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 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10746
JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-0935166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(Address of principal (Zip Code)
executive offices)
(215) 785-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 10, 1999
- --------------------- -----------------
$.01 par value 118,439,102
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JONES APPAREL GROUP, INC.
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
April 2, 2000 and December 31, 1999.............. 3
Consolidated Statements of Income
Quarters ended April 2, 2000 and April 4, 1999... 4
Consolidated Statements of Stockholders' Equity
Quarters ended April 2, 2000 and April 4, 1999... 5
Consolidated Statements of Cash Flows
Quarters ended April 2, 2000 and April 4, 1999... 6
Notes to Consolidated Financial Statements......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................ 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 15
Item 5. Other Information.................................. 16
Item 6. Exhibits and Reports on Form 8-K................... 16
Signatures.................................................. 17
Index to Exhibits........................................... 17
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in millions except per share data)
April 2, December 31,
2000 1999
---------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34.6 $ 47.0
Accounts receivable, net of allowance
for doubtful accounts of $22.2 and $26.6 593.9 271.1
Inventories 546.5 619.6
Prepaid and refundable income taxes - 34.5
Deferred taxes 91.4 98.9
Prepaid expenses and other current assets 60.9 59.5
--------- ---------
TOTAL CURRENT ASSETS 1,327.3 1,130.6
PROPERTY, PLANT AND EQUIPMENT, at cost,
less accumulated depreciation and amortization 242.9 239.8
GOODWILL, less accumulated amortization 1,018.0 989.9
OTHER INTANGIBLES, at cost, less
accumulated amortization 342.7 345.4
OTHER ASSETS 85.5 86.3
--------- ---------
$ 3,016.4 $ 2,792.0
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current portion of
long-term debt and capital lease obligations $ 533.2 $ 266.9
Accounts payable 222.5 205.1
Accrued restructuring costs 57.9 61.1
Income taxes payable 16.5 -
Accrued employee compensation 17.1 34.1
Accrued expenses and other current liabilities 89.0 94.2
--------- ---------
TOTAL CURRENT LIABILITIES 936.2 661.4
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt 801.4 801.5
Obligations under capital leases 31.7 32.7
Other 51.3 55.4
--------- ---------
TOTAL NONCURRENT LIABILITIES 884.4 889.6
--------- ---------
TOTAL LIABILITIES 1,820.6 1,551.0
--------- ---------
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 135.2 and 134.6 1.4 1.4
Additional paid-in capital 700.8 693.0
Retained earnings 852.8 782.2
Accumulated other comprehensive income (1.3) 0.3
--------- ---------
1,553.7 1,476.9
Less treasury stock, 17.5 and 12.0 shares,
at cost (357.9) (235.9)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,195.8 1,241.0
--------- ---------
$ 3,016.4 $ 2,792.0
========= =========
[FN]
See accompanying notes to consolidated financial statements
</FN>
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Jones Apparel Group, Inc.
Consolidated Statements of Income (Unaudited)
(All amounts in millions except per share data)
April 2, April 4,
Quarter Ended 2000 1999
- ---------------- --------- ---------
NET SALES $ 1,077.5 $ 574.8
LICENSING INCOME (NET) 4.9 4.3
--------- ---------
Total revenues 1,082.4 579.1
COST OF GOODS SOLD 644.6 364.8
--------- ---------
Gross profit 437.8 214.3
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 285.4 115.7
AMORTIZATION OF GOODWILL 8.6 2.7
--------- ---------
Operating income 143.8 95.9
INTEREST EXPENSE AND FINANCING COSTS 26.4 7.8
INTEREST INCOME (0.3) (1.1)
--------- ---------
Income before provision for income taxes 117.7 89.2
PROVISION FOR INCOME TAXES 47.1 34.8
--------- ---------
NET INCOME $ 70.6 $ 54.4
========= =========
EARNINGS PER SHARE
Basic $0.59 $0.53
Diluted $0.58 $0.51
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 119.3 103.6
Diluted 122.0 107.2
[FN]
See accompanying notes to consolidated financial statements
</FN>
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Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity (Unaudited)
(All amounts in millions)
Accumulated
stock- Total Additional other
holders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
--------- ------ ---------- --------- ------------ --------
BALANCE, JANUARY 1, 1999: $ 594.4 $ 1.2 $ 234.8 $ 593.8 $ (2.3) $(233.1)
QUARTER ENDED APRIL 4, 1999:
Comprehensive income:
Net income 54.4 - - 54.4 - -
Foreign currency translation
adjustments 0.3 - - - 0.3 -
---------
Total comprehensive income 54.7
---------
Exercise of stock options 1.3 - 1.3 - - -
Tax benefit derived from exercise
of stock options 0.9 - 0.9 - - -
--------- ------ ---------- --------- ------------ --------
BALANCE, APRIL 4, 1999 $ 651.3 $ 1.2 $ 237.0 $ 648.2 $ (2.0) $(233.1)
========= ====== ========== ========= ============ ========
BALANCE, JANUARY 1, 2000: $ 1,241.0 $ 1.4 $ 693.0 $ 782.2 $ 0.3 $(235.9)
QUARTER ENDED APRIL 2, 2000:
Comprehensive income:
Net income 70.6 - - 70.6 - -
Foreign currency translation
adjustments (1.6) - - - (1.6) -
---------
Total comprehensive income 69.0
---------
Amortization of deferred
compensation in connection
with executive stock options 0.1 - 0.1 - - -
Exercise of stock options 4.3 - 4.4 - - (0.1)
Tax benefit derived from exercise
of stock options 3.3 - 3.3 - - -
Treasury stock acquired (121.9) - - - - (121.9)
--------- ------ ---------- --------- ------------ --------
BALANCE, APRIL 2, 2000 $ 1,195.8 $ 1.4 $ 700.8 $ 852.8 $ (1.3) $(357.9)
========= ====== ========== ========= ============ ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
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Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(All amounts in millions)
April 2, April 4,
Quarter Ended 2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 70.6 $ 54.4
-------- --------
Adjustments to reconcile net income to
net cash used in operating activities,
net of acquisitions:
Amortization of goodwill 8.6 2.7
Depreciation and other amortization 13.6 7.7
Provision for losses on trade receivables 0.6 2.4
Deferred taxes 15.9 1.1
Other 0.2 0.5
Decrease (increase) in:
Trade receivables, including a $67.0 payment
in 2000 to terminate Nine West's accounts
receivable securitization program (323.5) (161.0)
Inventories 65.9 (5.6)
Prepaid expenses and other current assets (1.4) (2.0)
Other assets (0.8) (5.1)
Increase (decrease) in:
Accounts payable 17.5 33.6
Taxes payable 54.6 26.7
Accrued expenses and other current liabilities (71.7) 19.0
Other liabilities 0.2 -
-------- --------
Total adjustments (220.3) (80.0)
-------- --------
Net cash used in operating activities (149.7) (25.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13.2) (5.1)
Adjustments to acquisition costs (0.1) 0.7
Acquisition of intangibles (0.9) (2.1)
Proceeds from sale of property, plant
and equipment 4.4 -
-------- --------
Net cash used in investing activities (9.8) (6.5)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under long-term
credit facilities 266.1 (0.5)
Principal payments on capital leases (1.0) (1.1)
Purchases of treasury stock (121.9) -
Proceeds from exercise of stock options 4.3 1.3
Other - (0.1)
-------- --------
Net cash provided by (used in)
financing activities 147.5 (0.4)
-------- --------
EFFECT OF EXCHANGE RATES ON CASH (0.4) -
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12.4) (32.5)
CASH AND CASH EQUIVALENTS, BEGINNING 47.0 129.0
-------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 34.6 $ 96.5
======== ========
[FN]
See accompanying notes to consolidated financial statements
</FN>
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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 (collectively, the
"Company"). The financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") for interim financial
information and in accordance with the requirements of Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. The consolidated
financial statements included herein should be read in conjunction with the
consolidated financial statements and the footnotes therein included within
the Company's Annual Report on Form 10-K. As used in this Report, "Sun"
refers to Sun Apparel, Inc. and "Nine West" refers to Nine West Group Inc.
(acquired June 15, 1999). The results of Nine West are included in the
Company's operating results from the date of acquisition and, therefore,
the Company's operating results for the periods presented are not comparable.
In the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The foregoing interim
results are not necessarily indicative of the results of operations for the
full year ending December 31, 2000. The Company reports interim results in
13 week quarters; however, the annual reporting period is the calendar year.
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of Nine West and Sun (acquired
October 2, 1998), the Company assessed and formulated preliminary plans to
restructure certain operations of each company. These plans involved the
closure of manufacturing facilities, certain offices, foreign subsidiaries,
and selected domestic and international retail locations. The objectives of
the plans were to eliminate unprofitable or marginally profitable lines of
business and reduce overhead expenses. The accrual of these costs and
liabilities was recorded as an increase to goodwill and include:
Balance at Net Balance at
(in millions) December 31, 1999 Additions Payments April 2, 2000
----------------- --------- -------- -------------
Severance and other employee costs $ 26.7 $ 9.7 $ 10.0 $ 26.4
Closing of retail stores 15.0 (4.0) 1.5 9.5
Consolidation of facilities 14.4 0.5 0.2 14.7
Other 5.0 2.9 0.6 7.3
------ ------ ------ ------
Total $ 61.1 $ 9.1 $ 12.3 $ 57.9
====== ====== ====== ======
Estimated severance payments and other employee costs of $26.4 million
accrued at April 2, 2000 relate to the remaining estimated severance for
approximately 970 employees at locations to be closed, costs associated with
employees transferring to continuing offices and other related costs.
Employee groups affected (totaling an estimated 3,600 employees) include
retail sales personnel at closed store locations, accounting, administrative,
customer service and management personnel at closed facilities, manufacturing
and production personnel at closed plant locations and duplicate corporate
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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
headquarters management and administrative personnel. During the quarter
ended April 2, 2000, payments of $10.0 million to approximately 750
employees were made and charged against the reserve.
Accrued liabilities for the closing of Nine West retail stores of $9.5
million at April 2, 2000 relate primarily to lease obligations and other
closing costs for the remaining 127 stores to be closed after April 2, 2000
from the approximately 250 stores originally identified to be closed.
The $14.7 million accrued at April 2, 2000 for the consolidation of
facilities relate primarily to expected costs to be incurred, including
lease obligations, for closing certain Nine West facilities in connection
with consolidating their operations into other existing Company facilities.
The Company's plans have not been finalized in all areas, and additional
restructuring costs may result as the Company continues to evaluate and
assess the impact of duplicate responsibilities and office locations,
underperforming retail locations and international operations. Any additional
costs relating to Nine West incurred before June 15, 2000 will be recorded as
additional goodwill; after that date, additional costs will be charged to
operations in the period in which they occur. Any additional costs for Sun
will be charged to operations in the period in which they occur.
INVENTORIES
Inventories are summarized as follows (in millions):
April 2, December 31,
2000 1999
------- -----------
Raw materials $ 34.1 $ 25.6
Work in process 38.5 42.5
Finished goods 473.9 551.5
------- -----------
$546.5 $619.6
======= ===========
STATEMENT OF CASH FLOWS
Quarter Ended: April 2, April 4,
(In millions) 2000 1999
------- -----------
Supplemental disclosures of cash
flow information:
Cash paid (received) during the
quarter for:
Interest $ 21.3 $ 11.7
Income taxes, net of refunds (23.4) 4.4
Supplemental disclosures of non-cash
investing and financing activities:
Tax benefits related to stock options 3.3 0.9
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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal years beginning
after June 15, 2000. The Company is currently reviewing SFAS No. 133 and
has of yet been unable to fully evaluate the impact, if any, it may have on
future operating results or financial statement disclosures.
SEGMENT INFORMATION
Upon the acquisition of Nine West, the Company redefined the operating
segments it uses for financial reporting purposes. Historical data has been
restated to reflect these changes.
The Company's operations are comprised of three reportable segments:
wholesale apparel, wholesale footwear and accessories, and retail. The
Company identifies operating segments based on, among other things, the way
that the Company's management organizes the components of the Company's
business for purposes of allocating resources and assessing performance.
Segment revenues are generated from the sale of apparel, footwear and
accessories through wholesale channels and the Company's own retail
locations. The wholesale segments include wholesale operations with third
party department and retail stores while the retail segment includes retail
operations by Company-owned retail stores. The Company defines segment
profit as operating income before amortization of goodwill, interest expense
and income taxes. Summarized below are the Company's segment sales and
income (loss) by reportable segments for the quarters ended April 2, 2000
and April 4, 1999.
(In millions) Wholesale
Wholesale Footwear & Other &
Apparel Accessories Retail Eliminations Consolidated
--------- ----------- -------- ------------ ------------
For the quarter ended April 2, 2000
Revenues from external customers $ 595.2 $ 245.8 $ 236.5 $ 4.9 $1,082.4
Intersegment revenues 26.4 33.2 - (59.6) -
--------- ----------- -------- ------------ ------------
Total revenues 621.6 279.0 236.5 (54.7) 1,082.4
--------- ----------- -------- ------------ ------------
Segment income $ 115.8 $ 56.9 $ (5.6) $ (14.7) 152.4
========= =========== ======== ============
Amortization of goodwill (8.6)
Net interest expense (26.1)
------------
Income before provision for
income taxes $ 117.7
============
For the quarter ended April 4, 1999
Revenues from external customers $ 542.2 $ - $ 32.6 $ 4.3 $ 579.1
Intersegment revenues 28.2 - - (28.2) -
--------- ----------- -------- ------------ ------------
Total revenues 570.4 - 32.6 (23.9) 579.1
--------- ----------- -------- ------------ ------------
Segment income $ 108.5 $ - $ 1.3 $ (11.2) 98.6
========= =========== ======== ============
Amortization of goodwill (2.7)
Net interest expense (6.7)
------------
Income before provision for
income taxes $ 89.2
============
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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SUPPLEMENTAL SUMMARIZED FINANCIAL INFORMATION
Certain of the Company's subsidiaries function as obligors and co-
obligors of the Company's outstanding debt, including Jones Apparel Group
USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones
Holdings") and Nine West. Jones and Jones Holdings function as co-obligors
with respect to the outstanding debt securities of Jones USA and certain of
the outstanding debt securities of Nine West. In addition, Nine West
functions as a 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 summarized financial information represents the results of
Jones USA for the first quarters of 2000 and 1999 and Nine West for the
first quarter of 2000. Separate financial statements and other disclosures
concerning Jones USA, Nine West and Jones Holdings are not presented,
because management has determined that such information is not material to
the holders of the outstanding debt.
Other and
(In millions) Jones USA Nine West Eliminations Consolidated
--------- --------- ------------ ------------
On or for the quarter
ended April 2, 2000:
Current assets $1,523.4 $ 586.1 $(782.2) $1,327.3
Noncurrent assets 156.1 1,065.3 467.7 1,689.1
Current liabilities 971.1 559.9 (594.8) 936.2
Noncurrent liabilities 708.0 181.8 (5.4) 884.4
Total revenues 432.2 455.3 194.9 1,082.4
Gross profit 166.7 197.9 280.0 644.6
Operating income 70.4 41.6 31.8 143.8
Net income 27.0 22.2 21.4 70.6
On or for the quarter
ended April 4, 1999:
Current assets $ 592.8 $ - $ 171.0 $ 763.8
Noncurrent assets 146.9 - 412.0 558.9
Current liabilities 327.5 - (75.2) 252.3
Noncurrent liabilities 412.2 - 6.9 419.1
Total revenues 404.9 - 174.2 579.1
Gross profit 139.8 - 74.5 214.3
Operating income 53.9 - 42.0 95.9
Net income 28.5 - 25.9 54.4
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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 the
Company's results of operations for the quarterly periods ended April 2,
2000 and April 4, 1999, respectively, and its liquidity and capital
resources. The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere herein.
On June 15, 1999, the Company completed its acquisition of Nine West.
The results of operations of Nine West are included in the Company's
operating results from the date of acquisition. Accordingly, the financial
position and results of operations presented and discussed herein are not
directly comparable between years.
The Company operates in three reportable segments: wholesale apparel,
wholesale footwear and accessories, and retail. Historical data has been
restated to reflect these changes.
Results of Operations
Statements of Income Expressed as a Percentage of Total Revenues
Quarter ended
---------------------------
April 2, April 4,
2000 1999
---------- ----------
Net sales 99.5% 99.3%
Licensing income (net) 0.5% 0.7%
---------- ----------
Total revenues 100.0% 100.0%
Cost of goods sold 59.6% 63.0%
---------- ----------
Gross profit 40.4% 37.0%
Selling, general and
administrative expenses 26.4% 20.0%
Amortization of goodwill 0.8% 0.5%
---------- ----------
Operating income 13.3% 16.6%
Net interest expense 2.4% 1.2%
---------- ----------
Income before provision
for income taxes 10.9% 15.4%
Provision for income taxes 4.4% 6.0%
---------- ----------
Net income 6.5% 9.4%
========== ==========
Totals may not agree due to rounding.
Quarter Ended April 2, 2000 Compared to Quarter Ended April 4, 1999
Revenues. Total revenues for the 13 weeks ended April 2, 2000 (hereinafter
referred to as the "first quarter of 2000") increased 86.9%, or $503.3 million,
to $1.1 billion, compared to $574.8 million for the 13 weeks ended April 4,
1999 (hereinafter referred to as the "first quarter of 1999"). The revenue
growth resulted primarily from the net sales of product lines added as a
result of the Nine West acquisition ($455.3 million of the increase). The
breakdown of total revenues for both periods is as follows:
-11-
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First First
Quarter Quarter Percent
(in millions) of 2000 of 1999 Increase Change
-------- ------- -------- -------
Wholesale apparel $ 595.2 $542.2 $ 53.0 9.8%
Wholesale footwear
and accessories 245.8 - 245.8 -
Retail 236.5 32.6 203.9 625.5%
Other 4.9 4.3 0.6 14.0%
-------- ------- -------- -------
Total revenues $1,082.4 $579.1 $503.3 86.9%
======== ======= ======== =======
Wholesale apparel revenues increased primarily as a result of increases
in shipments of Lauren by Ralph Lauren and Polo Jeans Company products and
initial shipments of the Ralph by Ralph Lauren line, partially offset by
planned lower shipments of Jones New York and Rena Rowan products. The
increases in wholesale footwear and accessories and retail revenues are the
result of the acquisition of Nine West.
Gross Profit. The gross profit margin increased to 40.4% in the first
quarter of 2000 compared to 37.0% in the first quarter of 1999, primarily
due to proportionally higher retail sales in the first quarter of 2000 than
in the first quarter of 1999. Wholesale apparel gross profit margins
increased to 37.6% in the first quarter of 2000 compared to 35.8% in the
first quarter of 1999, resulting from the sales mix being weighted more
towards products carrying higher margins (such as Lauren by Ralph Lauren,
Ralph by Ralph Lauren and Polo Jeans Company), lower overseas production
costs and a continuing focus on inventory management. Retail gross profit
margins decreased to 50.5% from 53.7%, primarily due to the acquisition of
Nine West.
Selling, general and administrative ("SG&A") expenses. SG&A expenses of
$285.4 million in the first quarter of 2000 represented an increase of
$169.7 million over the first quarter of 1999. As a percentage of total
revenues, SG&A expenses increased to 26.4% in the first quarter of 2000 from
20.0% for the comparable period in 1999. Nine West accounted for $150.6
million of the increase, with the remainder primarily due to increased
royalty and advertising expenses.
Operating Income. The resulting first quarter of 2000 operating income
of $143.8 million increased 49.9%, or $47.9 million, over the $95.9 million
for the first quarter of 1999. The operating margin decreased to 13.3% in
the first quarter of 2000 from 16.6% in the first quarter of 1999, due to
the factors discussed above and the additional amortization of goodwill
resulting from the Nine West acquisition.
Net Interest Expense. Net interest expense was $26.1 million in the
first quarter of 2000 compared to $6.7 million in the comparable period of
1999, primarily as a result of the debt incurred to finance the Nine West
acquisition and repurchase treasury shares during the first quarter of 2000.
Provision for Income Taxes. The effective income tax rate was 40.0% for
the first quarter of 2000 compared to 39.0% for the first quarter of 1999.
The increase was primarily due to the nondeductibility of the additional
goodwill amortization in the first quarter of 2000.
Net Income. Net income increased 29.8% to $70.6 million in the first
quarter of 2000, an increase of $16.2 million over the net income of $54.4
million earned in the first quarter of 1999. Net income as a percentage of
total revenues was 6.5% in the first quarter of 2000 and 9.4% in the first
quarter of 1999. Excluding the amortization of goodwill resulting from the
Sun and Nine West acquisitions, net income
-12-
13
for the first quarters of 2000 and 1999 would have been $79.2 million and
$57.1 million, respectively ($0.65 and $0.53 per diluted share, respectively).
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund acquisitions,
working capital needs, capital expenditures and repurchases of the Company's
common stock on the open market. The Company has historically relied primarily
on internally generated funds, trade credit, bank borrowings and the issuance
of notes to finance its operations and expansion.
Cash Used in Operations. Operating activities used $149.7 million of
cash in the first quarter of 2000 and $25.6 million in the first quarter of
1999. The additional cash used in operations during the first quarter of
2000 was primarily due to a higher increase in accounts receivable compared
to the first quarter of 1999, a result of both the timing of shipments
during the first quarter of 2000 and the discontinuance of Nine West's five-
year Receivables Facility (see below).
Cash Used in Investing Activities. Investing activities used $9.8
million during the first quarter of 2000, an increase of $3.3 million over
the first quarter of 1999. This increase was primarily due to a higher
level of capital expenditures during the first quarter of 2000. Total
capital expenditures for 2000 are expected to be approximately $60.0 million.
Cash Provided by (Used in) Financing Activities. Financing activities
provided $147.5 million of cash in the first quarter of 2000, compared to a
usage of $0.4 million in the first quarter of 1999, as a result of higher
borrowings under the Company's long-term credit facilities offset by
purchases of treasury stock.
The Company repurchased $121.9 million of its common stock on the open
market during the first quarter of 2000. As of April 2, 2000, a total of
$356.9 million has been expended under announced programs to acquire up to
$500.0 million of such shares. The Company may authorize additional share
repurchases in the future depending on, among other things, market
conditions and the Company's financial condition. Proceeds from the
issuance of common stock to employees exercising stock options amounted to
$4.3 million and $1.3 million in the first quarters of 2000 and 1999,
respectively.
Liquidity. The terms of the acquisition agreement for Sun require the
Company to pay the former Sun shareholders additional consideration of $2.00
for each $1.00 of Sun's earnings before interest and taxes (as defined in
the merger agreement) for each of the years 1998 through 2001 that exceeds
certain targeted levels. This additional consideration is to be paid 59% in
cash and 41% in the Company's common stock, the value of which will be
determined by the prices at which the common stock trades in a defined
period preceding delivery in each year. On April 5, 2000, the Company paid
$26.6 million in cash and issued 669,323 shares of common stock (valued at
$18.3 million) as additional consideration for the Sun acquisition related
to 1999 earnings, which will be recorded as additional goodwill in the
second quarter of 2000.
During the first quarter of 2000, the Company terminated a five-year
Receivables Facility (created in 1995 and amended in 1998) which permitted
Nine West to obtain up to $132.0 million of funding based on the sale,
without recourse, of eligible Nine West accounts receivable. As a result of
this termination, reported net accounts receivable will no longer be reduced
by proceeds received under the Receivables Facility. This termination will
not affect the Company's liquidity.
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At April 2, 2000, the Company had credit agreements with First Union
National Bank, as administrative agent, and other lending institutions to
borrow an aggregate principal amount of up to $1.2 billion under Senior
Credit Facilities. These facilities, of which the entire amount is
available for letters of credit or cash borrowings, provide for a $500.0
million 364-day Revolving Credit Facility and a $700.0 million Five-Year
Revolving Credit Facility. At April 2, 2000, $256.0 million was outstanding
under the 364-Day Revolving Credit Facility (comprised of $234.8 million in
outstanding letters of credit and $9.2 million in cash borrowings) and
$510.0 million in cash borrowings was outstanding under the Company's 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 the Company 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 the Company's ability to incur additional
indebtedness, prepay subordinated indebtedness, make acquisitions, enter
into mergers, and pay dividends.
The Company also has a total of approximately $25.8 million of unsecured
foreign lines of credit in Europe, Australia and Canada, under which $4.9
million was outstanding at April 2, 2000.
The Company believes that funds generated by operations, the Senior
Credit Facilities and the foreign lines of credit will provide the financial
resources sufficient to meet its foreseeable working capital, letter of
credit, capital expenditure and stock repurchase requirements and any
ongoing obligations to the former Sun shareholders.
YEAR 2000
The Company completed its Year 2000 software program conversions and
compliance programs during the fourth quarter of 1999. The total external
costs for such programs was approximately $1.1 million. Subsequent to
December 31, 1999, the Company has not experienced any Year 2000 problems
either internally or from outside sources. The Company has no reason to
believe that Year 2000 failures will materially affect it in the future.
However, since it may take several additional months before it is known
whether the Company or third party suppliers, vendors or customers may have
undergone Year 2000 problems, no assurances can be given that the Company
will not experience losses or disruptions due to Year 2000 computer-related
problems. The Company will continue to monitor the operation of its
computers and microprocessor-based devices for any Year 2000 problems.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal years beginning after June 15, 2000. The Company
is currently reviewing SFAS No. 133 and is not yet able to fully evaluate
the impact, if any, it may have on future operating results or financial
statement disclosures.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in the Company's 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.
The Company manages this exposure through regular operating and financing
activities and, when deemed appropriate, through the use of derivative
financial instruments. Company policy allows the use of derivative
financial instruments for identifiable market risk exposures, including
interest rate and foreign currency fluctuations. The Company does not enter
into derivative financial contracts for trading or other speculative
purposes.
The Company employs an interest rate hedging strategy utilizing swaps to
effectively float a portion of its interest rate exposure on its fixed rate
financing arrangements. The primary interest rate exposures on floating
rate financing arrangements are with respect to United States, United
Kingdom and Australian short-term local currency rates. The Company had
approximately $1.2 billion in variable rate financing arrangements at April
2, 2000. Other than the interest rate swaps, there were no outstanding
derivative financial contracts at April 2, 2000.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 6, 2000, the Company and Nine West entered into settlement
agreements with the Attorneys General of the 50 States, the District of
Columbia, Puerto Rico, the Virgin Islands, American Samoa, the Northern
Mariana Islands and Guam (the "States"), and with the Federal Trade
Commission, resolving allegations that Nine West engaged in violations of
the antitrust laws by coercing retailers to adhere to resale prices of its
products. Both agreements are without any admission of liability on the
part of Nine West.
The agreement with the States resolves ongoing investigations and a
parens patriae action brought on behalf of consumers in the United States
District Court for the Southern District of New York in White Plains. The
settlement consists of injunctive relief in the form of a consent decree
which specifies the manner in which Nine West may implement its resale
pricing policies with its retailer customers, along with a payment of $34.0
million which will be used to benefit consumers. The settlement requires
court approval.
In a separate settlement on March 6, 2000, Nine West agreed to a consent
order with the Federal Trade Commission which also specifies the manner in
which Nine West may implement its resale pricing policies with its retailer
customers. The consent order, which resolved an ongoing investigation by
the FTC, was given final approval by the Commission on April 11, 2000.
There have been no other material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
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Item 5. Other information
Statement Regarding Forward-looking Disclosure
This Report includes, and incorporates by reference, "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. All statements regarding the Company's 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 the Company's expectations or beliefs
concerning future events that involve risks and uncertainties, including
those associated with the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's 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 the Company operates, the integration of Nine West,
Sun, or other acquired businesses into the Company's existing operations,
the termination or non-renewal of the licenses with Polo Ralph Lauren
Corporation, the Company's extensive foreign operations and manufacturing,
pending litigation and investigations, the failure of customers or suppliers
to achieve Year 2000 compliance, changes in the costs of raw materials,
labor and advertising, and the Company's 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 the Company believes 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 the Company's 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 the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary
Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JONES APPAREL GROUP, INC.
(Registrant)
Date: May 12, 2000 By /s/ Sidney Kimmel
------------------------------
SIDNEY KIMMEL
Chief Executive Officer
By /s/ Wesley R. Card
------------------------------
WESLEY R. CARD
Chief Financial Officer
INDEX TO EXHIBITS
Number Description
10.1* Agreement Regarding Termination of Nine West Trade Receivables
Master Trust Securitization Transaction, dated as of March 3,
2000, entered into by and among Nine West Funding Corporation,
The Bank of New York, in its capacity as trustee, Nine West Group
Inc., Nine West Footwear Corporation, Jones Apparel Group, Inc.,
Corporate Receivables Corporation, Citibank, N.A. and the other
financial institutions parties to the Amended and Restated
Certificate Purchase Agreement and Citicorp North America, Inc.
as the program agent.
99.1* Decision and Order of the Federal Trade Commission In the Matter
of Nine West Group Inc., Docket No. C-3937, dated April 11, 2000.
27* Financial Data Schedule (filed only electronically).
_________
* Filed herewith.
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