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 October 4, 2003
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 | 06-0935166 |
250 Rittenhouse Circle | 19007 |
(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 | Outstanding at November 12, 2003 |
JONES APPAREL GROUP, INC.
Index
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | ||
Consolidated Balance Sheets October 4, 2003 and December 31, 2002 | 3 | |
Consolidated Statements of Income Fiscal Quarters and Nine Months ended October 4, 2003 and October 5, 2002 | 4 | |
Consolidated Statements of Stockholders' Equity Fiscal Nine Months ended October 4, 2003 and October 5, 2002 | 5 | |
Consolidated Statements of Cash Flows Fiscal Nine Months ended October 4, 2003 and October 5, 2002 | 6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 23 | |
Item 4. Controls and Procedures | 23 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 23 | |
Item 5. Other Information | 24 | |
Item 6. Exhibits and Reports on Form 8-K | 25 | |
Signatures | 26 | |
Exhibit Index | 27 |
DEFINITIONS
As used in this Report, unless the context requires otherwise, "our," "us" and "we" means Jones Apparel Group, Inc. and consolidated subsidiaries, "Nine West" means Nine West Group Inc., "Victoria" means Victoria + Co Ltd., "Judith Jack" means Judith Jack, LLC, "McNaughton" means McNaughton Apparel Group Inc., "Gloria Vanderbilt" means Gloria Vanderbilt Apparel Corp. (acquired April 8, 2002), "l.e.i." means R.S.V. Sport, Inc. and its related companies (acquired August 15, 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.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones Apparel Group, Inc.Consolidated Balance Sheets
(All amounts in millions except per share data)
October 4, 2003 | December 31, 2002 | |||
(Unaudited) | ||||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and cash equivalents | $ 194.2 | $ 283.3 | ||
Accounts receivable, net of allowances of $48.3 and $38.6 for doubtful accounts, discounts, returns and co-op advertising | 620.9 | 389.3 | ||
Inventories | 554.9 | 529.6 | ||
Deferred taxes | 77.9 | 80.8 | ||
Prepaid expenses and other current assets | 50.1 | 35.2 | ||
TOTAL CURRENT ASSETS | 1,498.0 | 1,318.2 | ||
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization | 256.5 | 249.3 | ||
GOODWILL, less accumulated amortization | 1,587.7 | 1,541.2 | ||
OTHER INTANGIBLES, at cost, less accumulated amortization | 670.7 | 677.3 | ||
OTHER ASSETS | 49.9 | 66.6 | ||
$ 4,062.8 | $ 3,852.6 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
CURRENT LIABILITIES: | ||||
Current portion of long-term debt and capital lease obligations | $ 180.5 | $ 6.3 | ||
Accounts payable | 200.3 | 230.2 | ||
Income taxes payable | 48.1 | 26.0 | ||
Accrued employee compensation | 32.2 | 40.2 | ||
Accrued expenses and other current liabilities | 105.9 | 124.6 | ||
TOTAL CURRENT LIABILITIES | 567.0 | 427.3 | ||
NONCURRENT LIABILITIES: | ||||
Long-term debt | 787.3 | 955.7 | ||
Obligations under capital leases | 44.0 | 22.4 | ||
Deferred taxes | 107.4 | 98.6 | ||
Other | 48.8 | 45.1 | ||
TOTAL NONCURRENT LIABILITIES | 987.5 | 1,121.8 | ||
TOTAL LIABILITIES | 1,554.5 | 1,549.1 | ||
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 148.0 and 147.1 | 1.5 | 1.5 | ||
Additional paid-in capital | 1,163.0 | 1,143.8 | ||
Retained earnings | 1,915.5 | 1,638.8 | ||
Accumulated other comprehensive income | 5.8 | 4.8 | ||
3,085.8 | 2,788.9 | |||
Less treasury stock, 21.9 and 18.7 shares, at cost | (577.5) | (485.4) | ||
TOTAL STOCKHOLDERS' EQUITY | 2,508.3 | 2,303.5 | ||
$ 4,062.8 | $ 3,852.6 | |||
See accompanying notes to consolidated financial statements
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Jones Apparel Group, Inc.
Consolidated Statements of Income
(Unaudited)
(All amounts in millions except per share data)
Fiscal Quarter Ended | Fiscal Nine Months Ended | ||||||
October 4, 2003 | October 5, 2002 | October 4, 2003 | October 5, 2002 | ||||
Net sales | $ 1,171.1 | $ 1,271.0 | $ 3,372.6 | $ 3,357.4 | |||
Licensing income (net) | 9.4 | 6.5 | 22.6 | 19.0 | |||
Total revenues | 1,180.5 | 1,277.5 | 3,395.2 | 3,376.4 | |||
Cost of goods sold | 752.1 | 793.1 | 2,108.2 | 2,054.4 | |||
Gross profit | 428.4 | 484.4 | 1,287.0 | 1,322.0 | |||
Selling, general and administrative expenses | 264.4 | 262.7 | 786.3 | 795.8 | |||
Executive compensation obligations | - | - | - | 31.9 | |||
Operating income | 164.0 | 221.7 | 500.7 | 494.3 | |||
Interest income | 0.8 | 2.5 | 2.4 | 3.5 | |||
Interest expense and financing costs | 14.7 | 16.6 | 44.5 | 47.8 | |||
Equity in earnings of unconsolidated affiliates | 0.6 | 0.7 | 1.7 | 0.7 | |||
Income before provision for income taxes | 150.7 | 208.3 | 460.3 | 450.7 | |||
Provision for income taxes | 56.8 | 78.5 | 173.5 | 170.0 | |||
Income before cumulative effect of change in accounting principle | 93.9 | 129.8 | 286.8 | 280.7 | |||
Cumulative effect of change in accounting for intangible assets, net of tax | - | - | - | 13.8 | |||
Net income | $ 93.9 | $ 129.8 | $ 286.8 | $ 266.9 | |||
Earnings per share | |||||||
Basic | |||||||
Income before cumulative effect of change in accounting principle | $0.74 | $1.00 | $2.25 | $2.19 | |||
Cumulative effect of change in accounting intangible assets | - | - | - | 0.11 | |||
Basic earnings per share | $0.74 | $1.00 | $2.25 | $2.08 | |||
Diluted | |||||||
Income before cumulative effect of change in accounting principle | $0.71 | $0.95 | $2.15 | $2.07 | |||
Cumulative effect of change in accounting intangible assets | - | - | - | 0.10 | |||
Diluted earnings per share | $0.71 | $0.95 | $2.15 | $1.97 | |||
Weighted average common shares and share equivalents outstanding | |||||||
Basic | 126.6 | 129.4 | 127.6 | 128.0 | |||
Diluted | 135.7 | 139.7 | 136.6 | 138.9 |
See accompanying notes to consolidated financial statements
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Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
(All amounts in millions except per share data)
Number of common shares outstanding | Total stock- holders' equity | Common stock | Additional paid-in capital | Retained earnings | Accumu- lated other compre- hensive income (loss) | Treasury stock | ||||||||
Balance, January 1, 2002 | 125.7 | $1,905.4 | $ 1.4 | $974.3 | $1,320.3 | $ 0.5 | $(391.1) | |||||||
Fiscal nine months ended October 5, 2002: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 266.9 | - | - | 266.9 | - | - | |||||||
Change in fair value of cash flow hedges, net of $0.3 tax | - | (0.4) | - | - | - | (0.4) | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.5 tax | - | (0.8) | - | - | - | (0.8) | - | |||||||
Foreign currency translation adjustments | - | (0.1) | - | - | - | (0.1) | - | |||||||
Total comprehensive income | 265.6 | |||||||||||||
Treasury stock reissued for acquisition of Gloria Vanderbilt | 0.6 | 20.0 | - | 10.1 | - | - | 9.9 | |||||||
Treasury stock reissued for acquisition of l.e.i. | 1.0 | 36.3 | - | 11.3 | - | - | 25.0 | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 12.6 | - | 12.6 | - | - | - | |||||||
Exercise of employee stock options | 2.7 | 62.2 | - | 62.2 | - | - | - | |||||||
Tax benefit derived from exercise of employee stock options | - | 12.7 | - | 12.7 | - | - | - | |||||||
Treasury stock acquired | (1.0) | (29.5) | - | - | - | - | (29.5) | |||||||
Balance, October 5, 2002 | 129.0 | $2,285.3 | $ 1.4 | $1,083.2 | $1,587.2 | $(0.8) | $(385.7) | |||||||
Balance, January 1, 2003 | 128.4 | $2,303.5 | $ 1.5 | $1,143.8 | $1,638.8 | $ 4.8 | $(485.4) | |||||||
Fiscal nine months ended October 4, 2003: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 286.8 | - | - | 286.8 | - | - | |||||||
Change in fair value of cash flow hedges, net of $0.8 tax | - | (1.1) | - | - | - | (1.1) | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $1.3 tax | - | (2.4) | - | - | - | (2.4) | - | |||||||
Foreign currency translation adjustments | - | 4.5 | - | - | - | 4.5 | - | |||||||
Total comprehensive income | 287.8 | |||||||||||||
Issuance of restricted stock to employees | 0.4 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 7.5 | - | 7.5 | - | - | - | |||||||
Exercise of employee stock options | 0.5 | 10.0 | - | 10.0 | - | - | - | |||||||
Tax benefit derived from exercise of employee stock options | - | 1.7 | - | 1.7 | - | - | - | |||||||
Dividends on common stock ($0.08 per share) | - | (10.1) | - | - | (10.1) | - | - | |||||||
Treasury stock acquired | (3.2) | (92.1) | - | - | - | - | (92.1) | |||||||
Balance, October 4, 2003 | 126.1 | $2,508.3 | $ 1.5 | $1,163.0 | $1,915.5 | $ 5.8 | $(577.5) | |||||||
See accompanying notes to consolidated financial statements
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Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(All amounts in millions)
Fiscal Nine Months Ended | |||||
October 4, 2003 | October 5, 2002 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||
Net income | $ 286.8 | $ 266.9 | |||
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: | |||||
Cumulative effect of change in accounting principle | - | 13.8 | |||
Amortization of original issue discount | 11.3 | 11.0 | |||
Trademark impairment losses | - | 5.8 | |||
Depreciation and other amortization | 59.9 | 57.8 | |||
Provision for losses on accounts receivable | 1.0 | 2.6 | |||
Deferred taxes | 14.4 | 0.3 | |||
Gain on short sale of U.S. Treasury securities | (6.6) | (11.0) | |||
Other | (0.7) | 0.2 | |||
Changes in operating assets and liabilities: | |||||
Accounts receivable | (231.5) | (182.5) | |||
Inventories | (23.4) | 76.0 | |||
Prepaid expenses and other current assets | (20.3) | (0.2) | |||
Other assets | 16.8 | 15.9 | |||
Accounts payable | (31.0) | 57.5 | |||
Income taxes payable | 23.5 | 66.7 | |||
Accrued expenses and other liabilities | (23.7) | (10.5) | |||
Total adjustments | (210.3) | 103.4 | |||
Net cash provided by operating activities | 76.5 | 370.3 | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||
Acquisitions, net of cash acquired | - | (332.7) | |||
Capital expenditures | (40.3) | (40.3) | |||
Net cash relating to sales of U.S. Treasury securities | 12.2 | 9.2 | |||
Additional consideration paid for acquisition of Gloria Vanderbilt | (54.0) | - | |||
Payments relating to acquisition of Victoria | - | (2.0) | |||
Payments relating to acquisition of l.e.i. | (0.1) | - | |||
Repayment of loans to officers | - | 2.0 | |||
Proceeds from sales of property, plant and equipment | 25.4 | 0.3 | |||
Acquisition of intangibles | (6.0) | (2.8) | |||
Other | 0.2 | (0.1) | |||
Net cash used in investing activities | (62.6) | (366.4) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||
Net borrowings under long-term credit facilities | - | 56.0 | |||
Repayment of long-term debt | (7.4) | (2.0) | |||
Refinancing of acquired debt | - | (126.9) | |||
Principal payments on capital leases | (4.0) | (11.6) | |||
Purchases of treasury stock | (92.1) | (29.5) | |||
Dividends paid | (10.1) | - | |||
Proceeds from exercise of employee stock options | 10.0 | 62.2 | |||
Net cash used in financing activities | (103.6) | (51.8) | |||
EFFECT OF EXCHANGE RATES ON CASH | 0.6 | 0.1 | |||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (89.1) | (47.8) | |||
CASH AND CASH EQUIVALENTS, BEGINNING | 283.3 | 76.5 | |||
CASH AND CASH EQUIVALENTS, ENDING | $ 194.2 | $ 28.7 | |||
See accompanying notes to consolidated financial statements
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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 thereto included within our Annual Report on Form 10-K. The results of Gloria Vanderbilt and l.e.i. 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, 2003.
STOCK OPTIONS
Prior to January 1, 2003, pursuant to a provision in SFAS No. 123, "Accounting for Stock-Based Compensation," we had elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense for stock options had been measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, we had only recognized compensation expense for options awarded to employees for options granted at below-market prices, with the expense recognized over the vesting period of the options. Had we elected to adopt the fair value approach of SFAS No. 123 upon its effective date, our net income would have decreased accordingly.
Effective January 1, 2003, we adopted the fair value method of accounting for employee stock options for all options granted after December 31, 2002 pursuant to the "prospective method" set forth in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Under this approach, the fair value of the option on the date of grant (as determined by the Black-Scholes option pricing model) is amortized to compensation expense over the option's vesting period.
Both the stock-based employee compensation cost included in the determination of net income as reported and the stock-based employee compensation cost that would have been included in the determination of net income if the fair value based method had been applied to all awards, as well as the resulting pro forma net income and earnings per share using the fair value approach, are presented in the following table. These pro forma amounts may not be representative of future disclosures, since the fair value of stock options is amortized to expense over the vesting period and additional options may be granted in future years.
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Fiscal Quarter Ended | Fiscal Nine Months Ended | ||||||
(In millions except per share data) | October 4, 2003 | October 5, 2002 | October 4, 2003 | October 5, 2002 | |||
Net income - as reported | $ 93.9 | $ 129.8 | $ 286.8 | $ 266.9 | |||
Add: stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported | 1.7 | - | 4.7 | 7.8 | |||
Deduct: stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value-based method had been applied to all awards | (2.1) | (7.1) | (14.3) | (30.3) | |||
Net income - pro forma | $ 93.5 | $ 122.7 | $ 277.2 | $ 244.4 | |||
Basic earnings per share | |||||||
As reported | $0.74 | $1.00 | $2.25 | $2.08 | |||
Pro forma | $0.74 | $0.95 | $2.17 | $1.91 | |||
Diluted earnings per share | |||||||
As reported | $0.71 | $0.95 | $2.15 | $1.97 | |||
Pro forma | $0.71 | $0.89 | $2.08 | $1.81 |
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 in the first fiscal quarter of 2002, which was reported as a cumulative effect of change in accounting principle resulting from the adoption of SFAS No. 142.
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of Nine West, Judith Jack, McNaughton and Gloria Vanderbilt, we assessed and formulated plans to restructure certain operations of each company. These plans involved the closure of distribution facilities and certain offices. The objectives of the plans were to eliminate unprofitable or marginally profitable lines of business and reduce overhead expenses. During 2002 and 2003, we also restructured several of our operations, including the closing of Canadian and Mexican production facilities, the closing of an administrative, warehouse and preproduction facility in El Paso, Texas and the closing of a warehouse facility in Rural Hall, North Carolina. The accrual of these costs and liabilities, which are included in accrued expenses and other current liabilities, is as follows:
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(In millions) | Severance and other employee costs | Closing and consolidation of facilities | Total | ||
Balance, December 31, 2001 | $ 11.2 | $ 4.2 | $ 15.4 | ||
Net additions | 0.5 | 1.7 | 2.2 | ||
Payments and reductions | (6.1) | (1.6) | (7.7) | ||
Balance, October 5, 2002 | $ 5.6 | $ 4.3 | $ 9.9 | ||
Balance, December 31, 2002 | $ 7.5 | $ 2.0 | $ 9.5 | ||
Net additions | 0.6 | - | 0.6 | ||
Payments and reductions | (6.1) | (0.5) | (6.6) | ||
Balance, October 4, 2003 | $ 2.0 | $ 1.5 | $ 3.5 | ||
Estimated severance payments and other employee costs of $2.0 million accrued at October 4, 2003 relate to the remaining estimated severance costs for an estimated 242 employees at locations to be closed. Employee groups affected (totaling an estimated 853 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.
The $0.6 million net addition during the first fiscal nine months of 2003 represents a $0.1 million increase in severance accruals related to acquisitions, which was recorded as goodwill, and a net $0.5 million accrual charged to operations relating to severance costs related to the closing and consolidation of existing facilities. The $0.5 million net addition during the first fiscal nine months of 2002 represents a net reversal of $0.9 million of the accrual related to acquisitions, which was recorded as a reduction of goodwill, and a $1.4 million accrual charged to operations relating to severance costs related to the closing and consolidation of existing facilities.
During the first fiscal nine months of each of 2003 and 2002, $6.1 million of the reserve was utilized (relating to partial or full severance and related costs for 412 and 220 employees, respectively).
The $1.5 million accrued at October 4, 2003 for the consolidation of facilities relates 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, as well as the closing of the Canadian production facility.
The $1.7 million net addition for the first fiscal nine months of 2002 consisted of a $0.5 million charge to operations related to the closing of the Canadian production facility and $1.2 million of severance and related costs for the closing and consolidation of existing facilities, which was recorded as an increase to goodwill.
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. We do not expect any final adjustments to be material. Any additional costs will be charged to operations in the period in which they occur.
INVENTORIES
Inventories are summarized as follows (in millions):
October 4, 2003 | December 31, 2002 | ||
Raw materials | $ 25.6 | $ 29.6 | |
Work in process | 49.5 | 30.1 | |
Finished goods | 479.8 | 469.9 | |
$ 554.9 | $ 529.6 | ||
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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" and SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and 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.
At October 4, 2003, we had outstanding foreign exchange contracts to purchase a total of US$10.0 million through February 2004.
For the periods July 2002 through October 2002 and 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 pre-tax gains of $21.6 million and $8.3 million, respectively, which is being amortized as a reduction of interest expense over the remaining terms of the interest rate swap agreements, with approximately $8.0 million of pre-tax income to be reclassified into earnings within the next 12 months.
During the first fiscal nine months of 2003, no material amounts were reclassified from other comprehensive income to earnings relating to cash flow hedges. If foreign currency exchange rates do not change from their October 4, 2003 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.
STATEMENT OF CASH FLOWS
Fiscal Nine Months Ended: (In millions) | October 4, 2003 | October 5, 2002 | |
Supplemental disclosures of cash flow information: | |||
Cash paid during the period for: | |||
Interest | $ 30.1 | $ 31.7 | |
Income taxes | 134.7 | 100.7 | |
Supplemental disclosures of non-cash investing and financing activities: | |||
Tax benefits related to exercise of employee stock options | 1.7 | 12.7 | |
Treasury stock reissued for acquisitions | - | 34.9 | |
Equipment acquired through capital lease financing | 26.5 | 3.9 | |
Details of acquisitions: | |||
Fair value of assets acquired | $ - | $ 603.9 | |
Liabilities assumed | - | (193.3) | |
Common stock and options issued | - | (56.3) | |
Cash paid for acquisitions | - | 354.3 | |
Cash acquired in acquisitions | - | (21.6) | |
Net cash paid for acquisitions | $ - | $ 332.7 | |
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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. Our operations are 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, and income and expenses related to trademarks, licenses and general corporate functions are reported under "other and eliminations." We define segment income as operating income before net interest expense, equity in earnings of unconsolidated affiliates and income taxes. Summarized below are our segment revenues and income (loss) by reportable segment for the fiscal quarters and fiscal nine months ended October 4, 2003 and October 5, 2002.
(In millions) | Wholesale Better Apparel | Wholesale Moderate Apparel | Wholesale Footwear & Accessories | Retail | Other & Eliminations | Consolidated |
For the fiscal quarter ended October 4, 2003 | ||||||
Revenues from external customers | $ 410.6 | $ 355.1 | $ 240.8 | $ 164.6 | $ 9.4 | $ 1,180.5 |
Intersegment revenues | 26.8 | 2.9 | 18.9 | - | (48.6) | - |
Total revenues | 437.4 | 358.0 | 259.7 | 164.6 | (39.2) | 1,180.5 |
Segment income (loss) | $ 60.0 | $ 44.4 | $ 49.7 | $ 15.8 | $ (5.9) | 164.0 |
Net interest expense | (13.9) | |||||
Equity in earnings of unconsolidated affiliates | 0.6 | |||||
Income before provision for income taxes | $ 150.7 | |||||
For the fiscal quarter ended October 5, 2002 | ||||||
Revenues from external customers | $ 508.2 | $ 341.8 | $ 255.4 | $ 165.6 | $ 6.5 | $ 1,277.5 |
Intersegment revenues | 27.9 | 3.8 | 21.1 | - | (52.8) | - |
Total revenues | 536.1 | 345.6 | 276.5 | 165.6 | (46.3) | 1,277.5 |
Segment income (loss) | $ 128.0 | $ 39.8 | $ 49.2 | $ 11.8 | $ (7.1) | 221.7 |
Net interest expense | (14.1) | |||||
Equity in earnings of unconsolidated affiliates | 0.7 | |||||
Income before provision for income taxes | $ 208.3 | |||||
For the fiscal nine months ended October 4, 2003 | ||||||
Revenues from external customers | $ 1,173.9 | $ 1,053.7 | $ 663.0 | $ 482.0 | $ 22.6 | $ 3,395.2 |
Intersegment revenues | 69.3 | 11.5 | 48.5 | - | (129.3) | - |
Total revenues | 1,243.2 | 1,065.2 | 711.5 | 482.0 | (106.7) | 3,395.2 |
Segment income (loss) | $ 209.8 | $ 148.2 | $ 125.2 | $ 39.1 | $ (21.6) | 500.7 |
Net interest expense | (42.1) | |||||
Equity in earnings of unconsolidated affiliates | 1.7 | |||||
Income before provision for income taxes | $ 460.3 | |||||
For the fiscal nine months ended October 5, 2002 | ||||||
Revenues from external customers | $ 1,325.9 | $ 822.4 | $ 700.1 | $ 509.0 | $ 19.0 | $ 3,376.4 |
Intersegment revenues | 75.9 | 9.5 | 58.5 | - | (143.9) | - |
Total revenues | 1,401.8 | 831.9 | 758.6 | 509.0 | (124.9) | 3,376.4 |
Segment income (loss) | $ 301.9 | $ 111.1 | $ 99.7 | $ 41.7 | $ (60.1) | 494.3 |
Net interest expense | (44.3) | |||||
Equity in earnings of unconsolidated affiliates | 0.7 | |||||
Income before provision for income taxes | $ 450.7 | |||||
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"), Nine West Footwear Corporation ("Nine West Footwear") and Jones Retail Corporation ("Jones Retail")(collectively, including Jones, the "Issuers").
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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 Footwear. In addition, Nine West Footwear and Jones Retail function 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 Footwear 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, Nine West Footwear or Jones Retail to Jones. On January 1, 2003, the retail operations of Nine West were merged with the operations of Melru Corporation to form Jones Retail, with the remaining Nine West wholesale operations continuing as Nine West Footwear. As a result, the condensed consolidating balance sheet for December 31, 2002 and the statements of income and statements of cash flows for the third fiscal quarter and first fiscal nine months of 2002 have been restated for comparison purposes.
Condensed Consolidating Balance Sheets
(In millions)
October 4, 2003 December 31, 2002 ----------------------------------------- ----------------------------------------- Elim- Cons- Elim- Cons- Issuers Others inations olidated Issuers Others inations olidated ----------------------------------------- ----------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 149.6 $ 44.6 $ - $ 194.2 $ 256.2 $ 27.1 $ - $ 283.3 Accounts receivable - net 330.2 290.7 - 620.9 184.8 204.5 - 389.3 Inventories 286.5 268.8 (0.4) 554.9 285.7 244.2 (0.3) 529.6 Prepaid and refundable income taxes 2.3 0.4 (2.7) - 0.7 1.4 (2.1) - Deferred taxes 41.7 36.2 - 77.9 50.0 30.8 - 80.8 Prepaid expenses and other current assets 33.6 16.5 - 50.1 25.2 10.0 - 35.2 ----------------------------------------- ----------------------------------------- TOTAL CURRENT ASSETS 843.9 657.2 (3.1) 1,498.0 802.6 518.0 (2.4) 1,318.2 Property, plant and equipment - net 129.5 127.0 - 256.5 156.1 93.2 - 249.3 Due from affiliates 498.7 504.2 (1,002.9) - 557.5 420.5 (978.0) - Goodwill - net 646.3 941.4 - 1,587.7 646.3 894.9 - 1,541.2 Other intangibles - net 167.4 503.3 - 670.7 173.5 503.8 - 677.3 Investments in subsidiaries 3,027.8 - (3,027.8) - 2,611.5 24.7 (2,636.2) - Deferred taxes - - - - 6.5 - (6.5) - Other assets 30.6 20.4 (1.1) 49.9 43.0 23.8 (0.2) 66.6 ----------------------------------------- ----------------------------------------- $ 5,344.2 $ 2,753.5 $ (4,034.9) $ 4,062.8 $ 4,997.0 $ 2,478.9 $ (3,623.3) $ 3,852.6 ========================================= ========================================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 179.1 $ 1.4 $ - $ 180.5 $ 6.3 $ - $ - $ 6.3 Accounts payable 102.0 98.3 - 200.3 152.5 77.7 - 230.2 Income taxes payable 50.3 6.1 (8.3) 48.1 20.2 7.8 (2.0) 26.0 Accrued expenses and other current liabilities 91.7 46.4 - 138.1 100.5 64.3 - 164.8 ----------------------------------------- ----------------------------------------- TOTAL CURRENT LIABILITIES 423.1 152.2 (8.3) 567.0 279.5 149.8 (2.0) 427.3 ----------------------------------------- ----------------------------------------- NONCURRENT LIABILITIES: Long-term debt 787.3 - - 787.3 955.7 - - 955.7 Obligations under capital leases 18.9 25.1 - 44.0 22.4 - - 22.4 Deferred taxes 18.3 89.1 - 107.4 26.3 78.8 (6.5) 98.6 Due to affiliates 503.8 499.1 (1,002.9) - 492.0 486.0 (978.0) - Other 33.9 14.9 - 48.8 41.2 3.9 - 45.1 ----------------------------------------- ----------------------------------------- TOTAL NONCURRENT LIABILITIES 1,362.2 628.2 (1,002.9) 987.5 1,537.6 568.7 (984.5) 1,121.8 ----------------------------------------- ----------------------------------------- TOTAL LIABILITIES 1,785.3 780.4 (1,011.2) 1,554.5 1,817.1 718.5 (986.5) 1,549.1 ----------------------------------------- ----------------------------------------- STOCKHOLDERS' EQUITY: Common stock and additional paid-in capital 1,953.9 1,206.4 (1,995.8) 1,164.5 1,969.4 1,178.3 (2,002.4) 1,145.3 Retained earnings 2,161.2 765.5 (1,011.2) 1,915.5 1,673.3 588.5 (623.0) 1,638.8 Accumulated other comprehensive income (loss) 21.3 1.2 (16.7) 5.8 22.6 (6.4) (11.4) 4.8 ----------------------------------------- ----------------------------------------- 4,136.4 1,973.1 (3,023.7) 3,085.8 3,665.3 1,760.4 (2,636.8) 2,788.9 Less treasury stock (577.5) - - (577.5) (485.4) - - (485.4) ----------------------------------------- ----------------------------------------- TOTAL STOCKHOLDERS' EQUITY 3,558.9 1,973.1 (3,023.7) 2,508.3 3,179.9 1,760.4 (2,636.8) 2,303.5 ----------------------------------------- ----------------------------------------- $ 5,344.2 $ 2,753.5 $ (4,034.9) $ 4,062.8 $ 4,997.0 $ 2,478.9 $ (3,623.3) $ 3,852.6 ========================================= =========================================
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Condensed Consolidating Statements of Income
(In millions)
Fiscal Quarter Ended October 4, 2003 Fiscal Quarter Ended October 5, 2002 ----------------------------------------- ----------------------------------------- Elim- Cons- Elim- Cons- Issuers Others inations olidated Issuers Others inations olidated ----------------------------------------- ----------------------------------------- Net sales $ 677.0 $ 501.3 $ (7.2) $ 1,171.1 $ 808.8 $ 467.5 $ (5.3) $ 1,271.0 Licensing income (net) - 9.4 - 9.4 - 6.5 - 6.5 ----------------------------------------- ----------------------------------------- Total revenues 677.0 510.7 (7.2) 1,180.5 808.8 474.0 (5.3) 1,277.5 Cost of goods sold 403.6 352.9 (4.4) 752.1 466.0 330.4 (3.3) 793.1 ----------------------------------------- ----------------------------------------- Gross profit 273.4 157.8 (2.8) 428.4 342.8 143.6 (2.0) 484.4 Selling, general and administrative expenses 199.8 67.3 (2.7) 264.4 220.9 43.3 (1.5) 262.7 ----------------------------------------- ----------------------------------------- Operating income 73.6 90.5 (0.1) 164.0 121.9 100.3 (0.5) 221.7 Net interest expense (income) and financing costs 13.6 0.3 - 13.9 14.2 (0.1) - 14.1 Equity in earnings of unconsolidated affiliates 0.6 0.4 (0.4) 0.6 0.7 - - 0.7 ----------------------------------------- ----------------------------------------- Income before provision for income taxes and equity in earnings of subsidiaries 60.6 90.6 (0.5) 150.7 108.4 100.4 (0.5) 208.3 Provision for income taxes 25.7 31.6 (0.5) 56.8 42.9 41.1 (5.5) 78.5 Equity in earnings of subsidiaries 58.4 - (58.4) - 110.2 - (110.2) - ----------------------------------------- ----------------------------------------- Net income $ 93.3 $ 59.0 $ (58.4) $ 93.9 $ 175.7 $ 59.3 $ (105.2) $ 129.8 ========================================= ========================================= Fiscal Nine Months Ended October 4, 2003 Fiscal Nine Months Ended October 5, 2002 ----------------------------------------- ----------------------------------------- Elim- Cons- Elim- Cons- Issuers Others inations olidated Issuers Others inations olidated ----------------------------------------- ----------------------------------------- Net sales $ 1,915.4 $ 1,476.5 $ (19.3) $ 3,372.6 $ 2,196.3 $ 1,175.2 $ (14.1) $ 3,357.4 Licensing income (net) - 22.6 - 22.6 - 19.0 - 19.0 ----------------------------------------- ----------------------------------------- Total revenues 1,915.4 1,499.1 (19.3) 3,395.2 2,196.3 1,194.2 (14.1) 3,376.4 Cost of goods sold 1,097.2 1,023.9 (12.9) 2,108.2 1,267.6 818.6 (31.8) 2,054.4 ----------------------------------------- ----------------------------------------- Gross profit 818.2 475.2 (6.4) 1,287.0 928.7 375.6 17.7 1,322.0 Selling, general and administrative expenses 591.9 198.3 (3.9) 786.3 685.6 147.2 (5.1) 827.7 ----------------------------------------- ----------------------------------------- Operating income 226.3 276.9 (2.5) 500.7 243.1 228.4 22.8 494.3 Net interest expense (income) and financing costs 39.7 2.4 - 42.1 46.2 (1.9) - 44.3 Equity in earnings of unconsolidated affiliates 1.9 0.7 (0.9) 1.7 0.7 - - 0.7 ----------------------------------------- ----------------------------------------- Income before provision for income taxes and equity in earnings of subsidiaries 188.5 275.2 (3.4) 460.3 197.6 230.3 22.8 450.7 Provision for income taxes 81.1 98.2 (5.8) 173.5 90.5 86.4 (6.9) 170.0 Equity in earnings of subsidiaries 430.7 - (430.7) - 206.3 - (206.3) - ----------------------------------------- ----------------------------------------- Income before cumulative effect of change in accounting principle 538.1 177.0 (428.3) 286.8 313.4 143.9 (176.6) 280.7 Cumulative effect of change in accounting for intangible assets, net of tax - - - - - 13.8 - 13.8 ----------------------------------------- ----------------------------------------- Net income $ 538.1 $ 177.0 $ (428.3) $ 286.8 $ 313.4 $ 130.1 $ (176.6) $ 266.9 ========================================= =========================================
Condensed Consolidating Statements of Cash Flows
(In millions)
Fiscal Nine Months Ended October 4, 2003 Fiscal Nine Months Ended October 5, 2002 ----------------------------------------- ----------------------------------------- Elim- Cons- Elim- Cons- Issuers Others inations olidated Issuers Others inations olidated ----------------------------------------- ----------------------------------------- Net cash provided by (used in) operating activities $ 49.1 $ 27.4 $ - $ 76.5 $ 372.5 $ (2.2) $ - $ 370.3 ----------------------------------------- ----------------------------------------- Cash flows from investing activities: Acquisitions, net of cash acquired - - - - (332.7) - - (332.7) Capital expenditures (19.3) (21.0) - (40.3) (18.1) (22.2) - (40.3) Net cash related to sale of U.S. Treasury bonds 12.2 - - 12.2 9.2 - - 9.2 Payments relating to acquisitions (54.1) - - (54.1) (2.0) - - (2.0) Acquisition of intangibles - (6.0) - (6.0) - (2.8) - (2.8) Repayments of loans to officers - - - - 2.0 - - 2.0 Proceeds from sales of property, plant and equipment 0.6 24.8 - 25.4 0.1 0.2 - 0.3 Other 0.2 - - 0.2 0.2 (0.3) - (0.1) ----------------------------------------- ----------------------------------------- Net cash used in investing activities (60.4) (2.2) - (62.6) (341.3) (25.1) - (366.4) ----------------------------------------- ----------------------------------------- Cash flows from financing activities: Net borrowings under various credit facilities - - - - 56.0 - - 56.0 Repayment of long-term debt - (7.4) - (7.4) (1.1) (0.9) - (2.0) Refinancing of acquired debt - - - - (126.9) - - (126.9) Principal payments on capital leases (3.2) (0.8) - (4.0) (8.8) (2.8) - (11.6) Purchases of treasury stock (92.1) - - (92.1) (29.5) - - (29.5) Dividends paid (10.1) - - (10.1) - - - - Proceeds from exercise of employee stock options 10.0 - - 10.0 62.2 - - 62.2 ----------------------------------------- ----------------------------------------- Net cash used in financing activities (95.4) (8.2) - (103.6) (48.1) (3.7) - (51.8) ----------------------------------------- ----------------------------------------- Effect of exchange rates on cash 0.1 0.5 - 0.6 - 0.1 - 0.1 ----------------------------------------- ----------------------------------------- Net increase (decrease) in cash and cash equivalents (106.6) 17.5 - (89.1) (16.9) (30.9) - (47.8) Cash and cash equivalents, beginning 256.2 27.1 - 283.3 27.8 48.7 - 76.5 ----------------------------------------- ----------------------------------------- Cash and cash equivalents, ending $ 149.6 $ 44.6 $ - $ 194.2 $ 10.9 $ 17.8 $ - $ 28.7 ========================================= =========================================
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EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
Fiscal Quarter Ended | Fiscal Nine Months Ended | ||||||
(In millions except per share amounts) | October 4, 2003 | October 5, 2002 | October 4, 2003 | October 5, 2002 | |||
Basic | |||||||
Net income | $ 93.9 | $ 129.8 | $ 286.8 | $ 266.9 | |||
Weighted average common shares outstanding | 126.6 | 129.4 | 127.6 | 128.0 | |||
Basic earnings per share | $ 0.74 | $ 1.00 | $ 2.25 | $ 2.08 | |||
Diluted | |||||||
Net income | $ 93.9 | $ 129.8 | $ 286.8 | $ 266.9 | |||
Add: interest expense associated with convertible notes, net of tax benefit | 2.4 | 2.3 | 7.1 | 6.8 | |||
Income available to common shareholders | $ 96.3 | $ 132.1 | $ 293.9 | $ 273.7 | |||
Weighted average common shares outstanding | 126.6 | 129.4 | 127.6 | 128.0 | |||
Effect of dilutive securities: | |||||||
Employee stock options | 1.2 | 2.4 | 1.1 | 3.0 | |||
Assumed conversion of convertible notes | 7.9 | 7.9 | 7.9 | 7.9 | |||
Weighted average common shares and share equivalents outstanding | 135.7 | 139.7 | 136.6 | 138.9 | |||
Diluted earnings per share | $ 0.71 | $ 0.95 | $ 2.15 | $ 1.97 | |||
SHORT-TERM BOND TRANSACTIONS
In December 2001 and August 2002, we entered into two transactions relating to the short sale of $157.9 million and $190.5 million, respectively, of U. S. Treasury securities. These transactions were intended to address interest rate exposure and generate capital gains that could be used to offset previously incurred capital losses.
As a result of the first transaction, which closed in August 2002, we recorded a short-term capital gain of $9.2 million and related interest income of $1.1 million and interest expense and fees of $11.9 million for the fiscal nine months ended October 5, 2002. The net effect of $1.6 million is included in the statement of operations as interest expense.
As a result of the second transaction, which closed in May 2003, we recorded a short-term capital gain of $6.6 million and related interest income of $0.6 million and interest expense and fees of $7.9 million for the fiscal nine months ended October 4, 2003. The net effect of $0.7 million is included in the statement of operations as interest expense.
ACQUISITION
We have agreed to purchase Kasper A.S.L., Ltd. ("Kasper") for $221 million in cash. The closing is anticipated to occur in early December 2003 and is subject to customary conditions. The acquisition is subject to a plan of reorganization by Kasper that will require, among other things, approval by the requisite holders of Kasper's debt and equity and confirmation by the Bankruptcy Court.
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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 13 and 40 week periods ended October 4, 2003 (hereinafter referred to as the "third fiscal quarter of 2003" and "first fiscal nine months of 2003," respectively) and the 13 and 40 week periods ended October 5, 2002 (hereinafter referred to as the "third fiscal quarter of 2002" and "first fiscal nine months of 2002," respectively), and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.
We completed our acquisitions of Gloria Vanderbilt on April 8, 2002 and l.e.i. on August 15, 2002. The results of operations of the acquired companies 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 years. Gloria Vanderbilt and l.e.i. operate in the wholesale moderate apparel segment.
During the first fiscal nine months of 2002, we recorded a $31.9 million charge relating to contractual obligations under employment contracts, primarily for former President Jackwyn Nemerov and former Vice Chairman Irwin Samelman. The charges under these contracts are comprised of pre-tax amounts totaling $11.8 million for contractual salary and bonus obligations and $18.1 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.
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. 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 Ralph by Ralph Lauren ("Ralph") license with Polo Ralph Lauren Corporation ("Polo") is scheduled to end on December 31, 2003. During the course of the discussions concerning Ralph, Polo asserted that the expiration of the Ralph contract will cause the Lauren by Ralph Lauren ("Lauren") license agreements and associated design agreements (the "Lauren license agreements") to end on December 31, 2003, instead of December 31, 2006. We believe that this is an improper interpretation and that the expiration of the Ralph license does not cause the Lauren license to end.
On June 3, 2003, we announced that our discussions with Polo regarding the interpretation of the Lauren license had reached an impasse and that, as a result, we had filed a complaint in the New York State Supreme Court against Polo and its affiliates (see "Legal Proceedings"). The complaint alleges that Polo breached the Lauren license agreements by claiming that the license ends at the end of 2003. We asked the court to enter a judgment for compensatory damages of $550 million as well as punitive damages. On June 3, 2003, Polo also filed a complaint in the New York State Supreme Court against us, seeking among other things a declaratory judgment that the Lauren license terminates as of December 31, 2003. On July 25, 2003, we served papers opposing Polo's motion and also served upon Polo a motion seeking summary judgment in Polo's action for a declaratory judgment. On August 12, 2003, Polo filed a cross-motion for summary judgment in that action. These motions were argued on September 30, 2003, and the parties are awaiting decisions.
We assert within the complaint that Polo's actions fully discharge our obligations under the Lauren license agreements for lines to be sold after December 31, 2003. Therefore, we have ceased development of Lauren products effective with the Spring 2004 season. Our Lauren business represents a significant portion of our sales
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and profits. Net sales of Lauren products were $141.3 million and $402.0 million for the third fiscal quarter and first fiscal nine months of 2003, respectively. The termination of our exclusive right to manufacture and market clothing under this trademark in the United States, Canada and elsewhere will have a material adverse effect on our results of operations after 2003. While we intend to pursue other opportunities, including internal brands (including a new lifestyle brand under the Jones New York Signature label), acquisitions and licensing options that we have previously been precluded from exploring, there is no guarantee that we will be able to replace all of the net sales of the Lauren brand. However, the loss of the Lauren license will not materially adversely impact our liquidity, and we will continue to have a strong financial position.
The expiration of the Ralph license will not be material to us in any respect. Net sales of Ralph products were $8.4 million and $24.4 million for the third fiscal quarter and first fiscal nine months of 2003, respectively.
We and Polo have agreed that, in connection with the expiration of the Ralph license, the Polo Jeans license in Canada will terminate as of December 31, 2003. The termination of the Polo Jeans license in Canada will not be material to us in any respect. Net sales of Polo Jeans products in Canada were $4.5 million and $9.8 million for the third fiscal quarter and first fiscal nine months of 2003, respectively. The dispute between us and Polo does not relate to the Polo Jeans license in the United States, and an end to the Lauren and Ralph licenses and the Polo Jeans license in Canada does not end our longer term Polo Jeans license in the United States or otherwise adversely affect the Polo Jeans license in the United States.
On July 31, 2002, we announced that we would begin expensing the fair value of employee stock options granted after December 31, 2002 pursuant to the guidelines contained in SFAS No. 123, "Accounting for Stock-Based Compensation" using the "prospective method" set forth in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Under this approach, the fair value of the option on the date of grant (as determined by the Black-Scholes option pricing model) is amortized to compensation expense over the option's vesting period. Since the expense to be recorded is dependent on both the timing and the number of options to be granted, we cannot estimate the effect on future results of operations at this time. Prior to January 1, 2003, pursuant to a provision in SFAS No. 123 we had elected to continue using the intrinsic-value method of accounting for stock options granted to employees in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options had been measured as the excess, if any, of the quoted market price of our stock at the date of the grant over the amount the employee must pay to acquire the stock. Under this approach, we had only recognized compensation expense for stock-based awards to employees for options granted at below-market prices.
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 assist in selling 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.
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RESULTS OF OPERATIONS
Statements of Income Stated in Dollars and as a Percentage of Total Revenues
(In millions) | Fiscal Quarter Ended | Fiscal Nine Months Ended | |||||||||
October 4, 2003 | October 5, 2002 | October 4, 2003 | October 5, 2002 | ||||||||
Net sales | $ 1,171.1 | 99.2% | $ 1,271.0 | 99.5% | $ 3,372.6 | 99.3% | $ 3,357.4 | 99.4% | |||
Licensing income (net) | 9.4 | 0.8% | 6.5 | 0.5% | 22.6 | 0.7% | 19.0 | 0.6% | |||
Total revenues | 1,180.5 | 100.0% | 1,277.5 | 100.0% | 3,395.2 | 100.0% | 3,376.4 | 100.0% | |||
Cost of goods sold | 752.1 | 63.7% | 793.1 | 62.1% | 2,108.2 | 62.1% | 2,054.4 | 60.8% | |||
Gross profit | 428.4 | 36.3% | 484.4 | 37.9% | 1,287.0 | 37.9% | 1,322.0 | 39.2% | |||
Selling, general and administrative expenses | 264.4 | 22.4% | 262.7 | 20.6% | 786.3 | 23.2% | 795.8 | 23.6% | |||
Executive compensation obligations | - | - | - | - | - | - | 31.9 | 0.9% | |||
Operating income | 164.0 | 13.9% | 221.7 | 17.4% | 500.7 | 14.7% | 494.3 | 14.6% | |||
Net interest expense | 13.9 | 1.2% | 14.1 | 1.1% | 42.1 | 1.2% | 44.3 | 1.3% | |||
Equity in earnings of unconsolidated affiliates | 0.6 | 0.1% | 0.7 | 0.1% | 1.7 | 0.1% | 0.7 | - | |||
Income before provision for income taxes | 150.7 | 12.8% | 208.3 | 16.3% | 460.3 | 13.6% | 450.7 | 13.3% | |||
Provision for income taxes | 56.8 | 4.8% | 78.5 | 6.1% | 173.5 | 5.1% | 170.0 | 5.0% | |||
Income before cumulative effect of change in accounting principle | 93.9 | 8.0% | 129.8 | 10.2% | 286.8 | 8.4% | 280.7 | 8.3% | |||
Cumulative effect of change in accounting for intangible assets, net of tax | - | - | - | - | - | - | 13.8 | 0.4% | |||
Net income | $ 93.9 | 8.0% | $ 129.8 | 10.2% | $ 286.8 | 8.4% | $ 266.9 | 7.9% | |||
Percentage totals may not add due to rounding.
Fiscal Quarter Ended October 4, 2003 Compared to Fiscal Quarter Ended October 5, 2002
Revenues. Total revenues for the third fiscal quarter of 2003 were $1.18 billion compared to $1.28 billion for the third fiscal quarter of 2002, a decrease of 7.6%.
Revenues by segment were as follows:
(In millions) | Third Fiscal Quarter of 2003 | Third Fiscal Quarter of 2002 | Increase/ (Decrease) | Percent Change |
Wholesale better apparel | $ 410.6 | $ 508.2 | $(97.6) | (19.2%) |
Wholesale moderate apparel | 355.1 | 341.8 | 13.3 | 3.9% |
Wholesale footwear and accessories | 240.8 | 255.4 | (14.6) | (5.7%) |
Retail | 164.6 | 165.6 | (1.0) | (0.6%) |
Other | 9.4 | 6.5 | 2.9 | 44.6% |
Total revenues | $ 1,180.5 | $ 1,277.5 | $ (97.0) | (7.6%) |
Wholesale better apparel revenues declined primarily as the result of a decrease in shipments in our Lauren and Ralph lines and an increase in customer allowances and other incentives provided to our retail customers related to the exit of these businesses. Planned decreases in Jones New York career and decreased shipments in our Polo Jeans, Jones New York Sport, Jones New York Dress and Rena Rowan products were offset by increases in our Nine West Apparel and Jones New York Suit product lines.
Wholesale moderate apparel revenues increased primarily as a result of the product lines obtained as a result of the l.e.i. acquisition being included for the full current period compared to approximately seven weeks in the prior period. Increases were also realized in the Nine & Company and Gloria Vanderbilt businesses, which were offset by reduced shipments of our Norton McNaughton, Evan-Picone, Energie and Erika products.
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The wholesale footwear and accessories business was planned conservatively in light of the uncertain retail climate. These planned reductions impacted shipments of our Nine West accessories and Nine West and Enzo Angiolini footwear product lines, which were somewhat offset by new product lines, including Esprit and Gloria Vanderbilt in both footwear and accessories product categories, as well as the growth of our Bandolino footwear line.
Retail revenues decreased primarily due to fewer doors within each of our footwear and ready-to-wear concepts compared to the prior period. Combined comparable store sales increased 0.1% for the current period, with footwear stores increasing approximately 0.6% while ready-to-wear stores decreased approximately 2.0%.
Gross Profit. The gross profit margin decreased to 36.3% in the third fiscal quarter of 2003 compared to 37.9% in the prior period.
Wholesale better apparel gross profit margins were 36.5% and 42.0% for the third fiscal quarters of 2003 and 2002, respectively. The decrease was a result of higher discounts and customer allowances provided to our retail customers in relation to the discontinuance of the Lauren business as well as higher customer allowances in our Polo Jeans Company business.
Wholesale moderate apparel gross profit margins were 25.6% and 23.8% for the third fiscal quarters of 2003 and 2002, respectively. The gross profit margin for the third fiscal quarter of 2003 was impacted by a higher level of customer allowances as a result of higher promotions at our retail customers. The gross profit margin for the third fiscal quarter of 2002 was impacted by $13.9 million related to adjustments required under purchase accounting to write up acquired inventories to market value.
Wholesale footwear and accessories gross profit margins were 33.8% and 33.9% for the third fiscal quarters of 2003 and 2002, respectively. Improved margins in our costume jewelry business as a result of an emphasis on maintaining lower inventory levels, which resulted in lower jewelry sales through the off-price channel, were offset by slightly lower footwear margins.
Retail gross profit margins were 53.1% and 51.9% for the third fiscal quarters of 2003 and 2002, respectively. The increase was primarily the result of inventory planning that resulted in a higher percentage of full-price sell-throughs and lower promotional activity in our retail stores.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $264.4 million in the third fiscal quarter of 2003 represented an increase of $1.7 million from the $262.7 million reported for the third fiscal quarter of 2002. l.e.i. added $4.9 million in the wholesale moderate apparel segment to the third fiscal quarter of 2003, which was offset by lower operating costs in our private label denim business (a result of restructuring and integrating its operations into l.e.i.). Gloria Vanderbilt operating expenses increased due to the addition and expansion of product lines, while royalties and advertising costs relating to our licensed products were lower due to reduced sales.
Operating Income. The resulting operating income for the third fiscal quarter of 2003 of $164.0 million decreased 26.0%, or $57.7 million, from the $221.7 million for the third fiscal quarter of 2002 due to the factors described above.
Net Interest Expense. Net interest expense was $13.9 million and $14.1 million for the third fiscal quarters of 2003 and 2002, respectively.
Provision for Income Taxes. The effective income tax rate was 37.7% for the third fiscal quarters of both 2003 and 2002.
Net Income and Earnings Per Share. Net income was $93.9 million in the third fiscal quarter of 2003, a decrease of $35.9 million from the net income of $129.8 million earned in 2002. Diluted earnings per share for the third fiscal quarter of 2003 was $0.71 compared to $0.95 for the prior period, on 2.9% fewer shares outstanding.
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Fiscal Nine Months Ended October 4, 2003 Compared to Fiscal Nine Months Ended October 5, 2002
Revenues. Total revenues for the first fiscal nine months of 2003 were $3.40 billion compared to $3.38 billion for the first fiscal nine months of 2002, an increase of 0.6%.
Revenues by segment were as follows:
(In millions) | First Fiscal Nine Months of 2003 | First Fiscal Nine Months of 2002 | Increase/ (Decrease) | Percent Change |
Wholesale better apparel | $ 1,173.9 | $ 1,325.9 | $(152.0) | (11.5%) |
Wholesale moderate apparel | 1,053.7 | 822.4 | 231.3 | 28.1% |
Wholesale footwear and accessories | 663.0 | 700.1 | (37.1) | (5.3%) |
Retail | 482.0 | 509.0 | (27.0) | (5.3%) |
Other | 22.6 | 19.0 | 3.6 | 18.9% |
Total revenues | $ 3,395.2 | $ 3,376.4 | $ 18.8 | 0.6% |
Wholesale better apparel revenues declined primarily as the result of a decrease in shipments and increased customer allowances of our Polo Jeans, Lauren and Ralph businesses. Other planned decreases in Jones New York career and decreased shipments in our Jones New York Sport, Jones New York Dress and Rena Rowan products were partially offset by increases in our Nine West and Easy Spirit apparel product lines.
Wholesale moderate apparel revenues increased primarily as a result of the product lines obtained as a result of the Gloria Vanderbilt and l.e.i. acquisitions. Increases were also realized in the Nine & Company and Gloria Vanderbilt businesses during the first fiscal nine months of 2003, which were offset by reduced shipments of our Jones Wear, Energie, Evan-Picone and Erika products.
The wholesale footwear and accessories business was planned conservatively in light of the uncertain retail climate. These planned reductions significantly impacted shipments of our Nine West accessories and Enzo Angiolini and Nine West footwear product lines, which were somewhat offset by new product lines, including Esprit and Gloria Vanderbilt in both the footwear and accessories product categories, as well as the growth of our Bandolino footwear line.
Retail revenues decreased primarily due to comparable store sales decreasing approximately 5.0% for footwear and accessories stores and 4.5% for ready-to-wear outlet stores as compared to the prior period. As noted, however, footwear comparable store sales showed marked improvement in the third fiscal quarter of 2003 from the preceding quarters. The overall decreases were a result of a lack of consumer traffic and the challenging retail environment as well as a reduction of five stores from the prior period.
Gross Profit. The gross profit margin decreased to 37.9% in the first fiscal nine months of 2003 compared to 39.2% in the prior period.
Wholesale better apparel gross profit margins were 39.8% and 42.0% for the first fiscal nine months of 2003 and 2002, respectively. The decrease was a result of higher discounts and customer allowances provided to our retail customers in relation to the discontinuance of our Lauren business as well as higher customer allowances related to the Polo Jeans Company business. This decrease was partially offset by improved performance of the Jones New York career products at retail, necessitating lower levels of customer allowances, as well as a higher percentage of sales to regular customers and fewer sales through the off-price channel.
Wholesale moderate apparel gross profit margins were 27.2% and 27.5% for the first fiscal nine months of 2003 and 2002, respectively. The margin for the current period was impacted by a higher level of customer allowances as a result of higher promotions at our retail customers, as well as a higher ratio of off-price to regular price sales during the period. Cost of sales for the first fiscal nine months of 2002 included $23.1 million related to adjustments required under purchase accounting to write up acquired inventories to market value.
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Wholesale footwear and accessories gross profit margins were 34.4% and 32.3% for the first fiscal nine months of 2003 and 2002, respectively. The margin increase, which occurred principally in our costume jewelry business, was driven by our inventory liquidation plan in 2002 and an emphasis on maintaining lower inventory levels, which resulted in lower sales through the off-price channel. Footwear margins decreased due to a higher level of customer allowances in our footwear and accessories product lines as a result of higher promotions at our retail customers.
Retail gross profit margins were 53.9% and 53.0% for the first fiscal nine months of 2003 and 2002, respectively. The increase was primarily the result of inventory planning which resulted in a higher percentage of full-price sales and lower promotional activity in our retail stores.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $786.3 million in the first fiscal nine months of 2003 represented a decrease of $41.4 million from the $827.7 million reported for the first fiscal nine months of 2002. Gloria Vanderbilt and l.e.i. added a total of $28.2 million in the wholesale moderate apparel segment to the first fiscal nine months of 2003, which was somewhat offset by a $11.5 million reduction in our private label denim business (a result of restructuring and integrating its operations into l.e.i.). The reorganization of our costume jewelry business also reduced overhead costs by $11.3 million from the prior period. The remaining decline represents tighter cost controls across the wholesale businesses and leveraging the corporate infrastructure across the organization, eliminating duplicative expenses in our new acquisitions. The prior period reflected $31.9 million of executive compensation costs and a $5.8 million writedown of costume jewelry trademarks in the other and eliminations segment.
Operating Income. The resulting operating income for the first fiscal nine months of 2003 of $500.7 million increased 1.3%, or $6.4 million, from the $494.3 million for the first fiscal nine months of 2002, due to the factors described above.
Net Interest Expense. Net interest expense was $42.1 million in the first fiscal nine months of 2003 compared to $44.3 million in the first fiscal nine months of 2002. This was primarily a result of both lower interest rates and lower average borrowings compared to the prior period.
Provision for Income Taxes. The effective income tax rate was 37.7% for the first fiscal nine months of both 2003 and 2002.
Net Income and Earnings Per Share. Net income was $286.8 million in the first fiscal nine months of 2003, an increase of $19.9 million from the net income of $266.9 million earned in the first fiscal nine months of 2002. Diluted earnings per share for the first fiscal nine months of 2003 was $2.15 compared to $1.97 for the prior period, on 1.6% fewer shares outstanding.
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. As of October 4, 2003, total cash and cash equivalents were $194.2 million, a decrease of $89.1 million from the $283.3 million reported as of December 31, 2002.
Operating activities provided $76.5 million in the first fiscal nine months of 2003 and provided $370.3 million in the first fiscal nine months of 2002. The change was primarily due to a larger increase in accounts receivable during the first nine months of 2003 compared to the prior period, an increase in inventory levels during the first nine months of 2003 compared to a decrease in the prior period, a decrease in accounts payable levels during the first nine months of 2003 compared to an increase in the prior period and higher levels of estimated tax payments in the current period. The change in accounts receivable was due to the effects in the current period of the businesses acquired during 2002. The change in inventory was due primarily to increases in the current period attributable to our acquired businesses, which used cash, and the liquidation of excess wholesale apparel and jewelry inventories in the prior period, which generated cash. The change in accounts payable was primarily due
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to reductions in in-transit inventories, changes in global sourcing arrangements and timing differences associated with the settlement of capital markets activities.
Investing activities used $62.6 million and $366.4 million in the first fiscal nine months of 2003 and 2002, respectively. The change was primarily due to the proceeds from the sale and leaseback of our Virginia warehouse facility in early 2003 and the acquisitions of Gloria Vanderbilt and l.e.i. in 2002.
Financing activities used $103.6 million in the first fiscal nine months of 2003, primarily to repurchase $92.1 million of our common stock. As of October 4, 2003, a total of $647.1 million had been expended under announced programs to acquire up to $650.0 million of such shares. On July 29, 2003 we announced that our Board of Directors had authorized an additional $150.0 million of share repurchases, bringing the aggregate total to $800.0 million under our repurchase programs. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition. On August 29, 2003, we paid $10.1 million for our first-ever quarterly cash dividend of $.08 per share to all common stockholders of record as of August 15, 2003.
Financing activities used $51.8 million in the first fiscal nine months of 2002, primarily the result of refinancing $126.9 million of acquired debt and repurchases of $29.5 million of our common stock offset by $56.0 million in net borrowings under revolving credit facilities and $62.2 million in proceeds from the exercise of employee stock options.
During the first fiscal nine months of 2003, we entered into a sale-leaseback agreement for our Virginia warehouse facility. The gross sale price was $25.9 million, which resulted in a net gain of $7.9 million that has been deferred and is being amortized over the 20-year term of the lease agreement (which has been recorded as a capital lease). In connection with this transaction, we repaid $7.4 million of long-term debt related to the Virginia warehouse facility.
At October 4, 2003, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.4 billion under Senior Credit Facilities. These facilities, of which the entire amount is available for letters of credit or cash borrowings, provide for a $700.0 million three-year revolving credit facility (which expires in June 2006 and replaced a similar $850.0 million 364-day revolving credit facility in June 2003) and a $700.0 million five-year revolving credit facility (which expires in June 2004). At October 4, 2003, $148.8 million was outstanding under the three-year revolving credit facility (comprised solely 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 addition to these committed facilities, we have an unsecured uncommitted line of credit for the purpose of issuing letters of credit and bankers' acceptances for McNaughton. As of October 4, 2003, $123.2 million was outstanding under this line of credit.
At October 4, 2003, we also had a C$25.0 million unsecured line of credit in Canada, under which no amounts were outstanding.
In December 2001 and August 2002, we entered into transactions relating to the short sale of $157.9 million and $190.5 million, respectively, of U. S. Treasury securities. These transactions were intended to address interest rate exposure and generate capital gains that could be used to offset previously incurred capital losses. See "Short Term Bond Transactions" in Notes to Consolidated Financial Statements.
We have two joint ventures with HCL Technologies Limited to provide us with computer consulting, programming and associated support services. On August 31, 2004, we are obligated to contribute approximately $1.0 million of additional capital to the joint ventures in the form of cash or assets. As of October 4, 2003, we have
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committed to purchase an additional $17.3 million in services from these joint venture companies through June 30, 2007.
We also have a joint venture with Sutton Developments Pty. Ltd. ("Sutton") to operate retail locations in Australia. We have unconditionally guaranteed up to AU$7.0 million of borrowings under the joint venture's uncommitted credit facility and up to AU$0.4 million of presettlement risk associated with foreign exchange transactions. Sutton is required to reimburse us for 50% of any payments made under these guarantees. At October 4, 2003, the outstanding balance subject to these guarantees was approximately $0.7 million.
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, 2001, 2002 and 2003. No payments were required for either 2001 or 2002.
On April 8, 2002, we completed the acquisition of Gloria Vanderbilt. The aggregate purchase price was approximately $100.9 million, which included payments to the selling shareholders of $80.9 million in cash and the issuance of approximately 0.6 million shares of our common stock. We also assumed approximately $43.7 million of Gloria Vanderbilt's funded debt and accrued interest, which we subsequently refinanced. The terms of the acquisition agreement for Gloria Vanderbilt required 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) that exceeded certain targeted levels for the 12 months following the completion of the acquisition, up to a maximum of $54.0 million. The maximum additional consideration was paid in cash on July 7, 2003 and was recorded first as a reduction of the liability resulting from the fair value of assets acquired exceeding the purchase price, with the remaining balance of $45.1 million being recorded as goodwill in the third fiscal quarter of 2003.
On August 15, 2002, we completed the acquisition of l.e.i. The aggregate purchase price was approximately $309.7 million, which included payments to the selling shareholders of $272.5 million in cash and the issuance of approximately 1.0 million shares of our common stock. We also assumed approximately $84.0 million of l.e.i.'s funded debt and accrued interest, $83.2 million of which we subsequently refinanced. The selling shareholders and certain employees of l.e.i. will be entitled to receive future payments of up to $70.0 million in the form of cash and/or common stock if certain earnings targets are achieved during the three years following the closing of the transaction.
On October 28, 2003, we announced that the Board of Directors had declared a quarterly cash dividend of $.08 per share to all common stockholders of record as of November 14, 2003 for payment on November 28, 2003.
We may redeem, at our option, our Zero Coupon Convertible Senior Notes due 2021 ("Convertible Notes") at any time for cash on or after February 1, 2004. Any noteholder may also require us to purchase such holder's Convertible Notes as of February 1, 2004. We are actively considering calling the Convertible Notes for redemption at that time. The redemption of the Convertible Notes would require an aggregate cash payment of approximately $446.6 million.
We believe that cash on hand, funds generated by operations, the Senior Credit Facilities and the McNaughton and Canadian lines of credit, as well as proceeds from any future issuance of debt securities, will provide the financial resources sufficient to meet our foreseeable working capital, capital expenditure, dividend and stock repurchase requirements, fund our contractual obligations and our contingent liabilities and commitments, fund the redemption of our Convertible Notes and meet any ongoing obligations to the seller of Judith Jack and the selling shareholders and certain employees of l.e.i.
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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 $1.4 billion in variable rate facilities at October 4, 2003.
At October 4, 2003, we had outstanding Canadian foreign exchange contracts to purchase a total of 10.0 million U.S. dollars through February 2004. 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.
For further information see "Derivatives" in the Notes to Consolidated Financial Statements.
Item 4. Controls and Procedures
As required by Exchange Act Rule 13a-15, we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Operating and Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our President and Chief Executive Officer and our Chief Operating and Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings and that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.
There have been no changes in our internal controls or in other factors that could significantly affect internal controls during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
The Ralph license with Polo is scheduled to end on December 31, 2003. During the course of the discussions concerning Ralph, Polo asserted that the expiration of the Ralph contract will cause the Lauren license agreements to end on December 31, 2003, instead of December 31, 2006. We believe that this is an improper interpretation and that the expiration of the Ralph license does not cause the Lauren license to end.
On June 3, 2003, we announced that our discussions with Polo regarding the interpretation of the Lauren license had reached an impasse and that, as a result, we had filed a complaint in the New York State Supreme Court against Polo and its affiliates and our former President, Jackwyn Nemerov. The complaint alleges that Polo breached the Lauren license agreements by claiming that the license ends at the end of 2003. The complaint also alleges that Ms. Nemerov breached the confidentiality and non-compete provisions of her employment agreement with us. Additionally, Polo is alleged to have induced Ms. Nemerov to breach her employment agreement and
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Ms. Nemerov is alleged to have induced Polo to breach the Lauren license agreements. We asked the court to enter a judgment for compensatory damages of $550 million, as well as punitive damages, and to enforce the confidentiality and non-compete provisions of Ms. Nemerov's employment agreement. On June 3, 2003, Polo also filed a complaint in the New York State Supreme Court against us, seeking among other things a declaratory judgment that the Lauren license terminates as of December 31, 2003. On June 25, 2003, we filed an amended complaint adding a claim against Ms. Nemerov for conversion, which alleges that Ms. Nemerov wrongfully took and possesses documents containing confidential information regarding us.
On July 3, 2003, Ms. Nemerov filed a motion to stay our claims against her and to compel arbitration of those claims. We have opposed that motion. Additionally, on July 3, 2003, Polo served a motion on us to dismiss our breach of contract claim, and to stay our claim regarding inducement of Ms. Nemerov's breach of her employment agreement pending the outcome of arbitration. On July 8, 2003, we served papers opposing Nemerov's motion. On July 25, 2003, we served papers opposing Polo's motion and also served upon Polo a motion seeking summary judgment in Polo's action for a declaratory judgment. On August 12, 2003, Polo filed a cross-motion for summary judgment in that action. The four motions were argued on September 30, 2003, and the parties are awaiting decisions.
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.
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 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.
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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 October 4, 2003, we filed the following Current Reports on Form 8-K with the SEC.
(1) | We filed a Current Report on Form 8-K, dated July 29, 2003, announcing our results of operations for the fiscal quarter ended July 5, 2003, as well as:
|
(2) | We filed a Current Report on Form 8-K, dated August 7, 2003, announcing that the Special Committee of the Board of Directors of Kasper had determined that we had made the highest offer to purchase Kasper at the previously announced auction. |
(3) | We filed a Current Report on Form 8-K, dated August 14, 2003, announcing that the Bankruptcy Court had approved our agreement to purchase Kasper. |
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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)
Date: November 14, 2003 |
By /s/ Peter Boneparth
PETER BONEPARTH
Chief Executive Officer
By /s/ Wesley R. Card
WESLEY R. CARD
Chief Operating and Financial Officer
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EXHIBIT INDEX
Exhibit No. | Description of Exhibit |
2.1* | Purchase Agreement dated as of August 7, 2003 between Kasper A.S.L., Ltd. and Jones Apparel Group, Inc. |
31* | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32* | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
____________
* Filed herewith.
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