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, 2005 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ------------------------- Commission File Number 0-18183 ---------------------------------------------------------- G-III APPAREL GROUP, LTD. (Exact name of registrant as specified in its charter) Delaware 41-1590959 ---------------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 512 Seventh Avenue, New York, New York 10018 (Address of Principal Executive Offices) (Zip Code) (212) 403-0500 ---------------------------------------------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ----------- Indicate by checkmark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---------- ------------ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---------- ------------ As of September 1, 2005, there were 8,167,764 common shares outstanding. Part I FINANCIAL INFORMATION Page No. Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - July 31, 2005, July 31, 2004 and January 31, 2005 ..............3 Condensed Consolidated Statements of Operations - For the Three Months Ended July 31, 2005 and 2004...............4 Condensed Consolidated Statements of Operations - For the Six Months Ended July 31, 2005 and 2004.................5 Condensed Consolidated Statements of Cash Flows - For the Six Months Ended July 31, 2005 and 2004.................6 Notes to Condensed Consolidated Financial Statements..............8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......19 Item 4. Controls and Procedures..........................................19 Part II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Stockholders..................20 Item 6. Exhibits.........................................................21 2 ITEM 1. FINANCIAL STATEMENTS G-III APPAREL GROUP, LTD. AND SUBSIDIARIES ------------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) <TABLE> JULY 31, JULY 31, JANUARY 31, 2005 2004 2005 ---- ---- ---- (unaudited) (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,194 $ 680 $ 16,574 Accounts receivable, net of allowance for doubtful accounts and sales discounts of $4,211, $6,503 and $6,690, respectively 53,078 34,195 24,783 Inventories, net 72,727 50,507 24,108 Deferred income taxes 3,357 5,895 3,357 Prepaid expenses and other current assets 15,145 8,429 3,887 ---------- ----------- ---------- Total current assets 145,501 99,706 72,709 PROPERTY, PLANT AND EQUIPMENT, NET 3,581 1,770 2,350 DEFERRED INCOME TAXES 2,050 1,940 2,050 INTANGIBLES 29,288 - - OTHER ASSETS 4,201 3,021 3,486 ---------- ----------- ---------- $ 184,621 $ 106,437 $ 80,595 ========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 48,906 $ 21,765 $ 770 Current maturities of obligations under capital leases 151 37 202 Income taxes payable - - 104 Accounts payable 31,336 19,916 6,565 Accrued expenses 7,688 5,330 5,200 ---------- ----------- ---------- Total current liabilities 88,081 47,048 12,841 NOTES PAYABLE, NON-CURRENT 28,350 - - OTHER NON-CURRENT LIABILITIES 774 247 824 ---------- ----------- ---------- 117,205 47,295 13,665 ---------- ----------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, 1,000,000 shares authorized; no shares issued and outstanding in all periods Common stock - $.01 par value; 20,000,000 shares authorized; 8,387,581, 7,414,950 and 7,521,915 shares issued, respectively 84 74 75 Additional paid-in capital 33,709 27,672 28,275 Accumulated other comprehensive income 62 56 50 Retained earnings 34,531 32,310 39,500 ---------- ----------- ---------- 68,386 60,112 67,900 Less common stock held in treasury - 244,817 shares at cost (970) (970) (970) ---------- ----------- ---------- 67,416 59,142 66,930 ---------- ----------- ---------- $ 184,621 $ 106,437 $ 80,595 ========== =========== ========== </TABLE> 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) <TABLE> THREE MONTHS ENDED JULY 31, --------------------------- (Unaudited) 2005 2004 ---- ---- Net sales $ 54,553 $ 43,975 Cost of goods sold 41,804 33,354 ----------- ---------- Gross profit 12,749 10,621 Selling, general and administrative expenses 12,600 11,790 Write-down of equity investment - 882 ----------- ---------- Operating income (loss) 149 (2,051) Interest and financing charges, net 527 197 ----------- ---------- Loss before income taxes (378) (2,248) Income tax benefit (77) (588) ----------- ---------- Net loss $ (301) $ (1,660) =========== ========== LOSS PER COMMON SHARE: Basic and Diluted: - ------------------ Net loss per common share $ (0.04) $ (0.23) =========== ========== Weighted average number of shares outstanding 7,491,000 7,162,000 =========== ========== </TABLE> 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) <TABLE> SIX MONTHS ENDED JULY 31, ------------------------- (Unaudited) 2005 2004 ---- ---- Net sales $ 68,320 $ 60,473 Cost of goods sold 54,656 48,113 ----------- ----------- Gross profit 13,664 12,360 Selling, general and administrative expenses 21,703 21,924 Write-down of equity investment - 882 ----------- ----------- Operating loss (8,039) (10,446) Interest and financing charges, net 530 270 ----------- ----------- Loss before income taxes (8,569) (10,716) Income tax benefit (3,599) (4,229) ----------- ----------- Net loss $ (4,970) $ (6,487) =========== =========== LOSS PER COMMON SHARE: Basic and Diluted: - ------------------ Net loss per common share $ (0.68) $ (0.91) ========= ========== Weighted average number of shares outstanding 7,338,000 7,141,000 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 5 <TABLE> G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) SIX MONTHS ENDED JULY 31, ------------------------- (Unaudited) ----------- 2005 2004 ---- ---- Cash flows from operating activities Net loss $ (4,970) $ (6,487) Adjustments to reconcile net loss to net cash used in operating activities, net of assets and liabilities acquired: Depreciation and amortization 781 635 Deferred financing charges 131 Write-down of equity investment 882 Changes in operating assets and liabilities: Accounts receivable (20,160) (14,891) Inventories, net (30,106) (22,146) Income taxes, net 50 (4,576) Prepaid expenses and other current assets (10,799) (2,584) Other assets (1,062) 81 Accounts payable and accrued expenses 16,989 12,585 ------------- ------------ Net cash used in operating activities (49,146) (36,501) ------------- ------------ Cash flows from investing activities Capital expenditures (648) (193) Acquisition of Marvin Richards, net of cash acquired (19,623) Acquisition of Winlit (580) ------------- Net cash used in investing activities (20,851) (193) ------------- ------------ Cash flows from financing activities Increase in notes payable, net 20,995 Repayment of terminated credit facility (12,457) Proceeds from new credit facility 36,405 Proceeds from term loan 30,000 Payments for capital lease obligations (101) (50) Proceeds from sale of common stock 675 Proceeds from exercise of stock options 83 348 ------------- ------------ Net cash provided by financing activities 54,605 21,293 ------------- ------------ Effect of exchange rate changes on cash and cash equivalents 12 9 ------------- ------------ Net decrease in cash and cash equivalents (15,380) (15,392) Cash and cash equivalents at beginning of period 16,574 16,072 ------------- ------------ Cash and cash equivalents at end of period $ 1,194 $ 680 ============= ============ </TABLE> 6 G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (in thousands) <TABLE> SIX MONTHS ENDED JULY 31, ------------------------- (Unaudited) ----------- 2005 2004 ---- ---- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 545 $ 279 Income taxes 308 328 Supplemental schedule of non-cash investing and financing activities: Shares issued in connection with the Marvin Richards acquisition $ 4,685 Debt assumed in connection with the Winlit asset acquisition 6,697 Detail of the Marvin Richards and Winlit acquisitions: Acquired intangibles $ 27,819 Fair value of other assets acquired 29,743 ----------- Fair value of total assets acquired 57,562 Liabilities assumed (32,655) Common stock issued (4,685) ----------- Net cash paid for acquisitions 20,222 Cash acquired 19 ----------- Cash paid for acquisitions $ 20,203 =========== </TABLE> The accompanying notes are an integral part of these statements. 7 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, 2005 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. Certain amounts in the Condensed Consolidated Statements of Operations for the three and six months ended July 31, 2004 have been reclassified to conform to the current period presentation. 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, 2005. Note 2 - Effects of Recently Issued Accounting Pronouncements - ------------------------------------------------------------- In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004), "Share-based Payment" that will require the Company to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123(R) requires that the fair value of share-based payments to employees be expensed over the period service is received. The Company is currently evaluating the requirements and impact of SFAS No. 123 (R) on the Company's consolidated financial statements. The Company believes the pro forma disclosures in Note 5 - Stock-Based Compensation provide an appropriate short-term indicator as to the level of expense that will be recognized in accordance with SFAS No. 123(R). SFAS No. 123(R) becomes effective for the Company on February 1, 2006. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No. 151 requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facility. The standard is effective for fiscal years beginning on or after January 1, 2006. We do not expect SFAS No. 151 to have a material effect on the Company's Consolidated Financial Statements. 8 Note 3 - Acquisitions of Marvin Richards and Winlit Group - --------------------------------------------------------- MARVIN RICHARDS - --------------- On July 11, 2005, the Company acquired all of the outstanding capital stock of J. Percy for Marvin Richards, Ltd., all of the membership interests of CK Outerwear, LLC and 50% of the membership interests in Fabio Licensing, LLC, collectively referred to as Marvin Richards, for aggregate consideration consisting of (i) $19,185,000 in cash, (ii) 466,666 shares of the Company's common stock and (iii) 150,000 shares of the Company's common stock that may vest based on the future market price of the Common Stock through the fiscal year ending January 31, 2009. In August 2005, 25,000 of the unvested shares vested. The sellers are also entitled to receive additional purchase price based on the performance of the Company's new Marvin Richards business through the fiscal year ending January 31, 2009. The Company will account for its interest in the operations of Fabio Licensing, LLC, which is not material, using the equity method of accounting. The total consideration paid by the Company in connection with the acquisition of Marvin Richards was $24.5 million, including associated fees and expenses. The cost to acquire Marvin Richards has been preliminarily allocated to the assets and liabilities assumed according to estimated fair values and is subject to adjustment when additional information concerning asset and liability valuations is finalized. The preliminary allocation has resulted in acquired intangibles of $21.9 million related to the acquisition of Marvin Richards. Marvin Richards has been an outerwear manufacturer and supplier for over 20 years under the Marvin Richards brand name. In addition, it has licenses for men's and women's outerwear under the Calvin Klein and ck Calvin Klein brand name and women's outerwear under the St. John brand name. Marvin Richards also conducts a variety of private label programs. WINLIT - ------ On July 11, 2005, the Company acquired certain operating assets of Winlit Group, Ltd. for aggregate consideration consisting of $580,000 in cash and the assumption of $6.7 million of Winlit's bank debt that became part of the revolving credit debt under the Company's new financing agreement (see Note 7). Winlit is entitled to receive additional purchase price based on the performance of the Company's new Winlit business through January 31, 2009. The total consideration paid by the Company in connection with the acquisition of Winlit was $7.4 million, including associated fees and expenses. The cost to acquire Winlit has been preliminarily allocated to the assets and liabilities assumed according to estimated fair values and is subject to adjustment when additional information concerning asset and liability valuations is finalized. The preliminary allocation has resulted in acquired intangibles of $5.9 million related to the acquisition of Winlit assets. Winlit has been a supplier of outerwear for over 35 years. As a result of acquiring Winlit's assets, the Company has licenses for men's and women's outerwear under the Guess? brand and leather outerwear under the Tommy Hilfiger brand, as well as licenses for Ellen Tracy, London Fog, Pacific Trail and BCBG by Max Azria. Winlit also sells apparel under the Winlit, LNR, and NY 10018 owned names and through private label programs. 9 The following unaudited pro forma information presents the results of operations of the Company as if the Marvin Richards and Winlit acquisitions had taken place on February 1, 2004: Three Months ended July 31, Six Months ended July 31, --------------------------- ------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands, except per share amounts) Net sales $ 54,360 $ 50,946 $ 76,543 $ 72,098 Net loss (4,978) (5,176) (12,990) (12,860) Loss per share: Basic and diluted $ (0.61) $ (0.67) $ (1.63) $ (1.66) The unaudited pro forma results shown above reflect the assumption that the Company would have financed the acquisitions under identical terms and conditions as the actual financing and do not reflect any anticipated cost savings that may result from combining the entities. The unaudited pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the Marvin Richards and Winlit acquisitions occurred as of February 1, 2004. The operating results of Marvin Richards and Winlit have been included in the Company's financial statements since July 11, 2005. Note 4 - Inventories - -------------------- Inventories consist of: JULY 31, July 31, January 31, 2005 2004 2005 ---- ---- ---- (in thousands) Finished goods $ 64,624 $ 44,312 $ 20,761 Work-in-process 593 1,647 83 Raw materials 7,510 4,548 3,264 -------- -------- -------- $ 72,727 $ 50,507 $ 24,108 ======== ======== ======== Note 5 - 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. Note 6 - 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 market price 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. 10 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: <TABLE> Three Months ended July 31, Six Months ended July 31, --------------------------- ------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands, except per share amounts) Net loss - as reported $ (301) $ (1,660) $ (4,970) $ (6,487) Deduct: Stock-based employee compensation expense determined under fair value method, net of related tax effects 79 88 154 174 ------- --------- -------- --------- Pro forma net loss $ (380) $ (1,748) $ (5,124) $ (6,661) ======= ========= ======== ========= Loss per share: Basic and diluted - as reported $ (0.04) $ (0.23) $ (0.68) $ (0.91) Basic and diluted - adjusted $ (0.05) $ (0.24) $ (0.70) $ (0.93) </TABLE> Note 7 - Notes Payable - ---------------------- On July 11, 2005, the Company entered into a financing agreement with The CIT Group/Commercial Services, Inc., as Agent, for a consortium of banks. The financing agreement is a three year senior secured credit facility providing for borrowings in the aggregate principal amount of up to $195 million. The facility consists of a revolving line of credit and a term loan. The revolving line of credit provides for a maximum line ranging from $45 million to $165 million at specific times during the year, provided that there are no borrowings outstanding for at least 45 days during the period from December 1 through April 30 each year. Amounts available under the line are subject to borrowing base formulas and over advances as specified in the financing agreement. Borrowings under the line of credit bear interest at the Company's option at the prime rate or LIBOR plus 2.25%. The term loan is in the principal amount of $30 million payable over three years with eleven quarterly installments of principal in the amount of $1,650,000, commencing on December 31, 2005, and the remaining balance of $11,850,000 due on maturity of the loan. Mandatory prepayments are required under the term loan commencing with the fiscal year ending January 31, 2007 to the extent of 50% of excess cash flow, as defined. The term loan bears interest, at the Company's option, at prime plus 1% or LIBOR plus 3.25%. The financing agreement requires the Company, among other covenants, to maintain certain earnings, tangible net worth and minimum fixed charge coverage ratios as defined. It also limits payments for cash dividends and stock redemption to $1.5 million plus an additional amount for stock redemptions based on the proceeds of sales of equity securities. The financing agreement is secured by all of the assets of the Company. On July 11, 2005, in connection with the financing agreement entered into on that date, the Company repaid in full all borrowings under its previously existing secured working capital line of credit. As a result, that line of credit was terminated. Notes payable also includes a foreign note payable ($770,000) by PT Balihides, the Company's inactive Indonesian subsidiary. 11 Note 8 - Closing of Manufacturing Facility - ------------------------------------------ The unpaid portion of the non-recurring charge associated with the closing of our Indonesian manufacturing facility in December 2002 is included in "Accrued expenses" in the accompanying Consolidated Balance Sheets. The balance in the reserve at July 31, 2005 and January 31, 2005 is $403,000 and $411,000, respectively, and represents accrued expenses, severance and other miscellaneous costs. Based on current estimates, management believes that existing accruals are adequate. Note 9 - 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: <TABLE> THREE MONTHS ENDED JULY 31, --------------------------- 2005 2004 ---- ---- NON- Non- LICENSED LICENSED Licensed Licensed -------- -------- -------- -------- Net sales $ 27,046 $ 27,507 $ 26,684 $ 17,291 Cost of goods sold 20,332 21,472 20,805 12,549 --------- --------- -------- --------- Gross profit 6,714 6,035 5,879 4,742 Selling, general and administrative 8,363 4,237 8,370 3,420 Write-down of equity investment - - - 882 --------- --------- -------- --------- Operating profit (loss) (1,649) 1,798 (2,491) 440 Interest expense, net 445 82 179 18 --------- --------- -------- --------- Income (loss) before income taxes $ (2,094) $ 1,716 $ (2,670) $ 422 ========= ========= ======== ========= SIX MONTHS ENDED JULY 31, ------------------------- 2005 2004 ---- ---- NON- Non- LICENSED LICENSED Licensed Licensed -------- -------- -------- -------- Net sales $ 38,143 $ 30,177 $ 40,937 $ 19,536 Cost of goods sold 30,333 24,323 32,769 15,344 -------- --------- --------- --------- Gross profit 7,810 5,854 8,168 4,192 Selling, general and administrative 14,655 7,048 15,771 6,153 Write-down of equity investment - - - 882 -------- --------- --------- --------- Operating loss (6,845) (1,194) (7,603) (2,843) Interest expense, net 512 18 265 5 -------- --------- --------- --------- Loss before income taxes $ (7,357) $ (1,212) $ (7,868) $ (2,848) ======== ========= ========= ========= </TABLE> 12 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, possible business disruption from acquisitions, 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. The sale of licensed product has been a key element of our business strategy for many years. As part of this strategy, we are continually adding new fashion and sports apparel licenses and are continuously seeking new licensing opportunities. We believe that consumers prefer to buy brands they know and we have sought licenses that would increase the portfolio of name brands we can offer through different tiers of retail distribution and at a variety of price points. On July 11, 2005, we acquired the business of Marvin Richards for aggregate consideration consisting of (i) $19,185,000 in cash, (ii) 466,666 shares of our common stock and (iii) 150,000 shares of our common stock that may vest based on the future market price of our common stock through the fiscal year ending January 31, 2009. In August 2005, 25,000 of the unvested shares vested. The sellers are also entitled to receive additional purchase price based on the performance of our new Marvin Richards business through the fiscal year ending January 31, 2009. Marvin Richards has been an outerwear manufacturer and supplier for over 20 years under the Marvin Richards brand name. In addition, it has licenses for men's and women's outerwear under the Calvin Klein and ck Calvin Klein brand name and women's outerwear under the St. John brand name. Marvin Richards also conducts a variety of private label programs. 13 On July 11, 2005, we also acquired specified operating assets of Winlit Group, Ltd. for aggregate consideration consisting of $580,000 in cash and the assumption of $6.7 million of Winlit's bank debt. Winlit is entitled to receive additional purchase price based on the performance of our new Winlit business through January 31, 2009. Winlit has been a supplier of outerwear for over 35 years. As a result of acquiring Winlit's assets, we have licenses for men's and women's outerwear under the Guess? brand and leather outerwear under the Tommy Hilfiger brand, as well as licenses for Ellen Tracy, London Fog, Pacific Trail and BCBG by Max Azria. Winlit also sells apparel under the Winlit, LNR, and NY 10018 owned names and through private label programs. The operating results of Marvin Richards and Winlit have been included in our financial statements since July 11, 2005. These acquisitions are consistent with our strategy to increase the portfolio of brands that we offer through different tiers of retail distribution and at a variety of price points. Both transactions are expected to complement our existing group of licensed brands, G-III owned labels and private label programs. These acquisitions are expected to result in opportunities for expense leverage, economies of scale, and sales growth. We entered into a new financing agreement on July 11, 2005 to fund the purchase price for these acquisitions and provide additional working capital. See "Liquidity and Capital Resources" for a description of this agreement. RESULTS OF OPERATIONS THREE MONTHS ENDED JULY 31, 2005 COMPARED TO THREE MONTHS ENDED JULY 31, 2004 Net sales for the three months ended July 31, 2005 increased to $54.6 million from $44.0 million in the same period last year. Net sales from our new Marvin Richards and Winlit businesses accounted for $6.1 million of this increase. Net sales of licensed apparel were approximately the same in both periods, as sales of $2.5 million of licensed apparel by our two new businesses offset a net decrease of $2.1 million in sales of our existing licensed apparel. Net sales of our non-licensed apparel increased $10.2 million to $27.5 million from $17.3 million in the same quarter last year. This increase is primarily a result of an increase of $8.2 million in sales of non-licensed apparel to our largest customer and sales of $3.6 million of non-licensed apparel by our two new businesses. Gross profit increased to $12.7 million, or 23.4% of net sales, for the three month period ended July 31, 2005 from $10.6 million, or 24.2% of net sales, in the same period last year. Gross profit from our two new businesses accounted for $1.9 million of this increase. The gross profit percentage in our licensed apparel segment increased to 24.8% in the three month period ended July 31, 2005 from 22.0% in the same period last year. The gross profit percentage in our licensed apparel segment increased due to stronger performance in our sports licensing and Sean John divisions. The gross profit percentage in our non-licensed apparel segment decreased to 21.9% in the three months ended July 31, 2005 from 27.4% in the same period last year due, in part, to lower commission based sales. Commission fee income, which is primarily generated in the non-licensed apparel segment, decreased to $211,000 during the three months ended July 31, 2005 from $839,000 in the comparable period of the prior year. There is no cost of goods sold component associated with these commission transactions. Increased closeout activity in our non-licensed brands also had a negative impact on the gross margin percentage of our non-licensed apparel segment. Selling, general and administrative expenses increased to $12.6 million in the three month period ended July 31, 2005 from $11.8 million in the same period last year. Selling, general and 14 administrative expenses of our two new businesses were $1.1 million and our third party warehousing costs increased by $222,000. These additional expenses were offset in part by decreases in advertising and promotional expenses ($477,000) and a reduction in our bad debt expense ($137,000). Third party warehousing expense increased because more units were shipped to our largest customer utilizing third party warehouses compared to the prior comparable quarter. Advertising and promotional expenses decreased primarily due to lower cooperative advertising, a decrease in advertising purchased by us, and a reduction in national advertising with respect to some of our licenses. Bad debt expense was favorably impacted by the improved collections of our accounts receivable as a result of our continued focus on slower paying accounts. Interest and finance charges, net for the three month period ended July 31, 2005 were $527,000 compared to $197,000 for the comparable period last year. Interest expense increased due to the additional debt incurred in connection with the financing of our two acquisitions and the write off of deferred costs associated with our prior credit agreement that was terminated, as well as due to an increase in interest rates from an average of approximately 4.25% to 6.25%, which represented approximately $50,000 of the increase. Income tax benefit for the three months ended July 31, 2005 was $77,000 compared to $588,000 in the comparable period last year. The effective rate for the current three months is 20.4% compared to 26.2% for the comparable prior period. The current effective rate reflects a change in our estimated annual effective tax rate from 43% in our first fiscal quarter to 42% in our second fiscal quarter. The effective rate in the prior comparable period 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, 2005 COMPARED TO SIX MONTHS ENDED JULY 31, 2004 Net sales for the six months ended July 31, 2005 were $68.3 million compared to $60.5 million for the same period in the prior year. Net sales from our new Marvin Richards and Winlit businesses accounted for $6.1 million of this increase. Net sales of licensed apparel decreased $2.8 million to $38.1 million from $40.9 million in the same period last year, primarily as a result of decreased sales of our fashion sports apparel (approximately $5.4 million) and Kenneth Cole and Nine West brands (approximately $3.8 million) offset in part by increased sales in our core sports licensed product (approximately $3.6 million) and $2.5 million of sales of licensed apparel by our two new businesses. Net sales of non-licensed apparel increased $10.7 million to $30.2 million from $19.5 million in the same period last year. The increase is primarily a result of an increase of $8.2 million in sales of non-licensed apparel to our largest customer and sales of $3.6 million of non-licensed apparel by our two new businesses offset, in part, by reduced sales of our Siena Studio product ($1.2 million). Gross profit increased to $13.7 million, or 20.0% of net sales, for the six months ended July 31, 2005 from $12.4 million, or 20.4% of net sales, for the same period last year. Gross profit from our two new businesses accounted for $1.9 million of gross profit which offset a decrease of $600,000 in the gross profit from our existing businesses. The gross profit percentage of our licensed apparel segment was 20.5% in the six months ended July 31, 2005 compared to 19.9 % in the same period last year. The gross profit percentage in our non-licensed apparel segment decreased to 19.4% in the six months ended July 31, 2005 from 21.5% in the six months ended July 31, 2004. The decrease in gross profit percentage in our non-licensed apparel segment resulted from lower commission based sales. Commission fee income, which is primarily generated in the non-licensed apparel segment, decreased to $262,000 during the six months ended July 31, 2005 from $1.0 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 six months ended July 31, 2005 were $21.7 million compared to $21.9 million for the same period last year. Selling, general and administrative 15 expenses of our two new businesses were $1.1 million. These additional expenses were more than offset by decreases in advertising and promotional expenses ($863,000) and a reduction in our bad debt expense ($350,000). Advertising and promotional expenses decreased primarily due to lower cooperative advertising, a decrease in advertising purchased by us, and a reduction in national advertising with respect to some of our licenses. Bad debt expense was favorably impacted by the improved collections of our accounts receivable as a result of our continued focus on slower paying accounts. Interest and finance charges, net were $530,000 for the six months ended July 31, 2005 compared to $270,000 in the same period last year. Interest expense increased due to the additional debt incurred in connection with the financing of our two acquisitions and the write off of deferred costs associated with our prior credit agreement that was terminated, as well as due to an increase in average interest rates from approximately 4.25% to 6.25%, representing approximately $50,000 of the increase. We had an income tax benefit of $3.6 million for the six months ended July 31, 2005 compared to $4.2 million in the same period last year. Our effective tax rate was 42.0% in the six month period ended July 31, 2005 compared to 39.5% 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. LIQUIDITY AND CAPITAL RESOURCES Our primary cash requirements are to fund our seasonal build up in inventories and accounts receivable, primarily during the second and third fiscal quarters each year. Due to the seasonality of our business, we generally reach our maximum borrowing under our asset-based credit facility during our third fiscal quarter. During the three months ended July 31, 2005, we also used cash to fund the purchase of Marvin Richards and Winlit. On July 11, 2005, we entered into a financing agreement with The CIT Group/Commercial Services, Inc., as Agent, for a consortium of banks. The financing agreement is a three year, senior secured credit facility providing for borrowings in the aggregate principal amount of up to $195.0 million. The facility consists of a revolving line of credit and a term loan. This financing agreement replaced our prior financing agreement that was a revolving line of credit that provided a maximum line of credit in amounts that ranged from $35 million to $110 million at specific times during the year. The revolving line of credit provides for a maximum line ranging from $45 million to $165 million at specific times during the year, provided that there are no borrowings outstanding for at least 45 days during the period from December 1 through April 30 each year. Amounts available under the line are subject to borrowing base formulas and over advances as specified in the financing agreement. Borrowings under the line of credit bear interest at our option at the prime rate or LIBOR plus 2.25%. The amount borrowed under the line of credit varies based on our seasonal requirements. As of July 31, 2005, direct borrowings were $46.5 million and our contingent liability under open letters of credit was approximately $26.5 million compared to direct borrowings of $21.0 million and contingent liability under open letters of credit of approximately $27.7 million as of July 31, 2004. The term loan is in the principal amount of $30 million payable over three years with eleven quarterly installments of principal in the amount of $1,650,000, commencing on December 31, 2005, and the remaining balance of $11,850,000 due on maturity of the loan. Mandatory prepayments are required under the term loan commencing with the fiscal year ending January 31, 2007 to the extent of 50% of excess cash flow, as defined. The term loan bears interest, at our option, at prime plus 1% or LIBOR plus 3.25%. 16 PT Balihides, our Indonesian subsidiary, had a separate credit facility with an Indonesian bank. In December 2002, we closed the manufacturing facility operated by this subsidiary. The notes payable under this facility represent borrowings as of July 31, 2005 of approximately $770,000. The loan is collateralized by the property, plant, and equipment of this subsidiary. No other G-III entity has guaranteed this loan. We continue to be in discussions with the bank regarding settlement of this debt. We had cash and cash equivalents of $1.2 million as of July 31, 2005. We generally use significant cash in the operation of our business in the first half of our fiscal year as we prepare for the third quarter, which is generally our highest sales volume quarter. This year we also used significant cash to fund the purchase price of the two acquisitions we made in July 2005. We used $49.1 million of cash from operating activities in the six months ended July 31, 2005, primarily as a result of our net loss of $5.0 million and increases of $30.1 million in inventory, $20.2 million in accounts receivable and $10.7 million in prepaid expenses, offset in part by an increase in accounts payable and accrued expenses of $17.0 million. The increase in accounts receivable was a result of approximately $7.0 million of additional accounts receivable related to sales of the acquired businesses offset by a decrease in accounts receivable from our existing businesses. The increase in inventory for the six months is a result of the beginning of our fall shipping season, which is consistent with our seasonal pattern in prior years. Prepaid expenses increased due to an increase in payments to licensors, deferred financing costs, and sampling costs. The increase in accounts payable and accrued expenses was primarily a result of the purchasing activity for the fall season. We used $21.3 million of cash for investing activities in the six months ended July 31, 2005, primarily in connection with the acquisitions of Marvin Richards and Winlit. We used the balance of $648,000 in investing activities for capital expenditures, primarily to renovate existing and additional warehouse space that we leased. Cash from financing activities provided $54.6 million in the six months ended July 31, 2005 primarily as a result of borrowings of $66.4 million under our new financing agreement, offset in part by the repayment of $12.5 million under our terminated credit facility. These borrowings were used to repay our prior revolving credit agreement, finance our inventory purchases for the upcoming fall season and for other working capital purposes and pay the cash portion of the purchase price for the acquisitions of Marvin Richards and Winlit and expenses incurred in connection with the acquisitions and the new financing agreement. 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, 2005 are those that depend most heavily on these judgments and estimates. As of July 31, 2005, there have been no material changes to our critical accounting policies except for the additional critical policy set forth below. 17 Goodwill and Intangible Assets On July 11, 2005, we acquired Marvin Richards and specified operating assets of Winlit. SFAS No. 142 requires that goodwill and intangible assets with an indefinite life be tested for impairment at least annually. Goodwill and intangible assets with an indefinite life are required to be written down when impaired, rather than amortized as previous accounting standards required. Goodwill and intangible assets with an indefinite life are tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is generally determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the fair value methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples of the reportable unit. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our goodwill and intangible assets with an indefinite life. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. In estimating the fair value of a reporting unit for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of that reporting unit. Although our cash flow forecasts are based on assumptions that are consistent with our plans and estimates we are using to manage the underlying businesses, there is significant exercise of judgment involved in determining the cash flows attributable to a reporting unit over its estimated remaining useful life. In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units. We also consider our and our competitor's market capitalization on the date we perform the analysis. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge. We have preliminarily allocated the purchase price of our two acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. These preliminary estimates are subject to adjustment when additional information concerning asset and liability valuations is finalized. The preliminary allocation resulted in acquired intangibles of $21.9 million related to the acquisition of Marvin Richards and $5.9 million related to the acquisition of specified assets of Winlit. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004), "Share-based Payment" that will require us to expense costs related to share-based payment transactions with employees. With limited exceptions, SFAS No. 123(R) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123(R) becomes effective for us on February 1, 2006. We believe the pro forma disclosures in Note 6 - Stock-Based Compensation to the accompanying financial statements provide an appropriate short-term indicator as to the level of expense that will be recognized in accordance with SFAS No. 123(R). In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No. 151 requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facility. The standard is effective for fiscal years beginning on or after January 1, 2006. We do not expect SFAS No. 151 to have a material effect on the Company's Consolidated Financial Statements. 18 TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS As of July 31, 2005, our contractual obligations were as follows (in thousands): Payments Due By Period Less than 1 1-3 3-5 More than 5 ----------- Contractual Obligations Total Year Years Years Years - ----------------------- ----- ---- ----- ----- ----- Long-term debt obligations (1) $ 30,770 $2,420 $ 28,350 Capital lease obligations 733 250 422 $ 61 Operating lease obligations 23,989 4,123 8,128 8,293 $ 3,445 Minimum royalty payments (2) 42,729 16,958 24,895 876 Purchase obligations (3) 26,500 26,500 -------- -------- -------- ------ Total $124,721 $ 50,251 $ 61,795 $9,230 $ 3,445 ======== ======== ======== ====== ======= (1) Includes term loan under new credit facility and notes payable by PT Balihides (an Indonesian subsidiary) under a previously existing line of credit. No other G-III entity has guaranteed the PT Balihides note. (2) Includes obligations to pay minimum scheduled royalty, advertising and other required payments under various license agreements. (3) Includes outstanding trade letters of credit, which represent inventory purchase commitments that typically mature in less than six months. 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, 2005. 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. Acquisition of Marvin Richards and Winlit On July 11, 2005, we completed the acquisition of Marvin Richards and specified assets of Winlit. The operating results of Marvin Richards and Winlit are included in our results from July 11, 2005 to July 31, 2005. We have applied our disclosure controls and procedures to Marvin Richards and Winlit for that period. Pro forma information is based upon unaudited information of the acquired companies for periods prior to July 11, 2005. We have not evaluated the controls that were in place during these periods. We will continue to closely monitor and refine our internal controls over financial reporting for these new businesses during the transition and integration period. No deficiencies have been identified at this time. 19 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS ----------------------------------------------- (a) Our Annual Meeting of Stockholders was held on June 9, 2005. (b) The following matters were voted on and approved by our stockholders at the Annual Meeting: (i) The election of seven 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 6,785,673 434,212 -------------------- ------------ --------------------------- Thomas J. Brosig 6,802,218 417,667 -------------------- ------------ --------------------------- Pieter Deiters 6,803,023 416,862 -------------------- ------------ --------------------------- Alan Feller 6,707,090 512,795 -------------------- ------------ --------------------------- Carl Katz 6,733,990 485,895 -------------------- ------------ --------------------------- Willem van Bokhorst 6,788,623 431,262 -------------------- ------------ --------------------------- Richard White 6,788,323 431,562 ==================== ============ =========================== (ii) The ratification of the appointment of Ernst & Young LLP as our independent certified public accountants for the fiscal year ending January 31, 2006. Our stockholders voted as follows: FOR: 6,496,842 AGAINST: 14,873 ABSTENTIONS: 1,000 (iii)The approval of the 2005 Stock Incentive Plan. Our stockholders voted as follows: FOR: 3,418,261 AGAINST: 611,658 20 ITEM 6. 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 July 31, 2005. 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, 2005. 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, 2005. 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 fiscal quarter ended July 31, 2005. 21 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 14, 2005 By: /s/ Morris Goldfarb ------------------- Morris Goldfarb Chief Executive Officer Date: September 14, 2005 By: /s/ Wayne S. Miller ------------------- Wayne S. Miller Chief Financial Officer 22
G-III Apparel (GIII)
Filed: 14 Sep 05, 12:00am