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 April 30, 1999
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
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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 XX No
__________ __________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 1, 1999.
Common Stock, $.01 par value per share: 6,717,921 shares.
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements *
Condensed Consolidated Balance Sheets -
April 30, 1999 and January 31, 1999........................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended
April 30, 1999 and 1998....................................4
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended
April 30, 1999 and 1998....................................5
Notes to Condensed Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.........................................................9
* The Balance Sheet at January 31, 1999 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..................................12
1. Fifth Amended and Restated Loan Agreement dated as of May
31, 1999, by and among G-III Leather Fashions, Inc., the
Lenders signatory thereto and Fleet Bank, N.A., as Agent.
-2-
G-III Apparel Group, Ltd. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS APRIL 30, JANUARY 31,
1999 1999
---- ----
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 455 $ 7,241
Accounts receivable 7,153 12,280
Allowance for doubtful accounts and sales discounts (1,184) (1,667)
Inventories - net 23,281 16,355
Prepaid income taxes 2,743 767
Prepaid expenses and other current assets 1,489 935
-------- --------
Total current assets 33,937 35,911
PROPERTY, PLANT AND EQUIPMENT, NET 3,580 3,777
DEFERRED INCOME TAXES 3,615 3,615
OTHER ASSETS 1,465 1,567
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$42,597 $44,870
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,738 $ 2,712
Current maturities of obligations under capital leases 123 181
Accounts payable 3,124 2,605
Accrued expenses 3,356 2,631
Accrued nonrecurring charges 547 545
-------- --------
Total current liabilities 9,888 8,674
OTHER LONG-TERM LIABILITIES 567 621
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; issued and outstanding, 6,717,921 shares
on April 30, 1999 and January 31, 1999 67 67
Additional paid-in capital 24,767 24,767
Retained earnings 7,308 10,741
-------- -------
32,142 35,575
-------- -------
$42,597 $44,870
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The accompanying notes are an integral part of these statements.
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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share amounts)
THREE MONTHS ENDED APRIL 30,
------------------------------
(Unaudited)
1999 1998
----- ----
Net sales $8,470 $4,950
Cost of goods sold 7,637 5,248
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Gross profit (loss) 833 (298)
Selling, general and administrative expenses 6,887 6,340
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Operating loss (6,054) (6,638)
Interest and financing charges, net 98 163
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Loss before minority interest
and income taxes (6,152) (6,801)
Minority interest in loss of joint venture 431 251
--------- --------
Loss before income taxes (5,721) (6,550)
Income tax benefit (2,288) (2,620)
--------- --------
Net loss $(3,433) $(3,930)
========= ========
LOSS PER COMMON SHARE:
Basic and Diluted;
Net loss per common share $ (0.51) $ (0.60)
========== =========
Weighted average number of shares outstanding 6,717,921 6,509,943
========== =========
The accompanying notes are an integral part of these statements.
-4-
G-III Apparel Group, Ltd. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED APRIL 30,
-------------------------------
(Unaudited)
1999 1998
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Cash flows from operating activities:
Net loss $ (3,433) $ (3,930)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Depreciation and amortization 345 323
Minority Interest (431) (251)
Changes in operating assets and liabilities:
Accounts receivable 4,644 4,926
Inventories (6,926) (10,025)
Prepaid income taxes (1,976) (3,992)
Prepaid expenses and other current assets (554) 257
Other assets 33 (63)
Accounts payable and accrued expenses 1,244 (1,394)
Accrued nonrecurring charge (21) (11)
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Net cash used in operating activities (7,075) (14,160)
--------- --------
Cash flows from investing activities:
Capital expenditures (148) (404)
Investment in joint venture 500 250
--------- ---------
Net cash from (used in) investing activities 352 (154)
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Cash flows from financing activities:
Increase in notes payable, net 26 9,145
Payments for capital lease obligations (89) (62)
Proceeds from exercise of stock options 16
---------- --------
Net cash from (used in) financing activities (63) 9,099
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NET DECREASE IN CASH
AND CASH EQUIVALENTS (6,786) (5,215)
Cash and cash equivalents at beginning of period 7,241 5,842
-------- --------
Cash and cash equivalents at end of period $ 455 $ 627
========== =========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for
Interest $ 91 $ 175
Income taxes (286) 1,539
The accompanying notes are an integral part of these statements
-5-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General Discussion
The results for the three month period ended April 30, 1999 are not necessarily
indicative of the results expected for the entire fiscal year. 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 Form 10K filed with the
Securities and Exchange Commission for the year ended January 31, 1999.
Note 2 - Inventories
Inventories consist of:
APRIL 30, January 31,
1999 1999
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(in thousands)
Finished products $ 15,117 $ 12,939
Work-in-process 251 115
Raw materials 7,913 3,301
-------- --------
$ 23,281 $ 16,355
======== ========
Note 3 - Net Loss Per Common Share
Basic earnings per share amounts have been computed using the weighted average
number of common shares outstanding during each year. When applicable, diluted
earnings per share amounts are computed using the weighted average number of
common shares and the dilutive potential common shares outstanding during the
year.
Note 4 - Notes Payable
As of May 31, 1999, the Company's loan agreement was extended for three years to
May 31, 2002. The agreement provides for a maximum line of credit in amounts
that range from $45 million to $65 million during each year of the loan term.
The amounts available include direct borrowings that range from $30 million to
$50 million during each year of the loan term. The balance of the credit line
may be used for letters of credit. All amounts available for borrowing are
subject to borrowing base formulas and overadvances specified in the agreement.
There was no loan balance outstanding at either April 30, 1999 or January 31,
1999 under this agreement.
-6-
The BET Design Studio, LLC joint venture has an asset-based credit facility with
The CIT Group. Direct borrowings bear interest at the prevailing prime rate plus
50 basis points (8.25% at June 1, 1999). As of April 30, 1999, there were $1.1
million of direct borrowings included in Notes Payable. To support the
requirement for overadvances which occur when the available collateral is not
sufficient to support the level of direct bank debt and letters of credit opened
to pay for product, both partners have opened stand-by letters of credit in the
amount of $750,000 under which The CIT Group is the beneficiary.
To fund additional marketing and advertising expenditures, Black Entertainment
Television, Inc. ("BET") has agreed to advance up to $600,000 under a lending
agreement to BET Design Studio, LLC. Borrowings under this agreement bear
interest at 12.0% during the first twelve months of the agreement and 14%
thereafter. The agreement also grants BET, Inc. the right after one year to
convert the principal balance to a 10% ownership interest. If exercised, this
would increase BET Holdings, Inc.'s ownership interest in BET Design Studio, LLC
to 59.9%, with a corresponding decrease in the Company's ownership interest to
40.1%. These advances totaled $173,000 as of April 30, 1999.
Notes payable also includes foreign notes payable by PT Balihides, the Company's
Indonesian subsidiary. The foreign notes payable represent maximum borrowings
under a line of credit of approximately $1.5 million with an Indonesian bank as
of April 30, 1999 and January 31, 1999.
Note 5 - Nonrecurring Charges
Included in the original 1995 non-recurring charge was approximately $2.0
million to sell or liquidate a factory located in Indonesia. During the year
ended January 31, 1998, the Company applied approximately $1.6 million of the
reserve as a reduction of the Indonesian property, plant and equipment, since
the Company cannot assure any recoveries in connection with its disposition. In
December 1997, the factory was contracted to manufacture luggage, and as a
result, the Company has since discontinued its plan to sell or liquidate the
factory. However, due to the political and economic instability being
experienced in Indonesia, management determined that the $462,000 nonrecurring
balance with respect to its Indonesian assets should be maintained. The
remaining nonrecurring balance ($379,000) relates to the reserve associated with
the closure of the Company's domestic factory that was completed by January 31,
1995. Based on current estimates, management believes that existing accruals are
adequate. Other long-term liabilities include $294,000 and $317,000 of
nonrecurring charges at April 30, 1999 and January 31, 1999, respectively.
The status of the provision at the end of the period was:
Balance 1999 BALANCE
January 31, 1999 Activity APRIL 30, 1999
---------------- -------- --------------
(in thousands)
Closure of Domestic Facility $ 400 $ (21) $ 379
Uncertainty of Indonesian Assets 462 462
----- --------- -----
$ 862 $ (21) $ 841
===== ======= =====
-7-
Note 6 - Comprehensive Income
As of February 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. This pronouncement sets forth requirements for disclosure of the
Company's comprehensive income and accumulated other comprehensive items.
Comprehensive income is defined as the change in equity during a period from
transactions in other events and circumstances unrelated to net income (e.g.,
foreign currency translation gains and losses). For the three month periods
ended April 30, 1999 and 1998, other comprehensive income was not material.
Note 7 - 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 fiscal years indicated below:
1999 1998
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NON- Non-
LICENSED LICENSED Licensed Licensed
-------- -------- -------- --------
Net sales $ 4,907 $ 3,563 $ 1,607 $ 3,343
Cost of goods sold 4,200 3,437 1,415 3,833
------- ------- ------- -------
Gross profit (loss) 707 126 192 (490)
Selling, general and
Administrative 2,177 4,710 2,096 4,244
------- ------- ------- -------
Operating loss (1,470) (4,584) (1,904) (4,734)
Interest expense (income) (25) 123 1 162
---------- -------- -------- --------
Loss before minority
Interest and income taxes (1,445) (4,707) (1,905) (4,896)
Minority interest 431 251
---------- -------- -------- -------
Loss before income taxes $ (1,445) $ (4,276) $ (1,905) $ (4,645)
======== ======= ======= ========
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Statements in this Quarterly Report on Form 10-Q concerning the Company's
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, 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
Traditionally, the three month period ending April 30 has been the quarter with
the lowest sales volume during the Company's fiscal year. Net sales for the
three months ended April 30, 1999 were $8.5 million compared to $5.0 million for
the same period last year. The increase in net sales during the quarter was
primarily attributable to a $3.3 million increase in sales of licensed
merchandise.
The Company generated a gross profit of $833,000 for the three month period
ended April 30, 1999 compared to a gross loss of $298,000 for the same period
last year. The gross margin improvement is attributable to increased sales of
higher margin licensed merchandise and improved margins on shipments of
non-licensed merchandise.
Selling, general and administrative expenses for the three months ended April
30, 1999 were $6.9 million, inclusive of BET Design Studio expenses of $1.1
million. For the three months ended April 30, 1998, selling, general and
administrative expenses were $6.3 million, inclusive of BET Design Studio
expenses of $500,000. Excluding BET Design Studio, the Company's selling,
general and administrative expenses were $5.8 million in each of the three month
periods ended April 30, 1999 and 1998.
Interest expense and finance charges for the three month period ended April 30,
1999 were $98,000 compared to $163,000 for the comparable period last year. This
decrease is primarily attributable to a lower level of bank debt compared to the
prior period.
Income tax benefit of $2.3 million reflects an effective tax rate of 40% for the
three months ended April 30, 1999 compared to an income tax benefit of $2.6
million which reflected the same effective tax rate in the comparable period
last year.
As a result of the foregoing for the three months ended April 30, 1999, the
Company had a net loss of $3.4 million, or $0.51 per share, compared to a net
loss of $3.9 million, or $0.60 share, for the comparable period last year.
-9-
LIQUIDITY AND CAPITAL RESOURCES
The Company's loan agreement was extended for three years to May 31, 2002. The
agreement provides for a maximum line of credit in amounts that range from $45
million to $65 million during each year of the loan term. The amounts available
include direct borrowings that range from $30 million to $50 million during each
year of the loan term. The balance of the credit line may be used for letters of
credit. All amounts available for borrowing are subject to borrowing base
formulas and overadvances specified in the agreement.
Direct borrowings bear interest at the agent's prime rate (7.75% as of June 1,
1999) or LIBOR plus 250 basis points (7.43% at April 13, 1999) at the election
of the Company. All borrowings are collateralized by the assets of the Company.
The loan agreement requires the Company, among other covenants, to maintain
certain earnings and tangible net worth levels, and prohibits the payment of
cash dividends. As of April 30, 1999, there were no direct borrowings and
approximately $12.8 million of contingent liability under open letters of
credit. The amount borrowed under the line of credit varies based upon the
Company's seasonal requirements.
In February 1997, the Company formed a joint venture with Black Entertainment
Television (BET) to provide a BET-branded clothing and accessory line. The joint
venture agreement provides for the Company and BET each to make an initial
capital contribution in the amount of $1.0 million. In addition, the agreement
provides for the Company and BET each to make an additional capital contribution
of up to $3.5 million. As of April 30, 1999, BET and the Company have each
contributed $2.0 million to this joint venture. During May 1999, BET and the
Company each contributed an additional $250,000 to the joint venture.
The BET Design Studio, LLC joint venture has an asset-based credit facility with
The CIT Group. Direct borrowings bear interest at the prevailing prime rate plus
50 basis points (8.25% at June 1, 1999). As of April 30, 1999, there were $1.1
million of direct borrowings and $60,000 of contingent liability under open
letters of credit. To support the requirement for overadvances which occur when
the available collateral is not sufficient to support the level of direct bank
debt and letters of credit opened to pay for product, both partners have opened
stand-by letters of credit in the amount of $750,000 under which The CIT Group
is the beneficiary.
To fund additional marketing and advertising expenditures, BET, Inc. has agreed
to advance up to $600,000 under a lending agreement to BET Design Studio, LLC.
Borrowings under this agreement bear interest at 12.0% during the first twelve
months of the agreement and 14% thereafter. The agreement also grants BET, Inc.
the right after one year to convert the principal balance to a 10% ownership
interest. If exercised, this would increase BET Holdings, Inc.'s ownership
interest in BET Design Studio, LLC to 59.9%, with a corresponding decrease in
the Company's ownership interest to 40.1%. These advances totaled $173,000 as of
April 30, 1999.
PT Balihides, the Company's Indonesian subsidiary, has a separate credit
facility with an Indonesian bank. The foreign notes payable represent maximum
borrowings under a line of credit of approximately $1.5 million as of April 30,
1999 and January 31, 1999.
-10-
YEAR 2000 COMPLIANCE
The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company participates in the electronic
data interchange program maintained by many of its larger customers, including
Federated Department Stores, Wal-Mart and J. C. Penney Co. This program allows
the Company to receive customer orders, provide advanced shipping notices,
monitor store inventory and track orders on-line from the time such orders are
placed through delivery. The Company is also able to notify certain of its
customers' warehouses in advance as to shipments.
The Company has a formal Year 2000 compliance schedule for the Company's IT
systems. The Company completed an upgrade of its accounting systems in July 1998
to ensure proper processing of transactions relating to the Year 2000 and
beyond. In addition, the Company is currently evaluating its other management
information systems, such as its manufacturing and distribution systems,
microcomputers, telephones, and fax machines, and has established plans to
upgrade, modify or replace such equipment. The Company continues to evaluate
appropriate courses of corrective actions, including replacement of certain
systems. The Company has completed testing the majority of its domestic computer
operating systems and expects to complete the remaining domestic and overseas
systems by the end of the fiscal quarter ending October 31, 1999.
The Company does not expect the cost associated with ensuring year 2000
compliance to have a material effect on its financial position or results of
operations. All costs associated with Year 2000 compliance are being funded with
working capital and are being expensed as incurred. The Company currently
estimates that it will expend approximately $200,000 to complete its Year 2000
compliance. Of this amount, $60,000 was expended during fiscal 1999 and $70,000
has been incurred during the three month period ended April 30, 1999.
Based on current information, the Company believes that Y2K issues will not have
a material adverse effect on the Company, its business or its financial
condition. There can, however, be no assurances that Y2K remediation by the
Company or third parties will be properly and timely completed, and failure to
do so could have a material adverse effect on the Company, its business and its
financial condition. The Company believes that the greatest risk presented by
Y2K issues is from third parties, such as suppliers, financial institutions,
utility providers, and others who may not have adequately addressed the problem.
A failure of any such third party's computer or other applicable systems in
sufficient magnitude could materially and adversely affect the Company. The
Company is not presently able to quantify this risk.
-11-
The Company is unable to assess a reasonable worst case Y2K scenario given a
number of factors outside of the Company's direct or indirect control, including
among others, the Company's current evaluation and assessment status and the
uncertainty of the readiness of vendors and customers. The Company recognizes
the risks in its ability to conduct business if other key suppliers in
utilities, communications, transportation, banking and government, both domestic
(local, state and federal) and foreign, are not Y2K ready. The Company is in the
process of surveying vendors and customers about their readiness. Upon
completion of this survey, the Company will complete its own internal review of
this information to verify the accuracy of the responses. The Company is
monitoring news and progress reports pertaining to those critical services to
determine the effect on the Company's ability to conduct business as a result of
Y2K issues on the economy if those and other key suppliers in utilities,
communications, transportation, banking and government, both domestic (local,
state and federal) and foreign, cease to function. Once the Company has
completed its assessment and remediation phases of the Y2K issue, the Company
will develop appropriate worst-case scenarios and plans to deal with such
contingencies while it develops its contingency plans which are expected to be
completed by the end of the fiscal quarter ending October 31, 1999. At this time
the Company has not developed any such contingency plans.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Derivatives
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS NO. 133"), "Accounting for Derivative Instruments and Hedging
Activities," which is effective for the Company's fiscal year ending December
31, 2000. SFAS No. 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Adoption of SFAS No. 133 is not expected to
have a material effect on the Company's financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Fifth Amended and Restated Loan Agreement dated as of May 31,
1999, by and among G-III Leather Fashions, Inc., the Lenders
signatory thereto and Fleet Bank, N.A., as Agent.
-12-
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: June 14, 1999 By: /s/ Morris Goldfarb
_____________________________________
Morris Goldfarb
Chief Executive Officer
Date: June 14, 1999 By: /s/ Wayne S. Miller
_____________________________________
Wayne S. Miller
Chief Financial Officer
STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as................................. 'SS'