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 October 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
512 Seventh Avenue, New York, New York 10018
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(Address of Principal Executive Offices) (Zip Code)
(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 December 1, 2004 there were 7,220,698 common shares outstanding.
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
October 31, 2004 and January 31, 2004.....................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended October 31, 2004 and 2003......4
Condensed Consolidated Statements of Operations -
For the Nine Months Ended October 31, 2004 and 2003.......5
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended October 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 6. Exhibits.......................................................18
ITEM 1. FINANCIAL STATEMENTS
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
OCTOBER 31, JANUARY 31,
2004 2004
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,043 $ 16,072
Accounts receivable, net of allowance for doubtful accounts
and sales discounts and allowances of $10,202 and $8,922,
respectively 81,698 19,304
Inventories, net 37,010 28,361
Deferred income taxes 5,895 5,895
Prepaid expenses and other current assets 2,599 2,928
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Total current assets 130,245 72,560
PROPERTY, PLANT AND EQUIPMENT, NET 2,347 1,969
DEFERRED INCOME TAXES 1,940 1,940
OTHER ASSETS 2,881 4,227
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$ 137,413 $ 80,696
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 36,211 $ 770
Current maturities of obligations under capital leases 71 82
Income taxes payable 4,101 1,659
Accounts payable 19,898 6,155
Accrued expenses 7,605 6,506
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Total current liabilities 67,886 15,172
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LONG-TERM LIABILITIES 412 252
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STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized;
no shares issued and outstanding
Common stock - $.01 par value; 20,000,000 shares
authorized; 7,448,215 and 7,347,815 shares issued 74 73
Additional paid-in capital 27,753 27,325
Accumulated other comprehensive income 51 47
Retained earnings 42,207 38,797
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70,085 66,242
Treasury stock - 244,817 shares at cost (970) (970)
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69,115 65,272
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$ 137,413 $ 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 OCTOBER 31,
(Unaudited)
2004 2003
---- ----
Net sales $ 114,909 $ 125,547
Cost of goods sold 81,358 88,208
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Gross profit 33,551 37,339
Selling, general and administrative expenses 15,638 16,785
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Operating income 17,913 20,554
Interest and financing charges, net 550 583
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Income before income taxes 17,363 19,971
Income tax expense 7,466 8,591
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Net income $ 9,897 $ 11,380
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NET INCOME PER COMMON SHARE:
Basic:
Net income per common share $ 1.38 $ 1.65
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Weighted average number of shares outstanding 7,190,000 6,900,000
========== ==========
Diluted:
Net income per common share $ 1.33 $ 1.50
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Weighted average number of shares outstanding 7,429,000 7,571,000
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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)
2004 2003
---- ----
Net sales $ 175,322 $ 189,558
Cost of goods sold 129,471 132,184
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Gross profit 45,851 57,374
Selling, general and administrative expenses 37,502 36,388
Write-down of equity investment 882 --
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Operating income 7,467 20,986
Interest and financing charges, net 820 861
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Income before income taxes 6,647 20,125
Income tax expense 3,237 8,654
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Net income $ 3,410 $ 11,471
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NET INCOME PER COMMON SHARE:
Basic:
Net income per common share $ 0.48 $ 1.67
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Weighted average number of shares outstanding 7,158,000 6,885,000
========== ==========
Diluted:
Net income per common share $ 0.46 $ 1.54
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Weighted average number of shares outstanding 7,480,000 7,428,000
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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)
2004 2003
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Cash flows from operating activities
Net income $ 3,410 $ 11,471
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 994 960
Write-down of equity investment 882 --
Changes in operating assets and liabilities
Accounts receivable (62,394) (68,637)
Inventories, net (8,649) (9,550)
Income taxes, net 2,442 8,092
Prepaid expenses and other current assets 329 547
Other assets 100 (185)
Accounts payable and accrued expenses 14,892 13,303
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Net cash used in operating activities (47,994) (43,999)
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Cash flows from investing activities
Capital expenditures (834) (479)
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Net cash used in investing activities (834) (479)
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Cash flows from financing activities
Increase in notes payable, net 35,441 42,648
Payments for capital lease obligations (75) (86)
Proceeds from exercise of stock options 429 151
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Net cash provided by financing activities 35,795 42,713
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Effect of exchange rate changes on cash and cash equivalents 4 17
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Net decrease in cash and cash equivalents (13,029) (1,748)
Cash and cash equivalents at beginning of period 16,072 3,408
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Cash and cash equivalents at end of period $ 3,043 $ 1,660
======== ========
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest $ 864 $ 825
Income taxes $ 737 $ 542
Non-cash investing and financing activity:
Acquisition of fixed assets
under capital lease $ 174
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 nine month periods ended October 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, the Company committed to attempt to sell its 39% interest
in a joint venture which operates a factory located in Qingdao, China. As a
result of this decision, the Company recorded a non-cash charge of $882,000
associated with its write-down of its equity investment that was reflected in
its results of operations for the quarter ended July 31, 2004.
The Company's joint venture partner had advised the Company 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.
The Company accounted for its 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.
Based upon the prospect of the factory continuing to generate losses, the
Company determined that the best course of action was to attempt to sell its
interest in the joint venture. The Company's estimate of the charge represented
the difference between its investment in the joint venture as of July 31, 2004
($1,082,000) and the proceeds ($200,000) the Company estimated it would receive
on sale of this joint venture interest. The Company does 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)
The Company believes that it will be able to complete a sale of the joint
venture interest by January 31, 2005, the end of its current fiscal year. The
Company is currently negotiating to sell its interest to its joint venture
partner. However, there is no assurance that the Company will be able to
complete this sale by that date, if at all, or at the sale price estimated by
the Company.
Note 3 - Inventories
Inventories consist of:
OCTOBER 31, January 31,
2004 2004
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(in thousands)
Finished goods $ 32,926 $ 21,777
Work-in-process 363 125
Raw materials 3,721 6,459
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$ 37,010 $ 28,361
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Note 4 - Net Income per Common Share
Basic net income 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 Statement 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 October 31, Nine Months ended October 31,
------------------------------ -----------------------------
2004 2003 2004 2003
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(in thousands, except per share amounts)
Net income - as reported $ 9,897 $ 11,380 $ 3,410 $ 11,471
Deduct: Stock-based employee compensation expense
determined under fair value method, net of related
tax effects 83 78 257 229
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Pro forma net income $ 9,814 $ 11,302 $ 3,153 $ 11,242
========= ========== ========= ==========
Basic income per share - as reported $ 1.38 $ 1.65 $ 0.48 $ 1.67
Pro-forma basic income per share $ 1.36 $ 1.64 $ 0.44 $ 1.63
Diluted income per share - as reported $ 1.33 $ 1.50 $ 0.46 $ 1.54
Pro forma diluted income per share $ 1.32 $ 1.49 $ 0.42 $ 1.51
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 over advances 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 $35.4
million of outstanding borrowings at October 31, 2004 and no balance outstanding
at January 31, 2004 under this agreement.
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 reserves associated with the Indonesian manufacturing facility closed in
December 2002 are included in "Accrued expenses" in the accompanying
Consolidated Balance Sheets. The status of the components of the reserve is as
follows:
RESERVE
Reserve OCTOBER 31,
January 31, 2004 Utilized 2004
---------------- -------- ----
(in thousands)
Severance $ 81 $ 15 $ 66
Accrued expenses and other 431 $ 77 354
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$ 512 $ 92 $ 420
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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 nine- month periods indicated below:
THREE MONTHS ENDED OCTOBER 31,
------------------------------
2004 2003
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NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $71,412 $43,497 $96,387 $29,160
Cost of goods sold 49,443 31,915 67,721 20,487
------- ------- ------- -------
Gross profit 21,969 11,582 28,666 8,673
Selling, general and administrative 12,101 3,537 13,070 3,715
------- ------- ------- -------
Operating income 9,868 8,045 15,596 4,958
Interest expense, net 433 117 378 205
------- ------- ------- -------
Income before income taxes $ 9,435 $ 7,928 $15,218 $ 4,753
======= ======= ======= =======
-10-
Note 8 - Segments (cont'd)
NINE MONTHS ENDED OCTOBER 31,
-----------------------------
2004 2003
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NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $114,849 $ 60,473 $146,174 $ 43,384
Cost of goods sold 84,366 45,105 101,454 30,730
-------- -------- -------- --------
Gross profit 30,483 15,368 44,720 12,654
Selling, general and administrative 28,705 8,797 27,730 8,658
Write-down of equity investment -- 882 -- --
-------- -------- -------- --------
Operating income 1,778 5,689 16,990 3,996
Interest expense, net 630 190 543 318
-------- -------- -------- --------
Income before income taxes $ 1,148 $ 5,499 $ 16,447 $ 3,678
======== ======== ======== ========
-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.
On November 29, 2004, we entered into a license agreement with Kenneth Cole
Productions to manufacture, market and distribute men's and women's outerwear
under the "Kenneth Cole New York" and "Reaction Kenneth Cole" trademarks. We
previously had a license agreement with Kenneth Cole Productions for women's
outerwear that was to expire December 31, 2004. The new four-year agreement is
effective January 1, 2005 and expands our relationship with Kenneth Cole
Productions from the prior agreement to include both women's and men's
outerwear.
We entered into a two-year renewal of our license with the National Football
League that extends this license through March 31, 2007. Additionally, during
the current fiscal year, we have 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
-12-
Overview (cont'd)
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.
The sale of licensed product has been a key element of our business strategy for
many years. The sale of licensed product accounted for an increasing percentage
of our net sales between fiscal 2002 and fiscal 2004. For the nine months ended
October 31, 2004, licensed product accounted for 65.5% of our net sales compared
to 77.1% of our net sales in the comparable period last year. This decrease was
caused by the shift in purchases by our largest customer from licensed product
last year to our own proprietary branded product this year, as well as by the
decrease in sales of licensed fashion sports apparel. These decreases were
partially offset by increases in our sales of Cole Haan and Sean John licensed
apparel. We continue to believe that consumers prefer to buy brands that they
know and that licensed product will continue to constitute the substantial
majority of our net sales.
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. Accordingly,
in the three months ended July 31, 2004, we recorded a non-cash charge to
operations of $882,000 associated with the write-down of the investment. We are
currently negotiating to sell our interest to our joint venture partner.
However, there is no assurance that we will be able to complete this sale by the
end of the current fiscal year, if at all, or at the sale price estimated by us.
RESULTS OF OPERATIONS
Three months ended October 31, 2004 compared to three months ended October 31,
2003
Net sales for the three months ended October 31, 2004 were $114.9 million
compared to $125.5 million for the same period last year. Net sales of licensed
apparel decreased $25.0 million to $71.4 million from $96.4 million in the same
period last year, primarily as a result of decreased sales of fashion sports
apparel, as well as a change in purchases this year by our largest customer from
licensed product to our own proprietary brands. This decrease in sales of
licensed apparel was partially offset by increased sales of other licensed
apparel, primarily Cole Haan and Sean John. Net sales of non-licensed apparel
increased $14.3 million to $43.5 million from $29.2 million in the same period
last year. This increase was primarily the result of our largest customer buying
men's outerwear under our own labels rather than under licensed labels as was
done last year, as well as increased sales of our Black Rivet brand, which was
launched last year.
Gross profit was $33.6 million, or 29.2% of net sales, for the three months
ended October 31, 2004 compared to $37.3 million, or 29.7% of net sales, for the
same period last year. Gross profit of licensed apparel decreased to $22.0
million (30.8% of net sales) from $28.6 million (29.7% of net sales) in the same
period last year. The decrease in gross profit in the licensed apparel segment
for the three-months ended October 31, 2004 was primarily the result of the
decline in sales in our fashion sports apparel business. Our gross profit
percentages for licensed apparel increased as higher margin sales of other
licensed apparel, primarily Kenneth Cole and Cole Haan, offset the loss of
higher margin fashion sports apparel sales.
Gross profit of non-licensed apparel was $11.6 million (26.6% of net sales)
compared to $8.7 million (29.7% 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,
-13-
Results of operations (cont'd)
decreased to $1.1 million during the three months ended October 31, 2004 from
$2.5 million in the comparable period of the prior year. There is no cost of
goods sold component associated with commission transactions.
Selling, general and administrative expenses for the three months ended October
31, 2004 were $15.6 million compared to $16.8 million in the three months ended
October 31, 2003. This decrease primarily resulted from decreases in personnel
costs ($773,000), sales commissions ($472,000) and facility costs ($471,000)
offset by increases in design and product development ($255,000) and advertising
and promotion ($193,000). The decrease in personnel costs was primarily
attributable to the decreased bonus expense compared to the prior year partially
offset by additional personnel hired last year. The decrease in sales
commissions resulted from lower sales of fashion sports apparel which are made
primarily by an outside sales force. Facility costs decreased as a result of
less use of third party warehousing. 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 anticipated increases in our co-operative advertising.
Interest expense and financing charges for the three months ended October 31,
2004 were $550,000 compared to $583,000 in the same period last year as lower
borrowings levels were partially offset by higher interest rates.
We had an income tax expense of $7.5 million for the three months ended October
31, 2004 compared to income tax expense of $8.6 million in the same period in
the prior year. Our effective tax rate was 43.0% in both periods.
Nine months ended October 31, 2004 compared to nine months ended October 31,
2003
Net sales for the nine months ended October 31, 2004 were $175.3 million
compared to $189.6 million for the same period in the prior year. Net sales of
licensed apparel decreased $31.4 million to $114.8 million from $146.2 million
in the same period last year, primarily as a result of decreased sales of our
fashion sports apparel, as well as a change in purchases this year by our
largest customer from licensed product to our own proprietary brands. This
decrease in sales of licensed apparel was partially offset by increased sales of
other licensed apparel, primarily Cole Haan, Sean John and Kenneth Cole. Net
sales of non-licensed apparel increased $17.1 million to $60.5 million from
$43.4 million in the same period last year. This increase was primarily the
result of our largest customer buying men's outerwear under our own labels
rather than under licensed labels as was done last year, as well as increased
sales of our Black Rivet brand, which was launched last year.
Gross profit was $45.9 million, or 26.2% of net sales, for the nine months ended
October 31, 2004 compared to $57.4 million, or 30.3% of net sales, for the same
period last year. Gross profit of licensed apparel was $30.5 million (26.5% of
net sales) compared to $44.7 million (30.6% 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 nine-months ended October 31, 2004 was
primarily the result of the decline in sales in our higher margin fashion sports
apparel business. Furthermore, the gross profit percentage in the prior period
was 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.
-14-
Results of operations (cont'd)
Gross profit of non-licensed apparel was $15.4 million (25.4% of net sales)
compared to $12.7 million (29.2% 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 $2.1
million during the nine months ended October 31, 2004 from $4.1 million in the
comparable period of the prior year. There is no cost of goods sold component
associated with these commission transactions.
Selling, general and administrative expenses for the nine months ended October
31, 2004 were $37.5 million compared to $36.4 million for the same period last
year. This increase resulted primarily from increases in advertising and
promotion ($889,000), design and product development ($817,000) and personnel
costs ($563,000), which include health insurance benefits offset by a decrease
in sales commission expense ($1.4 million). Advertising and promotion expenses
increased primarily due to anticipated increases in our co-operative
advertising. Design and product development expenses increased primarily due to
more extensive sample development in our sports, Cole Haan and Black Rivet
lines. The increase in personnel costs was attributable to additional personnel
hired last year as well as increases in the cost of our health benefits offset
by decreased bonus expense compared to last year. The decrease in sales
commissions resulted from lower sales of fashion sports apparel which are made
primarily by an outside sales force.
In the second quarter 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 reflected in our results of operations
for the nine months ended October 31, 2004. We have taken no tax benefit for
this charge.
Interest expense and financing charges were $820,000 for the nine-months ended
October 31, 2004 compared to $861,000 in the same period last year.
We had an income tax expense of $3.2 million for the nine months ended October
31, 2004 compared to an income tax expense of $8.7 million in the same period
last year. Our effective tax rate was 48.7% in the nine month period ended
October 31, 2004 compared to 43.0% in the same period last year. The higher
effective tax rate in the period ended October 31, 2004 reflects the charge of
$882,000 for which we did not record a tax benefit.
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 as specified in the agreement.
Direct borrowings under the line of credit bear interest at our option at either
the prevailing prime rate (5.0% as of December 1, 2004) or LIBOR plus 225 basis
points (4.6% at December 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
Liquid and Capital Resources (cont'd)
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dividends.
The amount borrowed under the line of credit varies based on our seasonal
requirements. As of October 31, 2004, direct borrowings were $35.4 million and
contingent liability under open letters of credit was approximately $9.5 million
compared to direct borrowings of $42.6 million and contingent liability under
open letters of credit of approximately $7.4 million as of October 31, 2003.
At October 31, 2004, we had cash and cash equivalents of $3.0 million. We
generally use significant cash in the first nine months of our fiscal year as we
build inventory and then generate receivables during the July to November
period, which normally generates our highest sales volumes of the year. We used
$48.0 million of cash in operating activities in the nine months ended October
31, 2004, resulting primarily from an increase in accounts receivable of $62.4
million and inventory of $8.6 million, offset in part by an increase in accounts
payable and accrued expenses of $14.9 million and our net income of $3.4
million. Cash flows generated by financing activities in the nine months ended
October 31, 2004 were primarily from direct borrowings under our line of credit
in the amount of $35.4 million. Capital expenditures were not significant during
the nine months ended October 31, 2004.
We expect to meet our cash needs from cash generated from annual operating
results and the availability of funds from our line of credit. We anticipate
that we will be able to enter into a new line of credit on terms comparable to
our existing agreement prior to or concurrent with the expiration of our current
line of credit agreement on May 31, 2005.
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
October 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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ITEM 6. EXHIBITS
10.1 License Agreement, dated November 29, 2004, between
Kenneth Cole Productions (LIC), Inc. and G-III Apparel
Group, Ltd. (1)
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 October 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 October 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 October 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 October 31, 2004.
---------------
(1) A request for confidentiality has been filed for certain portions of the
indicated document. Confidential portions have been omitted and filed separately
with the Securities and Exchange Commission as required by Rule 24b-2
promulgated under the Securities Exchange Act of 1934.
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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: December 15, 2004 By: /s/ Morris Goldfarb
----------------- -------------------
Morris Goldfarb
Chief Executive Officer
Date: December 15, 2004 By: /s/ Wayne Miller
----------------- ----------------
Wayne S. Miller
Chief Financial Officer
