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 1, 2006
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] | Accelerated filer [ ] |
Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 April 27, 2006 |
JONES APPAREL GROUP, INC.
Index | Page No. | |
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | ||
Consolidated Balance Sheets April 1, 2006, April 2, 2005 and December 31, 2005 | 3 | |
Consolidated Statements of Income Fiscal Quarters ended April 1, 2006 and April 2, 2005 | 4 | |
Consolidated Statements of Stockholders' Equity Fiscal Quarters ended April 1, 2006 and April 2, 2005 | 5 | |
Consolidated Statements of Cash Flows Fiscal Quarters ended April 1, 2006 and April 2, 2005 | 6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 22 | |
Item 4. Controls and Procedures | 22 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 23 | |
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 24 | |
Item 5. Other Information | 25 | |
Item 6. Exhibits | 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, "Sun" means Sun Apparel, Inc., "Nine West" means Nine West Footwear Corporation, "McNaughton" means McNaughton Apparel Group Inc.,"Kasper" means Kasper, Ltd., "Maxwell" means Maxwell Shoe Company Inc. (acquired July 8, 2004), "Barneys" means Barneys New York, Inc. (acquired December 20, 2004), " Polo" means Polo Ralph Lauren Corporation, "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)
April 1, 2006 | April 2, 2005 | December 31, 2005 | ||
(Unaudited) | (Unaudited) | |||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and cash equivalents | $ 140.2 | $ 45.4 | $ 34.9 | |
Accounts receivable | 555.7 | 680.6 | 458.4 | |
Inventories | 590.0 | 645.8 | 650.0 | |
Deferred taxes | 49.3 | 62.8 | 52.5 | |
Prepaid expenses and other current assets | 79.5 | 73.5 | 88.5 | |
TOTAL CURRENT ASSETS | 1,414.7 | 1,508.1 | 1,284.3 | |
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $482.2, $499.9 and $472.2 | 323.2 | 301.0 | 312.1 | |
GOODWILL | 1,740.6 | 2,124.6 | 2,097.3 | |
OTHER INTANGIBLES, at cost, less accumulated amortization | 826.1 | 791.5 | 827.5 | |
OTHER ASSETS | 50.7 | 56.7 | 56.6 | |
$ 4,355.3 | $ 4,781.9 | $ 4,577.8 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
CURRENT LIABILITIES: | ||||
Short-term borrowings | $ - | $ 196.5 | $ 129.5 | |
Current portion of long-term debt and capital lease obligations | 228.9 | 133.5 | 227.8 | |
Accounts payable | 232.3 | 266.1 | 256.5 | |
Income taxes payable | 84.4 | 78.3 | 54.2 | |
Accrued employee compensation | 36.1 | 37.4 | 50.9 | |
Accrued expenses and other current liabilities | 122.8 | 134.1 | 117.6 | |
TOTAL CURRENT LIABILITIES | 704.5 | 845.9 | 836.5 | |
NONCURRENT LIABILITIES: | ||||
Long-term debt | 752.7 | 977.1 | 752.6 | |
Obligations under capital leases | 38.8 | 39.3 | 37.2 | |
Deferred taxes | 185.2 | 142.0 | 175.9 | |
Other | 109.6 | 82.0 | 109.2 | |
TOTAL NONCURRENT LIABILITIES | 1,086.3 | 1,240.4 | 1,074.9 | |
TOTAL LIABILITIES | 1,790.8 | 2,086.3 | 1,911.4 | |
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 152.2, 151.1 and 151.4 | 1.5 | 1.5 | 1.5 | |
Additional paid-in capital | 1,279.9 | 1,250.2 | 1,269.4 | |
Retained earnings | 2,438.4 | 2,279.0 | 2,426.2 | |
Accumulated other comprehensive income (loss) | (6.0) | (0.8) | (6.5) | |
Treasury stock, 39.7, 29.3 and 35.5 shares, at cost | (1,149.3) | (834.3) | (1,024.2) | |
TOTAL STOCKHOLDERS' EQUITY | 2,564.5 | 2,695.6 | 2,666.4 | |
$ 4,355.3 | $ 4,781.9 | $ 4,577.8 | ||
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 | |||
April 1, 2006 | April 2, 2005 | ||
Net sales | $ 1,200.2 | $ 1,335.1 | |
Licensing income (net) | 11.9 | 14.2 | |
Service income | 3.2 | - | |
Total revenues | 1,215.3 | 1,349.3 | |
Cost of goods sold | 765.0 | 850.6 | |
Gross profit | 450.3 | 498.7 | |
Selling, general and administrative expenses | 319.6 | 340.4 | |
Loss on sale of Polo Jeans Company business | 45.1 | - | |
Operating income | 85.6 | 158.3 | |
Interest income | 1.0 | 0.5 | |
Interest expense and financing costs | (16.3) | (19.4) | |
Equity in earnings of unconsolidated affiliates | 0.9 | 0.9 | |
Income before provision for income taxes | 71.2 | 140.3 | |
Provision for income taxes | 47.3 | 53.3 | |
Income before cumulative effect of change in accounting principle | 23.9 | 87.0 | |
Cumulative effect of change in accounting for share-based payments, net of tax | 1.9 | - | |
Net income | $ 25.8 | $ 87.0 | |
Earnings per share | |||
Basic | |||
Income before cumulative effect of change in accounting principle | $0.21 | $0.72 | |
Cumulative effect of change in accounting for share-based payments, net of tax | 0.02 | - | |
Basic earnings per share | $0.23 | $0.72 | |
Diluted | |||
Income before cumulative effect of change in accounting principle | $0.21 | $0.71 | |
Cumulative effect of change in accounting for share-based payments, net of tax | 0.01 | - | |
Basic earnings per share | $0.22 | $0.71 | |
Weighted average common shares and share equivalents outstanding | |||
Basic | 113.3 | 121.2 | |
Diluted | 115.5 | 122.7 | |
Dividends declared per share | $0.12 | $0.10 |
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, 2005 | 122.2 | $ 2,653.9 | $ 1.5 | $ 1,236.4 | $ 2,204.2 | $ 0.8 | $ (789.0) | |||||||
Fiscal quarter ended April 2, 2005: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 87.0 | - | - | 87.0 | - | - | |||||||
Change in fair value of cash flow hedges, net of $0.7 tax | - | (1.2) | - | - | - | (1.2) | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.6 tax | - | (0.9) | - | - | - | (0.9) | - | |||||||
Foreign currency translation adjustments | - | 0.5 | - | - | - | 0.5 | - | |||||||
Total comprehensive income | 85.4 | |||||||||||||
Issuance of restricted stock to employees, net of forfeitures | 0.7 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 4.6 | - | 4.6 | - | - | - | |||||||
Exercise of employee stock options | 0.3 | 8.3 | - | 8.3 | - | - | - | |||||||
Excess tax benefits from share-based payment arrangements | - | 0.9 | - | 0.9 | - | - | - | |||||||
Dividends on common stock ($0.10 per share) | - | (12.2) | - | - | (12.2) | - | - | |||||||
Treasury stock acquired | (1.4) | (45.3) | - | - | - | - | (45.3) | |||||||
Balance, April 2, 2005 | 121.8 | $ 2,695.6 | $ 1.5 | $ 1,250.2 | $ 2,279.0 | $ (0.8) | $ (834.3) | |||||||
Balance, January 1, 2006 | 115.9 | $ 2,666.4 | $ 1.5 | $ 1,269.4 | $ 2,426.2 | $ (6.5) | $ (1,024.2) | |||||||
Fiscal quarter ended April 1, 2006: | ||||||||||||||
Comprehensive income: | ||||||||||||||
Net income | - | 25.8 | - | - | 25.8 | - | - | |||||||
Change in fair value of cash flow hedges, net of $0.7 tax | - | 0.9 | - | - | - | 0.9 | - | |||||||
Reclassification adjustment for hedge gains and losses included in net income, net of $0.4 tax | - | (0.6) | - | - | - | (0.6) | - | |||||||
Foreign currency translation adjustments | - | 0.2 | - | - | - | 0.2 | - | |||||||
Total comprehensive income | 26.3 | |||||||||||||
Issuance of restricted stock to employees, net of forfeitures | 0.3 | - | - | - | - | - | - | |||||||
Amortization expense in connection with employee stock options and restricted stock | - | 3.6 | - | 3.6 | - | - | - | |||||||
Exercise of employee stock options | 0.5 | 8.8 | - | 8.8 | - | - | - | |||||||
Excess tax benefits from share-based payment arrangements | - | 1.2 | - | 1.2 | - | - | - | |||||||
Dividends on common stock ($0.12 per share) | - | (13.6) | - | - | (13.6) | - | - | |||||||
Cumulative effect of change in accounting for share-based payments | - | (3.1) | - | (3.1) | - | - | - | |||||||
Treasury stock acquired | (4.2) | (125.1) | - | - | - | - | (125.1) | |||||||
Balance, April 1, 2006 | 112.5 | $ 2,564.5 | $ 1.5 | $ 1,279.9 | $ 2,438.4 | $ (6.0) | $ (1,149.3) | |||||||
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 Quarter Ended | ||||
April 1, 2006 | April 2, 2005 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net income | $ 25.8 | $ 87.0 | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities, net of sale of Polo Jeans Company business: | ||||
Loss on sale of Polo Jeans Company business | 45.1 | - | ||
Cumulative effect of change in accounting for share-based payments | (3.1) | - | ||
Depreciation and amortization | 23.6 | 25.2 | ||
Equity in earnings of unconsolidated affiliates | (0.9) | (0.9) | ||
Provision for losses on accounts receivable | 0.7 | 1.0 | ||
Deferred taxes | 10.6 | 13.6 | ||
Other | 0.4 | 0.4 | ||
Changes in operating assets and liabilities: | ||||
Accounts receivable | (97.9) | (233.4) | ||
Inventories | 30.1 | 18.2 | ||
Prepaid expenses and other current assets | 9.7 | (5.3) | ||
Other assets | 1.1 | 2.6 | ||
Accounts payable | (24.2) | 3.9 | ||
Income taxes payable | 30.2 | 49.9 | ||
Accrued expenses and other liabilities | (7.8) | (20.4) | ||
Total adjustments | 17.6 | (145.2) | ||
Net cash provided by (used in) operating activities | 43.4 | (58.2) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
Net proceeds from sale of Polo Jeans Company business | 350.6 | - | ||
Capital expenditures | (29.4) | (17.6) | ||
Payments relating to acquisition of Barneys | - | (4.1) | ||
Acquisition of intangibles | - | (0.1) | ||
Other | - | 0.2 | ||
Net cash provided by (used in) investing activities | 321.2 | (21.6) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Net (repayments) borrowings under credit facilities | (129.5) | 127.2 | ||
Principal payments on capital leases | (1.2) | (1.3) | ||
Debt issuance costs | - | (0.4) | ||
Purchases of treasury stock | (125.1) | (42.3) | ||
Dividends paid | (13.6) | (12.2) | ||
Proceeds from exercise of employee stock options | 8.8 | 8.3 | ||
Excess tax benefits from share-based payment arrangements | 1.2 | - | ||
Net cash provided by (used in) financing activities | (259.4) | 79.3 | ||
EFFECT OF EXCHANGE RATES ON CASH | 0.1 | 0.9 | ||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 105.3 | 0.4 | ||
CASH AND CASH EQUIVALENTS, BEGINNING | 34.9 | 45.0 | ||
CASH AND CASH EQUIVALENTS, ENDING | $ 140.2 | $ 45.4 | ||
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.
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, 2006.
SALE OF POLO JEANS COMPANY BUSINESS
In October 1995, we acquired an exclusive license to manufacture and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Lauren by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo (collectively, the "Lauren License"), which were to expire on December 31, 2006. In May 1998, we acquired an exclusive license to manufacture and market women's dresses, shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Ralph by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo (the "Ralph License"). The Ralph License was scheduled to end on December 31, 2003.
During the course of the discussions concerning the Ralph License, Polo asserted that the expiration of the Ralph License would cause the Lauren License agreements to end on December 31, 2003, instead of December 31, 2006. We believed that this was an improper interpretation and that the expiration of the Ralph License did 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 alleged that Polo breached the Lauren License agreements by claiming that the license ends at the end of 2003. The complaint also alleged that Ms. Nemerov breached the confidentiality and non-compete provisions of her employment agreement with us. Additionally, Polo was alleged to have induced Ms. Nemerov to breach her employment agreement and Ms. Nemerov was 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.
These matters were resolved by settlement dated January 22, 2006, which closed on February 3, 2006. In connection with this settlement, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. We received gross proceeds of $355.0 million in connection with the sale and the settlement. Sun's assets and liabilities on the closing date primarily related to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995. We retained distribution and product development facilities in El Paso, Texas, along with certain working capital items, including accounts receivable and accounts payable. In addition, as part of the agreements, we will continue to provide certain support services to Polo (including manufacturing, distribution, information technology and other financial and administrative functions) for a limited period of time.
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We recorded a loss of approximately $145.1 million after allocating $356.7 million of goodwill to the business sold. We also recorded an after tax gain of approximately $96.3 million related to the litigation settlement, resulting in a combined after tax loss of approximately $48.8 million. The combined loss created federal and state capital loss carryforwards that we do not expect to be realizable and, as a result, we increased our deferred tax valuation allowance to offset the deferred tax benefit recorded as a result of the combined loss. We previously reported that we would record a combined after tax loss of approximately $80.4 million on the sale of the business and settlement of the litigation. We subsequently determined that the settlement of the litigation would be treated as a capital gain that could be offset against the loss on the sale.
Long-lived assets included in the sale include $2.0 million of net property, plant and equipment and $5.5 million of unamortized long-term prepaid marketing expenses. Net sales for the Polo Jeans Company business, which are reported under the wholesale better apparel segment, were $23.3 million and $88.4 million for the fiscal quarters ended April 1, 2006 and April 2, 2005, respectively.
STOCK-BASED EMPLOYEE COMPENSATION
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 at below-market prices, with the expense recognized over the vesting period of the options. 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-Merton option pricing model) was amortized to compensation expense over the option's vesting period.
In December 2004, the FASB issued a revision of SFAS No. 123, "Share-Based Payment" (hereinafter referred to as "SFAS No. 123R"), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. We adopted SFAS No. 123R on January 1, 2006 using the modified prospective application option. As a result, the compensation cost for the portion of awards we granted before January 1, 2006 for which the requisite service had not been rendered and that were outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered. In addition, the adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a pretax gain of $3.1 million on January 1, 2006, which is reported as a cumulative effect of a change in accounting principle. We are also required to change the amortization period for employees eligible to retire from the period over which the awards vest to the period from the grant date to the date the employee is eligible to retire. The adoption of SFAS No. 123R will not have a material effect on our results of operations or our financial position. Concurrently with the adoption of SFAS No. 123R, we have shifted the composition of our share-based compensation awards towards the use of restricted shares and away from the use of employee stock options.
Both the share-based employee compensation cost included in the determination of net income as reported and the share-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 | ||
(In millions except per share data) | April 1, 2006 | April 2, 2005 |
Net income - as reported | $ 25.8 | $ 87.0 |
Add: stock-based employee compensation cost, net of related tax effects, included in the determination of net income as reported | 3.6 | 2.8 |
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 | (3.6) | (3.3) |
Net income - pro forma | $ 25.8 | $ 86.5 |
Basic earnings per share | ||
As reported | $0.23 | $0.72 |
Pro forma | $0.23 | $0.71 |
Diluted earnings per share | ||
As reported | $0.22 | $0.71 |
Pro forma | $0.22 | $0.71 |
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 1, 2006 | April 2, 2005 | |
Basic | |||
Net income | $ 25.8 | $ 87.0 | |
Weighted average common shares outstanding | 113.3 | 121.2 | |
Basic earnings per share | $ 0.23 | $ 0.72 | |
Diluted | |||
Net income | $ 25.8 | $ 87.0 | |
Weighted average common shares outstanding | 113.3 | 121.2 | |
Effect of dilutive securities: | |||
Employee stock options and restricted stock | 2.2 | 1.5 | |
Weighted average common shares and share equivalents outstanding | 115.5 | 122.7 | |
Diluted earnings per share | $ 0.22 | $ 0.71 | |
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ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) | April 1, 2006 | April 2, 2005 | December 31, 2005 |
Trade accounts receivable | $ 563.1 | $ 704.5 | $ 459.1 |
Credit card receivable | 36.7 | 33.8 | 40.5 |
Allowances for doubtful accounts, returns, discounts and co-op advertising | (44.1) | (57.7) | (41.2) |
$ 555.7 | $ 680.6 | $ 458.4 | |
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of McNaughton, Kasper and Maxwell, 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.
In late 2003, we began to evaluate the need to broaden global sourcing capabilities to respond to the competitive pricing and global sourcing capabilities of our denim competitors, as the favorable production costs from non-duty/non-quota countries and the breadth of fabric options from Asia began to outweigh the benefits of Mexico's quick turn and superior laundry capabilities. The decision to expand global sourcing, combined with lower projected shipping levels of denim products for 2005, led us to begin a comprehensive review of our denim manufacturing during the fourth quarter of 2004. The result of this review was the development of a plan of reorganization of our Mexican operations to reduce costs associated with excess capacity.
On July 11, 2005, we announced that we had completed a comprehensive review of our denim manufacturing operations located in Mexico. The primary action plan arising from this review resulted in the closing of the laundry, assembly and distribution operations located in San Luis, Mexico (the "denim restructuring"). All manufacturing has been consolidated into existing operations in Durango and Torreon, Mexico. A total of 3,170 employees have been terminated as a result of the closure. We have undertaken a number of measures to assist affected employees, including severance and benefits packages. As a result of this consolidation, we expect that our manufacturing operations will perform more efficiently, thereby improving our operating performance.
In connection with the denim restructuring, we recorded $11.6 million of net pre-tax costs (of which $12.1 million was recorded in 2005 and $0.5 million was reversed in 2006), which includes $5.1 million of one-time termination benefits, $3.2 million of losses on the sale of property, plant and equipment, $2.2 million of contract termination costs and $1.1 million of legal and other associated costs. Of these amounts, $10.0 million were reported as cost of sales and $1.6 million were reported as a selling, general and administrative expense in the wholesale moderate apparel segment. The restructuring was substantially completed during the fiscal quarter ended April 1, 2006.
The accrual of restructuring costs and liabilities, of which $1.5 million is included in accrued expenses and other current liabilities and $1.5 million is included in other noncurrent liabilities, is as follows:
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(In millions) | Severance and other employee costs | Closing and consolidation of facilities | Denim restructuring | Total |
Balance, January 1, 2005 | $ 6.5 | $ 18.1 | $ - | $ 24.6 |
Net reversals | (0.4) | (1.3) | - | (1.7) |
Payments and reductions | (5.6) | (3.6) | - | (9.2) |
Balance, April 2, 2005 | $ 0.5 | $ 13.2 | $ - | $ 13.7 |
Balance, January 1, 2006 | $ 3.4 | $ 2.1 | $ 2.5 | $ 8.0 |
Reversals | - | - | (0.5) | (0.5) |
Payments and reductions | (2.6) | (0.2) | (1.7) | (4.5) |
Balance, April 1, 2006 | $ 0.8 | $ 1.9 | $ 0.3 | $ 3.0 |
Estimated severance payments and other employee costs of $0.8 million accrued at April 1, 2006 relate to the remaining estimated severance for three employees at locations to be closed and continuing benefits for employees previously terminated. Employee groups affected (totaling an estimated 259 employees) included administrative, warehouse and management personnel at locations closed.
The $0.4 million reversal in the fiscal quarter ended April 2, 2005 represents $0.3 million of adjustments related to severance accruals for the Kasper and Maxwell acquisitions, which were recorded as reductions of goodwill, and $0.1 million related to the prior closing of Mexican and El Paso facilities, which was recorded as a reduction of selling, general and administrative expenses in the moderate wholesale apparel segment.
During the fiscal quarters ended April 1, 2006 and April 2, 2005, $2.6 million and $5.6 million, respectively, of the reserve was utilized (relating to partial or full severance and related costs for 91 and 122 employees, respectively).
The $1.9 million accrued at April 1, 2006 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. The $1.3 million reversal in the fiscal quarter ended April 2, 2005 represents an adjustment related to the closing of a Maxwell facility, which was recorded as a reduction of goodwill.
The details of the denim restructuring accruals are as follows:
(In millions) | One-time termination benefits | Contract termination costs | Other associated costs | Total denim restructuring |
Balance, January 1, 2006 | $ 0.4 | $ 1.6 | $ 0.5 | $ 2.5 |
Reversals | (0.2) | (0.3) | - | (0.5) |
Payments and reductions | (0.2) | (1.3) | (0.2) | (1.7) |
Balance, April 1, 2006 | $ - | $ - | $ 0.3 | $ 0.3 |
During the fiscal quarter ended April 1, 2006, we settled all outstanding lease commitments for facilities we closed, resulting in a $0.3 million reversal, of which $0.2 million and $0.1 million was recorded as a reduction of cost of sales and selling, general and administrative expenses, respectively, in the wholesale moderate apparel segment. During the fiscal quarter ended April 1, 2006, $0.2 million of the termination benefits reserve was utilized (relating to costs for 18 employees) and $0.2 million of the accrual was reversed to cost of sales in the wholesale moderate apparel segment.
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.
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INVENTORIES
Inventories are summarized as follows (in millions):
April 1, 2006 | April 2, 2005 | December 31, 2005 | |
Raw materials | $ 16.0 | $ 22.2 | $ 16.6 |
Work in process | 15.6 | 41.9 | 17.7 |
Finished goods | 558.4 | 581.7 | 615.7 |
$ 590.0 | $ 645.8 | $ 650.0 | |
STATEMENT OF CASH FLOWS
Fiscal Quarter Ended: (In millions) | April 1, 2006 | April 2, 2005 |
Supplemental disclosures of cash flow information: | ||
Cash paid (received) during the period for: | ||
Interest | $ 3.1 | $ 10.6 |
Net income tax payments (refunds) | 5.5 | (11.1) |
Supplemental disclosures of non-cash investing and financing activities: | ||
Equipment acquired through capital lease financing | 3.6 | 0.5 |
Restricted stock issued to employees | 15.7 | 23.3 |
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.
We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and purchase products from foreign suppliers who require payment in funds other than the U.S. Dollar. At April 1, 2006, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a total of US $11.0 million through August 2006, US $33.5 million for Euros through February 2007 and US $0.8 million for British Pounds through June 2006.
We recorded amortization of net gains resulting from the termination of interest rate swaps and locks of $1.2 million and $1.8 million during the fiscal quarters ended April 1, 2006 and April 2, 2005, respectively, as a reduction of interest expense. We reclassified $0.2 million and $0.3 million of net losses from foreign currency exchange contracts to cost of sales during the fiscal quarters ended April 1, 2006 and April 2, 2005, respectively. There has been no material ineffectiveness related to our foreign currency exchange contracts as the instruments are designed to be highly effective in offsetting losses and gains on transactions being hedged. As of April 1, 2006, the estimated net amount of existing gains and losses reported in accumulated other comprehensive income that will be reclassified into earnings in the next 12 months include amortization of $1.1 million of net gains resulting from the termination of interest rate swaps as a reduction of interest expense. If foreign currency exchange rates do not change from their April 1, 2006 amounts, we estimate that any reclassifications from other comprehensive income to earnings within the next 12 months 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.
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PENSION PLANS
Components of Net Periodic Benefit Cost
Fiscal Quarter Ended | |||||
(In millions) | April 1, 2006 | April 2, 2005 | |||
Interest cost | $ 0.5 | $ 0.6 | |||
Expected return on plan assets | (0.5) | (0.5) | |||
Amortization of net loss | 0.3 | 0.3 | |||
Net periodic benefit cost | $ 0.3 | $ 0.4 | |||
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 profit as operating income before net interest expense, equity in earnings of unconsolidated affiliates and income taxes. Summarized below are our revenues and income by reportable segment for the fiscal quarters ended April 1, 2006 and April 2, 2005.
(In millions) | Wholesale Better Apparel | Wholesale Moderate Apparel | Wholesale Footwear & Accessories | Retail | Licensing, Other & Eliminations | Consolidated |
For the fiscal quarter ended April 1, 2006 | ||||||
Revenues from external customers | $ 337.7 | $ 332.1 | $ 227.9 | $ 305.2 | $ 12.4 | $ 1,215.3 |
Intersegment revenues | 37.8 | 1.3 | 12.1 | - | (51.2) | - |
Total revenues | 375.5 | 333.4 | 240.0 | 305.2 | (38.8) | 1,215.3 |
Segment income | $ 66.7 | $ 40.4 | $ 30.3 | $ 4.6 | $ (11.3) | 130.7 |
Loss on sale of Polo Jeans Company business | (45.1) | |||||
Net interest expense | (15.3) | |||||
Equity in earnings of unconsolidated affiliates | 0.9 | |||||
Income before provision for income taxes | $ 71.2 | |||||
For the fiscal quarter ended April 2, 2005 | ||||||
Revenues from external customers | $ 428.7 | $ 355.1 | $ 267.7 | $ 283.6 | $ 14.2 | $ 1,349.3 |
Intersegment revenues | 34.9 | 2.8 | 12.0 | - | (49.7) | - |
Total revenues | 463.6 | 357.9 | 279.7 | 283.6 | (35.5) | 1,349.3 |
Segment income | $ 71.6 | $ 45.6 | $ 41.6 | $ 10.4 | $ (10.9) | 158.3 |
Net interest expense | (18.9) | |||||
Equity in earnings of unconsolidated affiliates | 0.9 | |||||
Income before provision for income taxes | $ 140.3 | |||||
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NEW ACCOUNTING STANDARDS
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -an amendment of FASB Statements No. 133 and 140," which simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will have no impact on our results of operations or our financial position.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140," which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 will have no impact on our results of operations or our financial position.
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 and Jones Retail Corporation ("Jones Retail")(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 the outstanding debt securities of Nine West. In addition, Nine West 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 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 or Jones Retail to Jones.
Condensed Consolidating Balance Sheets
(In millions)
April 1, 2006 | December 31, 2005 | |||||||||
Issuers | Others | Eliminations | Cons- olidated | Issuers | Others | Eliminations | Cons- olidated | |||
ASSETS | ||||||||||
CURRENT ASSETS: | ||||||||||
Cash and cash equivalents | $ 121.1 | $ 19.1 | $ - | $ 140.2 | $ 20.3 | $ 14.6 | $ - | $ 34.9 | ||
Accounts receivable - net | 244.8 | 310.9 | - | 555.7 | 178.8 | 279.6 | - | 458.4 | ||
Inventories | 280.2 | 316.8 | (7.0) | 590.0 | 282.4 | 374.6 | (7.0) | 650.0 | ||
Prepaid and refundable income taxes | 1.0 | 6.7 | (7.7) | - | 1.5 | 6.5 | (8.0) | - | ||
Deferred taxes | 19.3 | 30.6 | (0.6) | 49.3 | 17.7 | 35.6 | (0.8) | 52.5 | ||
Prepaid expenses and other current assets | 39.1 | 40.4 | - | 79.5 | 45.7 | 42.8 | - | 88.5 | ||
TOTAL CURRENT ASSETS | 705.5 | 724.5 | (15.3) | 1,414.7 | 546.4 | 753.7 | (15.8) | 1,284.3 | ||
Property, plant and equipment - net | 133.6 | 189.6 | - | 323.2 | 133.6 | 178.5 | - | 312.1 | ||
Due from affiliates | 65.8 | 673.7 | (739.5) | - | 63.5 | 624.8 | (688.3) | - | ||
Goodwill | 1,456.3 | 284.3 | - | 1,740.6 | 1,784.3 | 313.0 | - | 2,097.3 | ||
Other intangibles - net | 166.9 | 659.2 | - | 826.1 | 166.8 | 660.7 | - | 827.5 | ||
Investments in subsidiaries | 2,237.0 | - | (2,237.0) | - | 2,205.2 | - | (2,205.2) | - | ||
Other assets | 30.1 | 22.4 | (1.8) | 50.7 | 30.7 | 27.4 | (1.5) | 56.6 | ||
$ 4,795.2 | $ 2,553.7 | $ (2,993.6) | $ 4,355.3 | $ 4,930.5 | $ 2,558.1 | $ (2,910.8) | $ 4,577.8 | |||
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Condensed Consolidating Balance Sheets (continued)
(In millions)
April 1, 2006 | December 31, 2005 | |||||||||
Issuers | Others | Eliminations | Cons- olidated | Issuers | Others | Eliminations | Cons- olidated | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||
CURRENT LIABILITIES: | ||||||||||
Short-term borrowings | $ - | $ - | $ - | $ - | $ 129.5 | $ - | $ - | $ 129.5 | ||
Current portion of long-term debt and capital lease obligations | 226.4 | 2.5 | - | 228.9 | 226.6 | 1.2 | - | 227.8 | ||
Accounts payable | 108.1 | 124.2 | - | 232.3 | 118.4 | 138.1 | - | 256.5 | ||
Income taxes payable | 69.7 | 34.2 | (19.5) | 84.4 | 54.9 | 17.8 | (18.5) | 54.2 | ||
Deferred taxes | 0.4 | 0.2 | (0.6) | - | 0.9 | - | (0.9) | - | ||
Accrued expenses and other current liabilities | 89.7 | 69.2 | - | 158.9 | 78.5 | 90.0 | - | 168.5 | ||
TOTAL CURRENT LIABILITIES | 494.3 | 230.3 | (20.1) | 704.5 | 608.8 | 247.1 | (19.4) | 836.5 | ||
NONCURRENT LIABILITIES: | ||||||||||
Long-term debt | 749.2 | 3.5 | - | 752.7 | 749.2 | 3.4 | - | 752.6 | ||
Obligations under capital leases | 12.2 | 26.6 | - | 38.8 | 12.5 | 24.7 | - | 37.2 | ||
Deferred taxes | 12.9 | 164.1 | 8.2 | 185.2 | 10.7 | 158.0 | 7.2 | 175.9 | ||
Due to affiliates | 673.7 | 65.8 | (739.5) | - | 624.8 | 63.5 | (688.3) | - | ||
Other | 39.4 | 70.2 | - | 109.6 | 38.0 | 71.2 | - | 109.2 | ||
TOTAL NONCURRENT LIABILITIES | 1,487.4 | 330.2 | (731.3) | 1,086.3 | 1,435.2 | 320.8 | (681.1) | 1,074.9 | ||
TOTAL LIABILITIES | 1,981.7 | 560.5 | (751.4) | 1,790.8 | 2,044.0 | 567.9 | (700.5) | 1,911.4 | ||
STOCKHOLDERS' EQUITY: | ||||||||||
Common stock and additional paid-in capital | 1,281.4 | 1,594.3 | (1,594.3) | 1,281.4 | 1,270.9 | 1,631.1 | (1,631.1) | 1,270.9 | ||
Retained earnings | 2,687.4 | 398.6 | (647.6) | 2,438.4 | 2,646.3 | 360.0 | (580.1) | 2,426.2 | ||
Accumulated other comprehensive income (loss) | (6.0) | 0.3 | (0.3) | (6.0) | (6.5) | (0.9) | 0.9 | (6.5) | ||
Treasury stock | (1,149.3) | - | - | (1,149.3) | (1,024.2) | - | - | (1,024.2) | ||
TOTAL STOCKHOLDERS' EQUITY | 2,813.5 | 1,993.2 | (2,242.2) | 2,564.5 | 2,886.5 | 1,990.2 | (2,210.3) | 2,666.4 | ||
$ 4,795.2 | $ 2,553.7 | $ (2,993.6) | $ 4,355.3 | $ 4,930.5 | $ 2,558.1 | $ (2,910.8) | $ 4,577.8 | |||
Condensed Consolidating Statements of Income
(In millions)
Fiscal Quarter Ended April 1, 2006 | Fiscal Quarter Ended April 2, 2005 | |||||||||
Issuers | Others | Eliminations | Cons- olidated | Issuers | Others | Eliminations | Cons- olidated | |||
Net sales | $ 579.6 | $ 638.5 | $ (17.9) | $ 1,200.2 | $ 625.1 | $ 731.0 | $ (21.0) | $ 1,335.1 | ||
Licensing income (net) | - | 11.9 | - | 11.9 | - | 14.2 | - | 14.2 | ||
Service income | - | 3.2 | - | 3.2 | - | - | - | - | ||
Total revenues | 579.6 | 653.6 | (17.9) | 1,215.3 | 625.1 | 745.2 | (21.0) | 1,349.3 | ||
Cost of goods sold | 350.3 | 426.7 | (12.0) | 765.0 | 377.3 | 485.5 | (12.2) | 850.6 | ||
Gross profit | 229.3 | 226.9 | (5.9) | 450.3 | 247.8 | 259.7 | (8.8) | 498.7 | ||
Selling, general and administrative expenses | 188.4 | 134.3 | (3.1) | 319.6 | 194.3 | 150.5 | (4.4) | 340.4 | ||
Loss on sale of Polo Jeans Company business | 22.8 | 22.3 | - | 45.1 | - | - | - | - | ||
Operating income | 18.1 | 70.3 | (2.8) | 85.6 | 53.5 | 109.2 | (4.4) | 158.3 | ||
Net interest (expense) income and financing costs | (17.7) | 2.4 | - | (15.3) | (19.8) | 0.9 | - | (18.9) | ||
Equity in earnings of unconsolidated affiliates | 0.2 | 1.1 | (0.4) | 0.9 | 0.1 | 0.3 | 0.5 | 0.9 | ||
Income before provision for income taxes and equity in earnings of subsidiaries | 0.6 | 73.8 | (3.2) | 71.2 | 33.8 | 110.4 | (3.9) | 140.3 | ||
Provision for income taxes | 13.0 | 35.1 | (0.8) | 47.3 | 14.6 | 40.2 | (1.5) | 53.3 | ||
Equity in earnings of subsidiaries | 65.1 | - | (65.1) | - | 61.3 | - | (61.3) | - | ||
Income before cumulative effect of change in accounting principle | 52.7 | 38.7 | (67.5) | 23.9 | 80.5 | 70.2 | (63.7) | 87.0 | ||
Cumulative effect of change in accounting for share-based payments, net of tax | 1.9 | - | - | 1.9 | - | - | - | - | ||
Net income | $ 54.6 | $ 38.7 | $ (67.5) | $ 25.8 | $ 80.5 | $ 70.2 | $ (63.7) | $ 87.0 | ||
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Condensed Consolidating Statements of Cash Flows
(In millions)
Fiscal Quarter Ended April 1, 2006 | Fiscal Quarter Ended April 2, 2005 | |||||||||
Issuers | Others | Eliminations | Cons- olidated | Issuers | Others | Eliminations | Cons- olidated | |||
Net cash provided by (used in) operating activities | $ 24.9 | $ 18.5 | $ - | $ 43.4 | $ (67.0) | $ 8.8 | $ - | $ (58.2) | ||
Cash flows from investing activities: | ||||||||||
Net proceeds from sale of Polo Jeans Company business | 344.1 | 6.5 | - | 350.6 | - | - | - | - | ||
Capital expenditures | (9.4) | (20.0) | - | (29.4) | (7.8) | (9.8) | - | (17.6) | ||
Payments relating to acquisitions | - | - | - | - | (4.1) | - | - | (4.1) | ||
Other (net) | - | - | - | - | - | 0.1 | - | 0.1 | ||
Net cash provided by (used in) investing activities | 334.7 | (13.5) | - | 321.2 | (11.9) | (9.7) | - | (21.6) | ||
Cash flows from financing activities: | ||||||||||
Net (repayments) borrowings under credit facilities | (129.5) | - | - | (129.5) | 127.2 | - | - | 127.2 | ||
Debt issuance costs | - | - | - | - | (0.4) | - | - | (0.4) | ||
Principal payments on capital leases | (0.6) | (0.6) | - | (1.2) | (0.8) | (0.5) | - | (1.3) | ||
Purchases of treasury stock | (125.1) | - | - | (125.1) | (42.3) | - | - | (42.3) | ||
Dividends paid | (13.6) | - | - | (13.6) | (12.2) | - | - | (12.2) | ||
Proceeds from exercise of employee stock options | 8.8 | - | - | 8.8 | 8.3 | - | - | 8.3 | ||
Excess tax benefits from share-based payment arrangements | 1.2 | - | - | 1.2 | - | - | - | - | ||
Net cash provided by (used in) financing activities | (258.8) | (0.6) | - | (259.4) | 79.8 | (0.5) | - | 79.3 | ||
Effect of exchange rates on cash | - | 0.1 | - | 0.1 | - | 0.9 | - | 0.9 | ||
Net increase (decrease) in cash and cash equivalents | 100.8 | 4.5 | - | 105.3 | 0.9 | (0.5) | - | 0.4 | ||
Cash and cash equivalents, beginning | 20.3 | 14.6 | - | 34.9 | 12.3 | 32.7 | - | 45.0 | ||
Cash and cash equivalents, ending | $ 121.1 | $ 19.1 | $ - | $ 140.2 | $ 13.2 | $ 32.2 | $ - | $ 45.4 | ||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information and analysis of our results of operations for the 13 weeks ended April 1, 2006 (hereinafter referred to as the "first fiscal quarter of 2006") and the 13 weeks ended April 2, 2005 (hereinafter referred to as the "first fiscal quarter of 2005"), and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.
Executive Overview
We design, contract for the manufacture of, manufacture and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children, and women's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers, primarily in the United States and Canada. We also operate our own network of retail and factory outlet stores. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.
During the first fiscal quarter of 2006, the following significant events took place:
- in February 2006, we settled the litigation with Polo and sold the Polo Jeans Company business to Polo;
- in March 2006, we opened a new Barneys New York flagship store in Boston, Massachusetts; and
- in March 2006, we announced that our Board of Directors is exploring a possible sale of the Company.
Sale of Polo Jeans Company Business
On January 22, 2006, we entered into a Stock Purchase Agreement with Polo and certain of its subsidiaries with respect to the sale to Polo of all outstanding stock of Sun. We also entered into a settlement and release agreement with Polo to settle the pending litigation between the respective parties, including our former President, upon closing (see "Part II, Item 1. Legal Proceedings"). Gross proceeds of the transactions, which closed on February 3, 2006, were $355.0 million. Sun's assets and liabilities on the closing date primarily related
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to the Polo Jeans Company business, which Sun operated under long-term license and design agreements entered into with Polo in 1995. We retained distribution and product development facilities in El Paso, Texas, along with certain working capital items, including accounts receivable and accounts payable. In addition, as part of the agreements, we will continue to provide certain support services to Polo (including manufacturing, distribution, information technology and other financial and administrative functions) for a limited period of time.
We recorded a loss of approximately $145.1 million after allocating $356.7 million of goodwill to the business sold. We also recorded an after tax gain of approximately $96.3 million related to the litigation settlement, resulting in a combined after tax loss of approximately $48.8 million. The combined loss created federal and state capital loss carryforwards that we do not expect to be realizable and, as a result, we increased our deferred tax valuation allowance to offset the deferred tax benefit recorded as a result of the combined loss. We previously reported that we would record a combined after tax loss of approximately $80.4 million on the sale of the business and settlement of the litigation. We subsequently determined that the settlement of the litigation would be treated as a capital gain that could be offset against the loss on the sale.
Long-lived assets included in the sale include $2.0 million of net property, plant and equipment and $5.5 million of unamortized long-term prepaid marketing expenses. Net sales for the Polo Jeans Company business, which are reported under the wholesale better apparel segment, were $23.3 million and $88.4 million for the fiscal quarters ended April 1, 2006 and April 2, 2005, respectively.
Strategic Review
We have completed a strategic review of our operating infrastructure to improve profitability and to ensure we are properly positioned for the long-term benefit of our shareholders. By proactively reviewing our infrastructure, systems and operating processes at a time when the industry is undergoing consolidation and change, we plan to eliminate redundancies and improve our overall cost structure and margin performance.
Supply Chain Management
- We are in the process of implementing a product development management system which will ultimately be integrated with our third-party manufacturers.
- We are utilizing the capabilities of our third-party manufacturers to increase pre-production collaboration efforts with them, thereby increasing speed to market and improving margins. This has already been achieved in some of the moderate and better apparel businesses, and will continue to be expanded across most of our businesses.
- We have selected SAP Apparel and Footwear Solution as our enterprise resource planning system, which will be implemented company-wide utilizing one universal platform.
- The logistics network is being analyzed in an effort to reduce costs and increase efficiency by following a tiered approach of (i) multiple product usage of existing distribution centers, (ii) utilizing third party logistics providers, and (iii) ultimately direct shipping from factory to vendor.
- In response to the elimination of apparel quotas and other trade safeguards, we are in the process of consolidating our third-party manufacturing to a more concentrated vendor matrix.
General and Administrative Areas
- We have completed a review of all general and administrative support areas and will implement best practices in connection with the migration of our current systems to the SAP Apparel and Footwear Solution platform.
The reviews have been completed, and we estimate that the implementation and execution of the initiatives underway will be substantially completed by mid-2008. We are targeting annual savings of approximately $100 million once all the initiatives have been implemented. The costs associated with the review and the ultimate capital expenditures and execution expenses (including severance and fees) related to the initiatives that are derived are expected to fall in a range of $70 million to $80 million. As of April 1, 2006, we have spent a total of $18.2 million.
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Stock-Based Compensation
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 at below-market prices, with the expense recognized over the vesting period of the options. 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-Merton option pricing model) was amortized to compensation expense over the option's vesting period.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. We adopted SFAS No. 123R on January 1, 2006 using the modified prospective application option. As a result, the compensation cost for the portion of awards we granted before January 1, 2006 for which the requisite service had not been rendered and that were outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered. In addition, the adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a pretax gain of $3.1 million on January 1, 2006, which is reported as a cumulative effect of a change in accounting principle. We are also required to change the amortization period for employees eligible to retire from the period over which the awards vest to the period from the grant date to the date the employee is eligible to retire. The adoption of SFAS No. 123R will not have a material effect on our results of operations or our financial position. Concurrently with the adoption of SFAS No. 123R, we have shifted the composition of our share-based compensation awards towards the use of restricted shares and away from the use of employee stock options.
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 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. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate 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 | ||||||||||
April 1, 2006 | April 2, 2005 | ||||||||||
Net sales | $ 1,200.2 | 98.8% | $ 1,335.1 | 98.9% | |||||||
Licensing income (net) | 11.9 | 1.0% | 14.2 | 1.1% | |||||||
Service income | 3.2 | 0.3% | - | - �� | |||||||
Total revenues | 1,215.3 | 100.0% | 1,349.3 | 100.0% | |||||||
Cost of goods sold | 765.0 | 62.9% | 850.6 | 63.0% | |||||||
Gross profit | 450.3 | 37.1% | 498.7 | 37.0% | |||||||
Selling, general and administrative expenses | 319.6 | 26.3% | 340.4 | 25.2% | |||||||
Loss on sale of Polo Jeans Company business | 45.1 | 3.7% | - | - | |||||||
Operating income | 85.6 | 7.0% | 158.3 | 11.7% | |||||||
Net interest expense | (15.3) | (1.3%) | (18.9) | (1.4%) | |||||||
Equity in earnings of unconsolidated affiliates | 0.9 | 0.1% | 0.9 | 0.1% | |||||||
Income before provision for income taxes | 71.2 | 5.9% | 140.3 | 10.4% | |||||||
Provision for income taxes | 47.3 | 3.9% | 53.3 | 4.0% | |||||||
Income before cumulative effect of change in accounting principle | 23.9 | 2.0% | 87.0 | 6.4% | |||||||
Cumulative effect of change in accounting for share-based payments, net of tax | 1.9 | 0.2% | - | - | |||||||
Net income | $ 25.8 | 2.1% | $ 87.0 | 6.4% | |||||||
Percentage totals may not add due to rounding.
Fiscal Quarter Ended April 1, 2006 Compared to Fiscal Quarter Ended April 2, 2005
Revenues. Total revenues for the first fiscal quarter of 2006 were $1.22 billion compared to $1.35 billion for the first fiscal quarter of 2005, a decrease of 9.9%.
Revenues by segment were as follows:
(In millions) | First Fiscal Quarter of 2006 | First Fiscal Quarter of 2005 | Increase/ (Decrease) | Percent Change |
Wholesale better apparel | $ 337.7 | $ 428.7 | $(91.0) | (21.2%) |
Wholesale moderate apparel | 332.1 | 355.1 | (23.0) | (6.5%) |
Wholesale footwear and accessories | 227.9 | 267.7 | (39.8) | (14.9%) |
Retail | 305.2 | 283.6 | 21.6 | 7.6% |
Other | 12.4 | 14.2 | (1.8) | (12.7%) |
Total revenues | $ 1,215.3 | $ 1,349.3 | $ (134.0) | (9.9%) |
Wholesale better apparel revenues decreased primarily due to the sale of the Polo Jeans Company business ($65.1 million of the decrease). Decreases in shipments of our Jones New York Sport and Jones New York Signature product lines were partially offset by increased shipments of our Nine West apparel product line.
Wholesale moderate apparel revenues decreased primarily due to decreased shipments of our l.e.i., Norton McNaughton, Energie, A|Line, Bandolino, Joneswear, Erika and Joneswear Jeans product lines (primarily to J.C. Penney Company, Inc., Sears Holding Corporation and Kohl's Corporation). These decreases were partially offset by increased shipments of our Gloria Vanderbilt and GLO product lines and shipments of several new product lines, including the C.L.O.T.H.E.S. and the private label Latina and Duckhead product lines.
Wholesale footwear and accessories revenues decreased due to decreased shipments of our Nine West accessory and costume jewelry product lines and our Enzo Angiolini and Easy Spirit footwear product lines (primarily to Federated Department Stores Inc. and Dillard's Inc.) as well as the discontinuance of the Bandolino, l.e.i. and licensed Tommy Hilfiger costume jewelry product lines.
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Retail revenues increased primarily due to a 3.5% increase in comparable store sales. We began the first fiscal quarter of 2006 with 1,086 retail locations and had a net decrease of 26 locations during the quarter to end the quarter with 1,060 locations.
Revenues for the first fiscal quarter of 2006 also include $3.2 million of service fees charged to Polo under a short-term transition service agreement entered into with Polo at the time of the sale of the Polo Jeans Company business. These revenues are based on contractual monthly and per-unit fees as set forth in the agreement. Of this amount, $2.1 million was recorded in the wholesale better apparel segment, $0.6 million was recorded in the wholesale moderate apparel segment and $0.5 million was recorded in the licensing and other segment.
Gross Profit. The gross profit margin increased to 37.1% in the first fiscal quarter of 2006 compared to 37.0% in the first fiscal quarter of 2005.
Wholesale better apparel gross profit margins were 39.4% and 36.7% for the first fiscal quarters of 2006 and 2005, respectively. The increase was due to lower levels of sales to off-price retailers partially offset by reduced sales of higher-margin Polo Jeans Company products as a result of the sale of the Polo Jeans Company business.
Wholesale moderate apparel gross profit margins were 24.9% and 27.9% for the first fiscal quarters of 2006 and 2005, respectively. The decrease was a result of lower margins on our l.e.i. product line, higher levels of sales to off-price retailers and excess capacity in our Mexican manufacturing operations.
Wholesale footwear and accessories gross profit margins were 30.9% and 32.0% for the first fiscal quarters of 2006 and 2005, respectively. The decrease was a result of lower net sales in the higher-margin wholesale jewelry business and markdowns related to the discontinuance of the licensed Tommy Hilfiger jewelry line in the current period.
Retail gross profit margins were 48.2% and 49.9% for the first fiscal quarters of 2006 and 2005, respectively. The decrease was primarily the result of a higher level of promotional activity in our footwear and accessories stores in the current period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $319.6 million in the first fiscal quarter of 2006 represented a decrease of $20.8 million from the $340.4 million reported for the first fiscal quarter of 2005. The decrease is primarily due to the sale of the Polo Jeans Company business, headcount reductions as a result of the strategic review and lower levels of advertising in the current period.
Operating Income. The resulting operating income for the first fiscal quarter of 2006 of $85.6 million decreased $72.7 million from the $158.3 million for the first fiscal quarter of 2005, due to the factors described above and the loss on the sale of the Polo Jeans Company business.
Net Interest Expense. Net interest expense was $15.3 million in the first fiscal quarter of 2006 compared to $18.9 million in the first fiscal quarter of 2005. The decrease was primarily the result of lower average borrowings during the first fiscal quarter of 2006.
Provision for Income Taxes. The effective income tax rate was 65.2% for the first fiscal quarter of 2006 and 38.0% for the first fiscal quarter of 2005. The difference was primarily driven by the net tax effects associated with the sale of the Polo Jeans Company business and the litigation settlement. Without the effects of the Polo Jeans Company sale and litigation settlement, the effective tax rate for the first fiscal quarter of 2006 was 37.5%.
Cumulative Effect of Change in Accounting for Share-Based Payment. The adoption of SFAS No. 123R required us to change from recognizing the effect of forfeitures of unvested employee stock options and restricted stock as they occur to estimating the number of outstanding instruments for which the requisite service is not expected to be rendered. As a result, we recorded a gain of $1.9 million (net of $1.2 million in taxes) on January 1, 2006 as a cumulative effect of a change in accounting principle.
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Net Income and Earnings Per Share. Net income was $25.8 million in the first fiscal quarter of 2006, a decrease of $61.2 million from the net income of $87.0 million earned in the first fiscal quarter of 2005. Diluted earnings per share for the first fiscal quarter of 2006 was $0.22 compared to $0.71 for the first fiscal quarter of 2005, on 5.9% fewer shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements have been to fund acquisitions, pay dividends, 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 April 1, 2006, total cash and cash equivalents were $140.2 million, an increase of $105.3 million from the $34.9 million reported as of December 31, 2005.
Operating activities provided $43.4 million and used $58.2 million in the first fiscal quarters of 2006 and 2005, respectively. The difference was primarily due to a smaller increase in accounts receivable in the current period, primarily as a result of lower wholesale sales, partially offset by a decrease in accounts payable in the current period, primarily as the result of the effects of the sale of the Polo Jeans Company business.
Investing activities provided $321.2 million and used $21.6 million in the first fiscal quarters of 2006 and 2005, respectively. The increase in the current period was primarily due to cash received from the sale of the Polo Jeans Company business.
Financing activities used $259.4 million in the first fiscal quarter of 2006, primarily to repay amounts outstanding under our Senior Credit Facilities, to repurchase our common stock and to pay dividends to our common shareholders.
Financing activities provided $79.3 million in the first fiscal quarter of 2005. Borrowings under our Senior Credit Facilities were offset by repurchases of our common stock and the payment of dividends to our common shareholders.
We repurchased $125.1 million of our common stock on the open market during the first fiscal quarter of 2006 and $45.3 million during the first fiscal quarter of 2005. As of April 1, 2006, a total of $1.2 billion had been expended under announced programs to acquire up to $1.4 billion of such shares. We may make 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 $8.8 million and $8.3 million in the first fiscal quarters of 2006 and 2005, respectively.
At April 1, 2006, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, of which the entire amount is available for letters of credit or cash borrowings, provide for a $1.0 billion five-year revolving credit facility that expires in June 2009 and a $750.0 million five-year revolving credit facility that expires in May 2010. At April 1, 2006, $217.6 million was outstanding under the credit facility that expires in June 2009 (comprised solely of outstanding letters of credit) and no amounts were outstanding under the credit facility that expires in May 2010. 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.
At April 1, 2006, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.
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On April 26, 2006, we announced that the Board of Directors had declared a quarterly cash dividend of $0.12 per share to all common stockholders of record as of May 12, 2006 for payment on May 26, 2006.
We have two joint ventures with HCL Technologies Limited to provide us with computer consulting, programming and associated support services. As of April 1, 2006, we have committed to purchase $5.25 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 $7.0 million of borrowings under the joint venture's uncommitted credit facility and up to $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 April 1, 2006, the outstanding balance subject to these guarantees was approximately $0.7 million.
We believe that funds generated by operations, proceeds from the issuance of notes, the Senior Credit Facilities and the Canadian line of credit will provide the financial resources sufficient to meet our foreseeable working capital, dividend, capital expenditure and stock repurchase requirements and fund our contractual obligations and our contingent liabilities and commitments.
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 $1.75 billion in variable rate credit facilities at April 1, 2006.
We are exposed to market risk related to changes in foreign currency exchange rates. We have assets and liabilities denominated in certain foreign currencies and purchase products from foreign suppliers who require payment in funds other than the U.S. Dollar. 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 a financial instrument fails to perform its obligation. However, we do not expect the counterparties, which presently have high credit ratings, to fail to meet their 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(b), we carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief 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 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.
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There have been no changes in our internal controls over financial reporting that occurred 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
In October 1995, we acquired an exclusive license to manufacture and market women's shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Lauren by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo, which were to expire on December 31, 2006. In May 1998, we acquired an exclusive license to manufacture and market women's dresses, shirts, blouses, skirts, jackets, suits, sweaters, pants, vests, coats, outerwear and hats under the Ralph by Ralph Lauren trademark in the United States, Canada and Mexico pursuant to license and design service agreements with Polo. The Ralph License was scheduled to end on December 31, 2003.
During the course of the discussions concerning the Ralph License, Polo asserted that the expiration of the Ralph License would cause the Lauren License agreements to end on December 31, 2003, instead of December 31, 2006. We believed that this was an improper interpretation and that the expiration of the Ralph License did 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 alleged that Polo breached the Lauren License agreements by claiming that the license ends at the end of 2003. The complaint also alleged that Ms. Nemerov breached the confidentiality and non-compete provisions of her employment agreement with us. Additionally, Polo was alleged to have induced Ms. Nemerov to breach her employment agreement and Ms. Nemerov was 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 terminated as of December 31, 2003. On June 25, 2003, we filed an amended complaint adding a claim against Ms. Nemerov for conversion, which alleged 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 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 23, 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.
On March 19, 2004, the Court issued a decision resolving the motions. The Court denied Polo's motion to dismiss our breach of contract claim, granted our motion for summary judgment in Polo's action for a declaratory judgment, and denied Polo's cross-motion for summary judgment in the same action. As a result, the Court dismissed Polo's action for a declaratory judgment and entered judgment in our favor in that action, while permitting our action against Polo to proceed.
The Court also denied Nemerov's motion to compel arbitration of our claim against her for inducing Polo to breach the Lauren Agreements, but granted her motion to compel arbitration of our remaining claims against her. The Court granted Polo's motion for a stay of proceedings relating to our claim against Polo for inducing Nemerov to breach her employment agreement while those claims are arbitrated by us and Nemerov. We dismissed our claims against Nemerov in the litigation and initiated an arbitration against her.
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Polo appealed from the rulings against it. In addition, Polo filed a motion for leave to reargue and to renew its previous motions to dismiss and for summary judgment, which we opposed. On May 19, 2004, the New York State Supreme Court heard oral argument on Polo's motion. On August 16, 2004, the Court denied Polo's motions to reargue and renew its previous motions. Polo appealed from this ruling. On March 4, 2005, the Appellate Court heard oral argument. On March 24, 2005, the Appellate Division, First Department of the Supreme Court unanimously affirmed the trial court's orders.
On April 22, 2005, Polo filed a motion in the Appellate Division to reargue its March 24, 2005 order and/or for permission to appeal to the New York Court of Appeals. On June 23, 2005, the Appellate Division denied Polo's motion for reargument and granted Polo leave to appeal to the New York Court of Appeals to determine whether the Appellate Division properly affirmed the trial court's orders. Polo appealed to the New York Court of Appeals.
On May 12, 2004, we initiated a Demand for Arbitration with the American Arbitration Association against Ms. Nemerov. The demand alleged Ms. Nemerov breached her employment agreement with us, violated her fiduciary duties and converted our property. Ms. Nemerov denied these allegations and asserted counterclaims for defamation and breach of the non-disparagement and indemnification clauses of her employment agreement. On August 24, 2004, we amended our demand to add a claim for misappropriation of trade secrets. Ms. Nemerov denied our claims and pursued her counterclaims.
These matters were resolved by settlement dated January 22, 2006, which closed on February 3, 2006. We received gross proceeds of $355.0 million in connection with the sale to Polo of our Polo Jeans Company business and the settlement (see "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Sale of Polo Jeans Company Business"). As a result, as of February 6, 2006, the litigation and arbitration were dismissed.
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.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The following table sets forth the repurchases of our common stock for the fiscal quarter ended April 1, 2006.
Issuer Purchases of Equity Securities
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
January 1, 2006 to January 28, 2006 | 100,000 | $31.59 | 100,000 | $53,010,946 |
January 29, 2006 to February 25, 2006 | 1,625,000 | $30.64 | 1,625,000 | $253,220,620 |
February 26, 2006 to April 1, 2006 | 2,470,000 | $29.22 | 2,470,000 | $181,037,215 |
Total | 4,195,000 | $29.83 | 4,195,000 | $181,037,215 |
These repurchases were made under programs announced on May 5, 2005 for $150.0 million and February 15, 2006 for $250.0 million. While neither plan has an expiration date, the $150.0 limit under the May 5, 2005 program was reached during February 2006.
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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 lower levels of consumer confidence;
- the performance of our products within the prevailing retail environment;
- customer acceptance of both new designs and newly-introduced product lines;
- our reliance on a few department store groups for large portions of our business;
- consolidation of our retail customers;
- financial difficulties encountered by customers;
- the effects of vigorous competition in the markets in which we operate;
- our ability to identify acquisition candidates and, in an increasingly competitive environment for such acquisitions, acquire such businesses on reasonable financial and other terms;
- the integration of the organizations and operations of any acquired businesses into our existing organization and operations;
- our reliance on independent foreign manufacturers;
- changes in the costs of raw materials, labor and advertising;
- the general inability to obtain higher wholesale prices for our products that we have experienced for many years;
- the uncertainties of sourcing associated with the new environment in which general quota has expired on apparel products (while China has agreed to safeguard quota on certain classes of apparel products through 2008, political pressure will likely continue for restraint on importation of apparel);
- our ability to successfully implement new operational and financial computer systems; 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. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.
See Exhibit Index.
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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: April 28, 2006 |
By /s/ Peter Boneparth
PETER BONEPARTH
Chief Executive Officer
By /s/ Efthimios P. Sotos
EFTHIMIOS P. SOTOS
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. | Description of Exhibit |
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. |
32o | 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.
o Furnished herewith.
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