FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2004
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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
G-III APPAREL GROUP, LTD.
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(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)
Registrant's telephone number, including area code: (212) 403-0500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value.
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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
As of July 31, 2003, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant (based on the last sale
price for such shares as quoted by the Nasdaq National Market) was $22,823,782
Indicate by checkmark if the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The number of outstanding shares of the registrant's Common Stock as of
March 31, 2004 was 7,107,798.
Documents incorporated by reference: Certain portions of the
registrant's definitive Proxy Statement relating to the registrant's Annual
Meeting of Stockholders to be held on or about June 10, 2004, to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 with the
Securities and Exchange Commission, are incorporated by reference into Part III
of this Report.
ITEM 1. BUSINESS
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. Our Internet
address is "www.g-iii.com".
OVERVIEW
G-III designs, manufactures, imports and markets an extensive range of
outerwear and sportswear including coats, jackets, pants, skirts and other
sportswear items under licensed labels, our own proprietary labels and private
retail labels. Our strategy is based upon delivering superior apparel value to
the retail consumer through recognizable brands. We distribute our products
through a broad mix of retail partners at a variety of price points.
The sale of licensed products is a key element of our strategy. We have
been distributing products under licensed brands for over ten years. We have
licenses to produce products under the Kenneth Cole New York, Reaction Kenneth
Cole, Nine West, Cole Haan, Jones New York, JNY Jones New York, Sean John,
Timberland, Bill Blass, Blassport, and James Dean fashion labels. We are also
licensed to produce products containing trademarks of the National Football
League, National Hockey League, National Basketball Association, Major League
Baseball, Louisville Slugger and many universities located in the United States.
During this past year, we expanded our sales of licensed vintage sports apparel
with Cooperstown Collection baseball products and Hardwood Classics basketball
products.
Proprietary labels owned by us include "G-III," TM "Siena Studio," TM
"Colebrook & Co," TM "JLC," TM "J.L. Colebrook," TM, "Colebrook," TM Colebrook
Essentials," TM "Colebrook Classics," TM and our recently launched "Black Rivet"
TM label.
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
principally includes sales of apparel under our own brands and private label
brands owned by retailers, as well as commission fee income received on sales
that are financed by and shipped directly to our customers. See Note L to our
Consolidated Financial Statements for financial information with respect to
these segments.
We are a Delaware corporation that was formed in 1989. We and our
predecessors have conducted our business since 1974.
PRODUCTS - DEVELOPMENT AND DESIGN
G-III manufactures and markets a full line of women's and men's apparel
at a wide range of retail sales prices. Our product offerings include leather
and textile outerwear, raincoats and sportswear. We sell products under licensed
brand names, our own brand names and private retail labels.
-2-
G-III's licensed apparel consists of both men's and women's products.
Our strategy is to seek licenses that will enable us to offer a range of
products targeting different price points and different tiers of distribution.
Women's licensed apparel includes leather and textile garments that sell at
retail prices ranging from $100 for sportswear items to $2,500 for outerwear.
Men's licensed apparel consists of leather, textile, and leather/textile
combination outerwear that sell at retail prices ranging from $50 for sportswear
items to $2,000 for outerwear.
We work closely with our licensors in creating designs and styles for
each licensed brand sold by us. Licensors generally must approve products to be
sold under their brand names prior to production by us.
G-III's proprietary branded apparel also consists of both men's and
women's products. The Colebrook, Colebrook Essentials, Colebrook Classics and
Black Rivet lines of women's apparel consist of moderately priced women's
outerwear and sportswear that typically sell at retail prices from $40 for
sportswear items to $250 for outerwear. Products in our men's outerwear lines
primarily consisting of leather outerwear, sold under the G-III and Colebrook
labels, typically have retail prices between $40 and $400. Siena Studio, our
bridge-priced line of women's leather and textile apparel, primarily consists of
jackets, skirts and related sportswear separates with retail prices from $100
for skirts to $700 for outerwear.
We also work with retail chains in developing product lines sold under
private labels. We meet frequently with department and chain store buyers who
custom order products by color, fabric and style. These buyers may provide
samples to us or may select styles already available in our showrooms. We
believe we have established a reputation among these buyers for the ability to
arrange for the manufacture of apparel on a reliable, expeditious and
cost-effective basis.
Our in-house designers are responsible for the design and look of our
licensed and non-licensed products. We respond to style changes in the apparel
industry by maintaining a continuous program of style, color, leather, and
fabric selection. In designing new products and styles, we attempt to
incorporate current trends and consumer preferences in our product offerings. We
seek to design products in response to trends in consumer preferences, rather
than to attempt to establish market trends and styles.
Design personnel meet regularly with our sales and merchandising
departments, as well as with the design and merchandising staffs of our
licensors, to review market trends, sales results and the popularity of our
latest products. In addition, our representatives regularly attend trade and
fashion shows and shop at fashion forward stores in the United States, Europe
and the Far East. Their efforts include extensive research using trend and color
services. They present sample items to us along with their evaluation of the
styles expected to be in demand in the United States. We also seek input from
selected customers with respect to product design. We believe that our
sensitivity to the needs of retailers, coupled with the flexibility of our
production capabilities and our continual monitoring of the retail market,
enables us to modify designs and order specifications in a timely fashion.
-3-
MANUFACTURING
G-III imports its products from independent manufacturers located
primarily in China and, to a lesser extent, in South Korea, Eastern Europe, Sri
Lanka, Vietnam, India and Mexico. Independent contractors located in the New
York City area also manufacture a selected number of leather garments for us. A
portion of our wool garments is manufactured in the United States.
In fiscal 2004, we manufactured approximately 16% of our products at
our partially owned factory in Northern China. In addition to the personnel
employed directly by the factory, we employed 54 persons who are located at this
factory. These employees perform quality control and supervisory functions.
Subsequent to our decision in December 2002 to close our Indonesian factory, we
arranged for additional production by independent manufacturers to replace the
production at that facility.
We have a branch office in Seoul, South Korea which acts as a liaison
between us and various manufacturers. G-III's headquarters provides this liaison
office with production orders stating the quantity, quality and types of
garments to be produced, and this liaison office negotiates and places orders
with one or more manufacturers. In allocating production among independent
suppliers, we consider a number of criteria, including quality, availability of
production capacity, pricing and ability to meet changing production
requirements. At January 31, 2004, the South Korean office employed 15 persons.
To facilitate better service for our customers and accommodate the
volume of manufacturing in the Far East, we also have an office in Hong Kong.
Similar to the South Korean office, the Hong Kong office acts as a liaison
between G-III and the various manufacturers of textile and leather apparel
located in China. We utilize our domestic and Hong Kong office employees to
monitor production at each manufacturer's facility to ensure quality control,
compliance with our specifications and timely delivery of finished garments to
our distribution facilities or customers. At January 31, 2004, the Hong Kong
office employed 7 persons.
In connection with the foreign manufacture of our apparel,
manufacturers purchase leather skins under our direction. In addition, they
purchase necessary "submaterials" (such as linings, zippers, buttons and
trimmings) according to parameters specified by us. Prior to commencing the
manufacture of garments, samples of the skins or submaterials are sent to us for
approval. We regularly inspect and supervise the manufacture of products for us
in order to ensure timely delivery, maintain quality control and monitor
compliance with our manufacturing specifications. We also inspect finished
apparel at the factory site.
The manufacture of the substantial majority of our apparel is performed
manually. A pattern is used in cutting fabric to panels that are assembled in
the factory. All submaterials are also added at this time. Products are
inspected throughout this process to insure that the design and quality
specifications of the order provided by us are being maintained as the garment
is assembled. After pressing, cleaning and final inspection, the garment is
labeled and ready for shipment. A final random inspection occurs when the
garments are packed for shipment.
-4-
We arrange for the production of apparel on a purchase order basis,
with each order to a foreign manufacturer generally backed by an irrevocable
international letter of credit. Substantially all letters of credit arranged by
us require as a condition, among others, of release of funds to the manufacturer
that an inspection certificate be signed by our representative. Accordingly, if
an order is not filled, the letter of credit is not paid and we do not bear the
risk of liability for the goods being manufactured. We assume the risk of loss
predominantly on a F.O.B. basis when goods are delivered to a shipper and are
insured against casualty losses arising during shipping.
As is customary in the apparel industry, we have not entered into any
long-term contractual arrangements with any contractor or manufacturer. We
believe that the production capacity of foreign manufacturers with whom we have
developed, or are developing, a relationship is adequate to meet our apparel
production requirements for the foreseeable future. We believe that alternative
foreign apparel manufacturers are readily available.
Our arrangements with textile manufacturers and suppliers are subject
to the availability of quota and other requisite customs clearances for textile
apparel and the imposition of export duties. United States customs duties on our
textile apparel presently range from 5% to 30%, depending upon the type of
fabric used and how the garment is constructed. We monitor duty, tariff and
quota-related developments and seek to minimize our potential exposure to
quota-related risks through, among other measures, geographical diversification
of manufacturing sources and shifts of production among countries and
manufacturers. Virtually all of our imported leather products are subject to
United States Customs duties of approximately 6%.
A majority of all finished goods manufactured abroad for us are shipped
to our New Jersey warehouse and distribution facility or to designated third
party facilities for final inspection and allocation and reshipment to
customers. The goods are delivered to our customers and us by independent
shippers, choosing the form of shipment (principally ship, truck or air) based
upon a customer's needs, cost and time considerations.
MARKETING AND DISTRIBUTION
G-III's products are sold primarily to department, specialty and mass
merchant retail stores in the United States. We sell to approximately 3,000
customers, ranging from national and regional chains of specialty retail and
department stores, whose annual purchases from us exceed $1,000,000, to small
specialty stores whose annual purchases from us are less than $1,000.
Sales to the Sam's Club and Wal-Mart divisions of Wal-Mart Stores, Inc.
accounted for an aggregate of 21.1% of our net sales in fiscal 2002, 20.2% of
our net sales in fiscal 2003, and 15.4% of our net sales in fiscal 2004. The
loss of this customer, or a significant reduction in purchases by this customer,
could have a material adverse affect on our results of operations. No other
customer accounted for more than 9% of our net sales during any of these three
fiscal years.
-5-
Almost all of our sales are made in the United States. We also market
our products in Canada and Europe, which account for less than 1% of our total
net sales.
Along with our foreign offices, our trading company subsidiary, Global
International Trading Company, located in Seoul, Korea, assists in providing
services to our customers. This office manages a sample room and assists in the
procurement of finished garments. As of January 31, 2004, Global International
Trading employed 24 persons.
G-III's products are sold primarily through a direct sales force that
consisted of 40 employees as of January 31, 2004. Our principal executives are
also actively involved in sales of our products. Some of our products are also
sold by various retail buying offices and independent sales representatives
located throughout the United States. Final authorization of all sales of
products is solely through our New York showroom, enabling our management to
deal directly with, and be readily accessible to, major customers, as well as to
more effectively control our selling operations.
Brand name products sold by us pursuant to a license agreement are
promoted by institutional and product advertisements placed by the licensor. Our
license agreements generally provide that we are required to pay the licensor a
fee, based on a percentage of net sales of licensed product, to pay for a
portion of these advertising costs. We may also be required to spend a specified
percentage of net sales of a licensed product on advertising placed by us.
We primarily rely on our reputation and relationships to generate
business in our non-licensed segment. We believe we have developed a significant
customer following and positive reputation in the industry, as a result of,
among other things, standards of quality control, on-time delivery, competitive
pricing and willingness and ability to assist customers in their merchandising
of our products. In addition, we have, to a limited extent, advertised our own
labels and engaged in cooperative ad programs with retailers. We believe we have
developed brand awareness of our own labels, despite the absence of general
advertising, primarily through our reputation, consumer acceptance and the
fashion press.
RAW MATERIALS
We purchase most products manufactured for us on a finished goods
basis. Raw materials used in the production of our apparel are available from
numerous sources. We are not aware of any manufacturer of our apparel not being
able to satisfy its requirements for any required raw materials due to an
inadequacy of supply.
The leather apparel industry competes with manufacturers of other
leather products for the supply of leather. Leather skins are a byproduct.
Accordingly, raw material costs are impacted by changes in meat consumption
worldwide as well as by the popularity of leather products.
-6-
We purchase leather skins for our partially-owned factory in China. The
demand for garment-type leather decreased in 2003 as compared to the previous
three years, primarily due to fashion trends. However, prices for this type of
leather remained at last season's levels or increased slightly due to a
reduction in the availability of leather and the decline in value of the dollar
against the Euro. We believe that we and our independent manufacturers will be
able to purchase a sufficient amount of leather skins to satisfy our production
requirements in the fiscal year ending January 31, 2005.
LICENSING
The sale of licensed products is a key element of our strategy and we
have continually expanded our offerings of licensed products over the last
several years. We have licenses to produce products under the Kenneth Cole New
York and Reaction Kenneth Cole, Nine West, Cole Haan, Jones New York, JNY Jones
New York, Sean John, Timberland, Bill Blass, Blassport, and James Dean fashion
labels. We are also licensed to produce products containing trademarks of the
National Football League, National Hockey League, National Basketball
Association, Major League Baseball, Louisville Slugger and many universities
located in the United States. During fiscal 2004, we expanded our sales of
licensed vintage sports apparel with Cooperstown Collection baseball products
and Hardwood Classics basketball products.
The following table sets forth for each of our principal licenses the
date on which the current term ends and the date on which any potential renewal
term ends:
DATE CURRENT DATE POTENTIAL
LICENSE TERM ENDS RENEWAL TERM ENDS
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Kenneth Cole NY/Reaction Kenneth Cole December 31, 2004 None
Nine West December 31, 2007 None
Cole Haan December 31, 2007 None
Jones New York/JNY Jones New York January 31, 2007 January 31, 2009
Sean John January 31, 2007 January 31, 2010
Timberland December 31, 2004 None
Bill Blass/Blassport January 31, 2006 January 31, 2009
James Dean December 31, 2006 None
National Football League March 31, 2005 March 31, 2007
National Hockey League June 30, 2005 June 30, 2006
National Basketball Association September 30, 2005 None
Major League Baseball October 31, 2004 None
Hardwood Classics September 30, 2005 None
Cooperstown Collection December 31, 2004 None
Collegiate Licensing Company March 31, 2005 None
Louisville Slugger January 31, 2008 January 31, 2011
United States Tennis Association December 31, 2004 None
-7-
Under our licensing agreements, we are generally required to achieve
minimum net sales of licensed products and pay guaranteed minimum royalties,
make specified royalty and advertising payments, usually based on a percentage
of net sales of licensed products, and receive prior approval of the licensor as
to all elements of a garment prior to production. If we do not satisfy any of
these requirements, a licensor usually will have the right to terminate our
license.
Our ability to extend the current term of a license agreement is
usually subject to attaining minimum sales and/or royalty levels and to our
compliance with all of the terms of the agreement. In addition, other criteria
may also impact our ability to renew a license. We cannot be sure that we will
be able to renew a license agreement when it expires even if we desire to do so.
We did not meet the required sales threshold that would have allowed us
to renew our license agreement with Kenneth Cole Productions through December
31, 2007. We are currently in discussions with Kenneth Cole Productions in
connection with a renewal of this license agreement.
We continue to seek other opportunities to enter into license
agreements in order to expand our product offerings under nationally recognized
labels and broaden the markets that we serve. Revenues from the sale of licensed
products accounted for 78.3% of our net sales during fiscal 2004 compared to
52.8% of our net sales in fiscal 2003 and 42.7% of our net sales in fiscal 2002.
The significant increase in fiscal 2004 in the percentage of our net sales
accounted for by licensed products was the result of increased sales of our
licensed sports apparel and a shift in sales to our largest customer from
primarily proprietary branded product to primarily licensed product.
SEASONALITY
Retail sales of outerwear apparel have traditionally been seasonal in
nature. Although we sell our apparel products throughout the year and have
expanded our offerings of sportswear, net sales in the months of July through
November accounted for approximately 74% of our net sales in fiscal 2002, 76% of
our net sales in fiscal 2003 and 75% of our net sales in fiscal 2004. The July
through November time frame is expected to continue to provide a
disproportionate amount of our net sales.
BACKLOG
A portion of our orders are short-term purchase orders from customers
who place orders on an as-needed basis. Information relative to open purchase
orders at any date may also be materially affected by, among other things, the
timing of the initial showing of apparel to the trade, as well as by the timing
of recording of orders and shipments. As a result, we do not believe that
disclosure of the amount of our unfilled customer orders at any time is
meaningful.
-8-
TRADEMARKS
Several trademarks owned by us have been granted federal trademark
protection through registration with the U.S. Patent and Trademark Office,
including G-III, G-III (& Design), J.L. Colebrook, JLC, Colebrook & Co., Sienna,
58 Sports (& Design), Ladies First by G-III/Carl Banks, American Classics By
Colebrook, Black Rivet & Design [lower diamond], Black Rivet & Design [upper
diamond], Black Rivet & Design [circles and diamond], Siena Studio, and Sports
58 (& Design). We have applications for several additional marks pending before
the U.S. Patent and Trademark Office.
We have been granted trademark registration for G-III in France, Canada
and the European Union, for J.L. Colebrook in Canada, France, Great Britain, and
the European Union, and for J.L.C. (& Design) and JLC (& Design) in Canada. We
also have one application pending in Canada and two in Mexico.
Although we regard our trademarks as valuable assets and intend to
vigorously enforce our trademark rights, we do not believe that any failure to
obtain federal trademark registrations for which we have applied would have a
material adverse effect on us.
COMPETITION AND OTHER RISKS
The apparel business is highly competitive. We have numerous
competitors with respect to the sale of leather and textile apparel, including
distributors that import leather apparel from abroad and domestic retailers with
established foreign manufacturing capabilities. Sales of our products are
affected by style, price, quality and general fashion trends. We also compete
with vertically integrated apparel manufacturers that also own retail stores. In
addition, we compete for supplies of raw materials and manufacturing and tanning
capacity.
We are dependent on sales of licensed product for a substantial portion
of our revenues. In fiscal 2004, revenues from the sale of licensed product
accounted for 78.3% of our net sales compared to 52.8% of our net sales in
fiscal 2003 and 42.7% of our net sales in fiscal 2002.
We are generally required to achieve specified minimum net sales, pay
specified royalties and advertising payments and receive prior approval of the
licensor as to all elements of a garment prior to production. License agreements
also may restrict our ability to enter into other license agreements for
competing products. If we do not satisfy any of these requirements, a licensor
usually will have the right to terminate our license. If a license contains a
renewal provision, there are usually minimum sales and other conditions that
must be met in order to be able to renew a license. Even if we comply with all
the terms of a licensing agreement, we cannot be sure that we will be able to
renew an agreement when it expires even if we desire to do so.
We are negotiating the renewal of several of our license agreements,
including our license agreements with the National Football League and with
Kenneth Cole Productions. We cannot be sure that we will be able to secure
renewals of these or other license agreements on terms acceptable to us or at
all. The loss of either the NFL or the Kenneth Cole license could have a
material adverse effect on our results of operations.
-9-
Our ability to successfully compete depends on a number of factors,
including our ability to effectively anticipate, gauge and respond to changing
consumer demands and tastes across multiple product lines and tiers of
distribution. We are required to translate market trends into attractive product
offerings and operate within substantial production and delivery constraints. We
cannot be sure we will be successful in this regard. For example, part of our
success in fiscal 2004 was a result of increased sales of fashion sports
apparel. This trend may not continue into fiscal 2005. As a result, we will need
to successfully respond to changing trends in order to avoid an adverse change
in our results for fiscal 2005.
We often produce garments to hold in inventory in order to meet our
customers' delivery requirements and to be able to quickly fulfill reorders. If
we misjudge the market for our products, we may be faced with significant excess
inventories for some products and missed opportunities with others. In addition,
weak sales and resulting markdown requests from customers could have a material
adverse effect on our business, results of operations and financial condition.
The apparel industry is cyclical. Purchases of outerwear, sportswear
and other apparel tend to decline during recessionary periods and sales of our
products may decline at other times as well for a variety of reasons, including
changes in fashion trends and the introduction of new products or pricing
changes by our competitors. Uncertainties regarding future economic prospects
could affect consumer-spending habits and have an adverse effect on our results
of operations. Uncertainty with respect to consumer spending as a result of weak
economic conditions during fiscal 2002 and 2003 caused our customers to delay
the placing of initial orders and to slow the pace of reorders during the
seasonal peak of our business. This had a material adverse effect on our results
of operations.
We are dependent on Morris Goldfarb and other key personnel. The loss
of the services of Mr. Goldfarb and any negative market or industry perception
arising from the loss of his services could have a material adverse effect on us
and the price of our shares. Our other executive officers have substantial
experience and expertise in our business and have made significant contributions
to our success. The unexpected loss of services of one or more of these
individuals could adversely affect us.
Our arrangements with foreign manufacturers are subject to the usual
risks of doing business abroad, including currency fluctuations, political
instability and potential import restrictions, duties and tariffs. We do not
maintain insurance for the potential lost profits due to disruptions of our
overseas factories. Because our products are produced abroad, political and/or
economic instability in China or elsewhere, could cause substantial disruption
in our factory in China and in the business of our foreign manufacturers. This
could materially adversely affect our financial condition and results of
operations.
In December 2002, we decided to close our 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. Our results of
operations for the fourth quarter and fiscal year ended January 31, 2003
reflected pre-tax charges of $4.1 million in connection with closing this
facility.
-10-
The substantial majority of our products are imported from independent
foreign manufacturers. Our dependence on independent manufacturers has increased
as a result of the closing of our Indonesian manufacturing facility. The failure
of these manufacturers to ship products to us in a timely manner or to meet
required quality standards could cause us to miss the delivery date requirements
of our customers. The failure to make timely deliveries could cause customers to
cancel orders, refuse to accept delivery of product or demand reduced prices,
any of which could have a material adverse effect on our business.
We are also dependent on these manufacturers for compliance with our
policies and the policies of our licensors and customers regarding labor
practices. In addition, since we negotiate our purchase orders with foreign
manufacturers in United States dollars, the value of the United States dollar
against local currencies could impact our cost in dollars of production from
these manufacturers. If there is continued downward pressure on the value of the
dollar, our purchase prices for our products could increase. We may not be able
to offset an increase in product costs with a price increase to our customers.
Legislation that would restrict the importation or increase the cost of
textiles and apparel produced abroad has been periodically introduced in
Congress. The enactment of new legislation or international trade regulation, or
executive action affecting international textile or trade agreements, could
adversely affect our business. International trade agreements that can provide
for tariffs and/or quotas can increase the cost and limit the amount of product
that can be imported. The quota system established by the World Trade
Organization is scheduled to be eliminated on December 31, 2004. We cannot be
certain of the impact that this elimination will have on international trade in
general and the apparel industry in particular. Part of this uncertainty
includes the potential for action by the United States government in the event
that the quantity of imported apparel significantly disrupts the apparel market
in the United States. Retaliatory or unilateral action by the United States
could disrupt our ability to import apparel and increase our costs.
The continued growth of our business depends on our access to
sufficient funds to support our growth. Our primary source of working capital to
support our growth is our existing line of credit. We have had this line of
credit for over ten years and have been able to increase the maximum
availability under this line several times in the past few years. This line of
credit expires on May 31, 2005. Our growth is dependent on our ability to
continue to extend and increase this line of credit. If we are unable to do so,
we cannot be sure we will be able to secure alternative financing on
satisfactory terms.
Fluctuations in the price, availability and quality of leather or other
raw materials used by us could have a material adverse effect on our cost of
goods sold and ability to meet customer demands. The supply of leather is
vulnerable to animal diseases as well as natural disasters that can affect the
supply and price of raw leather. For example, the outbreak of mad-cow and
foot-and-mouth disease in Europe, and its after effects, adversely affected the
supply of leather in 2000, 2001 and 2002.
-11-
In addition to the factors described above, our business,
including our revenues and profitability, is influenced by and subject to a
number of factors that are inherently uncertain and difficult to predict
including, among others: the variability of our results in any period due to the
seasonal nature of the business; risks associated with consolidations,
restructurings and other ownership changes in the retail industry; changes in
regional, national and global economic conditions; and our ability to correctly
balance the level of our finished goods, leather and other raw material
commitments with actual orders.
As of March 31, 2004, Morris Goldfarb and Aron Goldfarb beneficially
own an aggregate of approximately 51% of our outstanding common stock. As a
result, they effectively have the ability to control the outcome on all matters
requiring stockholder approval including, but not limited to, the election of
directors and any merger, consolidation or sale of all or substantially all of
our assets. They also have the ability to control our management and affairs.
EMPLOYEES
As of January 31, 2004, we had 368 full-time employees, of whom 68
worked in executive, administrative or clerical capacities, 163 worked in
design, merchandising and manufacturing, 90 worked in warehouse facilities, and
47 worked in sales. We employ both union and non-union personnel and believe
that our relations with our employees are good. We have not experienced any
interruption of any of our operations due to a labor disagreement with our
employees.
We are a party to an agreement with the Amalgamated Clothing and
Textile Workers Union, covering approximately 52 full-time employees as of
January 31, 2004. This agreement, which is currently in effect through October
31, 2005, automatically renews on an annual basis thereafter unless terminated
by us or the Union prior to September 1 of that year.
WEBSITE ACCESS TO REPORTS
The Company's internet website is http://www.g-iii.com. The Company
makes available free of charge on its website (under the heading "About G-III")
its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to those reports as soon as reasonably practicable
after the Company electronically files such material with, or furnishes it to,
the Securities and Exchange Commission.
-12-
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
executive officers.
Executive Officer or
Significant Employee
Name Age Position Since
---- --- -------- --------------------
Morris Goldfarb 53 Co-Chairman of the Board, Chief Executive 1974
Officer, Director
Jeanette Nostra-Katz 51 President 1981
Wayne S. Miller 46 Senior Vice President, Chief Operating and 1998
Financial Officer, Treasurer and Secretary
Deborah Gaertner 49 Vice President - Women's Sales Division of 1989
G-III Leather Fashions
Keith Sutton Jones 55 Vice President - Foreign Manufacturing of 1989
G-III Leather Fashions
Neal S. Nackman 44 Vice President - Finance 2003
Philip H. Litwinoff 54 Vice President and Corporate Controller 2001
Morris Goldfarb is our Co-Chairman of the Board and Chief Executive
Officer, as well as one of our directors. Until April 1997, Mr. Goldfarb also
served as our President. Mr. Goldfarb has served as an executive officer of us
and our predecessors since our formation in 1974. Mr. Goldfarb is also a
director of Lakes Gaming, Inc.
Jeanette Nostra-Katz became our President in April 1997. She had been
our Executive Vice President since March 1992. Ms. Nostra-Katz's
responsibilities for the Company include sales, marketing, public relations, and
operations as they relate to sales. We have employed Ms. Nostra-Katz since 1981.
Wayne S. Miller has been our Chief Financial Officer and Senior Vice
President since April 1998. In December 2003, Mr. Miller was appointed Chief
Operating Officer. In November 1998, Mr. Miller was elected Secretary and
Treasurer. Prior to his joining G-III, Mr. Miller held various senior level
positions in the apparel industry.
Deborah Gaertner is the Vice President - Women's Division of G-III
Leather Fashions and has held this position since March 1992. Ms. Gaertner is
responsible for sales and marketing of certain of our women's apparel lines. She
previously served as Vice President, Imports from June 1989 until March 1992,
coordinating production and merchandising.
-13-
Keith Sutton-Jones is the Vice President - Foreign Manufacturing of
G-III Leather Fashions and has been employed in this capacity since January
1989. His responsibilities include coordinating and controlling all aspects of
our Far Eastern sourcing and production.
Neal S. Nackman has been our Vice President - Finance since December
2003. Prior to joining G-III, Mr. Nackman was a financial consultant with
Jefferson Wells International from January 2003 until December 2003. From May
2001 until October 2002, he was Senior Vice President - Controller of Martha
Stewart Living Omnimedia, Inc. From May 1999 until May 2001, he was Chief
Financial Officer of Perry Ellis International Inc. From August 1995 until May
1999, he was the Vice-President - Finance with Nautica Enterprises, Inc.
Philip H. Litwinoff has been our Vice President and Corporate
Controller since April 2001. He had previously served as our Controller since
November 1995.
Aron Goldfarb, one of our directors, and Morris Goldfarb are father and
son, respectively. Carl Katz, one of our directors, and Jeanette Nostra-Katz are
married to each other.
ITEM 2. PROPERTIES
Our executive offices, sales showrooms and support staff are located at
512 Seventh Avenue, which is one of the leading outerwear apparel buildings in
New York City. We lease an aggregate of approximately 42,500 square feet in this
building through March 31, 2011 at a current aggregate annual rent of
approximately $1.2 million. We also lease approximately 4,000 square feet at a
current annual rent of $88,000 in an adjoining building at 500 Seventh Avenue
for additional design staff.
Our warehouse and distribution facility, located in Secaucus, New
Jersey, contains approximately 110,000 square feet. This facility is leased
through August 2005 at an annual rent of $643,000. A majority of our finished
goods are shipped to the New Jersey distribution facilities for final reshipment
to customers. We also use third-party warehouses to accommodate our finished
goods storage and reshipment needs.
We also lease office space at 345 West 37th Street in New York City.
This space is leased from a corporation owned by Morris Goldfarb and Aron
Goldfarb. Effective February 1, 2003, we leased one floor in this building, as
well as parking spaces and a billboard on top of the building. Aggregate
payments under this lease in fiscal 2004 were $230,000. Effective, April 1,
2004, we leased additional space in this building resulting in total leased
space in this building of approximately 10,100 square feet. Aggregate payments
under the revised lease are expected to be approximately $240,000 in fiscal
2005.
-14-
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-15-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET FOR COMMON STOCK
Our Common Stock is quoted on the Nasdaq National Stock Market under
the trading symbol "GIII". The following table sets forth, for the fiscal
periods shown, the high and low sales prices for our Common Stock, as reported
by the Nasdaq Stock Market.
Fiscal 2003 High Prices Low Prices
- ----------- ----------- ----------
Fiscal Quarter ended April 30, 2002 $ 8.33 $6.25
Fiscal Quarter ended July 31, 2002 $ 8.49 $5.81
Fiscal Quarter ended October 31, 2002 $ 7.75 $4.49
Fiscal Quarter ended January 31, 2003 $ 7.89 $4.91
Fiscal 2004
- -----------
Fiscal Quarter ended April 30, 2003 $ 6.50 $4.62
Fiscal Quarter ended July 31, 2003 $ 8.25 $5.95
Fiscal Quarter ended October 31, 2003 $12.00 $6.50
Fiscal Quarter ended January 31, 2004 $11.90 $8.42
Fiscal 2005
- -----------
Fiscal Quarter ending April 30, 2004 $10.89 $7.21
(through April 15, 2004)
The last sales price of our Common Stock as reported by the Nasdaq
Stock Market on April 15, 2004 was $8.03 per share.
On April 15, 2004, there were 57 holders of record and, we believe,
approximately 1,000 beneficial owners of our Common Stock.
DIVIDEND POLICY
Our Board of Directors currently intends to follow a policy of
retaining any earnings to finance the continued growth and development of our
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of cash dividends will be
dependent upon our financial condition, results of operations and other factors
deemed relevant by the Board. Our loan agreement prohibits the payment of cash
dividends without the consent of the lenders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in Item 7 below.
-16-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for
the years ended January 31, 2000, 2001, 2002, 2003 and 2004 have been derived
from our audited consolidated financial statements. Our audited financial
statements as of January 31, 2000, 2001 and 2002 and for the years ended January
31, 2000 and 2001 are not included in this filing. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (Item 7 of this
Report) and the audited consolidated financial statements and related notes
thereto included elsewhere in this Annual Report on Form 10-K.
(In thousands, except share and per share data)
Year Ended January 31,
----------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $149,632 $187,057 $201,426 $202,651 $224,061
Cost of goods sold 110,710 136,099 158,160 153,367 162,229
------- ------- ------- ------- -------
Gross profit 38,922 50,958 43,266 49,284 61,832
Selling, general & administrative expenses 28,145 29,860 35,814 41,551 47,039
Unusual or non-recurring charge 1,200 (643) 3,556
------- ------- ------- ------- -------
Operating profit 9,577 21,741 7,452 4,177 14,793
Interest and financing charges, net 1,857 2,839 3,577 1,907 1,179
------- ------- ------- ------- -------
Income before minority interest and income taxes 7,720 18,902 3,875 2,270 13,614
Minority interest of joint venture 1,994 (312)
------- ------- ------- ------- -------
Income before income taxes 9,714 18,590 3,875 2,270 13,614
Income taxes 3,934 7,436 1,511 1,888 5,238
------- ------- ------- ------- -------
Net income $5,780 $11,154 $2,364 $ 382 $8,376
======= ======= ======= ======= =======
Basic earnings per share $ 0.86 $ 1.70 $ 0.35 $0.06 $ 1.21
======= ======= ======= ======= =======
Weighted average shares outstanding - basic 6,712,051 6,561,537 6,676,270 6,764,398 6,911,644
Diluted earnings per share $ 0.84 $ 1.57 $ 0.32 $0.05 $ 1.14
======= ======= ======= ======= =======
Weighted average shares outstanding - diluted 6,848,433 7,120,986 7,373,723 7,346,925 7,348,101
As of January 31,
----------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $31,066 $41,931 $46,140 $47,260 $57,388
Total assets 59,601 71,952 67,701 70,956 80,696
Short-term debt 3,427 1,580 906 885 852
Long-term debt, excluding current portion 64 0 203 88 0
Total stockholders' equity 40,944 52,142 54,813 55,748 65,272
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Annual Report on Form 10-K 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 matters, 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 our
filings with the Securities and Exchange Commission, including this Annual
Report on Form 10-K.
The following presentation of management's discussion and analysis of
our financial condition and results of operations should be read in conjunction
with our Financial Statements, the accompanying notes and other financial
information appearing elsewhere in this Report. References to fiscal years refer
to the year ended or ending January 31 of that year.
OVERVIEW
G-III designs, manufactures, imports and markets an extensive range of
outerwear and sportswear including coats, jackets, pants, skirts 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, primarily in the United States, including most major department
stores, mass merchants, and specialty retail stores. Our largest customer is
Wal-Mart Stores, Inc. Sales to two of Wal-Mart's divisions represented
approximately 15% of our net sales in fiscal 2004. No other customer represented
more than 9% of our net sales in fiscal 2004.
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. See Note L to our Consolidated Financial Statements
for financial information with respect to these segments.
The sale of licensed products has been a key element of our business
strategy for many years. We believe that consumers prefer to buy brands they
know and we have continually 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. As a result, the sale of licensed products
accounted for 78.3% of our net sales in fiscal 2004 compared to 52.8% of our net
sales in fiscal 2003 and 42.7% of our net sales in fiscal 2002. The significant
increase in the percentage of our net sales accounted for by licensed products
over the past two years has been primarily the result of an increase in our
sales of licensed sports apparel and a shift in fiscal 2004 in sales to our
largest customer from primarily proprietary branded product to primarily
licensed product.
-18-
Our licensed sports apparel business is comprised of two distinct
pieces, our traditional core sports apparel and our fashion and classics sports
apparel. Our core sports business is primarily sold at the mass and mid-tier
retail level and consists principally of outerwear styles utilizing the names
and logos of sports teams from the major professional sports leagues and
universities throughout the country. Our fashion and classics business is more
broadly distributed including numerous specialty stores. It is composed
principally of sportswear and outerwear and is more driven by fashion trends
than our core sports business. While sales of fashion and classics sports
apparel is expected to be lower in fiscal 2005 than in fiscal 2004, we believe
it still represents on ongoing opportunity.
We continue to believe that brand owners will look to consolidate the
number of licensees they engage to develop product and they will continue to
look for licensees with a successful track record of developing brands. We are
continually entering into discussions with licensors regarding new
opportunities. We believe that we have expanded our product capability offerings
within outerwear fabrications and in sportswear design and development. We also
believe that our financial position is a positive factor for licensors when they
are choosing a licensee.
Two recent significant trends are affecting the apparel industry: a
desire on the part of retailers to consolidate vendors supplying them and a
shift in consumer shopping preferences away from traditional department stores
to other mid-tier and specialty store venues. We believe that our broad
distribution capabilities help us to respond to the various shifts by consumers
between distribution channels. We also believe that our operational capabilities
will enable us to continue to be a vendor of choice for our retail partners.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and revenues and expenses during the period.
Significant accounting policies employed by us, including the use of estimates,
are presented in the Notes to Consolidated Financial Statements.
Critical accounting policies are those that are most important to the
portrayal of our financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies, discussed below, pertain to
revenue recognition, accounts receivable, inventories and income taxes. In
applying these policies, management must use amounts that are based upon its
informed judgments and best estimates. On an on-going basis, we evaluate our
estimates, including those related to customer allowances and discounts, product
returns, bad debts and inventories. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions.
-19-
Revenue Recognition
We recognize a sale at the time merchandise is shipped to the customer.
We also act as an agent in brokering sales between our customers and overseas
factories. On these transactions, we recognize commission fee income on the
sales that are financed by and shipped directly to our customers. This income is
also recorded at the time the merchandise is shipped. Net sales take into
account reserves for returns and allowances. We estimate the amount of reserves
and allowances based on current and historical information and trends. Sales are
reported net of returns, discounts and allowances. Discounts, allowances and
estimates of future returns are recognized when the related revenues are
recognized.
Accounts Receivable
In the normal course of business, we extend credit to our customers
based on pre-defined credit criteria. Accounts receivable, as shown on our
consolidated balance sheet, are net of allowances and anticipated discounts. In
circumstances where we are aware of a specific customer's inability to meet its
financial obligation (such as in the case of bankruptcy filings or substantial
downgrading of credit sources), a specific reserve for bad debts is recorded
against amounts due to reduce the net recognized receivable to the amount
reasonably expected to be collected. For all other customers, an allowance for
doubtful accounts is determined through analysis of the aging of accounts
receivable at the date of the financial statements, assessments of
collectability based on historical trends and an evaluation of the impact of
economic conditions.
An allowance for discounts is based on reviews of open invoices where
concessions have been extended to customers. Costs associated with allowable
deductions for customer advertising expenses are charged to advertising expenses
in the selling, general and administrative section of our consolidated
statements of income. Costs associated with markdowns and other operational
charge backs, net of historical recoveries, are included as a reduction of net
sales. All of these are part of the allowances included in accounts receivable.
We reserve against known charge backs, as well as for an estimate of potential
future deductions by customers. These provisions result from seasonal
negotiations with our customers as well as historical deduction trends, net of
historical recoveries and the evaluation of current market conditions.
Inventories
Inventories are stated at lower of cost (determined by the weighted
average method, which approximates the first-in, first-out method) or market. We
continually evaluate the composition of our inventories, assessing slow-turning,
ongoing product as well as fashion product from prior seasons. The market value
of distressed inventory is based on historical sales trends of our individual
product lines, the impact of market trends and economic conditions, and the
value of current orders for this type of inventory.
Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual
current tax exposure, together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet.
-20-
RESULTS OF OPERATIONS
The following table sets forth selected operating data as a percentage
of our net sales for the fiscal years indicated below:
2002 2003 2004
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 78.5 75.7 72.4
----- ----- -----
Gross profit 21.5 24.3 27.6
Selling, general and administrative expenses 17.8 20.5 21.0
Non-recurring charge 1.8
----- ----- -----
Operating profit 3.7 2.0 6.6
Interest and financing charges, net 1.8 0.9 0.5
----- ----- -----
Income before income taxes 1.9 1.1 6.1
Income taxes 0.7 0.9 2.4
----- ----- -----
Net income 1.2% 0.2% 3.7%
===== ===== =====
Year ended January 31, 2004 ("fiscal 2004") compared to year ended January 31,
2003 ("fiscal 2003")
Net sales were $224.1 million in fiscal 2004 compared to $202.7 million
in fiscal 2003. Net sales of licensed apparel increased to $175.5 million in
fiscal 2004 from $106.9 million in fiscal 2003. Sales of licensed apparel
constituted 78.3% of our net sales in fiscal 2004 compared to 52.8% of our net
sales in fiscal 2003. The increase in sales of licensed apparel was primarily
attributable to increased sales of our core and fashion sports apparel and a
shift in fiscal 2004 in sales to our largest customer from primarily proprietary
branded product to primarily licensed product. Net sales of non-licensed apparel
decreased to $48.6 million in fiscal 2004 from $95.7 million in fiscal 2003. The
decrease in net sales of non-licensed apparel was primarily due to a decrease in
sales of women's and men's leather apparel, primarily as a result of the shift
in sales to our largest customer from proprietary branded product to licensed
product along with lower sales to this customer.
Gross profit increased to $61.8 million in fiscal 2004 from $49.3
million in fiscal 2003. Commission fee income, for which there is no related
cost of goods sold, was $4.3 million in fiscal 2004 compared to $3.3 million in
fiscal 2003. The increase in commission fee income over the prior year was in
the non-licensed business segment primarily within women's leather apparel. As a
percentage of net sales, gross profit increased to 27.6% in fiscal 2004 compared
to 24.3% in fiscal 2003.
-21-
Gross profit for licensed apparel was $48.6 million in fiscal 2004, or
27.7% of net sales of licensed apparel, compared to $28.4 million in fiscal
2003, or 26.6% of net sales of licensed apparel. The increase in the gross
profit margin percentage for licensed apparel was due to sales of higher margin
sports apparel product. Gross profit for non-licensed apparel was $13.2 million
in fiscal 2004, or 27.3% of net sales of non-licensed apparel, compared to $20.9
million in fiscal 2003, or 21.8% of net sales of non-licensed apparel. The
increase in gross profit percentage for non-licensed apparel was primarily a
result of losses during the prior fiscal year at the Indonesian facility prior
to its closedown in December 2002 (approximately $1.3 million), and the portion
($554,000) of the aggregate charges relating to the closedown of the Indonesian
subsidiary that was included in cost of goods sold in fiscal 2003. The increase
in gross profit percentage for non-licensed apparel also resulted from the
increase in commission fee income in fiscal 2004 while net sales of non-licensed
apparel decreased.
Selling, general and administrative expenses increased to $47.0
million, or 21.0% of net sales, in fiscal 2004 from $41.6 million, or 20.5% of
net sales, in fiscal 2003. Of this increase, approximately $3.6 million
represented increased personnel expenses relating to expansion of our Classics
Sports, Cole Haan and Sean John divisions, and increased bonus payments to our
officers and employees. In addition, we had increased selling expenses of
approximately $2.3 million primarily as a result of commissions paid to
independent sales representatives in connection with sales of our Classics
Sports apparel and Sean John products, and increased third party shipping costs
of approximately $1.3 million as a result of an increase in the number of units
required to be shipped, primarily because of increased sales of sports apparel
product. These increases were offset, in part, by a reduction in advertising
expenses of $938,000 and in bad debts of $504,000.
Interest and financing charges, net, were $1.2 million in fiscal 2004
compared to $1.9 million in fiscal 2003. This decrease resulted primarily from
lower borrowings due to lower inventory levels, as well as due to lower interest
rates.
As a result of the foregoing, we had income before income taxes of
$13.6 million in fiscal 2004 compared to income before income taxes of $2.3
million in fiscal 2003.
Income taxes were $5.2 million in fiscal 2004 compared to $1.9 million
in fiscal 2003. Our effective tax rate for fiscal 2004 was 38.5% compared to
83.2% in fiscal 2003. The tax rate in fiscal 2004 reflects the favorable
conclusion of Federal and New York State tax audits through the year ended
January 31, 2001. The tax rate in fiscal 2003 was significantly higher because
we did not take a financial statement tax benefit for some of the charges and
expenses relating to the closedown of our Indonesian facility.
Year ended January 31, 2003 ("fiscal 2003") compared to year ended January 31,
2002 ("fiscal 2002")
Net sales were $202.7 million in fiscal 2003 compared to $201.4 million
in fiscal 2002. Net sales of licensed apparel increased to $106.9 million in
fiscal 2003 from $86.0 million in fiscal 2002. Sales of licensed apparel
constituted 52.8% of our net sales in fiscal 2003 compared to 42.7% of our net
sales in fiscal 2002. The increase in sales of licensed apparel was primarily
attributable to our sports apparel business and, to a lesser extent, to the
addition of a new license for Sean John apparel. Net sales of non-licensed
apparel decreased to $95.7 million in fiscal 2003 from $115.4 million in fiscal
2002. The decrease in sales of non-licensed apparel was primarily due to a
decrease in sales of women's leather apparel.
-22-
Gross profit increased to $49.3 million in fiscal 2003 from $43.3
million in fiscal 2002. Commission fee income, for which there is no related
cost of goods sold, was $3.3 million in fiscal 2003 compared to $3.2 million in
fiscal 2002. As a percentage of net sales, gross profit increased to 24.3% in
fiscal 2003 compared to 21.5% in fiscal 2002.
Gross profit for licensed apparel was $28.4 million in fiscal 2003, or
26.6% of net sales of licensed apparel, compared to $20.5 million in fiscal
2002, or 23.8% of net sales of licensed apparel. The increase in the gross
profit margin percentage for licensed apparel was due to better inventory
management and sales of regular priced merchandise constituting a higher
proportion of goods sold. Gross profit for non-licensed apparel was $20.9
million in fiscal 2003, or 21.8% of net sales of non-licensed apparel, compared
to $22.8 million in fiscal 2002, or 19.7% of net sales of non-licensed apparel.
The decrease in gross profit for non-licensed apparel was primarily a result of
losses at the Indonesian facility prior to its closedown, and the portion
($554,000) of the aggregate charges relating to the closedown of the Indonesian
subsidiary that was included in cost of goods sold. The increase in gross profit
percentage for non-licensed apparel was due to the comparable level of
commission fee income in fiscal 2003 compared to fiscal 2002 while net sales of
non-licensed apparel decreased.
Selling, general and administrative expenses increased to $41.6
million, or 20.5% of net sales, in fiscal 2003 from $35.8 million, or 17.8% of
net sales, in fiscal 2002. These increases resulted primarily from increases in
third party shipping costs ($1.5 million), expenses ($1.2 million) relating to
the addition of our Sean John license, advertising expenses ($1.0 million) and
the bad debt provision ($700,000).
The non-recurring charge represents costs relating to the closedown of
our manufacturing facility in Indonesia. In December 2002, due to rapidly rising
costs and losses associated with this facility, as well as the political and
economic instability in Indonesia, we decided to close our factory in Indonesia.
The loss from the factory's operations prior to the closedown and the charge
taken in connection with the closing of our facility had a negative effect on
our results of operations for fiscal 2003. The components of this charge include
severance ($2,050,000), operating expenses of the subsidiary subsequent to the
announcement of the closing ($686,000), write-off of property, plant and
equipment ($385,000), and professional services incurred in closing the factory
($435,000).
Interest and financing charges, net, were $1.9 million in fiscal 2003
compared to $3.6 million in fiscal 2002. This decrease resulted primarily from
lower borrowings due to lower inventory levels, as well as due to lower interest
rates.
As a result of the foregoing, we had income before income taxes of $2.3
million in fiscal 2003 compared to income before income taxes of $3.9 million in
fiscal 2002.
Income taxes were $1.9 million in fiscal 2003 compared to $1.5 million
in fiscal 2002. Our effective tax rate for fiscal 2003 was 83.2% compared to
39.0% in fiscal 2002. The tax rate in fiscal 2003 was significantly higher
because we did not take a financial statement tax benefit for some of the
charges and expenses relating to the closedown of our Indonesian facility. The
tax rate in fiscal 2002 included benefits from the implementation of a strategic
tax plan which reduced our effective state income tax rate.
-23-
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements are to fund the seasonal buildup in
inventories and accounts receivable. Due to the seasonality of our business, we
generally reach our maximum borrowing under our asset-based credit facility
during our third fiscal quarter of each year. The primary source to meet our
cash requirements are borrowings under this credit facility and cash generated
from operations. Ordinarily, our capital expenditures are not significant. We
are in the process of investigating the possible relocation of our warehouse
facility. We estimate that, if we decide to relocate our warehouse, this would
result in an aggregate of approximately $5.0 million of capital expenditures in
fiscal 2005 and/or fiscal 2006. We anticipate that these expenditures would be
funded from our credit facility and cash from operations.
Our loan agreement, which expires on May 31, 2005, is a collateralized
working capital line of credit facility with six banks that provides for an
aggregate 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 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 under the line of credit bear interest at our option
at either the prevailing prime rate (4.0% at April 1, 2004) or LIBOR plus 225
basis points (3.3% at April 1, 2004). 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 in compliance with the
financial covenants for the fiscal year ended January 31, 2004.
The amount borrowed under the line of credit varies based on our
seasonal requirements. The maximum amount outstanding (i.e., open letters of
credit, bankers acceptances and direct borrowings) under our loan agreement was
approximately $82.5 million during fiscal 2002, $80.1 million during fiscal
2003, and $74.7 million during fiscal 2004. As of January 31, 2004, and 2003,
there were no direct borrowings and no banker's acceptances outstanding. We had
$2.8 million of contingent liability under open letters of credit as of January
31, 2004 compared to $3.7 million as of January 31, 2003.
PT Balihides, our Indonesian subsidiary, had a separate credit facility
with an Indonesian bank. The notes payable under this facility represent
borrowings as of January 31, 2004 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. In December 2002, we closed the
manufacturing facility operated by this subsidiary. We are in discussions with
the bank regarding settlement of this debt.
We had $12.9 million of cash provided from our operating activities in
fiscal 2004 resulting primarily from net income of $8.4 million, a decrease of
$2.6 million in inventories, and $1.3 million in non-cash depreciation and
amortization expense. We had $1.9 million of cash provided from our operating
activities in fiscal 2003 resulting primarily from a decrease of $6.2 million in
inventories, an increase of $1.9 million of accounts payable and accrued
expenses and $1.5 million in non-cash depreciation and amortization expense,
offset by an increase of $9.2 million in accounts receivable. We used $3.8
million of cash in our operating activities in fiscal 2002 primarily because our
net income of $2.4 million and a decrease of $5.3 million in inventories was
more than offset by a decrease of $5.2 million in accounts payable and accrued
expenses, an increase of $2.6 million in accounts receivable and an increase of
$2.4 million in the deferred income tax benefit.
-24-
We utilized $693,000 of cash in investing activities during fiscal 2004
to pay for capital expenditures. We utilized $1.2 million of cash in investing
activities during fiscal 2003 to pay an earn-out of $720,000 in connection with
the acquisition of certain assets of Gloria Gay, and $443,000 of capital
expenditures. We utilized $2.7 million of cash in investing activities during
fiscal 2002 primarily to pay an earn-out of $1.5 million in connection with the
acquisition of certain assets of Gloria Gay and for capital expenditures of $1.2
million. Historically, our business has not required significant capital
expenditures. Capital expenditures were used primarily for new computer
software, additional computer upgrades, leasehold improvements, and furniture,
fixtures and equipment.
We had $493,000 of cash provided by financing activities in fiscal 2004
primarily due to $609,000 received in connection with the exercise of stock
options, partially offset by $116,000 in payments of capital lease obligations.
We had $249,000 of cash provided by financing activities in fiscal 2003
primarily due to $385,000 received in connection with the exercise of stock
options, partially offset by $106,000 in payments of capital lease obligations.
We used $323,000 of cash in during fiscal 2002 primarily due to a $700,000
decrease in notes payable offset in part by a net increase of $229,000 in
capital lease obligations and $148,000 received from the exercise of stock
options.
We believe that our cash on hand and cash generated by operations,
together with the funds available under our loan agreement, will be sufficient
to meet our capital and operating requirements through fiscal 2005. We may seek
to acquire other businesses in order to expand our product offerings. We may
need additional financing in order to complete one or more acquisitions. We
cannot be certain that we will be able to obtain additional financing, if
required, on acceptable terms or at all.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, ("FIN 46"), "Consolidation of Variable Interest
Entities." FIN 46 requires an investor with a majority of the variable interests
(primary beneficiary) in a variable interest entity ("VIE") to consolidate the
entity and also requires majority and significant variable interest investors to
provide certain disclosures. A VIE is an entity in which the voting equity
investors do not have a controlling interest, or the equity investment at risk
is insufficient to finance the entity's activities without receiving additional
subordinated financial support from other parties. In December 2003, the FASB
deferred the effective date of FIN 46 for certain variable interest entities
(i.e. non-special purpose entities) until the first interim or annual period
ending March 31, 2004. The partial adoption of the provisions of FIN 46 did not
have a material effect on our consolidated results of operations or financial
position for the year ended January 31, 2004 and we do not expect that the full
adoption of the provisions of FIN 46 will have a material effect on our
consolidated results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of SFAS No. 149 had
no impact on our results of operations or our financial position.
-25-
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
adoption of SFAS No. 150 had no impact on our results of operations or our
financial position.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any "off-balance sheet arrangements" as such term is
defined in Item 303 of Regulation S-K of the SEC rules.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of January 31, 2004, our contractual obligations were as follows (in
thousands):
Payments Due By Period
----------------------
Contractual Obligations Less than 1-3 3-5 More than 5
- ----------------------- Total 1 year years years years
------- ------- ------- ------ ------
Long-Term Debt Obligations (1) $ 770 $ 770
Capital Lease Obligations 90 85 $ 5
Operating Lease Obligations 11,584 2,353 3,168 $2,844 $3,219
Minimum royalty payments (2) 22,620 11,013 11,542 65
Purchase obligations (3) 2,828 2,828
------- ------- ------- ------ ------
Total $37,892 $17,049 $14,715 $2,909 $3,219
======= ======= ======= ====== ======
(1) Includes notes payable by PT Balihides (an Indonesian subsidiary) and
represents maximum borrowings under a previously existing line of credit.
No other G-III entity has guaranteed this loan.
(2) Includes obligations to pay minimum scheduled royalty and advertising
payments under various license agreements.
(3) Includes outstanding letters of credit, which represent inventory purchase
commitments which typically mature in less than six months.
-26-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMPACT OF INFLATION AND FOREIGN EXCHANGE
Our results of operations for the periods discussed have not been
significantly affected by inflation or foreign currency fluctuation. We
negotiate our purchase orders with foreign manufacturers in United States
dollars. Thus, notwithstanding any fluctuation in foreign currencies, our cost
for any purchase order is not subject to change after the time the order is
placed. However, if the value of the United States dollar against local
currencies were to decrease, manufacturers might increase their United States
dollar prices for products. During this past year we were able to offset some of
the weakness in the dollar by shifting our sourcing to other more favorable
locations. We may not always be able to accomplish this in the future.
We believe that inflation has not had a material effect on our costs
and net revenues during the past three years.
INTEREST RATE EXPOSURE
We are subject to market risk from exposure to changes in interest
rates relating primarily to our line of credit. We borrow under the line of
credit to support general corporate purposes, including capital expenditures and
working capital needs. All of our debt is short-term with variable rates. We do
not expect changes in interest rates to have a material adverse effect on income
or cash flows in fiscal 2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required pursuant to this
Item begin on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 our disclosure
controls and procedures. Based on that evaluation, our 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.
-27-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We have adopted a Code of Ethics meeting the requirements of Item 406
of Regulation S-K. The Code of Ethics applies to all of the members of our Board
of Directors and all of our employees, including the Chief Executive Officer and
Chief Financial Officer. The Code of Ethics is posted on our website at
www.g-iii.com under the heading "About G-III".
The information contained under the heading "Proposal No. 1 - Election
of Directors" in our definitive Proxy Statement (the "Proxy Statement") relating
to our Annual Meeting of Stockholders to be held on or about June 10, 2004, to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with
the Securities and Exchange Commission is incorporated herein by reference. For
information concerning our executive officers and other significant employees,
see "Business-Executive Officers of the Registrant" in Item 1 above of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in
our Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership information of certain beneficial owners and
management as called for by this Item 12 is incorporated by reference to the
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the 2004 Proxy
Statement.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of January 31,
2004, the last day of fiscal 2004, regarding securities issued under the
Company's equity compensation plans that were in effect during fiscal 2004.
WEIGHTED AVERAGE NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF OUTSTANDING UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OPTIONS, WARRANTS PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A)
------------------- ---------- -----------------------
Equity compensation plans 1,007,749 $4.60 433,100
approved by stockholders
Equity compensation plans not
approved by stockholders
N/A N/A N/A
--------- ----- -------
Total 1,007,749 $4.60 433,100
========= ===== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Relationships and
Related Transactions" in our Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information contained under the heading "Principal Accountant Fees
and Services" in our Proxy Statement is incorporated herein by reference.
-28-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
2. Financial Statement Schedules.
The Financial Statements and Financial Statement Schedules
are listed in the accompanying index to consolidated
financial statements beginning on page F-1 of this report.
All other schedules, for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are shown in the financial statements or are
not applicable and therefore have been omitted.
3. Exhibits:
3.1 Certificate of Incorporation.1
3.2 By-Laws, as amended, of G-III Apparel Group, Ltd. (the
"Company").6
10.1 Employment Agreement, dated February 1, 1994, between the
Company and Morris Goldfarb.4
10.1(a) Amendment, dated October 1, 1999, to the Employment
Agreement, dated February 1, 1994, between the Company and
Morris Goldfarb.8
10.3 Sixth Amended and Restated Loan Agreement, dated April 29,
2002, by and among G-III Leather Fashions, Inc. ("G-III"),
the banks signatories thereto (the "Banks"), and Fleet
Bank, N.A. ("Fleet Bank"), as Agent.10
10.3(a) Amendment No. 1 and Waiver to Sixth Amended and Restated
Loan Agreement, dated March 18, 2003, by and among G-III,
the Banks and Fleet Bank.11
10.3(b) Amendment No. 2 and Waiver to Sixth Amended and Restated
Loan Agreement, dated December 1, 2003, by and among
G-III, the Banks and Fleet Bank.
10.3(c) Amendment No. 3 and Waiver to Sixth Amended and Restated
Loan Agreement, dated March 12, 2004, by and among G-III,
the Banks and Fleet Bank.
10.6 Lease, dated September 21, 1993, between Hartz Mountain
Associates and the Company.3
-29-
10.6(a) Lease renewal, dated May 27, 1999, between Hartz Mountain
Associates and the Company.9
10.6(b) Lease modification agreement, dated March 10, 2004,
between Hartz Mountain Associates and the Company.
10.7 Lease, dated June 1, 1993, between 512 Seventh Avenue
Associates ("512") and the Company.4
10.7(a) Lease amendment, dated July 1, 2000, between 512 and the
Company.9
10.8 Lease, dated January 31, 1994, between 512 and the
Company.5
10.8(a) Lease amendment, dated July 1, 2000, between 512 and the
Company.9
10.10 G-III Apparel Group, Ltd. 1989 Stock Option Plan, as
amended.4
10.11 G-III Apparel Group, Ltd. Stock Option Plan for
Non-Employee Directors.2
10.12 G-III Apparel Group, Ltd. 1997 Stock Option Plan, as
amended.
10.13 Letter Agreement, dated December 2, 1998, between the
Company and Aron Goldfarb.7
10.14 G-III Apparel Group, Ltd. 1999 Stock Option Plan for
Non-Employee Directors, as amended.
10.15 Lease Agreement dated February 1, 2003 between 345 W. 37th
Corp. and G-III Leather Fashions, Inc.12
10.16 Management Services Agreement dated February 1, 2003
between 345 W. 37th Corp. and G-III Leather Fashions,
Inc.12
10.17 First Amendment of Lease Agreement dated April 1, 2004
between 345 W. 37th Corp. and G-III Leather Fashions, Inc.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, dated April 26, 2004.
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 Annual Report on Form 10-K for the
fiscal year ended January 31, 2004.
31 .2 Certification by Wayne S. Miller, Chief Financial Officer
of G-III Apparel Group, Ltd., pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, in connection with G-III
Apparel Group, Ltd.'s Annual Report on Form 10-K for the
fiscal year ended January 31, 2004.
-30-
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 Annual Report on Form 10-K for the
fiscal year ended January 31, 2004.
32.2 Certification by Wayne S. Miller, Chief Financial Officer
of G-III Apparel Group, Ltd., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes- Oxley Act of 2002, in connection with G-III
Apparel Group, Ltd.'s Annual Report on Form 10-K for the
year ended January 31, 2004.
(b) Reports on Form 8-K:
None.
- ------------------
1/ Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (no. 33-31906), which exhibit is incorporated herein by
reference.
2/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1991, which exhibit is
incorporated herein by reference.
3/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1992, which exhibit is
incorporated herein by reference.
4/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1994, which exhibit is
incorporated herein by reference.
5/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1995, which exhibit is
incorporated herein by reference.
6/ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 1997, which exhibit is
incorporated herein by reference.
7/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1999, which exhibit is
incorporated herein by reference.
8/ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended October 31, 1999, which exhibit
is incorporated herein by reference.
9/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2001, which exhibit is
incorporated herein by reference.
10/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended January
-31-
31, 2002, which exhibit is incorporated herein by reference.
11/ Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2003, which exhibit is
incorporated herein by reference.
12/ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 30, 2003, which exhibit is
incorporated herein by reference.
Exhibits have been included in copies of this Report filed with the
Securities and Exchange Commission. We will provide, without charge, a copy of
these exhibits to each stockholder upon the written request of any such
stockholder therefore. All such requests should be directed to G-III Apparel
Group, Ltd., 512 Seventh Avenue, 35th floor, New York, New York 10018,
Attention: Mr. Wayne S. Miller, Secretary.
-32-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Morris Goldfarb
-------------------
Morris Goldfarb,
Chief Executive Officer
April 29, 2004
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Morris Goldfarb
- ---------------------------------- Director, Co-Chairman of the Board and Chief Executive April 29, 2004
Morris Goldfarb Officer (principal executive officer)
/s/ Wayne Miller
- ---------------------------------- Senior Vice President and Chief Financial and April 29, 2004
Wayne S. Miller Operating Officer (principal financial and accounting
officer)
/s/ Aron Goldfarb
- ---------------------------------- Director and Co-Chairman of the Board April 29, 2004
Aron Goldfarb
/s/ Thomas J. Brosig
- ---------------------------------- Director April 29, 2004
Thomas J. Brosig
/s/ Alan Feller
- ---------------------------------- Director April 29, 2004
Alan Feller
/s/ Carl Katz
- ---------------------------------- Director April 29, 2004
Carl Katz
/s/ Willem van Bokhorst
- ---------------------------------- Director April 29, 2004
Willem van Bokhorst
- ---------------------------------- Director
Richard White
- ---------------------------------- Director
George J. Winchell
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 15(A))
Page
----
Report of Independent Auditors F-2
Financial Statements
Consolidated Balance Sheets - January 31, 2004 and 2003 F-3
Consolidated Statements of Income - Years Ended
January 31, 2004, 2003, and 2002 F-4
Consolidated Statements of Stockholders' Equity - Years
Ended January 31, 2004, 2003, and 2002 F-5
Consolidated Statements of Cash Flows - Years Ended
January 31, 2004, 2003, and 2002 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule
II - Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, accordingly, are omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of G-III APPAREL GROUP, LTD.
We have audited the accompanying consolidated balance sheets of G-III Apparel
Group, Ltd. and subsidiaries as of January 31, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended January 31, 2004. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of G-III Apparel
Group, Ltd. and subsidiaries at January 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 31, 2004, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 18, 2004
F-2
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
(in thousands, except share and per share amounts)
ASSETS 2004 2003
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 16,072 $ 3,408
Accounts receivable, net of allowance for doubtful accounts
and sales discounts of $8,922 and $7,711, respectively 19,304 19,157
Inventories, net 28,361 30,948
Deferred income taxes 5,895 5,795
Prepaid expenses and other current assets 2,928 2,847
-------- --------
Total current assets 72,560 62,155
PROPERTY, PLANT AND EQUIPMENT, NET 1,969 2,065
DEFERRED INCOME TAXES 1,940 2,181
OTHER ASSETS 4,227 4,555
-------- --------
$ 80,696 $ 70,956
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 770 $ 770
Current maturities of obligations under capital leases 82 115
Income taxes payable 1,659 1,699
Accounts payable 6,155 5,699
Accrued expenses 6,506 6,612
-------- --------
Total current liabilities 15,172 14,895
-------- --------
LONG-TERM LIABILITIES 252 313
-------- --------
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, 20,000,000 shares; 7,347,815 and
7,120,644 shares issued
at January 31, 2004 and 2003, respectively 73 71
Additional paid-in capital 27,325 26,190
Accumulated other comprehensive income 47 36
Retained earnings 38,797 30,421
-------- --------
66,242 56,718
Less common stock held in treasury - 244,817 shares,
at cost, at January 31, 2004 and 2003 (970) (970)
-------- --------
65,272 55,748
-------- --------
$ 80,696 $ 70,956
======== ========
The accompanying notes are an integral part of these statements.
F-3
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year ended January 31,
----------------------------------
2004 2003 2002
-------- -------- --------
Net sales $224,061 $202,651 $201,426
Cost of goods sold 162,229 153,367 158,160
-------- -------- --------
Gross profit 61,832 49,284 43,266
Selling, general and administrative expenses 47,039 41,551 35,814
Non-recurring charge 3,556
-------- -------- --------
Operating profit 14,793 4,177 7,452
Interest and financing charges, net 1,179 1,907 3,577
-------- -------- --------
Income before income taxes 13,614 2,270 3,875
Income tax expense 5,238 1,888 1,511
-------- -------- --------
NET INCOME $ 8,376 $ 382 $ 2,364
======== ======== ========
INCOME PER COMMON SHARE:
Basic:
Net income per common share $ 1.21 $ .06 $ .35
======== ======== ========
Weighted average number of shares outstanding 6,912 6,764 6,676
======== ======== ========
Diluted:
Net income per common share $ 1.14 $ .05 $ .32
======== ======== ========
Weighted average number of shares outstanding 7,348 7,347 7,374
======== ======== ========
The accompanying notes are an integral part of these statements.
F-4
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended January 31, 2004, 2003, and 2002
(in thousands, except share amounts)
Accumulated Common
Additional other stock
Common paid-in comprehensive Retained held in
stock capital income earnings Treasury Total
----- ------- ------ -------- -------- -----
Balance as of January 31, 2001 $ 69 $ 25,295 $ 73 $ 27,675 $ (970) $ 52,142
Employee stock options exercised 148 148
Tax benefit from exercise of options 138 138
Foreign currency translation adjustment 21 21
Net income for the year 2,364 2,364
-------- -------- -------- -------- -------- --------
Balance as of January 31, 2002 69 25,581 94 30,039 (970) 54,813
Employee stock options exercised 2 383 385
Tax benefit from exercise of options 226 226
Foreign currency translation adjustment (58) (58)
Net income for the year 382 382
-------- -------- -------- -------- -------- --------
Balance as of January 31, 2003 71 26,190 36 30,421 (970) 55,748
Employee stock options exercised 2 607 609
Tax benefit from exercise of options 528 528
Foreign currency translation adjustment 11 11
Net income for the year 8,376 8,376
-------- -------- -------- -------- -------- --------
BALANCE AS OF JANUARY 31, 2004 $ 73 $ 27,325 $ 47 $ 38,797 $ (970) $ 65,272
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
F-5
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended January 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Cash flows from operating activities
Net income $ 8,376 $ 382 $ 2,364
-------- -------- --------
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation and amortization 1,275 1,489 1,216
Write off property plant and equipment of closed
subsidiary 268
Write off goodwill relating to closed subsidiary 61
Deferred income tax expense (benefit) 141 (736) (2,351)
Changes in operating assets and liabilities
Accounts receivable (147) (9,235) (2,636)
Inventories 2,587 6,224 5,278
Income taxes payable (40) 581 (1,194)
Tax benefit from exercise of options 528 226 138
Prepaid expenses and other current assets (81) 902 (1,268)
Other assets (158) (138) (80)
Accounts payable and accrued expenses 350 1,865 (5,179)
Long-term liabilities 22 10 (78)
-------- -------- --------
4,477 1,517 (6,154)
-------- -------- --------
Net cash provided by (used in) operating activities 12,853 1,899 (3,790)
-------- -------- --------
Cash flows from investing activities
Capital expenditures (693) (443) (1,167)
Capital dispositions 32
Purchase of certain assets of Gloria Gay Coats, LLC (720) (1,523)
-------- -------- --------
Net cash used in investing activities (693) (1,163) (2,658)
-------- -------- --------
F-6
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Year ended January 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Cash flows from financing activities
Decrease in notes payable, net $ (30) $ (700)
Proceeds from capital lease obligations 381
Payments for capital lease obligations $ (116) (106) (152)
Proceeds from exercise of stock options 609 385 148
-------- -------- --------
Net cash provided by (used in) financing activities 493 249 (323)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 11 (58) 21
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 12,664 927 (6,750)
Cash and cash equivalents at beginning of year 3,408 2,481 9,231
-------- -------- --------
Cash and cash equivalents at end of year $ 16,072 $ 3,408 $ 2,481
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,381 $ 1,645 $ 3,235
Income taxes $ 4,598 $ 1,779 $ 3,488
The accompanying notes are an integral part of these statements.
F-7
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Business Activity and Principles of Consolidation
As used in these financial statements, the term "Company" or "G-III"
refers to G-III Apparel Group, Ltd. and its wholly-owned subsidiaries.
The Company designs, manufactures, imports, and markets an extensive
range of outerwear and sportswear apparel which is sold to retailers
primarily throughout the United States.
The Company consolidates the accounts of all its wholly-owned
subsidiaries. All material intercompany balances and transactions have
been eliminated.
References to fiscal years refer to the year ended or ending on January
31 of that year.
2. Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The Company
has in excess of $100,000 in one financial institution.
3. Revenue Recognition
The Company recognizes sales when merchandise is shipped to the
customer. In addition, the Company acts as an agent in brokering sales
between its customers and overseas factories. On these transactions,
the Company recognizes commission fee income on the sales that are
financed by and shipped directly to its customers. This income is
recorded at the time the merchandise is shipped from the overseas
factory to the customer.
4. Returns and Allowances
The Company establishes reserves for returns and allowances based on
current and historical information and trends. Sales and accounts
receivable have been reduced by such amounts.
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could
affect the Company's estimate.
F-8
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Inventories
Inventories are stated at the lower of cost (determined by the weighted
average method, which approximates the first-in, first-out method) or
market.
6. Intangibles
In January 2001, the Company purchased the operations and certain
assets of Gloria Gay Coats, LLC for $3.4 million. Approximately $1.1
million of the purchase price was allocated to a license agreement
acquired in connection with this transaction. The Company was also
contractually obligated to make certain contingent payments if the
division reached certain performance criteria in each of the two years
ending January 31, 2003. Pursuant to the purchase agreement, additional
payments of $720,000 and $1.5 million were paid or accrued as of
January 31, 2003 and 2002, respectively. These additional payments were
also allocated to the license agreement. The $2.4 million aggregate net
intangible is included in other assets on the balance sheet and is
being amortized using the straight-line method through 2009, the
expected life of this license.
7. Depreciation and Amortization
Depreciation and amortization are provided by straight-line methods in
amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives.
The following are the estimated lives of the Company's fixed assets:
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 years
Computer equipment 2 to 5 years
Building 20 years
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
F-9
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. Impairment of Long-Lived Assets
In accordance with SFAS 144, the Company annually evaluates the
carrying value of its long-lived assets to determine whether changes
have occurred that would suggest that the carrying amount of such
assets may not be recoverable based on the estimated future
undiscounted cash flows of the businesses to which the assets relate.
Any impairment loss would be equal to the amount by which the carrying
value of the assets exceeded its fair value.
9. Income Taxes
Deferred income tax assets reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
10. Joint Venture
The Company has a joint venture with a Chinese entity principally to
operate a factory located in the People's Republic of China. The
Company invested $542,000 to obtain a 39% interest in the joint venture
company. The joint venture company has an initial term expiring in
fiscal 2015. The Company accounts for the joint venture operations,
which are not material, using the equity method of accounting. The
investment balance of $1.2 million at January 31, 2004 and 2003 is
included in Other Assets.
F-10
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
11. 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 net
income per share amounts have been computed using the weighted average
number of common shares and potential dilutive common shares,
consisting of stock options, outstanding during the period. Options to
acquire an aggregate of approximately 54,000, 45,000 and 6,000 shares
of common stock were not included in the computation of diluted income
per common share for the years ended January 31, 2004, 2003 and 2002,
respectively as including them would have been anti-dilutive.
A reconciliation between basic and diluted income per share is as
follows:
Year ended January 31,
----------------------------
2004 2003 2002
------ ------ ------
(in thousands, except per share amounts)
Net income $8,376 $ 382 $2,364
====== ====== ======
Basic EPS:
Basic common shares 6,912 6,764 6,676
====== ====== ======
Basic EPS $ 1.21 $ 0.06 $ 0.35
====== ====== ======
Diluted EPS:
Basic common shares 6,912 6,764 6,676
Plus impact of stock options 436 583 698
------ ------ ------
Diluted common shares 7,348 7,347 7,374
====== ====== ======
Diluted EPS $ 1.14 $ 0.05 $ 0.32
====== ====== ======
F-11
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
12. 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:
Year ended January 31,
--------------------------------
2004 2003 2002
------ ---- ------
(in thousands, except per share amounts)
Net income - as reported $8,376 $382 $2,364
Deduct: Stock-based employee compensation
expense determined under fair value method,
net of related tax effects 310 297 335
------ ---- ------
Pro forma net income $8,066 $85 $2,029
====== ==== ======
Earnings per share:
Basic - as reported $1.21 $.06 $.35
Basic - adjusted $1.17 $.01 $.30
Diluted - as reported $1.14 $.05 $.32
Diluted - adjusted $1.10 $.01 $.28
The effects of applying SFAS No. 123 on this pro forma disclosure may not be
indicative of future results.
F-12
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
13. Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
charged to expense were $4.6 million, $5.5 million, and $4.5 million,
in fiscal 2004, 2003, and 2002, respectively.
14. Shipping and Handling Costs
Shipping and handling costs are included as a component of Selling,
general & administrative expenses in the Consolidated Statements of
Income and are not material.
15. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
16. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the
Company's short-term debt approximates the carrying value. Furthermore,
the carrying value of all other financial instruments potentially
subject to valuation risk (principally consisting of cash, accounts
receivable and accounts payable) also approximates fair value due to
the short-term nature of such investments.
17. Foreign Currency Translation
The financial statements of subsidiaries outside the United States,
other than Indonesia are measured using local currency as the
functional currency. Assets and liabilities are translated at the rates
of exchange at the balance sheet date. Income and expense items are
translated at average monthly rates of exchange. Gains and losses from
foreign currency transactions of these subsidiaries are included in net
earnings.
F-13
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
18. Effects of Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, ("FIN 46"), "Consolidation of Variable
Interest Entities." FIN 46 requires an investor with a majority of the
variable interests (primary beneficiary) in a variable interest entity
("VIE") to consolidate the entity and also requires majority and
significant variable interest investors to provide certain disclosures.
A VIE is an entity in which the voting equity investors do not have a
controlling interest, or the equity investment at risk is insufficient
to finance the entity's activities without receiving additional
subordinated financial support from other parties. In December 2003,
the FASB deferred the effective date of FIN 46 for certain variable
interest entities (i.e. non-special purpose entities) until the first
interim or annual period ending March 31, 2004. The partial adoption of
the provisions of FIN 46 did not have a material effect on our
consolidated results of operations or financial position for the year
ended January 31, 2004 and we do not expect that the full adoption of
the provisions of FIN 46 will have a material effect on our
consolidated results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
The adoption of SFAS No. 149 had no impact on our results of operations
or our financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. The adoption of SFAS No. 150 had no impact on
our results of operations or our financial position.
F-14
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE B - INVENTORIES
Inventories consist of:
January 31,
-------------------
2004 2003
------- -------
-----(000's)-------
Finished goods $21,777 $21,285
Work-in-process 125 208
Raw materials 6,459 9,455
------- -------
$28,361 $30,948
======= =======
Raw materials of $6.1 million and $8.7 million were maintained in
China at January 31, 2004 and January 31, 2003, respectively.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost consist of:
January 31,
-------------------
2004 2003
------- -------
-----(000's)-------
Machinery and equipment $ 1,536 $ 1,498
Leasehold improvements 5,458 5,166
Furniture and fixtures 1,436 1,408
Computer equipment 5,837 5,514
Land and building 969 969
Property under capital leases (Note G)
Computer equipment 180 180
Leasehold improvements 200 200
------- -------
15,616 14,935
Less accumulated depreciation and amortization (including $233,000 and
$138,000 on property under capital leases at January 31, 2004 and
2003, respectively) 13,647 12,870
------- -------
$ 1,969 $ 2,065
======= =======
F-15
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE D - NOTES PAYABLE
Notes payable include foreign notes payable by PT Balihides, the
Company's Indonesian subsidiary. The foreign notes payable represent
maximum borrowings under a previously existing line of credit of
$770,000 with an Indonesian bank, as of January 31, 2004 and 2003. The
loan is collateralized by the property, plant, and equipment of the
subsidiary and is not the obligation of any G-III entity other than PT
Balihides.
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 an aggregate 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.
There was no loan balance outstanding at either January 31, 2004 or
2003 under this 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.
All borrowings under the agreement bear interest at the option of the
Company at either the prevailing prime rate (4.0% at April 1, 2004) or
LIBOR plus 225 basis points (3.3% at April 1, 2004) and 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.
The weighted average interest rates for amounts borrowed under the
domestic loan agreement and the PT Balihides notes were 3.5% and 4.4%
for the years ended January 31, 2004 and 2003, respectively.
At January 31, 2004 and 2003, the Company was contingently liable under
letters of credit in the amount of approximately $2.8 million and $3.7
million, respectively.
F-16
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE E - NON-RECURRING CHARGE
The Non-recurring charge is included in "Accrued expenses" on the
Consolidated Balance Sheet. The status of the components of the
Non-recurring charge was:
Reserve at RESERVE AT
Initial Utilized January 31, Utilized in JANUARY 31,
Charge Fiscal 2003 2003 Fiscal 2004 2004
------ ----------- ----------- ----------- ---------
----------------------------(000's)-----------------------------
Severance $2,050 $1,123 $ 927 $ 846 $ 81
Accrued expenses and other 1,040 470 570 139 431
Professional fees 435 15 420 420 --
Net write-off of Indonesian assets 385 385 -- -- --
Inventory valuation impairment 200 200 -- -- --
------ ------ ------ ------ ------
$4,110 $2,193 $1,917 $1,405 $ 512
====== ====== ====== ====== ======
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. In
the Company's Consolidated Statements of Income for that year, $3.6
million of these charges are included in "Non-recurring charge" and
$554,000 of these charges are included in "Cost of goods sold".
Based on current estimates, management believes that existing accruals
are adequate.
F-17
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE F - INCOME TAXES
The income tax provision is comprised of the following:
Year ended January 31,
--------------------------------
2004 2003 2002
------- ------- -------
------------(000's)-------------
Current
Federal $ 3,971 $ 1,402 $ 3,127
State and city 1,104 462 519
Foreign 22 760 216
------- ------- -------
5,097 2,624 3,862
Deferred tax expense (benefit) 141 (736) (2,351)
------- ------- -------
$ 5,238 $ 1,888 $ 1,511
======= ======= =======
Income (loss) before income taxes
United States $13,464 $ 2,691 $ 3,216
Non-United States 150 (421) 659
The significant components of the Company's deferred tax asset at January 31,
2004 and 2003 are summarized as follows:
2004 2003
------ ------
-------(000's)------
Supplemental employee retirement plan $ 118 $ 117
Officer bonus 340 63
Provision for bad debts and sales allowances 3,078 2,716
Depreciation and amortization 1,472 1,755
Inventory write-downs 1,110 748
Advertising allowance 490 568
Sales return accrual 551 758
Straight-line lease 314 297
Accrued non-recurring charges 20 702
Other 342 252
------ ------
$7,835 $7,976
====== ======
F-18
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE F - INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal income tax rate
to the effective rate reported in the financial statements:
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 31, 2004 JANUARY 31, 2003 JANUARY 31, 2002
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
--------- ------- --------- ------- --------- -------
(000'S) (000'S) (000'S)
Provision for Federal income taxes at
the statutory rate $ 4,765 35.0% $ 794 35.0% $ 1,356 35.0%
State and city income taxes,
net of Federal income tax benefit 738 5.4 218 9.6 33 .9
Effect of foreign taxable operations (31) (0.2) 827 36.4 42 1.1
Effect of permanent differences resulting in
Federal taxable income 18 .1 51 2.2 45 1.2
Other, net (252) (1.8) (2) -- 35 .8
------- ---- ------- ---- ------- ----
Actual provision for income taxes $ 5,238 38.5% $ 1,888 83.2% $ 1,511 39.0%
======= ==== ======= ==== ======= ====
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $1.9 million at January 31, 2004. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. income taxes
has been provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries, as applicable.
F-19
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases warehousing, executive and sales facilities, and
transportation equipment under operating leases with options to renew at
varying terms. Leases with provisions for increasing rents have been
accounted for on a straight-line basis over the life of the lease.
In addition, certain equipment leases have been treated as capital leases.
The present values of minimum future obligations are calculated based on
interest rates at the inception of the leases. The following schedule sets
forth the future minimum rental payments for operating leases having
noncancellable lease periods in excess of one year and future minimum
lease payments under capital leases at January 31, 2004:
(in thousands) Operating Capital
Leases Leases
--------- -------
Year ending January 31,
2005 $ 2,353 $ 85
2006 1,831 5
2007 1,337 -
2008 1,408 -
2009 1,436 -
Thereafter 3,219 -
-------- ------
Net minimum lease payments $ 11,584 90
========
Less amount representing interest 3
------
Present values of minimum lease payments $ 87
======
Current portion $ 82
Noncurrent portion 5
------
$ 87
======
Rent expense on the above operating leases (including the lease with 345
West - see Note J) for the years ended January 31, 2004, 2003, and 2002
was approximately $2,404,000, $2,246,000, and $2,114,000, respectively,
net of sublease income of $190,000, and $196,000, for the years ended
January 31, 2003 and 2002, respectively. There was no sublease income
during the year ended January 31, 2004.
F-20
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has entered into license agreements that provide for royalty
payments from 3.5% to 12% of net sales of licensed products. The Company
incurred royalty expense (included in cost of goods sold) of approximately
$15,336,000, $8,982,000, and $6,855,000, for the years ended January 31,
2004, 2003, and 2002, respectively. Based on minimum sales requirements,
future minimum royalty and advertising payments required under these
agreements are:
Year ending January 31, Amount
---------------------- ------
2005 $ 11,013,000
2006 6,128,000
2007 5,414,000
2008 65,000
------------
$ 22,620,000
============
The Company has an employment agreement with its chief executive officer
which expires on January 31, 2007. The agreement provides for a base
salary and bonus payments that vary between 3% and 6% of pretax income in
excess of $2 million.
F-21
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE H - STOCKHOLDERS' EQUITY
The bank agreement prohibits the payment of cash dividends without
consent.
Stock Options
The Company's stock plans authorize the granting of 2,180,000 options to
executive and key employees and 181,500 to directors of the Company. It is
the Company's policy to grant stock options at prices not less than the
fair market value on the date of the grant. Option terms, vesting and
exercise periods vary, except that the term of an option may not exceed
ten years.
The weighted average fair value at date of grant for options granted
during 2004, 2003 and 2002 was $4.99, $4.21, and $5.25 per option,
respectively. The fair value of each option at date of grant was estimated
using the Black-Scholes option pricing model. Such valuation calculation
may not be representative of the future effects of applying SFAS 123. The
following weighted average assumptions were used in the Black-Scholes
option pricing model for grants in 2004, 2003, and 2002, respectively:
2004 2003 2002
-------- -------- -------
Expected stock price volatility 65.4% 61.3% 65.9%
Expected lives of options
Directors and officers 7 YEARS 7 years 7 years
Employees 6 YEARS 6 years 6 years
Risk-free interest rate 3.2% 3.6% 4.9%
Expected dividend yield 0% 0% 0%
F-22
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding all options for 2004, 2003, and 2002 is as follows:
2004 2003 2002
----------------------------- ----------------------------- -------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- ----------- ---------- ----------- ----------- -------------
Options outstanding at
beginning of year 1,240,020 $4.17 1,182,650 $3.33 1,243,250 $3.23
Exercised (227,171) $2.68 (176,598) $2.18 (65,900) $2.25
Granted 59,000 $7.94 240,000 $6.88 11,000 $7.82
Cancelled or forfeited (14,100) $6.48 (6,032) $4.61 (5,700) $4.31
---------- ----------- ------------
Options outstanding at
end of year 1,057,749 $4.67 1,240,020 $4.17 1,182,650 $3.33
========= ========== ===========
Exercisable 726,779 $3.93 813,280 $3.45 875,440 $3.14
========= ========== ===========
The following table summarizes information about stock options
outstanding:
Weighted Number
Number out- average Weighted exercisable Weighted
standing as of remaining average as of average
Range of January 31, contractual exercise January 31, exercise
exercise prices 2004 life price 2004 price
- --------------- -------------- ----------- ------------ ------------ --------
$1.62 - $3.00 376,061 3.9 years $ 2.37 333,461 $2.37
$3.01 - $6.00 312,088 3.7 years $ 4.73 291,918 $4.76
$6.01 - $9.00 345,200 7.7 years $ 6.71 99,400 $6.60
$9.01 - $10.70 24,400 9.3 years $10.49 2,000 $9.55
--------- ---------
1,057,749 726,779
========= =========
Included in the above outstanding options as of January 31, 2004, 2003,
and 2002 are 25,000 options with an exercise price of $6.50 per share and
25,000 options with an exercise price of $5.50 per share. The fair value
of the Company's stock at the date of grant was $3.75 per share. All other
options were issued at an exercise price equal to the fair market value of
the Company's stock at the date of grant.
F-23
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE I - MAJOR CUSTOMER
For the years ended January 31, 2004, 2003, and 2002, one customer
accounted for 15.4%, 20.2%, and 21.1%, respectively, of the Company's net
sales. In the year ended January 31, 2004, the majority of sales to this
customer were generated in the licensed business segment. In the years
ended January 31, 2003 and 2002, the majority of sales to this customer
were generated in the non-licensed business segment.
NOTE J - RELATED PARTY TRANSACTIONS
During the years ended January 31, 2004, 2003, and 2002, G-III leased
space from 345 West 37th Corp. ("345 West"), a property owned by two
principal stockholders. Operating expenses paid by G-III to 345 West
during the years ended January 31, 2004, 2003, and 2002, amounted to
approximately $230,000, $161,000, and $202,000, respectively.
As of January 31, 2003, an executive of the Company owned an approximate
5% equity interest on a fully diluted basis in Wilsons The Leather Experts
Inc. ("Wilsons"), a customer of the Company. During the fiscal year ended
January 31, 2004, the executive disposed of the entire investment. In
addition, an outside director of the Company owns an approximate 2%
indirect equity interest on a fully diluted basis of Wilsons. This
director resigned from the Board of Directors of G-III effective January
1, 2004. During the years ended January 31, 2004, 2003, and 2002, Wilsons
accounted for approximately $6.6 million, $8.7 million, and $11.6 million,
respectively, of the Company's net sales.
NOTE K - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan and trust for nonunion employees. At
the discretion of the Company, the Company currently matches 50% of
employee contributions up to 3% of the participant's compensation. The
Company's matching contributions amounted to approximately $208,000,
$186,000, and $200,000, for the years ended January 31, 2004, 2003, and
2002, respectively.
F-24
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE L - 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:
2004 2003 2002
---------------------- ---------------------- -----------------------
NON- Non- Non-
LICENSED LICENSED Licensed Licensed Licensed Licensed
-------- -------- -------- -------- -------- ---------
Net sales $175,489 $ 48,572 $106,902 $ 95,749 $ 85,977 $115,449
Cost of goods sold 126,896 35,333 78,507 74,860 65,479 92,681
-------- -------- -------- ------- -------- --------
Gross profit 48,593 13,239 28,395 20,889 20,498 22,768
Selling, general and administrative 35,582 11,457 24,808 16,743 19,510 16,304
Non-recurring charge 3,556
-------- -------- -------- -------- -------- -------
Operating profit 13,011 1,782 3,587 590 988 6,464
Interest and financing charges, net 753 426 886 1,021 1,792 1,785
--------- -------- -------- -------- -------- -------
Income (loss) before income
taxes $ 12,258 $ 1,356 $ 2,701 $ (431) $ (804) $ 4,679
======== ======== ======== ======== ======== ========
Commission fee income was $4.3 million, $3.3 million, and $3.2 million,
for fiscal 2004, 2003, and 2002, respectively. This fee income is included
in non-licensed net sales and gross profit. The Company allocates all
expenses to its two reportable segments. The Company allocates overhead to
its business segments on various bases, which include units shipped, space
utilization, inventory levels, and relative sales levels, among other
factors. The method of allocation is consistent on a year-to-year basis.
2004 2003 2002
---------------------- ---------------------- -----------------------
LONG-LIVED Long-Lived Long-Lived
REVENUES ASSETS Revenues Assets Revenues Assets
-------- ---------- -------- ---------- -------- ----------
Geographic region
United States $223,572 $ 6,015 $200,205 $ 6,780 $194,921 $ 6,836
Non-United States 489 2,121 2,446 2,021 6,505 2,255
-------- ------- -------- -------- -------- -------
$224,061 $ 8,136 $202,651 $ 8,801 $201,426 $ 9,091
======== ======= ======== ======== ======== =======
Capital expenditures for locations outside of the United States were not
significant in each of the fiscal years ended January 31, 2004, 2003, and
2002.
F-25
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 31, 2004, 2003, and 2002
NOTE L - SEGMENTS (CONTINUED)
Included in finished goods inventory at January 31, 2004, 2003, and 2002
are $15.4 million and $6.4 million, $10.4 million and $10.6 million, and
$9.3 million and $8.9 million, respectively, of inventories for licensed
and non-licensed apparel, respectively. All other assets are commingled.
NOTE M - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data in thousands, except per share numbers,
for the fiscal years ended January 31, 2004 and 2003 are as follows:
Quarter ended
-------------------------------------------------------
April 30, July 31, October 31, January 31,
2003 2003 2003 2004
---------- --------- ----------- -----------
January 31, 2004
Net sales $ 18,712 $ 45,299 $ 125,547 $ 34,503
Gross profit 4,354 15,681 37,339 4,458
Net income (loss) (2,627) 2,718 11,380 (3,095)
Net income (loss) per common share
Basic $ (0.38) $ 0.40 $ 1.65 $ (0.44)
Diluted (0.38) 0.37 1.50 (0.44)
Quarter ended
-------------------------------------------------------
April 30, July 31, October 31, January 31,
2002 2002 2002 2003
---------- --------- ----------- -----------
January 31, 2003
Net sales $ 12,691 $ 40,022 $ 102,284 $ 47,654
Gross profit 903 10,813 27,960 9,608
Net income (loss) (4,169) 576 8,495 (4,520)(a)
Net income (loss) per common share
Basic $ (0.62) $ 0.09 $ 1.25 $ (0.66)(a)
Diluted (0.62) 0.08 1.16 (0.66)(a)
(a) Includes a charge of $3.4 million, net of tax, or $0.50 per diluted share,
associated with expenses related to closing the Company's manufacturing
facility in Indonesia.
F-26
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------------
(1) (2)
Balance at Charged to Charged Balance at
beginning costs and to other Deductions end of
Description of period expenses accounts (a) period
----------- ---------- ---------- --------- ---------- ----------
Year ended January 31, 2004
Deducted from asset accounts
Allowance for doubtful accounts $ 1,312 $ 422 $ 272 $ 1,462
Allowance for sales discounts 6,399 5,916 4,855 7,460
-------- ------- -------- -------
$ 7,711 $ 6,338 $ 5,127 $ 8,922
======== ======= ======== =======
Year ended January 31, 2003
Deducted from asset accounts
Allowance for doubtful accounts $ 614 $ 902 $ 204 $ 1,312
Allowance for sales discounts 5,555 5,303 4,459 6,399
-------- ------- -------- -------
$ 6,169 $ 6,205 $ 4,663 $ 7,711
======== ======= ======== =======
Year ended January 31, 2002
Deducted from asset accounts
Allowance for doubtful accounts $ 466 $ 234 $ 86 $ 614
Allowance for sales discounts 3,776 6,370 4,591 5,555
-------- ------- -------- -------
$ 4,242 $ 6,604 $ 4,677 $6,169
======== ======= ======== ======
(a) Accounts written off as uncollectible, net of recoveries.
S-1