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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-18183
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G-III APPAREL GROUP, LTD.
(Exact name of registrant as specified in its charter)
Delaware 41-1590959
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
512 Seventh Avenue, New York, New York 10018
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(Address of Principal Executive Office) (Zip Code)
(212) 403-0500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 1, 2001.
Common Stock, $.01 par value per share: 6,689,804 shares.
Page No.
Part I FINANCIAL INFORMATION
Item 1. Financial Statements *
Condensed Consolidated Balance Sheets -
October 31, 2001 and January 31, 2001.............................................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended
October 31, 2001 and 2000.........................................................4
Condensed Consolidated Statements of Operations -
For the Nine Months Ended
October 31, 2001 and 2000.........................................................5
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended
October 31, 2001 and 2000.........................................................6
Notes to Condensed Consolidated Financial Statements......................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................................10
* The Balance Sheet at January 31, 2001 has been taken from the audited
financial statements at that date. All other financial statements are
unaudited.
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................................13
1. Amendment No. 11 to the Fifth Amended and Restated Loan
Agreement, dated as of November 27, 2001 by and among
G-III, the Banks and Fleet Bank.
-2-
G-III Apparel Group, Ltd. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS OCTOBER 31, JANUARY 31,
2001 2001
---- ----
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,694 $ 9,231
Accounts receivable 59,209 11,528
Allowance for doubtful accounts and sales discounts (8,010) (4,242)
Inventories - net 52,972 42,450
Prepaid expenses and other current assets 3,891 2,481
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Total current assets 109,756 61,448
PROPERTY, PLANT AND EQUIPMENT, NET 3,160 2,940
DEFERRED INCOME TAXES 4,889 4,889
OTHER ASSETS 2,902 2,675
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$120,707 $71,952
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 41,400 $ 1,500
Current maturities of obligations under capital leases 104 80
Income taxes payable 3,002 2,312
Accounts payable 10,857 7,411
Accrued expenses 6,522 8,190
Accrued nonrecurring charges 103 97
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Total current liabilities 61,988 19,590
OTHER LONG-TERM LIABILITIES 496 293
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; authorized,
20,000,000 shares; 6,934,621 and 6,878,171 shares issued
at October 31, 2001 and January 31, 2001, respectively 69 69
Additional paid-in capital 25,423 25,295
Retained earnings 33,701 27,675
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59,193 53,039
Less common stock held in treasury - 244,817 shares at
October 31, 2001 and January 31, 2001, at cost (970) (970)
-------- -------
58,223 52,069
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$120,707 $71,952
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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)
2001 2000
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Net sales $ 90,623 $ 87,955
Cost of goods sold 69,905 62,647
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Gross profit 20,718 25,308
Selling, general and administrative expenses 10,930 8,208
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Operating income 9,788 17,100
Interest and financing charges, net 1,399 1,315
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Income before income taxes 8,389 15,785
Income tax expense 3,356 6,317
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Net income $ 5,033 $ 9,468
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INCOME PER COMMON SHARE:
Basic:
-----
Net income per common share $ 0.75 $ 1.45
========= =========
Weighted average number of shares outstanding 6,689,787 6,543,102
========= =========
Diluted:
-------
Net income per common share $ 0.68 $ 1.31
========= =========
Weighted average number of shares outstanding 7,380,068 7,218,711
========= =========
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)
2001 2000
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Net sales $ 170,703 $ 145,918
Cost of goods sold 130,420 104,632
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Gross profit 40,283 41,286
Selling, general and administrative expenses 27,422 21,790
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Operating income 12,861 19,496
Interest and financing charges, net 2,817 2,187
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Income before minority interest 10,044 17,309
and income taxes
Minority interest in loss of joint venture - 9
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Income before income taxes 10,044 17,318
Income tax expense 4,018 6,922
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Net income $ 6,026 $ 10,396
========= =========
INCOME PER COMMON SHARE:
Basic:
-----
Net income per common share $ 0.90 $ 1.58
========= =========
Weighted average number of shares outstanding 6,671,444 6,560,483
========= =========
Diluted:
-------
Net income per common share $ 0.82 $ 1.47
========= =========
Weighted average number of shares outstanding 7,393,126 7,095,332
========= =========
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,
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(Unaudited)
-----------
2001 2000
------------ --------
Cash flows from operating activities
Net income $ 6,026 $ 10,396
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization 897 765
Minority interest - (9)
Changes in operating assets and liabilities:
Accounts receivable (43,913) (44,731)
Inventories (10,522) (13,884)
Income taxes 690 3,586
Prepaid expenses and other current assets (1,410) (3,766)
Other assets (142) (275)
Accounts payable and accrued expenses 1,778 9,737
Accrued nonrecurring charge (71) (374)
Other long term liabilities 50 50
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Net cash used in operating activities (46,617) (38,505)
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Cash flows from investing activities
Capital expenditures (1,021) (682)
Capital dispositions 24 21
Purchase of certain assets of Gloria Gay Coats, LLC (205)
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Net cash used in investing activities (1,202) (661)
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Cash flows from financing activities
Increase in notes payable, net 39,900 24,778
Proceeds from capital lease obligations 381 -
Payments for capital lease obligations (127) (92)
Investment in joint venture by minority partner - 1,012
Purchase of common stock for Treasury - (540)
Proceeds from exercise of stock options 128 72
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Net cash from financing activities 40,282 25,230
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Net decrease in cash and cash equivalents (7,537) (13,936)
Cash and cash equivalents at beginning of period 9,231 14,530
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Cash and cash equivalents at end of period $ 1,694 $ 594
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 2,428 $ 1,897
Income taxes 3,269 3,265
The accompanying notes are an integral part of these statements.
-6-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General Discussion
The results for the three and nine month periods ended October 31, 2001 are not
necessarily indicative of the results expected for the entire fiscal year, given
the seasonal nature of the Company's business. The accompanying financial
statements included herein are unaudited. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods presented have been reflected.
The Company consolidates the accounts of all its majority-owned subsidiaries.
All material intercompany balances and transactions have been eliminated.
The accompanying financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10K filed with the Securities and Exchange Commission for the year ended January
31, 2001.
Certain reclassifications have been made to conform to the fiscal 2001
presentation.
Note 2 - Inventories
Inventories consist of:
October 31, January 31,
2001 2001
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(in thousands)
Finished products $30,585 $17,605
Work-in-process 2,598 1,707
Raw materials 19,789 23,138
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$52,972 $42,450
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Note 3 - Net Income Per Common Share
Basic income per share amounts have 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 the dilutive potential common shares outstanding during the
period.
-7-
Note 4 - Notes Payable
The Company's loan agreement, which expires on May 31, 2002, is a collateralized
working capital line of credit with six banks that provides for a maximum line
of credit in amounts that range from $45 million to $85 million at specific
times during the year. The line of credit provides for maximum direct borrowings
ranging from $30 million to $72 million during the year. The unused balance may
be used for letters of credit. Amounts available for borrowing are subject to
borrowing base formulas and overadvances specified in the agreement. The Company
was not in compliance with the covenant relating to earnings before interest,
taxes, depreciation and amortization ("EBITDA") for the nine months ended
October 31, 2001. On November 27, 2001, the Company received a waiver from its
lenders relating to this EBITDA covenant. The lenders also amended the EBITDA
and tangible net worth covenants for the year ending January 31, 2002. There was
$40.6 million outstanding at October 31, 2001 and no loan balance outstanding at
January 31, 2001 under this agreement.
Notes payable also includes borrowings by PT Balihides, the Company's Indonesian
subsidiary, under a credit facility with an Indonesian bank. During the nine
month period ended October 31, 2001, the Company reduced the amount of this
foreign debt. There were notes payable outstanding under this facility of
$800,000 as of October 31, 2001 and $1.5 million as of January 31, 2001.
Note 5 - Nonrecurring Charge
The nonrecurring charge refers to the reserve associated with the closure of the
company's domestic factory that was completed by January 31, 1995. The balance
of $157,000 at October 31, 2001 and $228,000 at January 31, 2001 relates to the
remaining obligation under an operating lease. Based on current estimates,
management believes that existing accruals are adequate. Other long-term
liabilities include $54,000 and $131,000 of nonrecurring charges at October 31,
2001 and January 31, 2001, respectively.
-8-
Note 6 - 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,
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2001 2000
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Non- Non-
Licensed Licensed Licensed Licensed
-------- -------- -------- --------
Net sales $39,897 $50,726 $31,706 $56,249
Cost of goods sold 29,782 40,123 21,697 40,950
------ ------ ------ ------
Gross profit 10,115 10,603 10,009 15,299
Selling, general and administrative 5,838 5,092 3,771 4,437
------ ------ ------ ------
Operating income 4,277 5,511 6,238 10,862
Interest expense 675 724 547 768
------ ------ ------ ------
Income before income taxes $ 3,602 $ 4,787 $ 5,691 $10,094
====== ====== ====== ======
NINE MONTHS ENDED OCTOBER 31,
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2001 2000
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Non- Non-
Licensed Licensed Licensed Licensed
-------- -------- -------- --------
Net sales $69,596 $101,107 $55,124 $90,794
Cost of goods sold 51,800 78,620 38,772 65,860
------ ------- ------ ------
Gross profit 17,796 22,487 16,352 24,934
Selling, general and administrative 14,753 12,669 10,229 11,561
------ ------- ------ ------
Operating income 3,043 9,818 6,123 13,373
Interest expense 1,322 1,495 837 1,350
------ ------- ------ ------
Income before minority
interest and income taxes 1,721 8,323 5,286 12,023
Minority interest 9
------ ------- ------ -----
Income before income taxes $ 1,721 $ 8,323 $ 5,286 $12,032
====== ======= ====== ======
-9-
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,
seasonality, customer acceptance of new products, the impact of competitive
products and pricing, dependence on existing management, general economic
conditions, as well as other risks detailed in the Company's filings with the
Securities and Exchange Commission, including this Quarterly Report on Form
10-Q.
Results of Operations
The tragic events of September 11, 2001 aggravated a retail environment that had
already begun to slow down due to the economic downturn in the United States.
The resulting uncertainty with respect to consumer spending caused our customers
to slow the pace of reorders during what is the seasonal peak of our business.
Retailers responded to this environment with increased promotional activity
which required us to grant greater allowances and discounts in order to sell our
products. These factors had an adverse effect on our net sales and gross profit
for the three and nine months ended October 31, 2001. These factors, as well as
the unseasonably warm weather that has continued into early December 2001, will
also have a negative effect on our results of operations for the quarter ending
January 31, 2002.
Net sales for the three months ended October 31, 2001 were $90.6 million
compared to $88.0 million for the same period last year. The increase in net
sales during the quarter was attributable to an $8.2 million increase in sales
of licensed apparel, primarily as a result of sales by our new Jones New York
women's wool division, partially offset by a $5.5 million decrease in sales of
non-licensed apparel. We entered into the license agreement relating to this
Jones New York business in January 2001. Net sales for the nine months ended
October 31, 2001 were $170.7 million compared to $145.9 million for the same
period in the prior year. The increase in net sales in the nine month period was
attributable to a $14.5 million increase in sales of licensed apparel, also due
primarily to sales by our new Jones New York women's wool division, and a
$10.3 million increase in sales of non-licensed apparel.
Gross profit was $20.7 million, or 22.9% of net sales, for the three months
ended October 31, 2001 compared to $25.3 million, or 28.8% of net sales, for the
same period last year. Gross profit was $40.3 million, or 23.6% of net sales,
for the nine months ended October 31, 2001 compared to $41.3 million, or 28.3%
of net sales, for the same period last year. The decrease in gross profit
percentage for both periods resulted from lower gross profit percentages in both
the licensed and non-licensed apparel segments.
-10-
The gross profit percentages were negatively impacted due to higher allowances
and discounts, which were necessary to sell products into the sluggish retail
market. In addition, a portion of the decrease resulted from lower commission
fee income. Commission fee income, which is primarily generated in the
non-licensed apparel segment, decreased to $1.7 million during the three months
ended October 31, 2001 from $3.8 million in the comparable period of the prior
year and to $3.2 million during the nine months ended October 31, 2002 from $5.9
million in the comparable period of the prior year. There is no cost of goods
sold component associated with commission transactions. Gross profit was also
negatively impacted by an increase of $1.9 million in our inventory reserve
during the three months ended October 31, 2001, reflecting the effect of excess
unsold inventory. Inventory reserves increased $1.5 million during the nine
month period ended October 31, 2001 as compared to the same period of the prior
year.
Selling, general and administrative expenses were $10.9 million for the three
months ended October 31, 2001 compared to $8.2 million in the three months ended
October 31, 2000 and $27.4 million for the nine months ended October 31, 2001
compared to $21.8 million for the same period last year. The increase in the
three month period was primarily a result of expenses relating to the start-up
of the Cole Haan, Sean John, and the two Jones New York divisions. Advertising
expenses increased by $1.0 million, personnel expenses increased by $700,000,
and facilities expense increased by $500,000 over the comparable period of the
prior year.
Selling, general and administrative expenses in the nine month period also
increased primarily from expenses relating to the start-up of the Cole Haan,
Sean John, and the two Jones New York divisions. Personnel expenses increased by
$2.0 million, advertising expenses increased by $1.7 million, and facility
expenses increased by $1.0 million, over the comparable period of the prior
year. To reduce our expenses, we terminated 15 employees in October, 2001, with
expected annualized cost savings of approximately $1.1 million.
Interest expense and finance charges for the three months ended October 31, 2001
were $1.4 million compared to $1.3 million in the same period last year.
Interest expense and finance charges for the nine month period ended October 31,
2001 were $2.8 million compared to $2.2 million in the same period last year.
The increase in interest expense in both the three and nine month periods
resulted primarily from increased borrowings to support higher inventory
investments, partially offset by lower interest rates.
Income tax expense was $3.4 million for the three months ended October 31, 2001
compared to $6.3 million in the same period in the prior year. Income tax
expense was $4.0 million for the nine months ended October 31, 2001 compared to
$6.9 million in the same period last year. Our effective tax rate was 40% in
both periods in each fiscal year.
For the three months ended October 31, 2001, we had net income of $5.0 million,
or $0.68 per diluted share, compared to $9.5 million, or $1.31 per diluted
share, for the same period in the prior year. For the nine months ended October
31, 2001, we had net income of $6.0 million, or $0.82 per diluted share,
compared to $10.4 million, or $1.47 per diluted share, for the same period in
the prior year.
-11-
Liquidity and Capital Resources
Our loan agreement, which expires on May 31, 2002, is a collateralized working
capital line of credit with six banks that provides for a maximum line of credit
in amounts that range from $45 million to $85 million at specific times during
the year. The line of credit provides for maximum direct borrowings ranging from
$30 million to $72 million during the year. The unused balance may be used for
letters of credit. Amounts available for borrowing are subject to borrowing base
formulas and overadvances specified in the agreement.
Direct borrowings under the line of credit bear interest at our option at either
the prevailing prime rate (4.75% as of December 12, 2001) or LIBOR plus 225
basis points (4.19% as of December 12, 2001). Our assets collateralize all
borrowings. The loan agreement requires us, among other covenants, to maintain
specified earnings and tangible net worth levels, and prohibits the payment of
cash dividends. We were not in compliance with the covenant relating to earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the nine
months ended October 31, 2001. On November 27, 2001, we received a waiver from
our lenders relating to this EBITDA covenant. The lenders also amended the
EBITDA and tangible net worth covenants for the year ending January 31, 2002.
The amount borrowed under the line of credit varies based on our seasonal
requirements. As of October 31, 2001, direct borrowings were $40.6 million and
contingent liabilities under open letters of credit were approximately $4.5
million compared to direct borrowings of $26.6 million and contingent
liabilities under open letters of credit of approximately $9.4 million as of
October 31, 2000. The increase in borrowings under our credit facility compared
to last year resulted primarily from increased inventories.
PT Balihides, our Indonesian subsidiary, has a separate credit facility with an
Indonesian bank. During the nine month period ended October 31, 2001, we reduced
the amount of this foreign debt. There were notes payable outstanding under this
facility of approximately $800,000 as of October 31, 2001 compared to $1.5
million as of October 31, 2000.
In November 1999, along with Black Entertainment Television ("BET"), we decided
to discontinue our BET Design Studio joint venture. The joint venture was
started in February 1997 to provide a BET-branded clothing and accessory line.
BET and us each contributed $3.8 million to this joint venture, of which $1.0
million was contributed during the quarter ended April 30, 2000. The final
distribution from the joint venture company was made in January 2001.
On December 20, 1999, our Board of Directors authorized the repurchase of up to
$1,000,000 worth of our common stock. We purchased 244,817 shares of our common
stock at a total cost of $970,000. We concluded this buyback program in the
quarter ended April 30, 2000, when we expended $540,000 to purchase our shares.
-12-
Effect of Recently Issued Accounting Pronouncements
Derivatives
Effective February 1, 2001, we adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Due to the immaterial amount of our derivative and hedging
activity, the effect of adopting SFAS 133 on our results of operations and
financial position was immaterial.
Business Combinations/Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to
periodic impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of the fiscal year ending January 31,
2003. We do not believe the new pronouncements will have a material impact on
our consolidated financial position or results of operations.
Accounting for the Impairment or Disposal of Long-Lived Assets
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment supersede FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of and provide a single accounting model for
long-lived assets to be disposed of. The new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale. This
distinction is important because assets to be disposed of are stated at the
lower of their fair values or carrying amounts and depreciation is no longer
recognized. This Standard also requires expected future operating losses from
discontinued operations to be displayed in the period(s) in which the losses are
incurred, rather than as of the measurement date as presently required.
We will apply the new rules on accounting for impairment or disposal of
long-lived assets beginning in the first quarter of the fiscal year ending
January 31, 2003. We do not believe the new pronouncement will have a material
impact on our consolidated financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Amendment No. 11 to the Fifth Amended and Restated Loan
Agreement, dated as of November 27, 2001, by and among G-III, the
Banks and Fleet Bank.
-13-
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 12, 2001 By: /s/ Morris Goldfarb
------------------------------------
Morris Goldfarb
Chief Executive Officer
Date: December 12, 2001 By: /s/ Wayne S. Miller
------------------------------------
Wayne S. Miller
Chief Financial Officer