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, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-18183
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G-III APPAREL GROUP, LTD.
(Exact name of registrant as specified in its charter)
Delaware 41-1590959
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
512 Seventh Avenue, New York, New York 10018
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(Address of Principal Executive Offices) (Zip Code)
(212) 403-0500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by checkmark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
Yes No X
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As of June 2, 2003 there were 6,876,127 common shares outstanding.
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements *
Condensed Consolidated Balance Sheets -
April 30, 2003 and January 31, 2003.....................3
Condensed Consolidated Statements of Operations -
For the Three Months Ended April 30, 2003 and 2002......4
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended April 30, 2003 and 2002......5
Notes to Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....12
Item 4. Controls and Procedures........................................12
* The Balance Sheet at January 31, 2003 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
Exhibits
10.1 Lease Agreement dated February 1, 2003 between 345 W. 37th
Corp. and G-III Leather Fashions, Inc.
10.2 Management Services Agreement dated February 1, 2003 between
345 W. 37th Corp. and G-III Leather Fashions, Inc.
99.1 Certification pursuant to 18.U.S.C. Section 1350 as adopted
pursuant to Section 106 of the Sarbanes-Oxley Act of 2002.
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G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
APRIL 30, JANUARY 31,
2003 2003
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,537 $ 3,408
Accounts receivable, net of allowance for doubtful accounts
and sales discounts of $6,177 and $7,711, respectively 11,768 19,157
Inventories 31,201 30,948
Income taxes receivable 653 -
Deferred income taxes 5,795 5,795
Prepaid expenses and other current assets 3,968 2,847
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Total current assets 56,922 62,155
PROPERTY, PLANT AND EQUIPMENT, NET 2,087 2,065
DEFERRED INCOME TAXES 2,181 2,181
OTHER ASSETS 4,469 4,555
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$ 65,659 $ 70,956
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 770 $ 770
Current maturities of obligations under capital leases 118 115
Income taxes payable - 1,699
Accounts payable 6,615 5,699
Accrued expenses 4,732 6,612
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Total current liabilities 12,235 14,895
OTHER LONG-TERM LIABILITIES 282 313
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized;
no shares issued and outstanding in all periods
Common stock - $.01 par value; authorized,
shares; 7,120,944 and 7,120,644 shares issued
at April 30, 2003 and January 31, 2003, respectively 71 71
Additional paid-in capital 26,191 26,190
Foreign currency translation adjustments 56 36
Retained earnings 27,794 30,421
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54,112 56,718
Less common stock held in treasury - 244,817 shares,
at cost, at April 30, 2003 and January 31, 2003 (970) (970)
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53,142 55,748
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$ 65,659 $ 70,956
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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 STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
THREE MONTHS ENDED APRIL 30,
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(Unaudited)
2003 2002
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Net sales $ 18,712 $ 12,691
Cost of goods sold 14,358 11,788
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Gross profit 4,354 903
Selling, general and administrative expenses 8,759 7,514
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Operating loss (4,405) (6,611)
Interest and financing charges, net 48 125
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Loss before income taxes (4,453) (6,736)
Income tax benefit (1,826) (2,567)
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Net loss $ (2,627) $ (4,169)
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LOSS PER COMMON SHARE:
Basic and Diluted:
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Net loss per common share $ (0.38) $ (0.62)
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Weighted average number of shares outstanding 6,875,830 6,702,370
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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 STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED APRIL 30,
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(Unaudited)
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2003 2002
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Cash flows from operating activities
Net loss $ (2,627) $ (4,169)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 322 363
Changes in operating assets and liabilities:
Accounts receivable 7,389 5,077
Inventories (253) (3,325)
Income taxes, net (2,352) (4,737)
Prepaid expenses and other current assets (1,121) (2,008)
Other assets (35) (33)
Accounts payable and accrued expenses (964) 4,281
Other long term liabilities - 49
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2,986 (333)
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Net cash provided by (used in) operating activities 359 (4,502)
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Cash flows from investing activities
Capital expenditures (223) (149)
Purchase of certain assets of Gloria Gay Coats, LLC - 18
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Net cash used in investing activities (223) (131)
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Cash flows from financing activities
Increase in notes payable, net - 2,504
Payments for capital lease obligations (28) (25)
Proceeds from exercise of stock options 1 35
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Net cash (used in) provided by financing activities (27) 2,514
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Effect of exchange rate changes on cash and cash equivalents 20 (23)
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Net increase (decrease) in cash and cash equivalents 129 (2,142)
Cash and cash equivalents at beginning of period 3,408 2,481
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Cash and cash equivalents at end of period $ 3,537 $ 339
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Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 236 $ 190
Income taxes $ 506 $ 2,161
The accompanying notes are an integral part of these statements.
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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, 2003 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
10-K filed with the Securities and Exchange Commission for the year ended
January 31, 2003.
Certain reclassifications have been made to conform to the fiscal 2003
presentation.
Note 2 - Inventories
Inventories consist of:
APRIL 30, January 31,
2003 2003
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(in thousands)
Finished goods $ 20,129 $ 21,285
Work-in-process 1,517 208
Raw materials 9,555 9,455
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$ 31,201 $ 30,948
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Note 3 - Net Loss per Common Share
Basic net loss 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.
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Note 4 - Stock-based Compensation
The Company grants stock options for a fixed number of shares to employees and
directors with an exercise price equal to or greater than the fair value of the
shares at the date of grant. The Company has adopted the disclosure-only
provision of Statements 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.
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 April 30,
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2003 2002
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(in thousands, except per share
amounts)
Net loss - as reported $ (2,627) $ (4,169)
Deduct: Stock-based employee compensation
expense determined under fair value method,
net of related tax effects 50 62
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Pro forma net loss $ (2,677) $ (4,231)
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Loss per share:
Basic and Diluted- as reported $ (0.38) $ (0.62)
Basic and Diluted- adjusted $ (0.39) $ (0.63)
The effects of applying SFAS 123 on this pro forma disclosure may not be
indicative of future results. SFAS 123 does not apply to grants prior to 1995,
and additional awards in future years may or may not be granted.
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Note 5 - Notes Payable
The Company's domestic loan agreement, which expires on May 31, 2005, is a
collateralized working capital line of credit with six banks that provides for a
maximum line of credit in amounts that range from $45 million to $90 million at
specific times during the year. The line of credit provides for maximum direct
borrowings ranging from $40 million to $72 million during the year. The unused
balance may be used for letters of credit. Amounts available for borrowing are
subject to borrowing base formulas and overadvances specified in the agreement.
The line of credit includes a requirement that the Company have no loans and
acceptances outstanding for 45 consecutive days each year of the lending
agreement. The Company met this requirement. There was no loan balance
outstanding at either April 30, 2003 or January 31, 2003 under this agreement.
Notes payable include foreign notes payable by PT Balihides, the Company's
Indonesian subsidiary. The foreign notes payable of approximately $770,000 at
April 30, 2003 and January 31, 2003 represent maximum borrowings under a line of
credit with an Indonesian bank. The loan is secured by the property, plant, and
equipment of the subsidiary and is not the obligation of any G-III entity other
than PT Balihides.
Note 6 - Nonrecurring Charges
In December 2002, the Company announced its decision to close its manufacturing
facility in Indonesia due to rapidly rising costs and losses associated with
this facility, as well as the political and economic instability in Indonesia.
The fiscal quarter and year ended January 31, 2003 included charges aggregating
$4.1 million ($3.4 million on an after-tax basis) in connection with this
closedown.
The components of the nonrecurring charges are as follows:
RESERVE
Reserve APRIL 30,
January 31, 2003 Utilized 2003
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----------------(in thousands)-------------
Severance $ 927 $ 812 $ 115
Accrued expenses and other 570 100 470
Professional fees 420 220 200
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$ 1,917 $ 1,132 $ 785
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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 three month periods indicated below:
THREE MONTHS ENDED APRIL 30,
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2003 2002
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NON- Non-
LICENSED LICENSED Licensed Licensed
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Net sales $ 16,352 $ 2,360 $ 8,360 $ 4,331
Cost of goods sold 11,783 2,575 6,928 4,860
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Gross profit (loss) 4,569 (215) 1,432 (529)
Selling, general and administrative 6,404 2,355 4,178 3,336
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Operating loss (1,835) (2,570) (2,746) (3,865)
Interest expense, net 23 25 50 75
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Loss before income taxes $ (1,858) $ (2,595) $ (2,796) $ (3,940)
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Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Unless the context otherwise requires, "G-III", "us", "we" and "our" refer to
G-III Apparel Group, Ltd. and its subsidiaries. References to fiscal years refer
to the year ended or ending on January 31 of that year.
Statements in this Quarterly Report on Form 10-Q concerning our business outlook
or future economic performance; anticipated revenues, expenses or other
financial items; product introductions and plans and objectives related thereto;
and statements concerning assumptions made or expectations as to any future
events, conditions, performance or other matter, are "forward-looking
statements" as that term is defined under the Federal securities laws.
Forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from those stated in such
statements. Such risks, uncertainties and factors include, but are not limited
to, reliance on foreign manufacturers, risks of doing business abroad, the
nature of the apparel industry, including changing consumer demand and tastes,
reliance on licensed product, seasonality, customer acceptance of new products,
the impact of competitive products and pricing, dependence on existing
management, general economic conditions, as well as other risks detailed in the
Company's filings with the Securities and Exchange Commission, including this
Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Traditionally, the three month period ending April 30 has been the quarter with
the lowest sales volume during our fiscal year. Net sales for the three months
ended April 30, 2003 increased to $18.7 million from $12.7 million in the same
period last year. Net sales of licensed apparel increased $8.0 million during
the quarter, primarily as a result of increased sales of sports apparel. This
increase was partially offset by a $2.0 million decrease in net sales of
non-licensed apparel due in part to the loss of sales to foreign customers
directly serviced by our Indonesian facility that was closed in the fourth
quarter of fiscal 2003.
Gross profit increased to $4.4 million, or 23.3% of net sales, for the three
month period ended April 30, 2003 from $903,000, or 7.1% of net sales, in the
same period last year. Gross profit as a percentage of net sales increased
primarily due to the increased gross profit percentage for sales of licensed
apparel. The increase was also caused by the absence of losses incurred in last
year's period relating to the Indonesian facility, which produced non-licensed
apparel, and a reduction in clearance activity in both segments compared to the
same period last year. We expect that our results for the balance of this fiscal
year will be favorably impacted by the elimination of the losses associated with
operating the Indonesian facility that we closed in December 2002.
Selling, general and administrative expenses increased to $8.8 million in the
three month period ended April 30, 2003 from $7.5 million in the same period
last year. The increase is primarily the result of higher expenses in connection
with the expansion of our sports apparel business in the licensed segment and
increased advertising to promote our new Black Rivet line in the non-licensed
segment, partially offset by the elimination of expenses related to our
Indonesian facility.
Interest expense and finance charges, net for the three month period ended April
30, 2003 was $48,000 compared to $125,000 for the comparable period last year.
In the current year, the net amount consists primarily of the amortization of
bank fees, partially offset by earnings on invested cash.
-10-
Income tax benefit of $1.8 million reflects an effective tax rate of 41.0% for
the three months ended April 30, 2003 compared to an income tax benefit of $2.6
million which reflected a 38.1% effective tax rate in the comparable period last
year. The tax rate in the three month period ended April 30, 2003 reflects
increased state and local income taxes.
As a result of the foregoing, for the three months ended April 30, 2003, we had
a net loss of $2.6 million, or $0.38 per share, compared to a net loss of $4.2
million, or $0.62 share, for the comparable period last year.
LIQUIDITY AND CAPITAL RESOURCES
Our loan agreement, which expires on May 31, 2005, is a collateralized working
capital line of credit with six banks that provides for a maximum line of credit
in amounts that range from $45 million to $90 million at specific times during
the year. The line of credit provides for maximum direct borrowings ranging from
$40 million to $72 million during the year. The unused balance may be used for
letters of credit. Amounts available for borrowing are subject to borrowing base
formulas and overadvances specified in the agreement. The loan agreement also
includes a requirement that we have no loans outstanding for 45 consecutive days
during each year of the agreement.
Direct borrowings under the line of credit bear interest at our option at either
the prevailing prime rate (4.25% as of June 2, 2003) or LIBOR plus 225 basis
points (3.53% at June 2, 2003). 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.
The amount borrowed under the line of credit varies based on our seasonal
requirements. As of April 30, 2003, there were no direct borrowings and
contingent liability under open letters of credit was approximately $17.1
million compared to direct borrowings of $2.5 million and contingent liability
under open letters of credit of approximately $7.6 million as of April 30, 2002.
The decrease in borrowings resulted from a reduced need for raw materials and
work-in-process inventories due to the closure of our Indonesian subsidiary. As
a result, inventory decreased from $40.5 million at April 30, 2002 to $31.2
million at April 30, 2003.
PT Balihides, our Indonesian subsidiary, has a separate credit facility with an
Indonesian bank. There were notes payable outstanding under this facility of
approximately $770,000 as of April 30, 2003 and $800,000 as of April 30, 2002.
The loan is secured by the property, plant, and equipment of the subsidiary and
is not the obligation of any G-III entity other than PT Balihides.
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EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by SFAS 146 include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS 146 applies to exit or disposal activities initiated
after December 31, 2002. The adoption of this statement did not have a material
effect on our consolidated results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material changes to the disclosure made with respect to these
matters in the Company's Annual Report on Form 10-K for the year ended January
31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company's 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 the Company's
disclosure controls and procedures are effective in alerting them to material
information, on a timely basis, required to be included in the Company's
periodic SEC filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date the Company's management carried out its
evaluation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
10.1 Lease Agreement dated February 1, 2003 between 345 W. 37th
Corp. and G-III Leather Fashions, Inc.
10.2 Management Services Agreement dated February 1, 2003 between
345 W. 37th Corp. and G-III Leather Fashions, Inc.
99.1 Certification pursuant to 18.U.S.C. Section 1350 as adopted
pursuant to Section 106 of the Sarbanes-Oxley Act of 2002.
-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 11, 2003 By: /s/ Morris Goldfarb
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Morris Goldfarb
Chief Executive Officer
Date: June 11, 2003 By: /s/ Wayne Miller
-----------------------
Wayne S. Miller
Chief Financial Officer
CERTIFICATIONS
I, Morris Goldfarb, certify that:
1. I have reviewed this quarterly report on Form 10-Q of G-III Apparel
Group, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 11, 2003
/s/ Morris Goldfarb
-----------------------
Morris Goldfarb
Chief Executive Officer
I, Wayne S. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of G-III Apparel
Group, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 11, 2003
/s/ Wayne Miller
-----------------------
Wayne S. Miller
Chief Financial Officer