GIII

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended April 30, 2002 for G-III Apparel Group, Ltd., a Delaware corporation engaged in the design, marketing, and distribution of licensed and non-licensed apparel. The company operates in two reportable segments: licensed and non-licensed apparel. The period represents the traditional low-volume quarter of the fiscal year.

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Decline: Net sales decreased by approximately 26% year-over-year, primarily driven by a drop in non-licensed apparel sales due to lower regular spring shipments and a shift in shipment timing to the second quarter.
• Margin Compression: Gross profit margin contracted significantly from 17.2% to 7.1%. Management attributed this to lower regular price shipments and deeper discounts utilized for inventory management in the non-licensed segment.
• Expense Stability: Selling, general, and administrative (SG&A) expenses remained flat at $7.5 million. Increased costs from new licensing lines (Timberland, Sean John) and sports licensing offset savings from headcount reductions implemented in October 2001.
• Debt Reduction: Direct borrowings under the domestic credit facility dropped from $23.8 million to $2.5 million, reflecting a significant reduction in inventory levels (from $72.1 million in 2001 to $41.0 million in 2002) and lower interest rates.
• Cash Flow Improvement: While the company reported a net loss, net cash used in operating activities improved dramatically from $(31.8) million to $(4.5) million, largely due to a $5.1 million decrease in accounts receivable and reduced inventory build-up compared to the prior year.

Guidance, Outlook, and Risks

Management Commentary: Management notes that the first quarter is historically the lowest sales volume period. The company implemented a strategic tax plan that reduced the effective state income tax rate, resulting in a 38.1% effective tax rate for the period. No specific forward-looking revenue guidance was provided in this filing.

Liquidity and Capital Resources: The company maintains a collateralized working capital line of credit with six banks, ranging from $45 million to $85 million depending on the time of year. As of April 30, 2002, cash on hand was $339,000. The credit agreement prohibits cash dividends and requires maintenance of specific earnings and tangible net worth levels.

Risks and Contingencies:

• Seasonality: Results for the quarter are not indicative of full-year performance due to the seasonal nature of the apparel business.
• Market Risks: The company faces risks related to changing consumer demand, competitive pricing, and reliance on foreign manufacturers.
• Accounting Changes: The company adopted SFAS No. 141 and 142 (Goodwill and Intangible Assets) and SFAS No. 144 (Impairment of Long-Lived Assets) effective February 1, 2002. Management stated these adoptions did not have a material impact on financial position.

Investor Verification Checklist

• Verify the sustainability of the inventory reduction strategy and its impact on future gross margins.
• Confirm the status of the $7.6 million in contingent liabilities under open letters of credit.
• Monitor the company's ability to meet the earnings and tangible net worth covenants of its credit facility given the current net loss.
• Assess the performance of new licensing lines (Timberland, Sean John) in offsetting declines in non-licensed apparel.
• Review the "nonrecurring charge" of $107,000 related to the closure of a domestic factory to ensure no further obligations exist.