FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended October 31, 2001 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 0-18183 ---------------------------------------------------------- G-III APPAREL GROUP, LTD. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> Delaware 41-1590959 - ---------------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) </TABLE> 512 Seventh Avenue, New York, New York 10018 ----------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (212) 403-0500 -------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of December 1, 2001. Common Stock, $.01 par value per share: 6,689,804 shares.
<TABLE> Page No. <S> <C> <C> Part I FINANCIAL INFORMATION Item 1. Financial Statements * Condensed Consolidated Balance Sheets - October 31, 2001 and January 31, 2001.............................................3 Condensed Consolidated Statements of Operations - For the Three Months Ended October 31, 2001 and 2000.........................................................4 Condensed Consolidated Statements of Operations - For the Nine Months Ended October 31, 2001 and 2000.........................................................5 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended October 31, 2001 and 2000.........................................................6 Notes to Condensed Consolidated Financial Statements......................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................10 </TABLE> * The Balance Sheet at January 31, 2001 has been taken from the audited financial statements at that date. All other financial statements are unaudited. <TABLE> <S> <C> <C> Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.....................................................13 1. Amendment No. 11 to the Fifth Amended and Restated Loan Agreement, dated as of November 27, 2001 by and among G-III, the Banks and Fleet Bank. </TABLE> -2-
G-III Apparel Group, Ltd. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) <TABLE> <CAPTION> ASSETS OCTOBER 31, JANUARY 31, 2001 2001 ---- ---- (unaudited) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 1,694 $ 9,231 Accounts receivable 59,209 11,528 Allowance for doubtful accounts and sales discounts (8,010) (4,242) Inventories - net 52,972 42,450 Prepaid expenses and other current assets 3,891 2,481 -------- ------- Total current assets 109,756 61,448 PROPERTY, PLANT AND EQUIPMENT, NET 3,160 2,940 DEFERRED INCOME TAXES 4,889 4,889 OTHER ASSETS 2,902 2,675 -------- ------- $120,707 $71,952 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 41,400 $ 1,500 Current maturities of obligations under capital leases 104 80 Income taxes payable 3,002 2,312 Accounts payable 10,857 7,411 Accrued expenses 6,522 8,190 Accrued nonrecurring charges 103 97 -------- ------- Total current liabilities 61,988 19,590 OTHER LONG-TERM LIABILITIES 496 293 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, 1,000,000 shares authorized; no shares issued and outstanding in all periods Common stock - $.01 par value; authorized, 20,000,000 shares; 6,934,621 and 6,878,171 shares issued at October 31, 2001 and January 31, 2001, respectively 69 69 Additional paid-in capital 25,423 25,295 Retained earnings 33,701 27,675 -------- ------- 59,193 53,039 Less common stock held in treasury - 244,817 shares at October 31, 2001 and January 31, 2001, at cost (970) (970) -------- ------- 58,223 52,069 -------- ------- $120,707 $71,952 ======== ======= </TABLE> The accompanying notes are an integral part of these statements. -3-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) <TABLE> <CAPTION> THREE MONTHS ENDED OCTOBER 31, ------------------------------ (Unaudited) 2001 2000 ----- ---- <S> <C> <C> Net sales $ 90,623 $ 87,955 Cost of goods sold 69,905 62,647 --------- --------- Gross profit 20,718 25,308 Selling, general and administrative expenses 10,930 8,208 --------- --------- Operating income 9,788 17,100 Interest and financing charges, net 1,399 1,315 --------- --------- Income before income taxes 8,389 15,785 Income tax expense 3,356 6,317 --------- --------- Net income $ 5,033 $ 9,468 ========= ========= INCOME PER COMMON SHARE: Basic: ----- Net income per common share $ 0.75 $ 1.45 ========= ========= Weighted average number of shares outstanding 6,689,787 6,543,102 ========= ========= Diluted: ------- Net income per common share $ 0.68 $ 1.31 ========= ========= Weighted average number of shares outstanding 7,380,068 7,218,711 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. -4-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) <TABLE> <CAPTION> NINE MONTHS ENDED OCTOBER 31, ----------------------------- (Unaudited) 2001 2000 ----- ---- <S> <C> <C> Net sales $ 170,703 $ 145,918 Cost of goods sold 130,420 104,632 --------- --------- Gross profit 40,283 41,286 Selling, general and administrative expenses 27,422 21,790 --------- --------- Operating income 12,861 19,496 Interest and financing charges, net 2,817 2,187 --------- --------- Income before minority interest 10,044 17,309 and income taxes Minority interest in loss of joint venture - 9 --------- --------- Income before income taxes 10,044 17,318 Income tax expense 4,018 6,922 --------- --------- Net income $ 6,026 $ 10,396 ========= ========= INCOME PER COMMON SHARE: Basic: ----- Net income per common share $ 0.90 $ 1.58 ========= ========= Weighted average number of shares outstanding 6,671,444 6,560,483 ========= ========= Diluted: ------- Net income per common share $ 0.82 $ 1.47 ========= ========= Weighted average number of shares outstanding 7,393,126 7,095,332 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. -5-
G-III Apparel Group, Ltd. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> NINE MONTHS ENDED OCTOBER 31, ----------------------------- (Unaudited) ----------- 2001 2000 ------------ -------- <S> <C> <C> Cash flows from operating activities Net income $ 6,026 $ 10,396 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 897 765 Minority interest - (9) Changes in operating assets and liabilities: Accounts receivable (43,913) (44,731) Inventories (10,522) (13,884) Income taxes 690 3,586 Prepaid expenses and other current assets (1,410) (3,766) Other assets (142) (275) Accounts payable and accrued expenses 1,778 9,737 Accrued nonrecurring charge (71) (374) Other long term liabilities 50 50 -------- -------- Net cash used in operating activities (46,617) (38,505) -------- -------- Cash flows from investing activities Capital expenditures (1,021) (682) Capital dispositions 24 21 Purchase of certain assets of Gloria Gay Coats, LLC (205) -------- -------- Net cash used in investing activities (1,202) (661) -------- -------- Cash flows from financing activities Increase in notes payable, net 39,900 24,778 Proceeds from capital lease obligations 381 - Payments for capital lease obligations (127) (92) Investment in joint venture by minority partner - 1,012 Purchase of common stock for Treasury - (540) Proceeds from exercise of stock options 128 72 -------- -------- Net cash from financing activities 40,282 25,230 -------- -------- Net decrease in cash and cash equivalents (7,537) (13,936) Cash and cash equivalents at beginning of period 9,231 14,530 -------- -------- Cash and cash equivalents at end of period $ 1,694 $ 594 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for Interest $ 2,428 $ 1,897 Income taxes 3,269 3,265 </TABLE> The accompanying notes are an integral part of these statements. -6-
G-III APPAREL GROUP, LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - General Discussion The results for the three and nine month periods ended October 31, 2001 are not necessarily indicative of the results expected for the entire fiscal year, given the seasonal nature of the Company's business. The accompanying financial statements included herein are unaudited. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been reflected. The Company consolidates the accounts of all its majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated. The accompanying financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10K filed with the Securities and Exchange Commission for the year ended January 31, 2001. Certain reclassifications have been made to conform to the fiscal 2001 presentation. Note 2 - Inventories Inventories consist of: <TABLE> <CAPTION> October 31, January 31, 2001 2001 ----------- ----------- (in thousands) <S> <C> <C> Finished products $30,585 $17,605 Work-in-process 2,598 1,707 Raw materials 19,789 23,138 ------- ------- $52,972 $42,450 ======= ======= </TABLE> Note 3 - Net Income Per Common Share Basic income per share amounts have been computed using the weighted average number of common shares outstanding during each period. When applicable, diluted income per share amounts are computed using the weighted average number of common shares and the dilutive potential common shares outstanding during the period. -7-
Note 4 - Notes Payable The Company's loan agreement, which expires on May 31, 2002, is a collateralized working capital line of credit with six banks that provides for a maximum line of credit in amounts that range from $45 million to $85 million at specific times during the year. The line of credit provides for maximum direct borrowings ranging from $30 million to $72 million during the year. The unused balance may be used for letters of credit. Amounts available for borrowing are subject to borrowing base formulas and overadvances specified in the agreement. The Company was not in compliance with the covenant relating to earnings before interest, taxes, depreciation and amortization ("EBITDA") for the nine months ended October 31, 2001. On November 27, 2001, the Company received a waiver from its lenders relating to this EBITDA covenant. The lenders also amended the EBITDA and tangible net worth covenants for the year ending January 31, 2002. There was $40.6 million outstanding at October 31, 2001 and no loan balance outstanding at January 31, 2001 under this agreement. Notes payable also includes borrowings by PT Balihides, the Company's Indonesian subsidiary, under a credit facility with an Indonesian bank. During the nine month period ended October 31, 2001, the Company reduced the amount of this foreign debt. There were notes payable outstanding under this facility of $800,000 as of October 31, 2001 and $1.5 million as of January 31, 2001. Note 5 - Nonrecurring Charge The nonrecurring charge refers to the reserve associated with the closure of the company's domestic factory that was completed by January 31, 1995. The balance of $157,000 at October 31, 2001 and $228,000 at January 31, 2001 relates to the remaining obligation under an operating lease. Based on current estimates, management believes that existing accruals are adequate. Other long-term liabilities include $54,000 and $131,000 of nonrecurring charges at October 31, 2001 and January 31, 2001, respectively. -8-
Note 6 - Segments The Company's reportable segments are business units that offer different products and are managed separately. The company operates in two segments, licensed and non-licensed apparel. The following information is presented for the three and nine month periods indicated below: <TABLE> <CAPTION> THREE MONTHS ENDED OCTOBER 31, ------------------------------ 2001 2000 ---- ---- Non- Non- Licensed Licensed Licensed Licensed -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $39,897 $50,726 $31,706 $56,249 Cost of goods sold 29,782 40,123 21,697 40,950 ------ ------ ------ ------ Gross profit 10,115 10,603 10,009 15,299 Selling, general and administrative 5,838 5,092 3,771 4,437 ------ ------ ------ ------ Operating income 4,277 5,511 6,238 10,862 Interest expense 675 724 547 768 ------ ------ ------ ------ Income before income taxes $ 3,602 $ 4,787 $ 5,691 $10,094 ====== ====== ====== ====== </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED OCTOBER 31, ----------------------------- 2001 2000 ---- ---- Non- Non- Licensed Licensed Licensed Licensed -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $69,596 $101,107 $55,124 $90,794 Cost of goods sold 51,800 78,620 38,772 65,860 ------ ------- ------ ------ Gross profit 17,796 22,487 16,352 24,934 Selling, general and administrative 14,753 12,669 10,229 11,561 ------ ------- ------ ------ Operating income 3,043 9,818 6,123 13,373 Interest expense 1,322 1,495 837 1,350 ------ ------- ------ ------ Income before minority interest and income taxes 1,721 8,323 5,286 12,023 Minority interest 9 ------ ------- ------ ----- Income before income taxes $ 1,721 $ 8,323 $ 5,286 $12,032 ====== ======= ====== ====== </TABLE> -9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Unless the context otherwise requires, "G-III", "us", "we" and "our" refer to G-III Apparel Group, Ltd. and its subsidiaries. References to fiscal years refer to the year ended or ending on January 31 of that year. Statements in this Quarterly Report on Form 10-Q concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; product introductions and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matter, are "forward-looking statements" as that term is defined under the Federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, reliance on foreign manufacturers, risks of doing business abroad, the nature of the apparel industry, including changing consumer demand and tastes, seasonality, customer acceptance of new products, the impact of competitive products and pricing, dependence on existing management, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. Results of Operations The tragic events of September 11, 2001 aggravated a retail environment that had already begun to slow down due to the economic downturn in the United States. The resulting uncertainty with respect to consumer spending caused our customers to slow the pace of reorders during what is the seasonal peak of our business. Retailers responded to this environment with increased promotional activity which required us to grant greater allowances and discounts in order to sell our products. These factors had an adverse effect on our net sales and gross profit for the three and nine months ended October 31, 2001. These factors, as well as the unseasonably warm weather that has continued into early December 2001, will also have a negative effect on our results of operations for the quarter ending January 31, 2002. Net sales for the three months ended October 31, 2001 were $90.6 million compared to $88.0 million for the same period last year. The increase in net sales during the quarter was attributable to an $8.2 million increase in sales of licensed apparel, primarily as a result of sales by our new Jones New York women's wool division, partially offset by a $5.5 million decrease in sales of non-licensed apparel. We entered into the license agreement relating to this Jones New York business in January 2001. Net sales for the nine months ended October 31, 2001 were $170.7 million compared to $145.9 million for the same period in the prior year. The increase in net sales in the nine month period was attributable to a $14.5 million increase in sales of licensed apparel, also due primarily to sales by our new Jones New York women's wool division, and a $10.3 million increase in sales of non-licensed apparel. Gross profit was $20.7 million, or 22.9% of net sales, for the three months ended October 31, 2001 compared to $25.3 million, or 28.8% of net sales, for the same period last year. Gross profit was $40.3 million, or 23.6% of net sales, for the nine months ended October 31, 2001 compared to $41.3 million, or 28.3% of net sales, for the same period last year. The decrease in gross profit percentage for both periods resulted from lower gross profit percentages in both the licensed and non-licensed apparel segments. -10-
The gross profit percentages were negatively impacted due to higher allowances and discounts, which were necessary to sell products into the sluggish retail market. In addition, a portion of the decrease resulted from lower commission fee income. Commission fee income, which is primarily generated in the non-licensed apparel segment, decreased to $1.7 million during the three months ended October 31, 2001 from $3.8 million in the comparable period of the prior year and to $3.2 million during the nine months ended October 31, 2002 from $5.9 million in the comparable period of the prior year. There is no cost of goods sold component associated with commission transactions. Gross profit was also negatively impacted by an increase of $1.9 million in our inventory reserve during the three months ended October 31, 2001, reflecting the effect of excess unsold inventory. Inventory reserves increased $1.5 million during the nine month period ended October 31, 2001 as compared to the same period of the prior year. Selling, general and administrative expenses were $10.9 million for the three months ended October 31, 2001 compared to $8.2 million in the three months ended October 31, 2000 and $27.4 million for the nine months ended October 31, 2001 compared to $21.8 million for the same period last year. The increase in the three month period was primarily a result of expenses relating to the start-up of the Cole Haan, Sean John, and the two Jones New York divisions. Advertising expenses increased by $1.0 million, personnel expenses increased by $700,000, and facilities expense increased by $500,000 over the comparable period of the prior year. Selling, general and administrative expenses in the nine month period also increased primarily from expenses relating to the start-up of the Cole Haan, Sean John, and the two Jones New York divisions. Personnel expenses increased by $2.0 million, advertising expenses increased by $1.7 million, and facility expenses increased by $1.0 million, over the comparable period of the prior year. To reduce our expenses, we terminated 15 employees in October, 2001, with expected annualized cost savings of approximately $1.1 million. Interest expense and finance charges for the three months ended October 31, 2001 were $1.4 million compared to $1.3 million in the same period last year. Interest expense and finance charges for the nine month period ended October 31, 2001 were $2.8 million compared to $2.2 million in the same period last year. The increase in interest expense in both the three and nine month periods resulted primarily from increased borrowings to support higher inventory investments, partially offset by lower interest rates. Income tax expense was $3.4 million for the three months ended October 31, 2001 compared to $6.3 million in the same period in the prior year. Income tax expense was $4.0 million for the nine months ended October 31, 2001 compared to $6.9 million in the same period last year. Our effective tax rate was 40% in both periods in each fiscal year. For the three months ended October 31, 2001, we had net income of $5.0 million, or $0.68 per diluted share, compared to $9.5 million, or $1.31 per diluted share, for the same period in the prior year. For the nine months ended October 31, 2001, we had net income of $6.0 million, or $0.82 per diluted share, compared to $10.4 million, or $1.47 per diluted share, for the same period in the prior year. -11-
Liquidity and Capital Resources Our loan agreement, which expires on May 31, 2002, is a collateralized working capital line of credit with six banks that provides for a maximum line of credit in amounts that range from $45 million to $85 million at specific times during the year. The line of credit provides for maximum direct borrowings ranging from $30 million to $72 million during the year. The unused balance may be used for letters of credit. Amounts available for borrowing are subject to borrowing base formulas and overadvances specified in the agreement. Direct borrowings under the line of credit bear interest at our option at either the prevailing prime rate (4.75% as of December 12, 2001) or LIBOR plus 225 basis points (4.19% as of December 12, 2001). Our assets collateralize all borrowings. The loan agreement requires us, among other covenants, to maintain specified earnings and tangible net worth levels, and prohibits the payment of cash dividends. We were not in compliance with the covenant relating to earnings before interest, taxes, depreciation and amortization ("EBITDA") for the nine months ended October 31, 2001. On November 27, 2001, we received a waiver from our lenders relating to this EBITDA covenant. The lenders also amended the EBITDA and tangible net worth covenants for the year ending January 31, 2002. The amount borrowed under the line of credit varies based on our seasonal requirements. As of October 31, 2001, direct borrowings were $40.6 million and contingent liabilities under open letters of credit were approximately $4.5 million compared to direct borrowings of $26.6 million and contingent liabilities under open letters of credit of approximately $9.4 million as of October 31, 2000. The increase in borrowings under our credit facility compared to last year resulted primarily from increased inventories. PT Balihides, our Indonesian subsidiary, has a separate credit facility with an Indonesian bank. During the nine month period ended October 31, 2001, we reduced the amount of this foreign debt. There were notes payable outstanding under this facility of approximately $800,000 as of October 31, 2001 compared to $1.5 million as of October 31, 2000. In November 1999, along with Black Entertainment Television ("BET"), we decided to discontinue our BET Design Studio joint venture. The joint venture was started in February 1997 to provide a BET-branded clothing and accessory line. BET and us each contributed $3.8 million to this joint venture, of which $1.0 million was contributed during the quarter ended April 30, 2000. The final distribution from the joint venture company was made in January 2001. On December 20, 1999, our Board of Directors authorized the repurchase of up to $1,000,000 worth of our common stock. We purchased 244,817 shares of our common stock at a total cost of $970,000. We concluded this buyback program in the quarter ended April 30, 2000, when we expended $540,000 to purchase our shares. -12-
Effect of Recently Issued Accounting Pronouncements Derivatives Effective February 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Due to the immaterial amount of our derivative and hedging activity, the effect of adopting SFAS 133 on our results of operations and financial position was immaterial. Business Combinations/Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to periodic impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of the fiscal year ending January 31, 2003. We do not believe the new pronouncements will have a material impact on our consolidated financial position or results of operations. Accounting for the Impairment or Disposal of Long-Lived Assets In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and provide a single accounting model for long-lived assets to be disposed of. The new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets to be disposed of are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. This Standard also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. We will apply the new rules on accounting for impairment or disposal of long-lived assets beginning in the first quarter of the fiscal year ending January 31, 2003. We do not believe the new pronouncement will have a material impact on our consolidated financial position or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 1. Amendment No. 11 to the Fifth Amended and Restated Loan Agreement, dated as of November 27, 2001, by and among G-III, the Banks and Fleet Bank. -13-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G-III APPAREL GROUP, LTD. (Registrant) Date: December 12, 2001 By: /s/ Morris Goldfarb ------------------------------------ Morris Goldfarb Chief Executive Officer Date: December 12, 2001 By: /s/ Wayne S. Miller ------------------------------------ Wayne S. Miller Chief Financial Officer