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, 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 December 1, 2005, there were 8,190,746 common shares outstanding. Part I FINANCIAL INFORMATION Page No. Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - October 31, 2005, October 31, 2004 and January 31, 2005 ..........................3 Condensed Consolidated Statements of Operations - For the Three Months Ended October 31, 2005 and 2004..............................4 Condensed Consolidated Statements of Operations - For the Nine Months Ended October 31, 2005 and 2004...............................5 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 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 6. Exhibits ..............................................................................20 2 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, OCTOBER 31, JANUARY 31, 2005 2004 2005 ---- ---- ---- (unaudited) (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,671 $ 3,043 $ 16,574 Accounts receivable, net of allowance for doubtful accounts and sales discounts of $10,509, $10,202 and $6,690, respectively 140,115 81,698 24,783 Inventories, net 52,123 37,010 24,108 Deferred income taxes 3,357 5,895 3,357 Prepaid expenses and other current assets 7,043 2,599 3,887 --------- --------- --------- Total current assets 205,309 130,245 72,709 PROPERTY, PLANT AND EQUIPMENT, NET 4,330 2,347 2,350 DEFERRED INCOME TAXES 2,050 1,940 2,050 INTANGIBLES, NET 28,389 2,005 1,884 OTHER ASSETS 3,594 876 1,602 --------- --------- --------- $ 243,672 $ 137,413 $ 80,595 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 96,111 $ 36,211 $ 770 Current maturities of obligations under capital leases 191 71 202 Income taxes payable 6,710 4,101 104 Accounts payable 20,350 19,898 6,565 Accrued expenses 11,845 7,605 5,200 --------- --------- --------- Total current liabilities 135,207 67,886 12,841 NOTES PAYABLE, NON-CURRENT 23,400 -- -- OTHER NON-CURRENT LIABILITIES 684 412 824 --------- --------- --------- 159,291 68,298 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; 8,425,563, 7,448,215 and 7,521,915 shares issued, respectively 84 74 75 Additional paid-in capital 35,924 27,753 28,275 Accumulated other comprehensive income -- 51 50 Retained earnings 49,343 42,207 39,500 --------- --------- --------- 85,351 70,085 67,900 Common stock held in treasury - 244,817 shares at cost (970) (970) (970) --------- --------- --------- 84,381 69,115 66,930 --------- --------- --------- $ 243,672 $ 137,413 $ 80,595 ========= ========= ========= 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) 2005 2004 ---- ---- Net sales $ 186,621 $ 115,406 Cost of goods sold 131,503 81,358 ---------- ---------- Gross profit 55,118 34,048 Selling, general and administrative expenses 27,337 16,135 ---------- ---------- Operating income 27,781 17,913 Interest and financing charges, net 2,241 550 ---------- ---------- Income before income taxes 25,540 17,363 Income tax expense 10,727 7,466 ---------- ---------- Net income $ 14,813 $ 9,897 ========== ========== INCOME PER COMMON SHARE: Basic: - ----- Net income per common share $ 1.87 $ 1.38 ========== ========== Weighted average number of shares outstanding 7,927,000 7,190,000 ========== ========== Diluted: - ------- Net income per common share $ 1.73 $ 1.33 ========== ========== Weighted average number of shares outstanding 8,553,000 7,429,000 ========== ========== The accompanying notes are an integral part of these statements. 4 G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) NINE MONTHS ENDED OCTOBER 31, (Unaudited) 2005 2004 ---- ---- Net sales $ 254,941 $ 175,878 Cost of goods sold 186,159 129,471 ---------- ---------- Gross profit 68,782 46,407 Selling, general and administrative expenses 49,040 38,058 Write-down of equity investment -- 882 ---------- ---------- Operating income 19,742 7,467 Interest and financing charges, net 2,771 820 ---------- ---------- Income before income taxes 16,971 6,647 Income tax expense 7,128 3,237 ---------- ---------- Net income $ 9,843 $ 3,410 ========== ========== INCOME PER COMMON SHARE: Basic: - ----- Net income per common share $ 1.31 $ 0.48 ========== ========== Weighted average number of shares outstanding 7,538,000 7,158,000 ========== ========== Diluted: - ------- Net income per common share $ 1.23 $ 0.46 ========== ========== Weighted average number of shares outstanding 7,995,000 7,480,000 ========== ========== The accompanying notes are an integral part of these statements. 5 G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) NINE MONTHS ENDED OCTOBER 31, (Unaudited) 2005 2004 ---- ---- Cash flows from operating activities Net income $ 9,843 $ 3,410 Adjustments to reconcile net income to net cash used in operating activities, net of assets and liabilities acquired: Depreciation and amortization 2,050 994 Non-cash compensation 1,738 Deferred financing charges 311 Write-down of equity investment 882 Changes in operating assets and liabilities: Accounts receivable (107,197) (62,394) Inventories, net (9,502) (8,649) Income taxes, net 6,760 2,442 Prepaid expenses and other current assets (2,877) 329 Other assets (572) 100 Accounts payable and accrued expenses 10,159 14,892 --------- --------- Net cash used in operating activities (89,287) (47,994) --------- --------- Cash flows from investing activities Capital expenditures (860) (834) Acquisition of Marvin Richards, net of cash acquired (19,961) Acquisition of Winlit (699) --------- --------- Net cash used in investing activities (21,520) (834) --------- --------- Cash flows from financing activities Increase in notes payable, net 35,441 Repayment of terminated credit facility (12,457) Proceeds from new credit facility 78,660 Proceeds from term loan 30,000 Payments for capital lease obligations (151) (75) Proceeds from sale of common stock 675 Proceeds from exercise of stock options 227 429 --------- --------- Net cash provided by financing activities 96,954 35,795 --------- --------- Effect of exchange rate changes on cash and cash equivalents (50) 4 --------- --------- Net decrease in cash and cash equivalents (13,903) (13,029) Cash and cash equivalents at beginning of period 16,574 16,072 --------- --------- Cash and cash equivalents at end of period $ 2,671 $ 3,043 ========= ========= 6 G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) (in thousands) NINE MONTHS ENDED OCTOBER 31, (Unaudited) 2005 2004 ---- ---- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,835 $ 864 Income taxes 322 737 Supplemental schedule of non-cash investing and financing activities: Acquisition of fixed assets under capital lease $ 174 Shares issued in connection with acquisitions of Marvin Richards and Winlit $ 5,019 Debt assumed in connection with the Winlit asset acquisition 6,697 Detail of the Marvin Richards and Winlit acquisitions: Acquired intangibles $ 27,792 Fair value of other assets acquired 30,561 -------- Fair value of total assets acquired 58,353 Liabilities assumed (32,655) Common stock issued (5,019) -------- Cash paid for acquisitions 20,679 Cash acquired 19 -------- Net cash paid for acquisitions $ 20,660 ======== 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 nine month periods ended October 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 Balance Sheets as of January 31, 2005 and October 31, 2004 and the Condensed Consolidated Statements of Operations for the three and nine months ended October 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. The Company does 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. All shares were valued at the market price on the date issued, except for the restricted stock which was based on the market value on the date the 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 $24.9 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 $22.5 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 (i) $580,000 in cash (ii) 30,000 shares of the Company's common stock valued at the market price on July 11, 2005, less consideration paid ($7.50 per share) and (iii) 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 $7.5 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 $5.3 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 October 31, Nine Months ended October 31, --------------------------------- ----------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands, except per share amounts) Net sales $ 186,621 $ 177,114 $ 263,164 $ 249,212 Net income 14,813 15,015 1,822 1,273 Income per share: Basic $ 1.83 $ 1.92 $ 0.23 $ 0.16 Diluted $ 1.73 $ 1.87 $ 0.22 $ 0.16 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, which are stated at lower of cost (determined by the first-in, first out method) or market, consist of: OCTOBER 31, October 31, January 31, 2005 2004 2005 ---- ---- ---- (in thousands) Finished goods $ 47,351 $ 32,926 $ 20,761 Work-in-process 682 363 83 Raw materials 4,090 3,721 3,264 -------- -------- -------- $ 52,123 $ 37,010 $ 24,108 ======== ======== ======== Note 5 - 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. Diluted income per share amounts are computed using the weighted average number of common shares and potential dilutive common shares, consisting of stock options and restricted stock, 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: Three Months ended October 31, Nine Months ended October 31, ------------------------------ ----------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (in thousands, except per share amounts) Net income - as reported $ 14,813 $ 9,897 $ 9,843 $ 3,410 Deduct: Stock-based employee compensation expense determined under fair value method, net of related tax effects 65 83 218 257 ---------- --------- --------- --------- Pro-forma net income $ 14,748 $ 9,814 $ 9,625 $ 3,153 ========== ========= ========= ========= Basic income per share - as reported $ 1.87 $ 1.38 $ 1.31 $ 0.48 Pro-forma basic income per share $ 1.86 $ 1.36 $ 1.28 $ 0.44 Diluted income per share - as reported $ 1.73 $ 1.33 $ 1.23 $ 0.46 Pro-forma diluted income per share $ 1.72 $ 1.32 $ 1.20 $ 0.42 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 October 31, 2005 and January 31, 2005 is $398,000 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 nine month periods indicated below: THREE MONTHS ENDED OCTOBER 31, --------------------------------------- 2005 2004 ---- ---- NON- Non- LICENSED LICENSED Licensed Licensed Net sales $ 108,054 $ 78,567 $ 66,948 $ 48,458 Cost of goods sold 72,740 58,763 45,823 35,535 ------------ ------------ -------- -------- Gross profit 35,314 19,804 21,125 12,923 Selling, general and administrative 19,344 7,993 11,866 4,269 ----------- ---------- ------------ --------- Operating profit 15,970 11,811 9,259 8,654 Interest expense, net 1,638 603 450 100 ---------- ----------- ----------- ---------- Income before income taxes $ 14,332 $ 11,208 $ 8,809 $ 8,554 ========= ========== ========= ========= NINE MONTHS ENDED OCTOBER 31, --------------------------------------- 2005 2004 ---- ---- NON- Non- LICENSED LICENSED Licensed Licensed Net sales $ 146,197 $ 108,744 $ 107,884 $ 67,994 Cost of goods sold 103,073 83,086 78,592 50,879 ---------- -------- -------- -------- Gross profit 43,124 25,658 29,292 17,115 Selling, general and administrative 33,999 15,041 27,638 10,420 Write-down of equity investment - - - 882 ------------- ------------- -------------- ---------- Operating profit 9,125 10,617 1,654 5,813 Interest expense, net 2,150 621 715 105 ---------- ---------- ----------- ---------- Income before income taxes $ 6,975 $ 9,996 $ 939 $ 5,708 ========= ========= =========== ========= Included in finished goods inventory at October 31, 2005 are $29.6 million and $17.8 million of inventories for licensed and non-licensed apparel, respectively. Included in finished goods at October 31, 2004 are $22.1 million and $10.8 million of inventories for licensed and non-licensed apparel, respectively. All other assets are commingled. 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 licensed product, reliance on foreign manufacturers, risks of doing business abroad, the nature of the apparel industry, including changing consumer demand and tastes, seasonality, customer acceptance of new products, the impact of competitive products and pricing, dependence on existing management, 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. 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. On July 11, 2005, we also acquired specified operating assets of Winlit Group, Ltd. 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 13 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. In September 2005, we entered into a license agreement to manufacture and distribute women's better suits under the Calvin Klein label. We expect to begin shipping this line for the spring 2006 season. RESULTS OF OPERATIONS THREE MONTHS ENDED OCTOBER 31, 2005 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2004 Net sales for the three months ended October 31, 2005 increased by $71.2 million to $186.6 million from $115.4 million in the same period last year. Net sales from our new Marvin Richards and Winlit divisions accounted for $65.7 million of this increase. Net sales of licensed apparel increased $41.2 million to $108.1 million from $66.9 million. The increase is primarily a result of sales of $28.7 million of licensed apparel by our two new divisions. Sales under new licenses for Kenneth Cole Men's and IZOD ($7.0 million) and increases in our Sports Licensing ($4.3 million) and Jones Women's ($3.7 million) divisions also contributed to the increase in the licensed segment. Net sales of our non-licensed apparel increased $30.1 million to $78.6 million from $48.5 million in the same quarter last year. This increase is the result of sales of non-licensed apparel of $36.9 million by our new Marvin Richards and Winlit divisions offset, in part, by decreases in sales of non-licensed apparel under our pre-existing owned labels and private label programs. Gross profit increased by $21.1 million to $55.1 million, or 29.5% of net sales, for the three month period ended October 31, 2005 from $34.0 million, or 29.5% of net sales, in the same period last year. Gross profit from our two new divisions accounted for $20.3 million of this increase. The gross profit percentage in our licensed apparel segment was 32.7% in the three month period ended October 31, 2005 compared to 31.6% in the same period last year. The gross profit percentage in our licensed apparel segment increased primarily due to commission fee income of $1.1 million. There was no commission fee income in this segment in last year's comparable period. There is no cost of goods sold component associated with these commission transactions. The gross profit percentage in our non-licensed apparel segment decreased to 25.2% in the three months ended October 31, 2005 from 26.7% in the same period last year primarily due to a decrease in gross profit margins in connection with sales of our non-licensed women's apparel partially offset by an increase in commission fee income. Commission fee income generated in the non-licensed apparel segment increased to $1.8 million during the three months ended October 31, 2005 from $1.1 million in the comparable period of the prior year. Selling, general and administrative expenses increased $11.2 million to $27.3 million in the three month period ended October 31, 2005 from $16.1 million in the same period last year. Selling, general and administrative expenses increased primarily as a result of increases in personnel costs ($5.6 million), advertising and promotion ($2.3 million), facility costs ($898,000) and depreciation and amortization ($920,000). Personnel costs increased due to additional personnel of the acquired businesses, as well as a non-cash compensation charge of $1.6 million incurred as a result of the vesting during the quarter of 141,000 shares of restricted stock previously granted to key management. Advertising and promotion increased due to contractual advertising under the licenses that we added as a result the acquisitions and contractual advertising under our existing license agreements. Facility costs increased as a result of the additional rent under leases assumed from the acquired businesses. Amortization expense increased as a result of the amortization of the identifiable intangibles acquired. Interest and finance charges, net for the three month period ended October 31, 2005 were $2.2 million compared to $550,000 for the comparable period last year. Interest expense increased due to the additional debt incurred in connection with the financing of our two acquisitions, the write off of deferred costs associated with our prior credit agreement that was terminated, as well as an increase in interest rates from an average of approximately 4.25% in the comparable period last year to 6.5% in this year's period, which represented approximately $225,000 of the increase. 14 Income tax expense for the three months ended October 31, 2005 was $10.7 million compared to $7.5 million in the comparable period last year. The effective rate for the current three months is 42% compared to 43% for the comparable prior period. The effective rate in the current three month period reflects a change in our estimated annual effective tax rate from 43% in our first fiscal quarter to 42% in our second fiscal quarter due to the reduced effect of the permanent differences on our higher taxable income. NINE MONTHS ENDED OCTOBER 31, 2005 COMPARED TO NINE MONTHS ENDED OCTOBER 31, 2004 Net sales for the nine months ended October 31, 2005 increased by $79.0 million to $254.9 million from $175.9 million for the same period in the prior year. Net sales from our new Marvin Richards and Winlit divisions accounted for $71.8 million of this increase. Net sales of licensed apparel increased $38.3 million to $146.2 million from $107.9 million in the same period last year. The increase is primarily a result of sales of $31.2 million of licensed apparel by our two new divisions. Sales under new licenses for Kenneth Cole Men's and IZOD ($7.0 million) and an increase in our Sports Licensing division ($7.9 million) were partially offset by a decrease in sales in our fashion sports apparel business ($7.8 million). Net sales of non-licensed apparel increased $40.7 million to $108.7 million from $68.0 million in the same period last year. This increase is the result of sales of non-licensed apparel of $40.5 million by our new Marvin Richards and Winlit divisions offset, in part, by decreases in sales of non-licensed apparel under our pre-existing owned labels and private label programs. Gross profit increased $22.4 million to $68.8 million, or 27.0% of net sales, for the nine months ended October 31, 2005 from $46.4 million, or 26.4% of net sales, for the same period last year. Gross profit from our two new divisions accounted for $22.2 million of this increase. The gross profit percentage of our licensed apparel segment increased to 29.5% in the nine months ended October 31, 2005 from 27.2 % in the same period last year. The gross profit percentage in our licensed apparel increased primarily due to commission fee income of $1.1 million. There was no commission fee income in this segment in last year's comparable period. There is no cost of goods sold component associated with these commission transactions. In addition, the higher gross margin in connection with sales in our new Calvin Klein division also contributed to the increase in the gross profit percentage. The gross profit percentage in our non-licensed apparel segment decreased to 23.6% during the nine months ended October 31, 2005 compared to 25.2% in the nine months ended October 31, 2004 primarily due to a decrease in commission fee income. Commission fee income in the non-licensed apparel segment decreased to $1.8 million during the nine months ended October 31, 2005 from $2.1 million in the comparable period of the prior year. Selling, general and administrative expenses for the nine months ended October 31, 2005 were $49.0 million compared to $38.1 million for the same period last year. Selling, general and administrative expenses increased primarily as a result of increases in personnel costs ($6.0 million), advertising and promotion ($1.6 million), facility costs ($1.1 million) and depreciation and amortization ($1.1 million). Personnel costs increased due to the additional personnel of the acquired businesses, as well as a non-cash compensation charge of $1.6 million incurred as a result of the vesting during the quarter of 141,000 shares of restricted stock previously granted to key management. Advertising and promotion increased due to contractual advertising under the licenses that we added as a result of the acquisitions and contractual advertising under our existing license agreements. Facility costs increased as a result of the additional rent under leases assumed from the acquired businesses. Amortization expense increased as a result of the amortization of the identifiable intangibles acquired. Interest and finance charges, net were $2.8 million for the nine months ended October 31, 2005 compared to $820,000 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 6.50%, representing approximately $225,000 of the increase. We had an income tax expense of $7.1 million for the nine months ended October 31, 2005 compared to $3.2 million in the same period last year. Our effective tax rate was 42% in the nine month period ended October 31, 2005 compared to 48.7% in the same period last year. The effective rate the current nine 15 month period reflects a change in our estimated annual effective tax rate from 43% in our first fiscal quarter to 42% in our second fiscal quarter due to the reduced effect of the permanent differences on our higher taxable income. The higher effective tax rate in the period ended October 31, 2004 also reflects the charge of $882,000 associated with the sale of our joint venture interest in a factory in China for which we did not record a tax benefit. 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 our second fiscal quarter, we also used cash to fund the purchase of Marvin Richards and certain assets from 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 October 31, 2005, direct borrowings were $88.7 million and our contingent liability under open letters of credit was approximately $7.8 million compared to direct borrowings of $35.4 million and contingent liability under open letters of credit of approximately $9.5 million as of October 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%. 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 October 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 $2.7 million as of October 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 our third quarter, which is generally our highest 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 $89.3 million of cash from operating activities in the nine months ended October 31, 2005, primarily as a result of increases of $107.2 million in accounts receivable and $9.5 million in inventory, offset in part by our net income of $9.8 million, an increase in accounts payable and accrued expenses of $10.2 million and an increase of income taxes payable of $6.8 million. The increase in accounts receivable for the nine months is a result of the majority of our sales occurring during our significant fall shipping season, which is consistent with our seasonal pattern in prior years. The increase over the prior year in the amount is due to the increased sales volume attributable to the acquired businesses. The increase in 16 inventory is a result of anticipated fourth quarter orders to be shipped. The increase in inventory compared to last year is a result of inventory held by the acquired businesses offset by inventory decreases in our pre-existing divisions. The increase in accounts payable and accrued expenses is primarily a result of the purchasing activity for the fall season and newly acquired businesses. We used $21.5 million of cash for investing activities in the nine months ended October 31, 2005, primarily in connection with the acquisitions of Marvin Richards and Winlit. We used the balance of $ 860,000 in investing activities for capital expenditures, primarily to renovate existing and additional warehouse space that we leased. Cash from financing activities provided $97.0 million in the nine months ended October 31, 2005 primarily as a result of borrowings of $108.7 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 and finance our working capital needs during our peak fall season. We also used the borrowings to 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. At October 31, 2004, we had cash and cash equivalents of $3.0 million. 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. The increase in accounts receivable for the nine months is a result of significant fall shipping season, which is consistent with our seasonal pattern in prior years. 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. 17 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 and in our Quarterly Report on Form 10-Q for the quarter ended July 31, 2005 are those that depend most heavily on these judgments and estimates. As of October 31, 2005, there have been no material changes to our critical accounting policies. 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 June 15, 2005. We do not expect SFAS No. 151 to have a material effect on our Consolidated Financial Statements. 18 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 and liabilities of Winlit. The operating results of Marvin Richards and Winlit are included in our results from July 11, 2005 to October 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 divisions during the transition and integration period. No deficiencies have been identified at this time. 19 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 October 31, 2005. 31.2 Certification by Neal S. Nackman, 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, 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 October 31, 2005. 32.2 Certification by Neal S. Nackman, 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 October 31, 2005. 20 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 13, 2005 By: /s/ Morris Goldfarb ------------------- Morris Goldfarb Chief Executive Officer Date: December 13, 2005 By: /s/ Neal S. Nackman ------------------- Neal S. Nackman Chief Financial Officer 21
G-III Apparel (GIII)
Filed: 13 Dec 05, 12:00am