310 38,797
--------- ---------
60,112 66,242
Treasury stock - 244,817 shares at cost (970) (970)
--------- ---------
59,142 65,272
--------- ---------
$ 106,437 $ 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 JULY 31,
---------------------------
(Unaudited)
2004 2003
---- ----
Net sales $ 43,892 $ 45,299
Cost of goods sold 33,354 29,618
----------- -----------
Gross profit 10,538 15,681
Selling, general and administrative expenses 11,707 10,844
Write-down of equity investment 882 --
----------- -----------
Operating income (loss) (2,051) 4,837
Interest and financing charges, net 197 230
----------- -----------
Income (loss) before income taxes (2,248) 4,607
Income tax expense (benefit) (588) 1,889
----------- -----------
Net income (loss) $ (1,660) $ 2,718
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Net income (loss) per common share $ (0.23) $ 0.40
=========== ===========
Weighted average number of shares outstanding 7,162,000 6,880,000
=========== ===========
Diluted:
Net income (loss) per common share $ (0.23) $ 0.37
=========== ===========
Weighted average number of shares outstanding 7,162,000 7,385,000
=========== ===========
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)
SIX MONTHS ENDED JULY 31,
(Unaudited)
-------------------------
2004 2003
----------- -----------
Net sales $ 60,413 $ 64,011
Cost of goods sold 48,113 43,976
----------- -----------
Gross profit 12,300 20,035
Selling, general and administrative expenses 21,864 19,603
Write-down of equity investment 882 --
----------- -----------
Operating income (loss) (10,446) 432
Interest and financing charges, net 270 278
----------- -----------
Income (loss) before income taxes (10,716) 154
Income tax expense (benefit) (4,229) 63
----------- -----------
Net income (loss) $ (6,487) $ 91
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic:
Net income (loss) per common share $ (0.91) $ 0.01
=========== ===========
Weighted average number of shares outstanding 7,141,000 6,878,000
=========== ===========
Diluted:
Net income (loss) per common share $ (0.91) $ 0.01
=========== ===========
Weighted average number of shares outstanding 7,141,000 7,325,000
=========== ===========
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)
SIX MONTHS ENDED JULY 31,
-------------------------
(Unaudited)
2004 2003
---- ----
Cash flows from operating activities
Net income (loss) $ (6,487) $ 91
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 635 640
Write-down of equity investment 882 --
Changes in operating assets and liabilities
Accounts receivable (14,891) (16,292)
Inventories, net (22,146) (28,445)
Income taxes, net (4,576) (459)
Prepaid expenses and other current assets (2,584) (2,443)
Other assets 81 (135)
Accounts payable and accrued expenses 12,585 11,918
-------- --------
Net cash used in operating activities (36,501) (35,125)
-------- --------
Cash flows from investing activities
Capital expenditures (193) (360)
-------- --------
Net cash used in investing activities (193) (360)
-------- --------
Cash flows from financing activities
Increase in notes payable, net 20,995 32,528
Payments for capital lease obligations (50) (52)
Proceeds from exercise of stock options 348 18
-------- --------
Net cash provided by financing activities 21,293 32,494
-------- --------
Effect of exchange rate changes on cash and cash equivalents 9 17
-------- --------
Net decrease in cash and cash equivalents (15,392) (2,974)
Cash and cash equivalents at beginning of period 16,072 3,408
-------- --------
Cash and cash equivalents at end of period $ 680 $ 434
======== ========
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest $ 279 $ 423
Income taxes $ 328 $ 575
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
three and six month periods ended July 31, 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 wholly-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 - Proposed Sale of Joint Venture Interest and Related Write-Down
On September 7, 2004, we committed to attempt to sell our 39% interest in a
joint venture which operates a factory located in Qingdao, China. As a result of
this decision, we recorded a non-cash charge of $882,000 that is reflected in
our results of operations for the three months ended July 31, 2004.
As of July 31, 2004, the carrying amount of our investment in this joint venture
was approximately $1.1 million. We accounted for our interest in this joint
venture based on the equity method and recorded a loss on the joint venture of
approximately $129,000 for the six months ended July 31, 2004. This loss
represents 39% of the total net losses of $330,000 of the joint venture for the
six months ended July 31, 2004 compared to a net profit for the joint venture of
$167,000 for the six months ended July 31, 2003.
Our joint venture partner has advised us that, based on the factory's current
operations, the joint venture may continue to generate losses for the
foreseeable future. A review of the operations of the factory is being
undertaken by management of the joint venture to determine whether cost cutting
measures or other operating efficiencies could return the factory to
profitability. There are no assurances that this review will result in future
profits for the joint venture.
Based upon the prospect of the factory continuing to generate losses, we believe
that the best course of action for us is to attempt to sell our interest in the
joint venture. Our estimate of the charge represents the difference between our
investment in the joint venture as of July 31, 2004 and the estimated proceeds
we would receive on sale of this joint venture interest. We do not believe that
this charge will result in future cash expenditures.
-7-
Note 2 - Proposed Sale of Joint Venture Interest and Related Write-Down (cont'd)
We believe that we will be able to complete a sale of the joint venture interest
by January 31, 2005, the end of our current fiscal year. However, there is no
assurance that we will be able to complete this sale by that date, if at all, or
at the sale price we have estimated.
Note 3 - Inventories
Inventories consist of:
JULY 31, January 31,
2004 2004
---- ----
(in thousands)
Finished goods $ 44,312 $ 21,777
Work-in-process 1,647 125
Raw materials 4,548 6,459
-------- -------
$ 50,507 $ 28,361
======= =======
Note 4 - Net Income (Loss) per Common Share
Basic net income (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.
Note 5 - Stock-based Compensation
The Company has granted 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.
-8-
Note 5 - Stock-based Compensation (cont'd)
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 July 31, Six Months ended July 31,
--------------------------- -------------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands, except per share amounts)
Net income (loss) - as reported $(1,660) $ 2,718 $(6,487) $ 91
Deduct: Stock-based employee compensation expense
determined under fair value method, net of related
tax effects 88 101 174 151
------- ------- ------- -------
Pro-forma net income (loss) $(1,748) $ 2,617 $(6,661) $ (60)
======= ======= ======= =======
Basic income (loss) per share - as reported $ (0.23) $ 0.40 $ (0.91) $ .01
Pro-forma basic income (loss) per share $ (0.24) $ 0.38 $ (0.93) $ (.01)
Diluted income (loss) per share - as reported $ (0.23) $ 0.37 $ (0.91) $ .01
Pro-forma diluted income (loss) per share $ (0.24) $ 0.35 $ (0.93) $ (.01)
Note 6 - 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 as
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 $21.0
million of outstanding borrowings at July 31, 2004 and no balance outstanding at
January 31, 2004 under this agreement.
We requested and obtained from our bank group an amendment to our loan
agreement. The amendment modified financial covenants related to tangible net
worth and earnings before interest, taxes, depreciation and amortization through
the remaining term of the agreement. As a result of the amendment, we were in
compliance with all covenants as of July 31, 2004.
Notes payable also includes a foreign note payable by PT Balihides, the
Company's inactive Indonesian subsidiary.
-9-
Note 7 - Closing of Manufacturing Facility
The reserve associated with the Indonesian manufacturing facility closed in
December 2002 is included in "Accrued expenses" in the accompanying Consolidated
Balance Sheets. The status of the components of the reserve is as follows:
RESERVE
Reserve JULY 31,
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 8 - 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 six- month periods indicated below:
THREE MONTHS ENDED JULY 31,
---------------------------
2004 2003
---- ----
NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $ 29,194 $ 14,698 $ 33,435 $ 11,864
Cost of goods sold 22,958 10,396 21,950 7,668
-------- -------- -------- --------
Gross profit 6,236 4,302 11,485 4,196
Selling, general and administrative 9,209 2,498 8,256 2,588
Write-down of equity investment -- 882 -- --
-------- -------- -------- --------
Operating income (loss) (2,973) 922 3,229 1,608
Interest expense, net 154 43 142 88
-------- -------- -------- --------
Income (loss) before income taxes $ (3,127) $ 879 $ 3,087 $ 1,520
======== ======== ======== ========
-10-
Note 8 - Segments (cont'd)
SIX MONTHS ENDED JULY 31,
-------------------------
2004 2003
---- ----
NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $ 43,437 $ 16,976 $ 49,787 $ 14,224
Cost of goods sold 34,923 13,190 33,733 10,243
-------- -------- -------- --------
Gross profit 8,514 3,786 16,054 3,981
Selling, general and administrative 16,604 5,260 14,660 4,943
Write-down of equity investment -- 882 -- --
-------- -------- -------- --------
Operating income (loss) (8,090) (2,356) 1,394 (962)
Interest expense, net 197 73 165 113
-------- -------- -------- --------
Income (loss) before income taxes $ (8,287) $ (2,429) $ 1,229 $ (1,075)
======== ======== ======== ========
-11-
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.
OVERVIEW
G-III designs, manufactures, imports and markets an extensive range of outerwear
and sportswear including coats, jackets, pants, skirts, handbags 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.
Effective April 1, 2005, we entered into a two-year renewal of our license with
the National Football League through March 31, 2007. Additionally, we signed a
license agreement with Cece Cord for apparel and accessories with initial
efforts focused on the design and marketing of a line of high-end handbags. We
have also added licenses with NASCAR for active wear and outerwear for men and
women, the World Poker Tour for men's and women's casual sportswear and
outerwear and the Collegiate Licensing Company for The Yard, a branding program
dedicated to the tradition and culture of historically black colleges and
universities.
On September 7, 2004, we committed to attempt to sell our 39% interest in a
joint venture which operates a factory located in Qingdao, China. As a result of
this decision, we recorded a charge of $882,000 that is reflected in our results
of operations for the three months ended July 31, 2004.
-12-
OVERVIEW (CONT'D)
As of July 31, 2004, the carrying amount of our investment in this joint venture
was approximately $1.1 million. We accounted for our interest in this joint
venture based on the equity method and recorded a loss on the joint venture of
approximately $129,000 for the six months ended July 31, 2004. This loss
represents 39% of the total net losses of $330,000 of the joint venture for the
six months ended July 31, 2004 compared to a net profit for the joint venture of
$167,000 for the six months ended July 31, 2003.
Our joint venture partner has advised us that, based on the factory's current
operations, the joint venture may continue to generate losses for the
foreseeable future. A review of the operations of the factory is being
undertaken by management of the joint venture to determine whether cost cutting
measures or other operating efficiencies could return the factory to
profitability. There are no assurances that this review will result in future
profits for the joint venture.
Based upon the prospect of the factory continuing to generate losses, we believe
that the best course of action for us is to attempt to sell our interest in the
joint venture. We believe this decision will also provide us with more
flexibility by allowing us to outsource all of our manufacturing. Our estimate
of the charge represents the difference between our investment in the joint
venture as of July 31, 2004 and the estimated proceeds we would receive on sale
of this joint venture interest. We do not believe that this charge will result
in future cash expenditures.
We believe that we will be able to complete a sale of the joint venture interest
by January 31, 2005, the end of our current fiscal year. However, there is no
assurance that we will be able to complete this sale by that date, if at all, or
at the sale price we have estimated.
RESULTS OF OPERATIONS
Three months ended July 31, 2004 compared to three months ended July 31, 2003
Net sales for the three months ended July 31, 2004 were $43.9 million compared
to $45.3 million for the same period last year. Net sales of licensed apparel
decreased $4.2 million to $29.2 million from $33.4 million in the same period
last year, primarily as a result of decreased sales of fashion sports apparel
partially offset by increased sales under other licenses, primarily Cole Haan,
Nine West and Kenneth Cole. Net sales of non-licensed apparel increased $2.8
million to $14.7 million from $11.9 million in the same period last year as a
result of one of our major customers buying men's outerwear under one of our own
labels rather than under a licensed label as was done last year and increased
sales of our Black Rivet brand, which was launched last year.
Gross profit was $10.5 million, or 24.0% of net sales, for the three months
ended July 31, 2004 compared to $15.7 million, or 34.6% of net sales, for the
same period last year. Gross profit of licensed apparel decreased to $6.2
million (21.4% of net sales) from $11.5 million (34.3% of net sales) in the same
period last year. The decrease in gross profit, both in amount and percentage,
in the licensed apparel segment for the three-months ended July 31, 2004 was
primarily the result of the decline in sales in our higher margin fashion sports
apparel business. Gross profit of non-licensed apparel was $4.3 million (29.3%
of net sales) compared to $4.2 million (35.4% of net sales) in the same period
last year. The decrease in the gross profit percentage in our non-licensed
apparel segment resulted primarily from lower commission based sales. Commission
fee income, which is primarily generated in the non-licensed apparel segment,
decreased to $839,000 during
-13-
Three months ended July 31, 2004 compared to three months ended July 31, 2003
(cont'd)
the three months ended July 31, 2004 from $1.6 million in the comparable period
of the prior year. There is no cost of goods sold component associated with
commission transactions. The gross profit margin percentage for the prior
comparable period was also favorably impacted by a $1.2 million decrease in our
receivable reserves in the second quarter of fiscal 2004 which predominantly
impacted our licensed apparel segment. These reserves were established in the
fourth quarter of fiscal 2003, but were no longer deemed necessary as actual
discounts and allowances were less than anticipated.
Selling, general and administrative expenses for the three months ended July 31,
2004 were $11.7 million compared to $10.8 million in the three months ended July
31, 2003. This increase primarily resulted from increased expenses in personnel
costs, ($550,000), design and product development ($475,000) and advertising and
promotion ($450,000) offset by a decrease in sales commission expense
($615,000). The increase in personnel costs was attributable to additional
personnel hired last year as well as increases in the cost of our health
benefits. Design and product development expenses increased primarily due to
more extensive sample development in our sports, Cole Haan and Black Rivet
lines. Advertising and promotion expenses increased primarily due to contractual
advertising contributions with respect to our licensed product and anticipated
increases in our co-operative advertising. The decrease in sales commissions
resulted from lower sales of fashion sports apparel which are made primarily by
an outside sales force.
For the three months ended July 31, 2004, we recorded a non-cash charge to
operations in the amount of $882,000 associated with our decision to sell our
joint venture interest in a factory located in China. We have taken no tax
benefit for this charge.
Interest expense and finance charges for the three months ended July 31, 2004
were $197,000 compared to $230,000 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 and our borrowing beginning
later in the season due to higher year end cash balances.
We had an income tax benefit of $588,000 for the three months ended July 31,
2004 compared to income tax expense of $1.9 million in the same period in the
prior year. Our effective tax rate was 26% for the three month period ended July
31, 2004 compared to 41% for the same period in the prior year. The lower
effective tax rate in the period ended July 31, 2004 reflects the charge of
$882,000 for which we did not record a tax benefit, offset by increased state
and local income taxes as a result of changes in the tax laws in certain states.
Six months ended July 31, 2004 compared to six months ended July 31, 2003
Net sales for the six months ended July 31, 2004 were $60.4 million compared to
$64.0 million for the same period in the prior year. Net sales of licensed
apparel decreased $6.4 million to $43.4 million from $49.8 million in the same
period last year, primarily as a result of decreased sales of our fashion sports
apparel partially offset by increased sales under other licenses, primarily Cole
Haan, Nine West and Kenneth Cole. Net sales of non-licensed apparel increased
$2.8 million to $17.0 million from $14.2 million in the same period last year as
a result of one of our major customers buying men's outerwear under one of our
own labels rather than under a licensed label as was done last year and
increased sales of our Black Rivet brand, which was launched last year.
-14-
Six months ended July 31, 2004 compared to six months ended July 31, 2003
(cont'd)
Gross profit was $12.3 million, or 20.4% of net sales, for the six months ended
July 31, 2004 compared to $20.0 million, or 31.3% of net sales, for the same
period last year. Gross profit of licensed apparel was $8.5 million (19.6% of
net sales) compared to $16.1 million (32.2% of net sales) in the same period
last year. The decrease in gross profit, both in amount and percentage, in the
licensed apparel segment for the six-months ended July 31, 2004 was primarily
the result of the decline in sales in our higher margin fashion sports apparel
business. Gross profit of non-licensed apparel was $3.8 million (22.3% of net
sales) compared to $4.0 million (28.0% of net sales) in the same period last
year. The decrease in gross profit percentage in our non-licensed apparel
segment resulted primarily from lower commission based sales. Commission fee
income, which is primarily generated in the non-licensed apparel segment,
decreased to $1.0 million during the six months ended July 31, 2004 from $1.6
million in the comparable period of the prior year. There is no cost of goods
sold component associated with these commission transactions. The gross profit
margin percentage in the prior period was favorably impacted by a $1.2 million
decrease in our receivable reserves in the second quarter of fiscal 2003 which
predominantly impacted our licensed apparel segment. These reserves were
established in the fourth quarter of fiscal 2003, but were no longer deemed
necessary as actual discounts and allowances were less than anticipated.
Selling, general and administrative expenses for the six months ended July 31,
2004 were $21.9 million compared to $19.6 million for the same period last year.
This increase resulted primarily from increased personnel costs, including
health insurance benefits ($1.3 million). Increases in other expenses include
advertising and promotion ($700,000) and design and product development
($560,000) offset by a decrease in sales commission expense ($940,000). The
increase in personnel costs was attributable to additional personnel hired last
year as well as increases in the cost of our health benefits. Design and product
development expenses increased primarily due to more extensive sample
development in our sports, Cole Haan and Black Rivet lines. Advertising and
promotion expenses increased primarily due to contractual advertising
contributions with respect to our licensed product and anticipated increases in
our co-operative advertising. The decrease in sales commissions resulted from
lower sales of fashion sports apparel which are made primarily by an outside
sales force.
In the three months ended July 31, 2004, we recorded a non-cash charge to
operations in the amount of $882,000 associated with our decision to sell our
joint venture interest in a factory located in China. This charge is also
reflected in our results of operations for the six months ended July 31, 2004.
We have taken no tax benefit for this charge.
Interest expense and finance charges were $270,000 for the six-months ended July
31, 2004 compared to $278,000 in the same period last year.
We had an income tax benefit of $4.2 million for the six months ended July 31,
2004 compared to an income tax expense of $63,000 in the same period last year.
Our effective tax rate was 39% in the six month period ended July 31, 2004
compared to 41% in the same period last year. The lower effective tax rate in
the period ended July 31, 2004 reflects the charge of $882,000 for which we did
not record a tax benefit, offset by increased state and local income taxes as a
result of changes in the tax laws in certain states.
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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 as specified in the agreement.
Direct borrowings under the line of credit bear interest at our option at either
the prevailing prime rate (4.5% as of September 2, 2004) or LIBOR plus 225 basis
points (4.1% at September 2, 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 requested and obtained from our bank group an amendment to our
loan agreement. The amendment modified financial covenants related to tangible
net worth and earnings before interest, taxes, depreciation and amortization. As
a result of the amendment, we were in compliance with all covenants as of July
31, 2004.
The amount borrowed under the line of credit varies based on our seasonal
requirements. As of July 31, 2004, direct borrowings were $21.0 million and
contingent liability under open letters of credit was approximately $27.7
million compared to direct borrowings of $33.3 million and contingent liability
under open letters of credit of approximately $29.5 million as of July 31, 2003.
At July 31, 2004, we had cash and cash equivalents of $680,000. We generally use
significant cash in the first half of our fiscal year as we prepare for the
third quarter, which is generally our highest sales volume quarter. We used
$36.5 million of cash in operating activities in the six months ended July 31,
2004, resulting primarily from our net loss of $6.5 million, income tax benefit
of $4.2 million, and increases in accounts receivable of $14.9 million and in
inventory of $22.1 million, offset by an increase in accounts payable and
accrued expenses of $12.6 million. Cash flows generated by financing activities
in the six months ended July 31, 2004 were primarily from direct borrowings
under our line of credit in the amount of $21.0 million. Capital expenditures
were not significant during the six months ended July 31, 2004.
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
July 31, 2004, there have been no material changes to any of these critical
accounting policies.
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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.
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.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
(a) Our Annual Meeting of Stockholders was held on June 10, 2004.
(b) The following matters were voted on and approved by our
stockholders at the Annual Meeting:
(i) The election of eight directors to serve for the ensuing
year. The following nominees were elected as directors
(with our stockholders having voted as set forth below):
====================================================================================
NOMINEE VOTES FOR WITHHELD AUTHORITY TO VOTE
------------------------------------------------------------------------------------
Morris Goldfarb 6,182,226 330,489
------------------------------------------------------------------------------------
Aron Goldfarb 6,182,226 330,489
------------------------------------------------------------------------------------
Thomas J. Brosig 6,487,917 24,798
------------------------------------------------------------------------------------
Alan Feller 6,169,226 343,489
------------------------------------------------------------------------------------
Carl Katz 6,182,226 330,489
------------------------------------------------------------------------------------
Willem van Bokhorst 6,487,917 24,798
------------------------------------------------------------------------------------
Richard White 6,488,022 24,693
------------------------------------------------------------------------------------
George J. Winchell 6,487,917 24,798
====================================================================================
(ii) The ratification of the appointment of Ernst & Young LLP as
our independent certified public accountants for the fiscal
year ending January 31, 2005. Our stockholders voted as
follows:
FOR: 6,496,842
AGAINST: 14,873
ABSTENTIONS: 1,000
-18-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.3(d) Amendment No. 4 to Sixth Amended and Restated Loan
Agreement, dated July 31, 2004, by and among G-III, the
Banks and Fleet Bank
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 July 31, 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 July 31, 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 July 31, 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 July 31, 2004.
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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: September 13, 2004 By: /s/ Morris Goldfarb
------------------ -----------------------------------
Morris Goldfarb
Chief Executive Officer
Date: September 13, 2004 By: /s/ Wayne Miller
------------------ -----------------------------------
Wayne S. Miller
Chief Financial Officer
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