| G III APPAREL GROUP LTD /DE/ ITEM 1A RISK FACTORS We believe that the occurrence of any one or some combination of the following factors could have a material adverse effect on our business, financial condition and results of operations |
| Risk Factors Relating to Our Operations The failure to maintain our licensing arrangements could cause us to lose significant revenues and have a material adverse effect on our results of operations |
| We are dependent on sales of licensed product for a substantial portion of our revenues |
| In fiscal 2006, revenues from the sale of licensed product accounted for 60dtta8prca of our net sales compared to 63dtta6prca of our net sales in fiscal 2005 and 76dtta3prca of our net sales in fiscal 2004 |
| 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 design and other 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 |
| Even if a licensor does not terminate our license, the failure to achieve net sales sufficient to cover our required minimum royalty payments could have a material adverse effect on our results of operations |
| 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 |
| The failure to maintain our license agreements could cause us to lose significant revenue and have a material adverse effect on our results of operations |
| We are currently negotiating renewals of some of our license agreements, including our license agreement with the National Football League |
| We cannot be sure that we will be able to secure the renewal of this or other license agreements on terms acceptable to us or at all |
| The loss of the NFL license could have a material adverse effect on our results of operations |
| Our success is dependent on the strategies and reputation of our licensors |
| Our business strategy is to offer our products on a multiple brand, multiple channel and multiple price point basis |
| As a part of this strategy, we license the names and brands of numerous recognized companies, designers and celebrities |
| In entering into these license agreements, we plan our products to be targeted towards different market segments based on consumer demographics, design, suggested pricing and channel of distribution |
| If any of our licensors decides to ‘‘reposition’’ its products under the brands we license from them, introduce similar products under similar brand names or otherwise change the parameters of design, pricing, distribution, target market or competitive set, we could experience a significant downturn in that brands’ business, adversely affecting our sales and profitability |
| In addition, as products may be personally associated with designers or celebrities, our sales of those products could be materially and adversely affected if any of those individuals’ images, reputations or popularity were to be negatively impacted |
| If we are unable to successfully translate market trends into attractive product offerings, our sales and profitability could suffer |
| 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 continue to be successful in this regard |
| For example, a key part of our success in fiscal 2004 was a result of increased sales of fashion sports apparel |
| This trend did not continue in fiscal 2005 and, as a result, our results of operations were materially adversely affected |
| We need to anticipate and respond to changing trends quickly, efficiently and effectively in order to be successful |
| Expansion of our product offerings involves significant costs and uncertainty and could adversely affect our results of operations |
| For example, in the past year we have added licenses for new lines of women’s suits, sportswear and dresses |
| We have limited prior 10 _________________________________________________________________ experience designing, manufacturing and marketing these types of products |
| We intend to continue to add additional product lines in the future |
| As is typical with new products, demand and market acceptance for any new products we introduce will be subject to uncertainty |
| Designing, producing and marketing new products requires substantial expenditures |
| We cannot be certain that our efforts and expenditures will successfully generate sufficient sales or that sales that are generated will be sufficient to cover our expenditures |
| If our customers change their buying patterns, request additional allowances or develop their own private label brands, our sales to these customers could be materially adversely affected |
| Our customers’ buying patterns, as well as the need to provide additional allowances to vendors, could have a material adverse effect on our business, results of operations and financial condition |
| Customers’ strategic initiatives, including developing their own private labels brands and reducing the number of vendors they purchase from, could also impact our sales to these customers |
| The concentration of our customers could adversely affect our business |
| Our ten largest customers accounted for approximately 61prca of our net sales in fiscal 2006 compared to 53prca of our net sales in fiscal 2005, with our two largest customers accounting for 19dtta0prca and 13dtta2prca of our net sales in fiscal 2006 |
| Consolidation in the retail industry, such as the combination of the Federated and May department store chains, has increased the concentration of our sales to our largest customers |
| We do not have long-term contracts with any customers, and sales to customers generally occur on an order-by-order basis that may be subject to cancellation or rescheduling by the customer |
| A decision by our major customers to decrease the amount of merchandise purchased from us, to increase the use of their own private label brands or to change the manner of doing business with us, could reduce our revenues and materially adversely affect our results of operations |
| If we miscalculate the market for our products, we may end up with significant excess inventories for some products and missed opportunities for others |
| 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 results of operations |
| We are dependent upon foreign manufacturers |
| We do not own or operate any manufacturing facilities |
| Almost all of our products are imported from independent foreign manufacturers |
| 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 products or demand reduced prices, any of which could have a material adverse effect on our business |
| We do not have long-term written agreements with any of our manufacturers |
| As a result, any of these manufacturers may unilaterally terminate its relationship with us at any time |
| We are also dependent on these manufacturers for compliance with our policies and the policies of our licensors and customers regarding labor practices employed by factories that manufacture product for us |
| Any failure by these manufactures to comply with required labor standards or any other divergence in their labor or other practices from those generally considered ethical in the United States, and the potential negative publicity relating to any of these events, could result in a violation by us of our license agreements and harm us and our reputation |
| Our arrangements with foreign manufacturers are subject to the usual risks of doing business abroad, including currency fluctuations, political or labor 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 the business of our foreign manufacturers |
| This could 11 _________________________________________________________________ materially adversely affect our financial condition and results of operations |
| Heightened terrorism security concerns could subject imported goods to additional, more frequent or more thorough inspections |
| This could delay deliveries and/or increase costs, which could adversely impact our results of operations |
| 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 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 |
| Fluctuations in the price, availability and quality of materials used in our products could have a material adverse effect on our cost of goods sold and ability to meet customer demands |
| Fluctuations in the price, availability and quality of the leather, wool and other materials used in our products could have a material adverse effect on our cost of sales or our ability to meet our customers’ demands |
| We compete with numerous entities for supplies of materials and manufacturing capacity |
| The supply and price of leather is vulnerable to animal diseases as well as natural disasters that can affect the supply and price of raw leather |
| For example, in the past the outbreak of mad-cow and foot-and-mouth disease in Europe, and its aftereffects, adversely affected the supply of leather |
| Any recurrence of these diseases could adversely affect us |
| The prices for wool and other fabrics used in our products depend largely on the market prices for the raw materials used to produce them, such as raw wool or cotton |
| If we lose the services of our key personnel, our business will be harmed |
| Our future success depends on Morris Goldfarb and other key personnel |
| 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 also adversely affect us |
| We have expanded our business through acquisitions that could result in diversion of resources, an inability to integrate acquired operations and extra expenses |
| This could disrupt our business and adversely affect our financial condition |
| Part of our strategy is to pursue acquisitions to expand our business |
| For example, in July 2005, we acquired Marvin Richards and the operating assets of Winlit |
| The negotiation of potential acquisitions as well as the integration of acquired businesses could divert our management’s time and resources |
| Acquired businesses may not be successfully integrated with our operations |
| We may not realize the intended benefits of any acquisition |
| Acquisitions could also result in: [spacer |
| gif] • substantial cash expenditures; [spacer |
| gif] • potentially dilutive issuances of equity securities; [spacer |
| gif] • the incurrence of debt and contingent liabilities; [spacer |
| gif] • a decrease in our profit margins; and [spacer |
| gif] • amortization of intangibles and potential impairment of goodwill |
| If acquisitions disrupt our operations, our business may suffer |
| We may need additional financing to continue to grow |
| 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 line of credit and related term loan entered into in July 2005 |
| Our need for working capital and the amount of our debt increased as a result of our two acquisitions in July 2005 |
| In December 2005, we began to make quarterly payments under our term loan of dlra1cmam650cmam000 |
| A final payment under the term loan of dlra11cmam850cmam000 is due in July 2008 |
| Our growth is dependent on our ability to extend and increase the line of credit and may be dependent 12 _________________________________________________________________ on our ability to refinance the term loan if we do not generate sufficient cash to make the payments due under the term loan |
| If we are unable to refinance our debt, we cannot be sure we will be able to secure alternative financing on satisfactory terms or at all |
| We are dependent on sales during the July through November period each year for the substantial majority of our net sales and net income |
| Retail sales of outerwear apparel have traditionally been seasonal in nature |
| As a result, we are dependent of our sales from July through November each year for the substantial majority of our net sales and net income |
| Any difficulties we may encounter during this period as a result of weather or disruption of manufacturing or transportation of our products will have a magnified effect on our net sales and net income for the year |
| The July through November time frame is expected to continue to provide a disproportionate amount of our sales for the foreseeable future |
| Risk Factors Relating to the Apparel Industry The competitive nature of the apparel industry may result in lower prices for our products and decreased gross profit margins |
| The apparel business is highly competitive |
| We have numerous competitors with respect to the sale of apparel, including distributors that import apparel from abroad and domestic retailers with established foreign manufacturing capabilities |
| Many of our competitors have greater financial and marketing resources and greater manufacturing capacity than we do |
| We also compete with vertically integrated apparel manufacturers that also own retail stores |
| The general availability of contract manufacturing capacity also allows ease of access by new market entrants |
| The competitive nature of the apparel industry may result in lower prices for our products and decreased gross profit margins, either of which may materially adversely affect our sales and profitability |
| If major department, mass merchant and specialty store chains continue to consolidate, our business could be negatively affected |
| We sell our products to major department, mass merchant and specialty store chains |
| Continued consolidation in the retail industry, such as the recent purchase of May Department Store Company by Federated Department Stores, Inc, could negatively impact our business |
| Consolidation could reduce the number of our customers and potential customers |
| With increased consolidation in the retail industry, we are increasingly dependent on retailers whose bargaining strength may increase and share of our business may grow |
| If purchasing decisions become more centralized, the risks from consolidation increases |
| Customers may also concentrate purchases among a narrowing group of vendors |
| This could adversely affect our business |
| The cyclical nature of the apparel industry and uncertainty over future economic prospects and consumer spending could have a materially adverse effect on our results of operations |
| The apparel industry is cyclical |
| Purchases of outerwear, sportswear and other apparel tend to decline during recessionary periods and may decline for a variety of other 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 has in the past caused our customers to delay the placing of initial orders and to slow the pace of reorders during the seasonal peak of our business |
| Weak economic conditions have had a material adverse effect on our results of operations at times in the past and could have a material adverse effect on our results of operations in the future as well |
| The significant increase in fuel prices could adversely affect our results of operations |
| Fuel prices have increased significantly during the past year, most recently as a result of Hurricane Katrina and tensions in the Middle East |
| Increased gasoline prices could adversely affect consumer 13 _________________________________________________________________ spending, including discretionary spending on apparel |
| In addition, higher fuel prices could cause our operating expenses to increase, especially with respect to warehousing and freight |
| Any significant decrease in sales or increase in expenses as a result of higher fuel prices could adversely affect our results of operations |
| If new legislation restricting the importation or increasing the cost of textiles and apparel produced abroad is enacted, our business could be adversely affected |
| 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 was eliminated on December 31, 2004 |
| We cannot be certain of the full impact that this elimination will have on international trade in general and the apparel industry in particular |
| We also cannot be certain of the impact of quota elimination on our business, including increased competition that could result from the importation of an increasing amount of lower priced apparel into the United States |
| Notwithstanding quota elimination, China’s accession agreement for membership in the WTO provides that WTO member countries, including the United States, may re-impose quotas on specific product |
| In May 2005, the United States imposed unilateral quotas on several product categories, limiting growth in imports of these categories to 7dtta5prca a year |
| We are unable to assess the potential for additional action by the United States government with respect to these or other product categories in the event that the quantity of imported apparel significantly disrupts the apparel market in the United States |
| Additional action by the United States in response to a disruption in its apparel market could limit our ability to import apparel and increase our costs |
| Other Risks Relating to Ownership of Our Common Stock Two persons are in a position to substantially control matters requiring a stockholder vote |
| As of March 31, 2006, Morris Goldfarb, our Chairman and Chief Executive Officer, and his father, Aron Goldfarb, our founder and former director, beneficially owned an aggregate of approximately 47dtta3prca of our outstanding common stock |
| As a result, if they vote together, 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 |
| The price of our common stock has fluctuated significantly and could continue to fluctuate significantly |
| Between February 1, 2004 and March 31, 2006, the market price of our common stock has ranged from a low of dlra3dtta79 to a high of dlra11dtta95 per share |
| The market price of our common stock may change significantly in response to various factors and events beyond our control, including: [spacer |
| gif] • fluctuations in our quarterly revenues or those of our competitors as a result of seasonality or other factors; [spacer |
| gif] • a shortfall in revenues or net income from that expected by securities analysts and investors; [spacer |
| gif] • changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or companies in our industry generally; [spacer |
| gif] • announcements concerning our competitors; [spacer |
| gif] • changes in product pricing policies by our competitors or our customers; [spacer |
| gif] • general conditions in our industry; and [spacer |
| gif] • general conditions in the securities markets |
| 14 _________________________________________________________________ The failure to comply with the internal control evaluation and certification requirements of Section 404 of Sarbanes-Oxley Act could harm our results of operations |
| We will be required to comply with the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 by no later than the end of our fiscal year ending January 31, 2008 |
| If we were to qualify as an accelerated filer as of July 31, 2006, we would need to comply by the end of our current fiscal year ending January 31, 2007 |
| We have begun the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 |
| This process may divert internal resources and will take a significant amount of time, effort and expense to complete |
| If it is determined that we are not in compliance with Section 404, we may be required to implement new internal control procedures and reevaluate our financial reporting |
| We may experience higher than anticipated operating expenses as well as outside auditor fees during the implementation of these changes and thereafter |
| Further, we may need to hire additional qualified personnel in order for us to be compliant with Section 404 |
| If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in our being unable to obtain an unqualified report on internal controls from our independent auditors |