UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 6, 2002
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 1-10746
JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization) | 06-0935166
(I.R.S. Employer
Identification No.) |
250 Rittenhouse Circle
Bristol, Pennsylvania
(Address of principal executive offices) | 19007
(Zip Code) |
(215) 785-4000
(Registrant's telephone number, including area code)
Not Applicable
(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 the latest practicable date.
Class of Common Stock
$.01 par value | Outstanding at May 15, 2002
128,787,927 |
JONES APPAREL GROUP, INC.
Index
DEFINITIONS
As used in this Report, unless the context requires otherwise, "our," "us" and "we" means Jones Apparel Group, Inc. and consolidated subsidiaries, "Sun" means Sun Apparel, Inc., "Nine West" means Nine West Group Inc., "Victoria" means Victoria + Co Ltd., "Judith Jack" means Judith Jack, LLC (acquired April 26, 2001), "McNaughton" means McNaughton Apparel Group Inc. (acquired June 19, 2001), "Gloria Vanderbilt" means Gloria Vanderbilt Apparel Corp. (acquired April 8, 2002), "FASB" means the Financial Accounting Standards Board, "SFAS" means Statement of Financial Accounting Standards and "SEC" means the United States Securities and Exchange Commission. The results of Judith Jack and McNaughton are included in our operating results from the respective dates of acquisition and, therefore, our operating results for all periods presented are not comparable.
- 2 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones Apparel Group, Inc.
Consolidated Balance Sheets (All amounts in millions except per share data)
| April 6,
2002
| December 31,
2001
|
| (Unaudited) | |
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful
accounts of $12.1 and $11.7
Inventories
Deferred taxes
Prepaid expenses and other current assets |
$ 143.3
585.1
478.9
64.3
45.6
|
$ 76.5
395.8
572.9
62.1
33.7
|
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, at cost, less
accumulated depreciation and amortization
GOODWILL, less accumulated amortization
OTHER INTANGIBLES, at cost, less accumulated
amortization
OTHER ASSETS | 1,317.2
246.6
1,369.8
509.8
79.7
| 1,141.0
242.5
1,368.4
533.3
88.3
|
| $ 3,523.1
| $ 3,373.5
|
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current portion of long-term
debt and capital lease obligations
Accounts payable
Income taxes payable
Accrued employee compensation and
severance payments
Accrued expenses and other current liabilities
TOTAL CURRENT LIABILITIES |
$ 8.3
181.3
67.8
49.7
122.1
429.2
|
$ 7.7
216.7
7.0
42.4
104.4
378.2
|
NONCURRENT LIABILITIES:
Long-term debt
Obligations under capital leases
Deferred taxes
Other
TOTAL NONCURRENT LIABILITIES
TOTAL LIABILITIES |
952.7
28.0
66.5
33.0
1,080.2
1,509.4
|
949.5
27.1
80.8
32.5
1,089.9
1,468.1
|
COMMITMENTS AND CONTINGENCIES
| | |
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares authorized 1.0;
none issued
Common stock, $.01 par value - shares authorized
200.0; issued 143.2 and 142.0
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
|
-
1.4
1,012.6
1,391.0
(0.2)
|
-
1.4
974.3
1,320.3
0.5
|
Less treasury stock, 16.3 shares, at cost
| 2,404.8
(391.1)
| 2,296.5
(391.1)
|
TOTAL STOCKHOLDERS' EQUITY
| 2,013.7
| 1,905.4
|
| $ 3,523.1
| $ 3,373.5
|
See accompanying notes to consolidated financial statements
- 3 -
Jones Apparel Group, Inc.
Consolidated Statements of Income (Unaudited)
(All amounts in millions except per share data)
| Fiscal Quarter Ended
|
| April 6, 2002
| April 7, 2001
|
Net sales
Licensing income (net)
| $ 1,120.3
6.6
| $ 1,072.3
5.4
|
Total revenues
Cost of goods sold
| 1,126.9
678.5
| 1,077.7
630.4
|
Gross profit
Selling, general and administrative expenses
Executive compensation obligations
Amortization of goodwill
| 448.4
265.5
31.2
-
| 447.3
257.3
-
9.6
|
Operating income
Interest income
Interest expense and financing costs | 151.7
(0.3)
16.3
| 180.4
(1.7)
22.8
|
Income before provision for income taxes
Provision for income taxes | 135.7
51.2
| 159.3
62.9
|
Income before cumulative effect of change in
accounting principle
Cumulative effect of change in accounting for intangible
assets, net of tax
|
84.5
13.8
|
96.4
-
|
| Net income | $ 70.7
| $ 96.4
|
Earnings per share
Basic
Income before cumulative effect of change in
accounting principle
Cumulative effect of change in accounting for
intangible assets |
$0.67
0.11
|
$0.80
-
|
| Basic earnings per share | $0.56
| $0.80
|
Diluted
Income before cumulative effect of change in
accounting principle
Cumulative effect of change in accounting for
intangible assets |
$0.63
0.10
|
$0.75
-
|
| Basic earnings per share | $0.53
| $0.75
|
Weighted average common shares and
share equivalents outstanding
Basic
Diluted |
126.2
137.3 |
120.7
130.4 |
See accompanying notes to consolidated financial statements
- 4 -
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
(All amounts in millions)
| Total
stock-
holders'
equity
| Common
stock
| Additional
paid-in
capital
| Retained
earnings
| Accumu-
lated
other
compre-
hensive
income
(loss)
| Treasury
stock
|
| Balance, January 1, 2001: | $ 1,477.2 | $ 1.4 | $ 752.0 | $ 1,084.1 | $ (2.4) | $ (357.9) |
Fiscal quarter ended April 7, 2001:
Comprehensive income:
Net income
Gain on termination of interest
rate hedges
Reclassification adjustment for
gains included in net income
Foreign currency translation adjustments
Total comprehensive income |
96.4
8.3
(0.2)
(0.7)
103.8
|
-
-
-
-
|
-
-
-
-
|
96.4
-
-
-
|
-
8.3
(0.2)
(0.7)
|
-
-
-
-
|
Amortization of deferred compensation in
connection with executive stock options
Exercise of stock options
Tax benefit derived from exercise of
stock options
Treasury stock acquired |
0.1
28.3
9.9
(69.0)
|
-
-
-
-
|
0.1
28.3
9.9
-
|
-
-
-
-
|
-
-
-
-
|
-
-
-
(69.0)
|
| Balance, April 7, 2001 | $ 1,550.3
| $ 1.4
| $ 790.3
| $ 1,180.5
| $ 5.0
| $ (426.9)
|
Balance, January 1, 2002: |
$ 1,905.4 |
$ 1.4 |
$ 974.3 |
$ 1,320.3 |
$ 0.5 |
$ (391.1) |
Fiscal quarter ended April 6, 2002:
Comprehensive income:
Net income
Change in fair value of cash flow hedges
Reclassification adjustment for
gains included in net income
Total comprehensive income |
70.7
(0.3)
(0.4)
70.0
|
-
-
-
|
-
-
-
|
70.7
-
-
|
-
(0.3)
(0.4)
|
-
-
-
|
Amortization of deferred compensation in
connection with executive stock options
Exercise of stock options
Tax benefit derived from exercise of
stock options |
7.5
26.0
4.8
|
-
-
-
|
7.5
26.0
4.8
|
-
-
-
|
-
-
-
|
-
-
-
|
| Balance, April 6, 2002 | $ 2,013.7
| $ 1.4
| $ 1,012.6
| $ 1,391.0
| $ (0.2)
| $ (391.1)
|
See accompanying notes to consolidated financial statements
- 5 -
Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(All amounts in millions)
| Fiscal Quarter Ended
|
| April 6, 2002
| April 7, 2001
|
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income |
$ 70.7
|
$ 96.4
|
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting for
intangible assets
Amortization of goodwill
Amortization of original issue discount
Depreciation and other amortization
Provision for losses on accounts receivable
Deferred taxes
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Income taxes payable
Accrued expenses and other liabilities |
13.8
-
3.6
21.8
0.8
(7.0)
0.4
(190.1)
94.1
(12.2)
6.0
(11.1)
65.5
0.9
|
-
9.6
2.3
17.3
2.0
0.6
2.3
(229.1)
(47.7)
7.2
2.9
(6.1)
60.6
(25.0)
|
| Total adjustments | (13.5)
| (203.1)
|
| Net cash provided by (used in) operating activities | 57.2
| (106.7)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Payments relating to acquisition of Victoria
Proceeds from sale of Nine West United Kingdom
operations
Repayment of loans to officers
Acquisition of intangibles
Other |
(14.5)
(2.0)
-
2.0
-
0.3
|
(12.5)
-
28.0
18.0
(1.0)
(0.7)
|
| Net cash (used in) provided by investing activities | (14.2)
| 31.8
|
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Zero Coupon Convertible Senior Notes,
net of discount and debt issuance costs
Net payments under long-term credit facilities
Repurchase of 6.25% Senior Notes
Proceeds from termination of interest rate swaps
Principal payments on capital leases
Purchases of treasury stock
Proceeds from exercise of stock options |
-
(0.7)
-
-
(1.5)
-
26.0
|
393.1
(236.2)
(16.1)
8.3
(1.2)
(69.0)
28.3
|
| Net cash provided by financing activities | 23.8
| 107.2
|
| EFFECT OF EXCHANGE RATES ON CASH | -
| 0.8
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING | 66.8
76.5
| 33.1
60.5
|
| CASH AND CASH EQUIVALENTS, ENDING | $143.3
| $ 93.6
|
See accompanying notes to consolidated financial statements
- 6 -
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the footnotes therein included within our Annual Report on Form 10-K. The results of Judith Jack and McNaughton are included in our operating results from the date of acquisition and, therefore, our operating results for the periods presented are not comparable.
In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to conform prior year data with the current presentation. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 31, 2002.
GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS No. 142
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which changed the accounting for goodwill and other intangible assets from an amortization method to an impairment-only approach. Upon our adoption of SFAS No. 142 on January 1, 2002, we ceased amortizing our trademarks without determinable lives and our goodwill. As prescribed under SFAS No. 142, we had our goodwill and trademarks tested for impairment during the first fiscal quarter of 2002.
Due to market conditions resulting from a sluggish economy compounded by the aftereffects of the events of September 11, 2001, we revised our earnings forecasts for future years for several of our trademarks and licenses. As a result, the fair market value of these assets (as appraised by an independent third party) was lower than their carrying value as of December 31, 2001. We accordingly recorded an after-tax impairment charge of $13.8 million, which is reported as a cumulative effect of change in accounting principle resulting from the adoption of SFAS No. 142.
The components of other intangible assets are as follows:
(In millions) | April 6, 2002
| December 31, 2001
|
| Gross
Carrying
Amount
|
Accumulated
Amortization
| Gross
Carrying
Amount
|
Accumulated
Amortization
|
Amortized intangible assets
License agreements
Covenant not to compete |
$ 42.3
2.9
|
$ 11.9
1.2
|
$ 44.3
2.9
|
$ 11.9
1.1
|
Unamortized trademarks | 45.2
477.7
| 13.1
-
| 47.2
499.1
| 13.0
-
|
| $ 522.9
| $ 13.1
| $ 546.3
| $ 13.0
|
Amortization expense for intangible assets subject to amortization for each of the years in the five-year period ending December 31, 2006 is estimated to be $4.1 million in 2002, $4.0 million in 2003, $4.0 million in 2004, $3.5 million in 2005 and $1.6 million in 2006.
- 7 -
The following table presents a comparison of net income and earnings per share for the fiscal quarter ended April 6, 2002 to the respective adjusted amounts for the fiscal quarter ended April 7, 2001 that would have been reported had SFAS No. 142 been in effect during 2001.
(In millions except per share amounts)
| Fiscal Quarter Ended: | April 6, 2002
| April 7, 2001
|
Reported net income
Add back goodwill amortization
Add back trademark amortization | $70.7
-
-
| $96.4
9.6
1.9
|
| Adjusted net income | $70.7
| $107.9
|
Earnings per share - basic
Reported net income
Goodwill amortization
Trademark amortization |
$0.56
-
-
|
$0.80
$0.07
$0.02
|
| Adjusted net income | $0.56
| $0.89
|
Earnings per share - diluted
Reported net income
Goodwill amortization
Trademark amortization |
$0.53
-
-
|
$0.75
$0.07
$0.02
|
| Adjusted net income | $0.53
| $0.84
|
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of Nine West, Judith Jack and McNaughton, we assessed and formulated plans to restructure certain operations of each company. These plans involved the closure of manufacturing facilities, certain offices, foreign subsidiaries, and selected domestic and international retail locations. The objectives of the plans were to eliminate unprofitable or marginally profitable lines of business and reduce overhead expenses. The accrual of these costs and liabilities is as follows:
(In millions) | Balance at
December 31,
2001
| Net
Additions
(Reductions)
|
Utilized
| Balance at
April 6,
2002
|
Severance and other employee costs
Consolidation of facilities | $ 11.2
4.2
| $ -
-
| $ 2.1
1.1
| $ 9.1
3.1
|
| Total | $ 15.4
| $ -
| $ 3.2
| $ 12.2
|
Estimated severance payments and other employee costs of $9.1 million accrued at April 6, 2002 relate to the remaining estimated severance for an estimated 163 employees at locations to be closed. Employee groups affected (totaling an estimated 248 employees) include accounting, administrative, customer service, manufacturing, production, warehouse and management personnel at locations closed or to be closed and duplicate corporate headquarters management and administrative personnel. During the fiscal quarter ended April 6, 2002, $2.1 million of the reserve was utilized (relating to severance and related costs for approximately 78 employees).
The $3.1 million accrued at April 6, 2002 for the consolidation of facilities relates primarily to expected costs to be incurred, including lease obligations, for closing certain acquired facilities in connection with consolidating their operations into our other existing facilities.
- 8 -
Our plans have not been finalized in all areas, and additional restructuring costs may result as we continue to evaluate and assess the impact of duplicate responsibilities, warehouses and office locations. Any additional costs relating to Judith Jack identified before April 26, 2002 and McNaughton identified before June 19, 2002 will be recorded as additional goodwill; after that date, additional costs will be charged to operations in the period in which they occur. Any additional costs relating to Nine West will be charged to operations in the period in which they occur.
INVENTORIES
Inventories are summarized as follows (in millions):
| April 6,
2002
| December 31,
2001
|
Raw materials
Work in process
Finished goods | $ 39.7
35.8
403.4
| $ 22.2
31.4
519.3
|
| $ 478.9
| $ 572.9
|
DERIVATIVES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," subsequently amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (as amended, hereinafter referred to as "SFAS 133") establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires us to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
Our primary objectives for holding derivative financial instruments have historically been to manage foreign currency and interest rate risks. We currently use foreign currency-based derivatives and interest rate swaps to hedge both the fair value of recognized assets or liabilities (a "fair value" hedge) and the variability of anticipated cash flows of a forecasted transaction (a "cash flow" hedge). Fair value hedges are entered into in order to hedge the fair value of recognized assets or liabilities denominated in non-functional currencies. Cash flow hedges are entered into in order to hedge forecasted inventory purchases and royalty payments that are denominated in non-functional currencies. The terms of foreign currency-based derivative instruments are generally less than 12 months; the terms of interest rate swaps are matched to the maturity date of the underlying debt instrument.
On the date the derivative contract is entered into, we designate the derivative as either a fair value hedge or a cash flow hedge. Changes in derivative fair values that are designated as fair value hedges are recognized in earnings as offsets to the changes in fair value of the related hedged assets and liabilities. Changes in derivative fair values that are designated as cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income until the associated hedged transactions impact the income statement, at which time the deferred gains and losses are reclassified to either cost of sales for inventory purchases or to selling, general and administrative expenses for all other items. Any ineffective portion of a hedging derivative's change in fair value will be immediately recognized in selling, general and administrative expenses.
During the fiscal quarter ended April 6, 2002, no material amounts were reclassified from other comprehensive income to earnings relating to cash flow hedges. If foreign currency exchange rates or interest rates do not change from their April 6, 2002 amounts, we estimate that any reclassifications from other comprehensive income to earnings within the next 12 months also will not be material. The actual amounts that will be reclassified to earnings over the next 12 months could vary, however, as a result of changes in market conditions.
- 9 -
From June 1999 through January 2001, we had employed an interest rate hedging strategy utilizing swaps to effectively float a portion of our interest rate exposure on our fixed rate financing arrangements. The termination of these interest rate swaps generated a pre-tax gain of $8.3 million, which will be amortized as a reduction of interest expense over the remaining terms of the interest rate swap agreements, with approximately $1.9 million of pre-tax income to be reclassified into earnings within the next 12 months.
STATEMENT OF CASH FLOWS
Fiscal Quarter Ended:
(In millions) | April 6,
2002
| April 7,
2001
|
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest
Income taxes, net of refunds |
$ 7.2
(7.5) |
$ 17.8
1.4 |
Supplemental disclosures of non-cash investing
and financing activities:
Tax benefits related to exercise of stock options
Equipment acquired through capital lease financing |
4.8
3.0 |
9.8
- |
SEGMENT INFORMATION
We identify operating segments based on, among other things, the way our management organizes the components of our business for purposes of allocating resources and assessing performance. With the addition of McNaughton in 2001 and the recent acquisition of Gloria Vanderbilt, we have redefined our reportable operating segments. Our operations are now comprised of four reportable segments: wholesale better apparel, wholesale moderate apparel, wholesale footwear and accessories, and retail. Segment revenues are generated from the sale of apparel, footwear and accessories through wholesale channels and our own retail locations. The wholesale segments include wholesale operations with third party department and other retail stores; the retail segment includes operations by our own stores. We define segment profit as operating income before interest expense, income taxes and (for periods prior to January 1, 2002) amortization of goodwill. Summarized below are our segment revenues, income (loss) and total assets by reportable segments for the fiscal quarter ended April 6, 2002 and restated segment revenues, income (loss) and total assets by reportable segments for the fiscal quarter ended April 7, 2001.
| (In millions) | Wholesale
Better
Apparel
| Wholesale
Moderate
Apparel
| Wholesale
Footwear &
Accessories
|
Retail
| Other &
Elim-
inations
|
Consolidated
|
For the fiscal quarter ended April 6, 2002
Revenues from external customers
Intersegment revenues |
$ 474.0
29.8
|
$ 256.5
1.4
|
$ 233.9
22.5
|
$ 155.9
-
|
$ 6.6
(53.7)
|
$ 1,126.9
-
|
| Total revenues | 503.8
| 257.9
| 256.4
| 155.9
| (47.1)
| 1,126.9
|
| Segment income | $ 108.1
| $ 46.9
| $ 31.0
| $ 6.6
| $ (40.9)
| 151.7 |
| Net interest expense | | | | | | (16.0)
|
| Income before provision for income taxes | | | | | | $ 135.7
|
| | | | | | | |
For the fiscal quarter ended April 7, 2001
Revenues from external customers
Intersegment revenues |
$ 538.9
25.6
|
$ 78.7
6.1
|
$ 294.1
25.6
|
$ 160.6
-
|
$ 5.4
(57.3)
|
$ 1,077.7
-
|
| Total revenues | 564.5
| 84.8
| 319.7
| 160.6
| (51.9)
| 1,077.7
|
| Segment income | $ 123.9
| $ 5.6
| $ 71.6
| $ 2.1
| $ (13.2)
| 190.0 |
Amortization of goodwill
Net interest expense | | | | | | (9.6)
(21.1)
|
| Income before provision for income taxes | | | | | | $ 159.3
|
| | | | | | | |
Total Assets
April 6, 2002
April 7, 2001 |
$1,683.7
1,973.2 |
$ 796.0
246.4 |
$ 1,160.0
1,245.0 |
$ 306.5
326.4 |
$ (423.1)
(553.5) |
$ 3,523.1
3,237.5 |
- 10 -
SUPPLEMENTAL SUMMARIZED FINANCIAL INFORMATION
Certain of our subsidiaries function as co-issuers, obligors and co-obligors (fully and unconditionally guaranteed on a joint and several basis) of the outstanding debt of Jones Apparel Group, Inc. ("Jones"), including Jones Apparel Group USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings") and Nine West (collectively, including Jones, the "Issuers").
Jones and Jones Holdings function as either co-issuers or co-obligors with respect to the outstanding debt securities of Jones USA and certain of the outstanding debt securities of Nine West. In addition, Nine West functions as either a co-issuer or co-obligor with respect to all of Jones USA's outstanding debt securities, and Jones USA functions as a co-obligor with respect to the outstanding debt securities of Nine West as to which Jones and Jones Holdings function as co-obligors.
The following condensed consolidating balance sheets, statements of income and statements of cash flows for the Issuers and our other subsidiaries have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Separate financial statements and other disclosures concerning Jones are not presented as Jones has no independent operations or assets. There are no contractual restrictions on distributions from Jones USA, Jones Holdings or Nine West to Jones.
Condensed Consolidating Balance Sheets
(In millions)
April 6, 2002 December 31, 2001
----------------------------------------- -----------------------------------------
Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated
----------------------------------------- -----------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 122.5 $ 20.8 $ - $ 143.3 $ 24.5 $ 52.0 $ - $ 76.5
Accounts receivable - net 369.7 215.4 - 585.1 251.9 143.9 - 395.8
Inventories 296.8 197.8 (15.7) 478.9 351.9 230.4 (9.4) 572.9
Prepaid and refundable income taxes 3.7 1.4 (5.1) - 4.0 - (4.0) -
Deferred taxes 35.5 28.8 - 64.3 35.6 26.6 (0.1) 62.1
Prepaid expenses and other current assets 30.4 15.2 - 45.6 20.8 12.9 - 33.7
----------------------------------------- -----------------------------------------
TOTAL CURRENT ASSETS 858.6 479.4 (20.8) 1,317.2 688.7 465.8 (13.5) 1,141.0
Property, plant and equipment - net 164.5 82.1 - 246.6 166.0 76.5 - 242.5
Due from affiliates 595.7 391.5 (987.2) - 595.9 349.7 (945.6) -
Goodwill - net 646.3 723.5 - 1,369.8 646.3 722.1 - 1,368.4
Other intangibles - net 254.3 255.5 - 509.8 267.1 266.2 - 533.3
Investments in subsidiaries 2,695.6 24.9 (2,720.5) - 2,521.2 24.4 (2,545.6) -
Deferred taxes 14.2 - (14.2) - 10.7 - (10.7) -
Other assets 50.8 28.9 - 79.7 58.1 30.2 - 88.3
----------------------------------------- -----------------------------------------
$ 5,280.0 $ 1,985.8 $ (3,742.7) $ 3,523.1 $ 4,954.0 $ 1,934.9 $ (3,515.4) $ 3,373.5
========================================= =========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $ 6.8 $ 1.5 $ - $ 8.3 $ 6.2 $ 1.5 $ - $ 7.7
Accounts payable 116.1 65.2 - 181.3 152.7 64.0 - 216.7
Income taxes payable 47.7 25.2 (5.1) 67.8 5.8 5.2 (4.0) 7.0
Accrued expenses and other current liabilities 119.3 52.5 - 171.8 85.9 61.0 (0.1) 146.8
----------------------------------------- -----------------------------------------
TOTAL CURRENT LIABILITIES 289.9 144.4 (5.1) 429.2 250.6 131.7 (4.1) 378.2
----------------------------------------- -----------------------------------------
NONCURRENT LIABILITIES:
Long-term debt 945.0 7.7 - 952.7 941.5 8.0 - 949.5
Obligations under capital leases 28.0 - - 28.0 27.1 - - 27.1
Deferred taxes 13.3 67.4 (14.2) 66.5 40.8 50.7 (10.7) 80.8
Due to affiliates 374.3 612.9 (987.2) - 337.2 608.4 (945.6) -
Other 29.3 3.7 - 33.0 28.5 4.0 - 32.5
----------------------------------------- -----------------------------------------
TOTAL NONCURRENT LIABILITIES 1,389.9 691.7 (1,001.4) 1,080.2 1,375.1 671.1 (956.3) 1,089.9
----------------------------------------- -----------------------------------------
TOTAL LIABILITIES 1,679.8 836.1 (1,006.5) 1,509.4 1,625.7 802.8 (960.4) 1,468.1
----------------------------------------- -----------------------------------------
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in capital 2,116.2 818.3 (1,920.5) 1,014.0 2,061.0 835.3 (1,920.6) 975.7
Retained earnings 1,867.2 338.2 (814.4) 1,391.0 1,648.8 303.7 (632.2) 1,320.3
Accumulated other comprehensive income (loss) 7.9 (6.8) (1.3) (0.2) 9.6 (6.9) (2.2) 0.5
----------------------------------------- -----------------------------------------
3,991.3 1,149.7 (2,736.2) 2,404.8 3,719.4 1,132.1 (2,555.0) 2,296.5
Less treasury stock (391.1) - - (391.1) (391.1) - - (391.1)
----------------------------------------- -----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,600.2 1,149.7 (2,736.2) 2,013.7 3,328.3 1,132.1 (2,555.0) 1,905.4
----------------------------------------- -----------------------------------------
$ 5,280.0 $ 1,985.8 $ (3,742.7) $ 3,523.1 $ 4,954.0 $ 1,934.9 $ (3,515.4) $ 3,373.5
========================================= =========================================- 11 -
Condensed Consolidating Statements of Income
(In millions)
Fiscal Quarter Ended April 6, 2002 Fiscal Quarter Ended April 7, 2001
----------------------------------------- -----------------------------------------
Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated
----------------------------------------- -----------------------------------------
Net sales $ 759.2 $ 388.2 $ (27.1) $ 1,120.3 $ 870.7 $ 234.8 $ (33.2) $ 1,072.3
Licensing income (net) 3.9 2.7 - 6.6 2.4 3.0 - 5.4
----------------------------------------- -----------------------------------------
Total revenues 763.1 390.9 (27.1) 1,126.9 873.1 237.8 (33.2) 1,077.7
Cost of goods sold 437.5 264.1 (23.1) 678.5 510.2 147.2 (27.0) 630.4
----------------------------------------- -----------------------------------------
Gross profit 325.6 126.8 (4.0) 448.4 362.9 90.6 (6.2) 447.3
Selling, general and administrative expenses 233.2 61.3 2.2 296.7 211.9 44.6 0.8 257.3
Amortization of goodwill - - - - 9.4 0.2 - 9.6
----------------------------------------- -----------------------------------------
Operating income 92.4 65.5 (6.2) 151.7 141.6 45.8 (7.0) 180.4
Net interest expense (income) and financing costs 11.8 4.2 - 16.0 23.8 (2.7) - 21.1
----------------------------------------- -----------------------------------------
Income before provision for income taxes,
equity in earnings of subsidiaries and
cumulative effect of change in
accounting principle 80.6 61.3 (6.2) 135.7 117.8 48.5 (7.0) 159.3
Provision for income taxes 29.8 21.4 - 51.2 45.6 17.3 - 62.9
Equity in earnings of subsidiaries (175.5) (0.5) 176.0 - (199.6) (0.7) 200.3 -
----------------------------------------- -----------------------------------------
Income before cumulative effect of
change in accounting principle 226.3 40.4 (182.2) 84.5 271.8 31.9 (207.3) 96.4
Cumulative effect of change in accounting for
intangible assets, net of tax 7.9 5.9 - 13.8 - - - -
----------------------------------------- -----------------------------------------
Net income $ 218.4 $ 34.5 $ (182.2) $ 70.7 $ 271.8 $ 31.9 $ (207.3) $ 96.4
========================================= =========================================Condensed Consolidating Statements of Cash Flows
(In millions)
Fiscal Quarter Ended April 6, 2002 Fiscal Quarter Ended April 7, 2001
----------------------------------------- -----------------------------------------
Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated
----------------------------------------- -----------------------------------------
Net cash provided by (used in)
operating activities $ 40.6 $ 16.6 $ - $ 57.2 $ 69.7 $ (0.4) $(176.0) $ (106.7)
----------------------------------------- -----------------------------------------
Cash flows from investing activities:
Capital expenditures (4.4) (10.1) - (14.5) (6.2) (6.3) - (12.5)
Payments relating to Victoria acquisition (2.0) - - (2.0) - - - -
Proceeds from sale of Nine West UK operations - - - - 28.0 - - 28.0
Acquisition of intangibles - - - - (1.0) - - (1.0)
Repayments of loans to officers 2.0 - - 2.0 18.0 - - 18.0
Other 0.3 - - 0.3 (0.7) - - (0.7)
----------------------------------------- -----------------------------------------
Net cash provided by (used in)
investing activities (4.1) (10.1) - (14.2) 38.1 (6.3) - 31.8
----------------------------------------- -----------------------------------------
Cash flows from financing activities:
Issuance of Zero Coupon Convertible Senior
Notes, net - - - - 393.1 - - 393.1
Net payments under various credit facilities (0.4) (0.3) - (0.7) (227.1) (9.1) - (236.2)
Repurchase of 6.25% Senior Notes - - - - (16.1) - - (16.1)
Proceeds from termination of interest rate swaps - - - - 8.3 - - 8.3
Principal payments on capital leases (1.4) (0.1) - (1.5) (1.0) (0.2) - (1.2)
Purchases of treasury stock - - - - (69.0) - - (69.0)
Proceeds from exercise of stock options 26.0 - - 26.0 28.3 - - 28.3
Dividends paid to affiliates - - - - - (176.0) 176.0 -
Net intercompany borrowings (payments) 37.3 (37.3) - - (247.6) 247.6 - -
----------------------------------------- -----------------------------------------
Net cash provided by (used in) financing
activities 61.5 (37.7) - 23.8 (131.1) 62.3 176.0 107.2
----------------------------------------- -----------------------------------------
Effect of exchange rates on cash - - - - 0.2 0.6 - 0.8
----------------------------------------- -----------------------------------------
Net increase (decrease) in cash and cash
equivalents 98.0 (31.2) - 66.8 (23.1) 56.2 - 33.1
Cash and cash equivalents, beginning 24.5 52.0 - 76.5 45.5 15.0 - 60.5
----------------------------------------- -----------------------------------------
Cash and cash equivalents, ending $ 122.5 $ 20.8 $ - $ 143.3 $ 22.4 $ 71.2 $ - $ 93.6
========================================= =========================================- 12 -
EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
| Fiscal Quarter Ended
|
| (In millions except per share amounts) | April 6,
2002
| April 7,
2001
|
Basic
Net income
Weighted average common shares outstanding |
$ 70.7
126.2
|
$ 96.4
120.7
|
| Basic earnings per share | $ 0.56
| $ 0.80
|
Diluted
Net income
Add: interest expense associated with convertible
notes, net of tax benefit |
$ 70.7
2.3
|
$ 96.4
1.4
|
| Income available to common shareholders | $ 73.0
| $ 97.8
|
Weighted average common shares outstanding
Effect of dilutive securities:
Employee stock options
Assumed conversion of convertible notes | 126.2
3.2
7.9
| 120.7
4.4
5.3
|
Weighted average common shares and
share equivalents outstanding | 137.3
| 130.4
|
| Diluted earnings per share | $ 0.53
| $ 0.75
|
SHORT-TERM BOND TRANSACTION
In December 2001, we entered into a transaction relating to the short sale of $157.9 million of U. S. Treasury Securities. The transaction, which is expected to close in August 2002, was intended to address interest rate exposure and generate capital gains that could be used to offset previously incurred capital losses. As a result of this transaction, we recorded a short-term capital gain of $4.2 million and related interest income of $0.5 million and interest expense and fees of $4.8 million for the fiscal quarter ended April 6, 2002. The net effect of $0.1 million is included in the statement of operations as interest expense. We have placed the proceeds from the short sale into an interest-bearing collateral account to provide for our obligation to repurchase the U. S. Treasury Securities (which had a market value of $166.8 million at April 6, 2002) on or before November 15, 2002. At April 6, 2002, the net excess of funds in the collateral account over the obligation to repurchase the securities is $1.9 million, which is included in prepaid expenses and other current assets.
ACQUISITIONS
On April 8, 2002, we acquired 100% of the common stock of Gloria Vanderbilt and also the Gloria Vanderbilt (and related) trademarks and third-party licenses from Gloria Vanderbilt Trademark B.V. Gloria Vanderbilt is a leading designer, marketer and distributor of women's moderately priced stretch and twill jeanswear. Gloria Vanderbilt markets its products nationwide to national chains, department stores, mass merchants, and specialty retailers. Brands include Gloria Vanderbilt and junior product marketed under the GLO brand name. Licensed products under the Gloria Vanderbilt brand include footwear, watches, socks, sleepwear, outerwear, swimwear and hair accessories.
- 13 -
The aggregate purchase price was $100.4 million, which included $80.4 million in cash payments and 562,947 shares of our common stock valued at $35.564 (the average price for the week in which the acquisition was announced). The purchase price will be allocated to the acquired assets and liabilities, tangible and intangible, with the excess of the purchase price over the fair value of the net assets acquired allocated to goodwill and property based on estimates of fair values. The prior shareholders of Gloria Vanderbilt will also be entitled to receive a future payment in the form of cash and/or common stock if certain earnings targets are achieved for the one year following the closing of the transaction. We also assumed approximately $43.7 million of Gloria Vanderbilt's funded debt and accrued interest that we have subsequently refinanced. Gloria Vanderbilt's results will be included in our wholesale moderate apparel segment subsequent to the acquisition date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion provides information and analysis of our results of operations for the fiscal quarters ended April 6, 2002 and April 7, 2001, respectively, and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes thereto included elsewhere herein.
We identify operating segments based on, among other things, the way our management organizes the components of our business for purposes of allocating resources and assessing performance. With the addition of McNaughton in 2001 and the recent acquisition of Gloria Vanderbilt, we have redefined our reportable operating segments. Our operations are now comprised of four reportable segments: wholesale better apparel, wholesale moderate apparel, wholesale footwear and accessories, and retail. Prior period segment results have been restated to reflect the new reporting segments.
We completed our acquisitions of Judith Jack on April 26, 2001 and McNaughton on June 19, 2001. The results of operations of Judith Jack and McNaughton are included in our operating results from the respective dates of acquisition. Accordingly, the financial position and results of operations presented and discussed herein are not directly comparable between the periods presented.
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor consideration to any purchasers of the vendor's products at any point along the distribution chain, regardless of whether the purchaser receiving the consideration is a direct customer of the vendor. Our adoption, effective January 1, 2002, required us to reclassify cooperative advertising expenses from a deduction against revenues to a selling, general and administrative ("SG&A") expense. As a result, restated net sales, gross profit and SG&A expenses for the first fiscal quarter of 2001 all increased by $7.2 million from amounts previously reported.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which changed the accounting for goodwill and other intangible assets from an amortization method to an impairment-only approach. Upon our adoption of SFAS No. 142 on January 1, 2002, we ceased amortizing our trademarks without determinable lives and our goodwill. As prescribed under SFAS No. 142, we had our goodwill and trademarks tested for impairment during the first fiscal quarter of 2002.
Due to market conditions resulting from a sluggish economy compounded by the aftereffects of the events of September 11, 2001, we revised our earnings forecasts for future years for several of our trademarks. As a result, the fair market value of these trademarks (as appraised by an independent third party) was lower than their carrying value as of December 31, 2001. We accordingly recorded an after-tax impairment charge of $13.8 million ($0.10 per diluted share), which is reported as a cumulative effect of change in accounting principle resulting from the adoption of SFAS No. 142.
During the fiscal quarter ended April 6, 2002, we recorded a $31.2 million charge relating to contractual obligations under employment contracts, primarily for former President Jackwyn Nemerov and former Vice
- 14 -
Chairman Irwin Samelman. The charges under these contracts are comprised of pre-tax amounts totaling $18.4 million for contractual salary and bonus obligations and $10.8 million for non-cash compensation expense resulting from contractual vesting of outstanding stock options and restricted stock. Also included is a pre-tax amount of $2.0 million related to certain obligations under the employment agreement that we entered into with Peter Boneparth when we acquired McNaughton in 2001. These obligations were satisfied in March 2002 when Mr. Boneparth was elected President and designated to become our Chief Executive Officer on May 22, 2002.
Critical Accounting Policies
Several of our accounting policies involve significant judgements and uncertainties. The policies with the greatest potential effect on our results of operations and financial position include the estimated collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the estimated fair values of both our goodwill and intangible assets with indefinite lives. For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions taken by our customers, allowances we provide to our retail customers to effectively flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. We utilize independent third-party appraisals to estimate the fair values of both our goodwill and our intangible assets with indefinite lives. These appraisals are based on projected cash flows and interest rates; should interest rates or our future cash flows differ significantly from the assumptions used in these projections, material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts.
Results of Operations
Fiscal Quarter Ended April 6, 2002 Compared to Fiscal Quarter Ended April 7, 2001
Statements of Income Stated in Dollars and as a Percentage of Total Revenues
| (In millions) | Fiscal Quarter Ended
April 6, 2002
| Fiscal Quarter Ended
April 7, 2001
|
Net sales
Licensing income (net) | $ 1,120.3
6.6
| 99.4%
0.6%
| $ 1,072.3
5.4
| 99.5%
0.5%
|
Total revenues
Cost of goods sold | 1,126.9
678.5
| 100.0%
60.2%
| 1,077.7
630.4
| 100.0%
58.5%
|
Gross profit
Selling, general and administrative expenses
Executive compensation obligations
Amortization of goodwill | 448.4
265.5
31.2
-
| 39.8%
23.6%
2.8%
-
| 447.3
257.3
-
9.6
| 41.5%
23.9%
-
0.9%
|
Operating income
Net interest expense | 151.7
16.0
| 13.5%
1.4%
| 180.4
21.1
| 16.7%
2.0%
|
Income before provision for income taxes
Provision for income taxes | 135.7
51.2
| 12.0%
4.5%
| 159.3
62.9
| 14.8%
5.8%
|
Income before cumulative effect of change in
accounting principle
Cumulative effect of change in accounting for
intangible assets, net of tax |
84.5
13.8
|
7.5%
1.2%
|
96.4
-
|
8.9%
-
|
| Net income | $ 70.7
| 6.3%
| $ 96.4
| 8.9%
|
| Percentage totals may not add due to rounding. |
Revenues. Total revenues for the 14 weeks ended April 6, 2002 (hereinafter referred to as the "first fiscal quarter of 2002") were $1.13 billion compared to $1.08 billion for the 14 weeks ended April 7, 2001 (hereinafter referred to as the "first fiscal quarter of 2001"), an increase of 4.6%.
- 15-
Revenues by segment were as follows:
(In millions) | First
Fiscal
Quarter
of 2002
| First
Fiscal
Quarter
of 2001
|
Increase/
(Decrease)
|
Percent
Change
|
Wholesale better apparel
Wholesale moderate apparel
Wholesale footwear and accessories
Retail
Other | $474.0
256.5
233.9
155.9
6.6
| $538.9
78.7
294.1
160.6
5.4
| $(64.9)
177.8
(60.2)
(4.7)
1.2
| (12.0%)
225.9%
(20.5%)
(2.9%)
22.2%
|
| Total revenues | $1,126.9
| $1,077.7
| $49.2
| 4.6%
|
As a result of the difficult economic environment experienced in 2001 and uncertainty as to the extent and duration of any continuing impact into 2002, we planned reductions across most of our wholesale businesses in coordination with many of our wholesale customers. In our wholesale better apparel segment, these planned reductions significantly impacted shipments of our Jones New York and Rena Rowan career collection businesses (which had experienced very difficult performance at retail during 2001). Similar planned reductions in the Lauren by Ralph Lauren collection were somewhat offset by stronger shipments of Polo Jeans Company products as a result of our ability to react to the replenishment portion of that business.
Wholesale moderate apparel revenues increased primarily as a result of the product lines obtained as a result of the McNaughton acquisition, which accounted for $173.5 million of the increase.
We also planned reductions in our wholesale footwear and accessories revenues as a result of the uncertain retail environment. While we experienced reduced shipments in nearly all product lines, the most significant impact was seen in Nine West accessories and Enzo Angiolini footwear. Shipments of the Nine West footwear line, while lower, benefitted from the positive business initiatives of focusing inventory on tested and proven footwear styles, as well as shortened production lead times. The product lines obtained from the Judith Jack acquisition added $4.6 million in net sales for the first fiscal quarter of 2002.
Retail revenues decreased primarily as a result of there being 17 fewer stores in the first fiscal quarter of 2002 compared to the prior period. Comparable store sales were up approximately 2.8% for footwear and accessories stores and down 4.9% for apparel outlet stores as compared to the first fiscal quarter of 2001.
Gross Profit. The gross profit margin decreased to 39.8% in the first fiscal quarter of 2002 compared to 41.5% in the first fiscal quarter of 2001. The decrease was attributable principally to a change in the mix of products sold resulting from the acquired McNaughton moderate apparel lines, which carry lower gross margins than the overall average of our other products.
Gross profit margin in wholesale better apparel increased to 41.0% for the first fiscal quarter of 2002, compared to 40.1% for the first fiscal quarter of 2001. The primary reasons for the increase are higher than expected recoveries on off-price sales to discounters against inventory identified and written down under the special charge in the third quarter of 2001 and more favorable pricing realized from off-shore production.
Wholesale moderate apparel gross profit margins were 31.9% for the first fiscal quarter of 2002, compared to 25.2% for the first fiscal quarter of 2001. The increase was due the mix of products sold, more favorable pricing realized from off-shore production, and higher than expected recoveries on off-price sales to discounters against inventory identified and written down under the special charge in the third quarter of 2001.
Gross profit margin in wholesale footwear and accessories decreased to 32.1% from 38.1%. The decrease in the margin is principally the result of markdowns recognized in the costume jewelry business to more aggressively liquidate inventories in both the wholesale and retail channels. The gross profit margin was also negatively impacted by the decrease in our higher-margin Nine West accessories business.
- 16 -
Retail gross profit margins were 52.5% for the first fiscal quarter of 2002 compared to 51.6% for the first fiscal quarter of 2001. Margins in our Nine West retail business benefitted from better inventory planning as well as improved product assortments in our stores. This improvement was offset by more promotional activity in our apparel outlet stores, impacted by the difficulty experienced in our Jones New York career business.
SG&A expenses. SG&A expenses of $265.5 million (excluding $31.2 million of costs related to the termination of executive employment contracts) in the first fiscal quarter of 2002 represented an increase of $8.2 million from the $257.3 million (excluding amortization of goodwill and trademarks) reported for the first fiscal quarter of 2001. McNaughton added $20.9 million to the first fiscal quarter of 2002, which was offset by tighter cost controls and the reduction in retail stores mentioned above.
Operating Income. The resulting operating income for the first fiscal quarter of 2002 of $151.7 million decreased 15.9%, or $28.7 million, from the $180.4 million for the first fiscal quarter of 2001. Excluding the costs related to the termination of executive employment contracts in the first fiscal quarter of 2002 and the amortization of goodwill and intangibles for the first fiscal quarter of 2001 that ended upon the adoption of SFAS No. 142, operating income for the first fiscal quarters of 2002 and 2001 would have been $182.9 million and $191.9 million, respectively.
Net Interest Expense. Net interest expense was $16.0 million in the first fiscal quarter of 2002 compared to $21.1 million in the comparable period of 2001, resulting from lower average borrowings, lower interest rates and using the proceeds from zero coupon convertible senior debt securities issued in February 2001 to repay higher-rate borrowings under our credit facilities.
Provision for Income Taxes. The effective income tax rate was 37.7% for the first fiscal quarter of 2002 compared to 39.5% for the first fiscal quarter of 2001. The decrease was primarily due to the elimination of nondeductible goodwill amortization resulting from the adoption of SFAS No. 142.
Net Income. Net income was $84.5 million in the first fiscal quarter of 2002, a decrease of $11.9 million from the net income of $96.4 million earned in the first fiscal quarter of 2001. Excluding the costs related to the termination of executive employment contracts and the cumulative effect of the change in accounting for intangible assets for the first fiscal quarter of 2002 and the amortization of goodwill and intangibles for the first fiscal quarter of 2001 that ended upon the adoption of SFAS No. 142, net income would have been $104.1 million and $107.9 million, respectively.
Earnings Per Share. Diluted earnings per share for the first fiscal quarter of 2002 was $0.53 compared to $0.75 for the first fiscal quarter of 2001, on a 5.3% increase in shares outstanding. Excluding the costs related to the termination of executive employment contracts and the cumulative effect of the change in accounting for intangible assets for the first fiscal quarter of 2002 and the amortization of goodwill and intangibles for the first fiscal quarter of 2001 that ended upon the adoption of SFAS No. 142, earnings per diluted share would have been $0.77 and $0.84, respectively.
Liquidity and Capital Resources
Our principal capital requirements have been to fund acquisitions, working capital needs, capital expenditures and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations and expansion.
Operating activities provided $57.2 million and used $106.7 million in the first fiscal quarters of 2002 and 2001, respectively. The change was primarily due to a decrease in inventories during the first fiscal quarter of 2002 compared to an increase in the first fiscal quarter of 2001 and a smaller increase in accounts receivable during the first fiscal quarter of 2002 than in the first fiscal quarter of 2001.
Investing activities used $14.2 million during the first fiscal quarter of 2002 and provided $31.8 million during the first fiscal quarter of 2001. The difference was primarily due to $28.0 million in proceeds from the sale of Nine West's United Kingdom operations and the repayment of an $18.0 million officer loan during the first fiscal
- 17 -
quarter of 2001. Capital expenditures were $14.5 million and $12.5 million for the first fiscal quarters of 2002 and 2001, respectively; total capital expenditures for 2002 are expected to be approximately $50.0 million.
Financing activities provided $23.8 million of cash in the first fiscal quarter of 2002 and $107.2 million in the first fiscal quarter of 2001. In February 2001, we issued 20-year, zero coupon convertible senior debt securities. Net proceeds of the offering were $392.8 million ($0.3 million in costs were paid during the second quarter of 2001). The securities carry a 3.5% yield to maturity with a face value of $805.6 million and are convertible into common stock at a conversion rate of 9.8105 shares per note. The proceeds were used to repay amounts then outstanding under our Senior Credit Facilities, repurchase $16.1 million of our outstanding 6.25% Senior Notes at par, and for general corporate purposes.
During the first fiscal quarter of 2001, we realized $8.3 million in proceeds from terminating our existing interest rate swap agreements (see "Derivatives" in the Notes to Consolidated Financial Statements).
We repurchased $69.0 million of our common stock on the open market during the first fiscal quarter of 2001. As of April 6, 2002, a total of $425.8 million has been expended under announced programs to acquire up to $500.0 million of such shares. We may authorize additional share repurchases in the future depending on, among other things, market conditions and our financial condition. Proceeds from the issuance of common stock to our employees exercising stock options amounted to $26.0 million and $28.3 million in the first fiscal quarters of 2002 and 2001, respectively.
The terms of the acquisition agreement for Victoria require us to pay the former Victoria shareholders additional consideration of $3.00 for each $1.00 of Victoria's earnings before interest and taxes (as defined in the securities purchase agreement) for each of the 12-month periods ending June 30, 2001 through 2003 that exceeds certain targeted levels. Any future additional consideration is to be paid 50% in cash and 50% in our common stock, the value of which will be determined by the prices at which our common stock trades in a defined period preceding delivery in each year.
The terms of the acquisition agreement for Judith Jack require us to pay the seller additional cash consideration of $2.00 for each $1.00 of Judith Jack's earnings before interest and taxes (as defined in the asset purchase agreement) that exceeds certain targeted levels for each of the years ending December 31, 2002 and 2003.
The terms of the acquisition agreement for Gloria Vanderbilt require us to pay the former Gloria Vanderbilt shareholders additional consideration of $4.50 for each $1.00 of Gloria Vanderbilt's earnings before interest and taxes (as defined in the stock purchase agreement) for the 12 months following the completion of the acquisition that exceeds certain targeted levels. Any additional consideration (the amount of which cannot exceed $54.0 million) is to be paid either in cash or a combination of cash and our common stock, the value of which will be determined by the prices at which our common stock trades in a defined period preceding delivery.
At April 6, 2002, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.55 billion under Senior Credit Facilities. These facilities, of which the entire amount is available for letters of credit or cash borrowings, provide for an $850.0 million 364-Day Revolving Credit Facility (increased from $750.0 million in June 2001) and a $700.0 million Five-Year Revolving Credit Facility. At April 6, 2002, $257.7 million was outstanding under the 364-Day Revolving Credit Facility (comprised entirely of outstanding letters of credit), and no amounts were outstanding under our Five-Year Revolving Credit Facility. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The Senior Credit Facilities are unsecured and require us to satisfy both a coverage ratio of earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents and a net worth maintenance covenant, as well as other restrictions, including (subject to exceptions) limitations on our ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers, and pay dividends.
In connection with the McNaughton acquisition, we assumed joint and several liability with McNaughton on a $100 million unsecured line of credit for the purpose of issuing letters of credit for McNaughton. As of April 6, 2002, $78.9 million was outstanding under this line of credit.
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We also have a C$20.0 million unsecured line of credit in Canada, under which C$14.5 million was outstanding at April 6, 2002.
In December 2001, we entered into a transaction relating to the short sale of $157.9 million of U. S. Treasury Securities. The transaction, which is expected to close in August 2002, was intended to address interest rate exposure and generate capital gains that could be used to offset previously incurred capital losses. See "Short Term Bond Transaction" in Notes to Consolidated Financial Statements. We may enter into similar transactions in the future if we determine that market conditions are appropriate for generating the desired results from the transactions.
We believe that funds generated by operations, proceeds from the issuance of notes, the Senior Credit Facilities, the McNaughton line of credit and the Canadian line of credit will provide the financial resources sufficient to meet our foreseeable working capital, letter of credit, debt repayment, capital expenditure and stock repurchase requirements and any ongoing obligations to the former Victoria and Gloria Vanderbilt shareholders and the seller of Judith Jack.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes.
The primary interest rate exposures on floating rate financing arrangements are with respect to United States and Canadian short-term interest rates. We had approximately $1.6 billion in variable rate facilities at April 6, 2002.
At April 6, 2002, we had outstanding foreign exchange contracts in Canada to purchase a total of $11.5 million U.S. dollars through July 2002. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. We are exposed to credit-related losses if the counterparty to the financial instruments fails to perform its obligations. However, we do not expect the counterparty, which presently has high credit ratings, to fail to meet its obligations.
On April 30, 2002, we entered into several fixed-to-floating interest rate swaps on the outstanding $225.0 million of our 7.875% Senior Notes due 2006 and $129.6 million of our 8.375% Series B Senior Notes due 2005. The expiration dates of the swaps match the maturity dates of the related debt.
For further information see "Derivatives" in the Notes to Consolidated Financial Statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have been named as a defendant in various actions and proceedings arising from our ordinary business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, any such liability will not have a material adverse financial effect on us.
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Item 5. Other information
Statement Regarding Forward-looking Disclosure
This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding our expected financial position, business and financing plans are forward-looking statements. The words "believes," "expects," "plans," "intends," "anticipates" and similar expressions identify forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of national and regional economic conditions, lowered levels of consumer spending resulting from a general economic downturn or generally reduced shopping activity caused by public safety concerns, the performance of our products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, financial difficulties encountered by customers, the effects of vigorous competition in the markets in which we operate, the integration of the organizations and operations of any acquired businesses into our existing organization and operations, the termination or non-renewal of the licenses with Polo Ralph Lauren Corporation, our foreign operations and manufacturing, changes in the costs of raw materials, labor and advertising, and our ability to secure and protect trademarks and other intellectual property rights. All statements other than statements of historical facts included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
During the fiscal quarter ended April 6, 2002, we filed the following Current Reports on Form 8-K with the SEC.
| (1) | We filed a Current Report on Form 8-K, dated March 11, 2002, announcing that Peter Boneparth had become our President and will become our Chief Executive Officer effective May 22, 2002, Wesley R. Card had been promoted to Chief Operating and Financial Officer, and Jackwyn Nemerov, our former President and Chief Operating Officer, had resigned.
|
| (2) | We filed a Current Report on Form 8-K, dated April 3, 2002, announcing charges related to employment contracts and trademark impairments. |
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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.
JONES APPAREL GROUP, INC.
(Registrant)
By /s/ Sidney Kimmel
SIDNEY KIMMEL
Chief Executive Officer
By /s/ Wesley R. Card
WESLEY R. CARD
Chief Operating and Financial Officer | INDEX TO EXHIBITS
| Number | Description |
10.1* |
Amended and Restated Employment Agreement dated March 11, 2002 between Jones Apparel Group, Inc. and Wesley R. Card.+
|
| 10.2* | Amended and Restated Employment Agreement dated April 4, 2002 between Jones Apparel Group, Inc. and Ira M. Dansky.+ |
_________
* Filed herewith.
+Management contract or compensatory plan or arrangement.
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