SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] 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 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 250 Rittenhouse Circle, Bristol, Pennsylvania 19007 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 785-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered - ----------------------------- ----------------------------- Common Stock, $0.01 par value New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 23, 1998 was approximately $2,365,861,580. As of March 23, 1998, there were 50,322,550 shares of the registrant's Common Stock outstanding. 2 DOCUMENTS INCORPORATED BY REFERENCE The documents incorporated by reference into this Form 10-K and the Parts hereof into which such documents are incorporated are listed below: Document Part ------------------------------------ ---- Those portions of the registrant's III proxy statement for the registrant's 1998 Annual Meeting (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. - 2 - 3 PART I ITEM 1. BUSINESS General Jones Apparel Group, Inc. (the "Company") is a leading designer and marketer of better priced women's sportswear, suits and dresses. The Company has pursued a multi-brand strategy by marketing its products under several nationally known brands, including Jones New York, Evan-Picone and Rena Rowan, and the licensed brand Lauren by Ralph Lauren. Each label is differentiated by its own distinctive styling and pricing strategy. The Company primarily contracts for the manufacture of its products through a worldwide network of quality manufacturers. The Company has capitalized on its nationally known brand names by entering into 32 licenses for the Jones New York brand name and 16 licenses for the Evan-Picone brand name with select manufacturers of women's and men's apparel and accessories. Products The Company's brands cover the entire women's better apparel market. Within those brands, various product classifications include career and casual sportswear, dresses and suits, and a combination of all components termed lifestyle collection. Career and casual sportswear are marketed as groups of skirts, pants, jackets, blouses, sweaters and related accessories which, while sold as separates, are coordinated as to styles, color schemes and fabrics, and are designed to be worn together. For its sportswear and dress collections, the Company will develop several groups in a selling season. New sportswear and dress collections are introduced in four or five of the principal selling seasons - Spring, Summer, Fall I, Fall II and Holiday/Resort, while suit collections have traditionally been developed for the Fall and Spring seasons. The introduction of different groups in each season is spaced to ensure that retail customers frequently are introduced to new merchandise. The Company's major product categories are summarized in the following table: Career Casual Lifestyle Suits, Dresses Sportswear Sportswear Collection and Other -------------- ------------- ------------- ---------------- Industry Better Better Better Better Categories Brand Labels Jones New York, Jones New York Lauren by Jones New York, Jones Wear, Sport, Ralph Lauren, Evan-Picone, Rena Rowan, Jones Wear, Jones New Saville Evan-Picone, Jones Jeans, York Country Jones & Co, Jones Studio Product Skirts, blouses Skirts, blouses, Skirts, Suits, Offerings pants, jackets, pants, jackets, blouses, dresses sweaters sweaters pants, jackets, sweates, suits, coats -3- 4 The Company's success is enhanced by its ability to maintain a name brand or designer image while its products are generally sold in the women's better market at the following retail price points: Skirts Blouses Casual Tops Suits & Jackets and Pants and Sweaters and Bottoms Coats Dresses - --------- --------- ------------ ----------- --------- --------- $150-$280 $70-$140 $70-$200 $25-$90 $200-$450 $125-$250 The following chart sets forth a breakdown of the Company's apparel sales by dollar amount (in thousands and as a percentage of the Company's total sales) during the past three fiscal years. 1997 1996 1995 ------------ ------------ ------------ Career Sportswear $613,000 45% $529,000 52% $439,000 57% Casual Sportswear $323,000 24% $292,000 29% $209,000 27% Lifestyle Collection $293,000 21% $59,000 6% $2,000 0% Suits, Dresses and Other $143,000 10% $141,000 13% $126,000 16% Career Sportswear. The Company's flagship brand, Jones New York, offers consumers an extensive range of better sportswear geared primarily for the career woman's working needs. Jones New York products are sold in misses, petites and women's sizes and are marketed under the Jones New York, Jones New York Petite and Jones New York Woman labels. Career sportswear under the Rena Rowan label is positioned at the opening price point in better apparel and includes misses, petites and women's sizes. The Company's Evan-Picone line of career sportswear is positioned at a price point between the Jones New York and Rena Rowan brands and includes misses and women's sizes. A career sportswear line using the Jones Wear label is sold to selected retail accounts that do not carry the Company's other lines of career sportswear. Casual Sportswear. Jones New York Sport offers a collection of casual sportswear which complements the Jones New York career line. These products are designed to be worn for weekend and informal workday dressing. Jones New York Sport is offered in misses, petite and women's sizes. The Company also offers a business casual collection under the Jones & Co label designed to meet the needs of the informal workplace and business "dress down" days. Jones Studio, introduced for the Spring 1996 season, provides business casual sportswear separates. In 1996, the Company introduced Jones Jeans, a denim and cotton-based collection for the women's market. Petites and misses sizes were added for Spring 1998. Lifestyle Collection. Jones New York Country, introduced for the Fall 1995 season, is a collection of classic country-styled casualwear. Prior to 1997, this label was exclusive to the Company's own retail outlets. The distribution of Jones New York Country products has now been extended to several specialty stores. In October 1995, the Company 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 -4- 5 Lauren trademark in the United States, pursuant to license and design service agreements with the licensor, which expire on December 31, 2001. Upon expiration of the initial term, the Company has the right to renew the license for an additional three-year period, provided that it meets certain minimum sales level requirements. The agreements provide for the payment by the Company of a percentage of net sales against guaranteed minimum royalty and design service payments as set forth in the agreements. In July 1996, the Company began shipping a collection of better career and casual sportswear under this label for the Fall 1996 season. The Company introduced a collection of Petite sportswear which began shipping in the Fall 1997 season. Coats and suits were also introduced in the Fall 1997 season. Suits. The Company produces suits under the brand names Jones New York and Saville. Jones New York is a better priced brand. Saville is targeted to sell at the opening price points of the better price category. Jones New York currently offers products in misses and petite sizes and Saville offers petite, misses and women's sizes. During 1997, the Company phased out its licensed Christian Dior suit business. Dresses. The Company ships collections of career dresses under the Jones New York and Evan-Picone brand names, targeted to sell at better prices. Other. The Company also produces sportswear for the private label market. While there is significant additional demand in this market, the Company has not actively pursued more private label business in order to concentrate on the expansion of its name brand business. The Company has introduced a collection of men's casual sportswear under the Jones New York label for the Fall 1998 selling season. Design Each product line of the Company has its own design team which is responsible for the creation, development and coordination of the product group offerings within each line. The Company believes its design staff of 215 people is widely recognized for its distinctive styling of garments and its ability to update fashion classics with contemporary trends. The Company's designers travel throughout the world for fabrics and colors, and attempt to stay continuously abreast of the latest fashion trends. In addition, the Company actively monitors the retail sales of its products to determine changes in consumer trends. For most sportswear lines, the Company will develop several groups in a season. A group typically consists of an assortment of skirts, pants, jackets, blouses, sweaters and various accessories. The Company believes that it is able to minimize design risks because the Company often will not have started cutting fabrics until the first few weeks of a major selling season. Since different styles within a group often use the same fabric, the Company can redistribute styles and, in some cases, colors, to fit current market demand. In accordance with standard industry practices for licensed products, Polo Ralph Lauren Corporation has the right to approve the Company's designs for the Lauren by Ralph Lauren product line. Manufacturing Apparel sold by the Company is produced in accordance with its design, specification and production schedules. The Company contracts for the cutting and sewing of the majority of its garments with approximately 133 contractors located in the United States and 280 in overseas locations. The Company also operates one manufacturing facility of its own. During 1997, approximately 30% of the Company's products were manufactured in the United States and Mexico, and 70% in other parts of the world, primarily Asia. -5- 6 The Company believes that outsourcing allows it to maximize production flexibility while avoiding significant capital expenditures, work-in-process inventory build-ups and costs of managing a larger production work force. The Company's fashion designers, production staff and quality control personnel closely supervise garments manufactured by contractors to ensure that they meet the Company's high standards. See "Quality Control" below. The Company's products are manufactured according to plans prepared each year which reflect prior years' experience, current fashion trends, economic conditions and management estimates of a line's performance. The Company orders piece goods concurrently with concept board development. The purchase of piece goods is controlled and coordinated on a divisional basis. The Company limits its exposure to specific colors and fabrics by committing to purchase a portion of total projected demand with options to purchase additional volume if demand meets the plan. The Company believes that its policy of limiting its commitments for purchases early in the season minimizes its exposure to excess inventory and obsolescence. The Company believes its extensive experience in logistics and production management underlies its success in coordinating with contractors who manufacture different garments included within the same product group. The Company has had long-term mutually satisfactory business relationships with many of its contractors, but does not have long-term written agreements with any of them. The Company has an active program in place to monitor compliance by its contract manufacturers with applicable laws relating to the payment of wages and working conditions. In 1996, the Company became a participant in the United States Department of Labor's Apparel Manufacturers Compliance Program for that purpose. Under that program, and through the Company's independent agreements with each of its domestic and foreign manufacturers, the Company regularly audits such compliance and requires corrective action when appropriate. Quality Control The Company's comprehensive quality control program is designed to ensure that purchased raw materials and finished goods meet the Company's exacting standards. Substantially all of the fabric purchases for domestically manufactured garments are inspected upon receipt in either the Company's Pennsylvania and North Carolina warehouse facilities (where they are stored prior to shipment for cutting) or at the contractor's warehouse. Fabrics for foreign manufactured garments are inspected by the Company's contractors upon receipt in their warehouses. The Company's quality control program includes inspection of prototypes of each garment prior to cutting by the contractors to ensure compliance with the Company's specifications. Domestic contractors are supervised by the Company's quality control staff based primarily in Pennsylvania, while foreign manufacturers' operations are monitored by both Company personnel and buying agents located in other countries. All finished goods are shipped to the Company's warehouses for final inspection and distribution. Supplies The Company generally supplies the raw material to its domestic manufacturers and occasionally to foreign manufacturers. Otherwise, the raw materials are purchased directly by the manufacturer in accordance with the Company's specifications. Raw materials, which are in most instances made and/or colored especially for the Company, consist principally of piece goods and yarn and are purchased by the Company from a number of domestic and foreign textile mills and converters. The Company's foreign finished goods purchases are generally purchased on a letter of credit basis, while its domestic purchases are generally purchased on an open order basis. The Company does not have long-term formal arrangements -6- 7 with any of its suppliers. However, the Company has experienced little difficulty in satisfying its raw material requirements and considers its sources of supply adequate. Marketing The Company distributes its products through approximately 1,225 customers, including department stores, specialty retailer accounts and direct mail catalog companies throughout the United States and Canada representing approximately 6,800 locations. Department stores account for approximately two-thirds of the Company's sales. The Company's ten largest customers accounted for approximately 67% of sales in 1997. No single customer accounted for more than 10% of net sales; however, certain of the Company's customers are under common ownership. When considered together as a group under common ownership, sales to seven department store customers currently owned by Federated Department Stores, Inc. ("Federated") accounted for approximately 20% of 1997 sales and sales to eight department store customers currently owned by The May Department Stores Company ("May") accounted for approximately 19% of 1997 sales. While the Company believes that purchasing decisions are generally made independently by each department store customer (including the stores in the Federated and May groups), in some cases the trend may be toward more centralized purchasing decisions. The Company attempts to minimize its credit risk from its concentration of customers by closely monitoring accounts receivable balances and shipping levels and the ongoing financial performance and credit status of its customers. Among the Company's leading customers are May group members Lord & Taylor, Hecht's and Foley's; Federated group members Macy's Department Stores, Lazarus and Bloomingdale's; and independent stores Dillard's, Dayton Hudson and Nordstrom. The Company has a direct sales force of 174 sales people (excluding employees in the Company's factory outlet stores) which includes individuals located in the Company's New York and Toronto showrooms as well as in regional sales offices and showrooms that the Company leases in Atlanta, Dallas, Los Angeles and Seattle. The Company also has a small number of independent sales representatives. In addition, senior management is actively involved in selling to major accounts. Products are marketed to department stores and specialty retailing customers during "market weeks," which are generally four to six months in advance of the five corresponding industry selling seasons. While the Company typically will allocate a six week period to market a line, most major orders are written within the first three weeks of any market period. Since piece goods for a line usually are not cut until the first few weeks of a marketing period, the Company is able to tailor production schedules and styles to current market demands and minimize excess inventory. As one of the primary apparel resources for many of its customers, the Company is able to influence the mix, quantity and timing of orders placed by its retail accounts enabling the Company to market complete lines of sportswear and minimize excess inventory. The Company's close relationships with its retail accounts allow it to efficiently monitor production schedules and inventories. The Company believes retail demand for its products is enhanced by the Company's ability to provide its retail accounts and consumers with knowledgeable sales support. In this regard, the Company has an established program to place retail sales specialists in many major department stores. These individuals have been trained by the Company to support the sale of its products by educating other store personnel and consumers about the Company's products and by coordinating the Company's marketing activities with those of the stores. In addition, the retail sales specialists provide the Company with firsthand information concerning consumer reactions to the Company's products. In addition, the Company has a program of designated sales personnel in which a store agrees to designate certain sales personnel who will devote a substantial portion of their time to selling Jones products in return for certain benefits. -7- 8 The Company employs a cooperative advertising program with its major retail accounts, whereby it shares the cost of its retail accounts' advertising and promotional expenses, up to a preset maximum percentage of the retail accounts' purchases. An important part of the marketing program includes prominent displays of the Company's products in retail accounts' sales catalogs. Factory Outlet Stores At December 31, 1997, the Company operated a total of 214 factory outlet stores and 5 full price stores. The Company operates six coffee bars in close proximity to six of its factory outlet stores as a convenience to its customers. Manufacturer's outlet malls are generally located either in high traffic tourist areas or on major highways to vacation destinations and major cities. The 214 factory outlet stores operated by the Company are located in 120 outlet malls throughout the United States. These locations are generally situated in select geographic markets which are not in direct competition with the Company's primary customers. The Company's outlet stores focus on breadth of product line and customer service as well as value pricing. In addition to its brand name merchandise, these stores also sell merchandise produced by licensees of the Company. The Company's outlet store expansion strategy is to continue to open multiple stores in select outlet malls for specific product lines which target different customer segments. The Company opened 45 and closed 26 stores in 1997 and opened 47 and closed 22 stores in 1996. The following table sets forth certain information regarding the number and type of stores open and aggregate store sales for each of the years in the three year period ended December 31, 1997. Retail stores open at end of period: Store Type Description 1997 1996 1995 - ---------------------- ---------------------------- ---- ---- ---- Jones New York Jones New York sportswear 85 82 78 Jones New York Full price retail showcase 2 2 2 for products Executive Suite Jones New York and Executive 21 28 33 Suite men's and women's suits and furnishings Jones New York Sport Jones New York Sport and 31 22 2 Jones & Co casual sportswear Evan-Picone Evan-Picone sportswear 15 17 23 Jones New York Country Jones New York Country 35 22 9 casual sportswear Jones New York Country Full price retail showcase 3 2 - for products Factory Finale Close out merchandise 19 15 15 Other concepts Various 8 10 13 ---- ---- ---- Total retail stores open at end of period 219 200 175 Aggregate net store sales (in thousands) $153,830 $129,767 $102,307 Square footage of gross store space at end of period 607,632 557,100 478,975 Nearly all stores are leased under long-term leases (typically five years). The average store size is approximately 2,775 square feet, ranging from a minimum of 1,386 square feet to a maximum of 6,600 square feet. -8- 9 Licensing of Company Brands As of December 31, 1997, the Company had 32 license agreements under which independent licensees sell products under the Company's Jones New York (and related) trademarks in accordance with designs furnished or approved by the Company in various territories in the United States and Canada. Current licenses include men's tailored clothing and overcoats, women's intimate apparel, women's rainwear, outerwear, leather outerwear and woolen coats, footwear and handbags, belts, scarves, women's swimwear, umbrellas, eyewear, fragrances, costume jewelry, hair accessories, and cosmetic travel accessories. Each of the licenses provides for the payment to the Company of a percentage of the licensee's net sales of the licensed products against guaranteed minimum royalty payments which generally increase over the term of the agreement. During 1997, the Company received $9,436,000 of Jones New York (and related names) licensing income. As of December 31, 1997, the Company had 16 license agreements under which independent licensees sell products under the Company's Evan-Picone trademarks in accordance with designs furnished or approved by the Company in various territories in the United States and Canada. These licenses include women's woolen coats, footwear, men's tailored clothing, mens' knit and woven shirts and sweaters, men's neckwear, and men's and women's hosiery. Each of the licenses provides for the payment to the Company of a percentage of the licensee's net sales of the licensed products against guaranteed minimum royalty payments which generally increase over the term of the agreement. During 1997, the Company received $5,945,000 of Evan-Picone licensing income. Trademarks The Company utilizes a variety of trademarks which it owns, including Jones New York, Jones New York Sport, Jones & Co, Jones*Wear, Jones Wear, JNY, Jones New York Country, Jones Jeans, Saville, Rena Rowan, Ellen Kaye, Evan-Picone, Picone Sport, Elements by Evan-Picone, Picone Studio, Evan-Picone Sport, Executive Suite and Strictly Business. The Company has registered or applied for registration for these and other trademarks for use on a variety of items of apparel and apparel-related products in the United States and Canada. In addition, the Company has registered certain of its trademarks in certain other countries. The Company's material registered trademarks Jones New York, Jones New York Sport, Rena Rowan and Evan-Picone, have their Federal trademark registrations expire in 2006, 2004, 2002, and 2003, respectively, with its other registered trademarks expiring at various dates through 2014, all of which are subject to renewal. The Company carefully monitors trademark expiration dates to ensure uninterrupted registration of its trademarks. The Company also licenses the Lauren by Ralph Lauren label (see "Products" above). The Company regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the marketing of its products. The Company vigorously protects its trademarks against infringement. Imports and Import Restrictions The Company's transactions with its foreign manufacturers and suppliers are subject to the risks of doing business abroad. The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries, including Hong Kong, Taiwan and Korea. These agreements impose quotas on the amount and type of goods which can be imported into the United States from these countries. Such agreements also allow the United States to impose at any time restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. -9- 10 The Company monitors duty, tariff and quota-related developments and continually seeks to minimize its potential exposure to quota-related risks through, among other measures, geographical diversification of its manufacturing sources, the maintenance of overseas offices, allocation of overseas production to merchandise categories where more quota is available and shifts of production among countries and manufacturers. The Company's imported products are also subject to United States customs duties and, in the ordinary course of business, the Company is from time to time subject to claims by the United States Customs Service for duties and other charges. The United States and the other countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adversely adjust presently prevailing quotas, duty or tariff levels, which could adversely affect the Company's operations and its ability to continue to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring. Because the Company's foreign manufacturers are located at greater geographic distances from the Company than its domestic manufacturers, the Company is generally required to allow greater lead time for foreign orders, which reduces the Company's manufacturing flexibility. Foreign imports are also affected by the high cost of transportation into the United States. In addition to the factors outlined above, the Company's future import operations may be adversely affected by political instability resulting in the disruption of trade from exporting countries, any significant fluctuation in the value of the dollar against foreign currencies and restrictions on the transfer of funds. However, the recent instability of Asian financial markets is not expected to have a material impact on the Company's financial results. Backlog On December 31, 1997, the Company had unfilled customer orders of approximately $557 million, compared to approximately $419 million of such orders at December 31, 1996. These amounts include both confirmed orders and unconfirmed orders which the Company believes, based on industry practice and past experience, will be confirmed. The amount of unfilled orders at a particular time is affected by a number of factors, including the timing of the receipt and processing of customer orders and scheduling of the manufacture and shipping of the product, which in some instances is dependent on the desires of the customer. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. Competition There is intense competition in the sectors of the apparel industry in which the Company participates. The Company competes with many other manufacturers, some of which are larger and have greater resources than the Company. The Company competes primarily on the basis of fashion, price and quality. The Company believes its competitive advantages include its ability to effectively anticipate and respond to changing consumer demands, its premier brand names and range of products and its ability to operate within the industry's production and delivery constraints. Furthermore, the Company's established brand names and relationships with retailers have resulted in a highly loyal following of customers. The Company considers the risk of formidable new competitors to be minimal due to barriers to entry such as significant startup costs and the long-term nature of supplier and customer relations. It has been the -10- 11 Company's belief that during the past few years, major department stores and specialty retailers have been increasingly unwilling to source garments from suppliers who are not well capitalized or do not have established reputations for delivering quality merchandise in a timely manner. However, there can be no assurance that significant new competitors will not develop in the future. Employees At December 31, 1997, the Company had approximately 3,135 full-time employees. This total includes 25 in executive or senior managerial positions, approximately 1,870 in quality control, production, design and distribution positions, approximately 380 in sales, clerical and office positions and approximately 860 in the Company factory outlet and full-price retail stores. The Company also employs approximately 790 part-time employees, of which approximately 720 work in the Company factory outlet and full-price retail stores. Approximately 350 of the Company's employees are members of the Teamsters Union, which has a four year labor agreement with the Company expiring in March 2002. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES The general location, use and approximate size of the Company's principal properties, all of which are leased, are set forth below: Approximate Area Location Use in Square Feet - --------------------- ----------------------------- ---------------- Bristol, Pennsylvania Headquarters, warehouse 419,200 and distribution Bristol, Pennsylvania Materials warehouse 102,400 Bristol, Pennsylvania Distribution warehouse 208,000 Bristol, Pennsylvania Computer and accounting 16,425 services Bristol, Pennsylvania Administrative services 22,500 Ciudad Juarez, Mexico Production 66,850 Downsview, Canada Canadian headquarters, 114,300 warehouse and distribution El Paso, Texas Administrative services 33,250 Lawrenceburg, Tennessee Distribution warehouses 1,205,100 New York, New York Executive and sales offices 156,700 Rural Hall, North Carolina Materials warehouse 232,200 The Company leases space for 214 outlet stores, five full-price retail stores and six coffee bars (aggregating approximately 613,500 square feet) at locations across the United States. The Company also leases regional sales offices and showrooms in Atlanta, Dallas, Los Angeles and Seattle. The Company believes that its existing facilities are well maintained, in good operating condition and that its existing and planned facilities will be adequate for its operations for the foreseeable future. The Company occupies a warehouse and office facility which is leased from an affiliated real estate partnership which is 50% owned by the Company's Chairman. The lease runs until March 31, 1998. Minimum annual rent payments are $1,000,000. The lease was capitalized at the fair market value of the facility which approximated the present value of the minimum lease payments. Upon the expiration of the lease, the Company has agreed to purchase the property from the partnership for $10,500,000, which -11- 12 approximates fair market value, and enter into a sale and leaseback arrangement with an unrelated third party. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Price range of common stock: 1997 High $41 3/8 $49 1/8 $57 3/16 $57 5/16 Low $32 1/8 $36 1/8 $46 5/8 $40 7/16 1996 High $24 1/4 $27 3/4 $37 3/8 $37 3/8 Low $17 13/16 $23 1/4 $22 9/16 $29 5/8 The Company's Common Stock is traded on the New York Stock Exchange under the symbol "JNY". The above figures set forth, for the periods indicated, the high and low sale prices per share of the Company's Common Stock as reported on the New York Stock Exchange Composite Tape. The last reported sale price per share of the Company's Common Stock on March 17, 1998 was $55 11/16 and on that date there were 154 holders of record of the Company's Common Stock. To date, the Company has not paid any cash dividends on shares of its Common Stock. The Company anticipates that all of its future earnings will be retained for its financial requirements and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. All stock prices have been adjusted to reflect the 2-for-1 stock split effective October 2, 1996. -12- 13 ITEM 6. SELECTED FINANCIAL DATA The following financial information is qualified by reference to, and should be read in conjunction with, the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this report. The selected consolidated financial information presented below is derived from the Company's audited Consolidated Financial Statements for each of the five years in the period ended December 31, 1997. Year Ended December 31, 1997 1996 1995 1994 1993 ---------- ---------- -------- -------- -------- Income Statement Data Net sales $1,372,458 $1,021,042 $776,365 $633,257 $541,152 Licensing income <F1> 15,013 13,036 10,314 8,487 4,907 ---------- ---------- -------- -------- -------- Total revenues 1,387,471 1,034,078 786,679 641,744 546,059 Cost of goods sold 940,149 717,250 546,413 438,575 363,742 ---------- ---------- -------- -------- -------- Gross profit <F2> 447,322 316,828 240,266 203,169 182,317 Selling, general and administrative expense 250,685 186,572 139,135 115,307 103,392 ---------- ---------- -------- -------- -------- Operating income 196,637 130,256 101,131 87,862 78,925 Interest expense 3,584 3,040 1,908 1,212 716 Interest income (1,556) (547) (445) (695) (810) ---------- ---------- -------- -------- -------- Income before provision for income taxes 194,609 127,763 99,668 87,345 79,019 Provision for 72,884 46,889 36,183 32,425 30,660 income taxes ---------- ---------- -------- -------- -------- Net income $121,725 $80,874 $63,485 $54,920 $48,359 <F3> ========== ========== ======== ======== ======== Per Share Data <F4><F5> Net income per share Basic $2.35 $1.55 $1.22 $1.06 $0.95 <F3> Diluted $2.26 $1.51 $1.20 $1.04 $0.92 <F3> Dividends paid per share - - - - - Weighted average number of common shares outstanding Basic 51,899 52,333 52,130 51,656 50,789 Diluted 53,905 53,651 53,024 52,889 52,286 December 31, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Balance Sheet Data Working capital $330,569 $293,970 $260,853 $204,221 $159,175 Total assets 580 767 488,109 400,959 318,286 266,594 Short-term debt, including current portion of capital lease obligations 4,199 3,067 2,327 1,859 1,722 Long-term debt, including capital lease obligations 27,290 12,141 10,151 8,029 9,545 Stockholders' equity 435,632 376,729 314,975 248,678 189,120 <F1> Represents license fees received by the Company (net of related expenses). -13- 14 <F2> Historically, the Company included licensing income as a separate line item in operating income. In accordance with current industry practice, the Company has included this amount in total revenues and gross profit. All periods presented reflect this reclassification of licensing income. <F3> Represents income before cumulative effect of change in accounting principle for the year ended December 31, 1993. In 1993, the Company recorded a cumulative effect of a change in accounting principle for income taxes as a result of the adoption of SFAS No. 109 which increased net income by $1,376,000. Basic and diluted income per share for the year ended December 31, 1993, including this change in accounting principle, was $0.98 and $0.95, respectively. <F4> On July 30, 1996, the Company's Board of Directors approved a two-for-one stock split of the Company's Common Stock in the form of a 100% stock dividend for shareholders of record as of September 12, 1996. Concurrently, the number of authorized shares of Common Stock was increased to 100,000,000. On October 2, 1996, a total of 26,744,580 shares of Common Stock were issued in connection with the split. The stated par value of each share remained at $0.01. All share and per share amounts have been restated to retroactively reflect the stock split. <F5> During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which provides for the calculation of "basic" and "diluted" earnings per share. This Statement, effective for financial statements issued for periods ending after December 15, 1997, requires restatement of all prior-period EPS data presented. All periods have been restated to comply with the provisions of SFAS No. 128. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS OF INCOME EXPRESSED AS A PERCENTAGE OF TOTAL REVENUES Year Ended December 31, 1997 1996 1995 ------ ------ ------ Net sales 98.9% 98.7% 98.7% Licensing income 1.1% 1.3% 1.3% ------ ------ ------ Total revenues 100.0% 100.0% 100.0% Cost of goods sold 67.8% 69.4% 69.5% ------ ------ ------ Gross profit 32.2% 30.6% 30.5% Selling, general and administrative expenses 18.1% 18.0% 17.7% ------ ------ ------ Operating income 14.2% 12.6% 12.9% Interest expense 0.3% 0.3% 0.2% Interest income (0.1%) (0.1%) (0.1%) ------ ------ ------ Income before provision for income taxes 14.0% 12.4% 12.7% Provision for income taxes 5.3% 4.5% 4.6% ------ ------ ------ Net income 8.8% 7.8% 8.1% ====== ====== ====== Totals may not agree due to rounding. -14- 15 GENERAL The following discussion provides information and analysis of the Company's results of operations from 1995 through 1997 and its liquidity and capital resources. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein. The Company has achieved compound annual growth rates of 32.8% for total revenues and 39.4% for operating income from 1995 to 1997. Total revenues and operating income in 1997 increased 34.2% and 51.0%, respectively, over 1996. The Company believes that it has achieved this growth by enhancing the brand equity of each of its labels and successfully adding new labels, such as Lauren by Ralph Lauren, through its focus on exceptional design, quality and value. The Company has leveraged the strength of its brands to increase both the number of locations and amount of selling space in which its products are offered, as well as to introduce new product extensions. The Company has also benefitted from a trend among its major retail accounts to concentrate their women's apparel buying among a narrowing group of apparel vendors. RESULTS OF OPERATIONS 1997 Compared to 1996 Net Sales Net sales in 1997 increased 34.4%, or $0.4 billion, to $1.4 billion compared to $1.0 billion in 1996, due primarily to an increase in the number of units shipped, and also, to a lesser extent, higher average selling prices per unit. Career sportswear sales increased 15.9%, or $83.9 million, to $612.8 million in 1997 compared to $528.9 million in 1996. Casual sportswear sales in 1997 increased 10.8%, or $31.5 million, to $323.4 million compared to $291.9 million in 1996. Lifestyle collection sales in 1997 increased $234.1 million, to $292.9 million compared to $58.8 million in 1996, largely the result of the rapid growth in sales of the Lauren by Ralph Lauren label. Net sales for the Company's suit, dress and other category increased 1.4%, or $2.0 million, to $143.4 million in 1997, compared to $141.4 million in 1996. Licensing Income Licensing income increased $2.0 million to $15.0 million in 1997, compared to $13.0 million in 1996. Income from licenses under the Jones New York label increased $1.8 million while income from licenses under the Evan-Picone label rose $0.2 million. The increases were primarily due to higher sales volume by licensees. Gross Profit The gross profit margin was 32.2% in 1997, compared to 30.6% in 1996. The increase was attributable to the impact of stronger margins across major product categories and the proportionately larger increase in sales of the Lauren by Ralph Lauren label, which was introduced in Fall 1996 and carries higher margins than the corporate average. SG&A Expenses Selling, general and administrative expenses ("SG&A" expenses) of $250.7 million in 1997 represented an increase of $64.1 million over $186.6 million in 1996. As a percentage of total revenues, SG&A expenses increased to 18.1% in 1997 from 18.0% in 1996. Expenses associated with Lauren by Ralph Lauren product advertising, royalties, store displays and associated operating costs, as well as the Company's overall sales growth, added significant expenses during 1997. Retail store operating expenses increased $6.9 million, reflecting the added cost of 19 new stores in operation at the end of 1997. -15- 16 Operating Income The resulting 1997 operating income increased $66.3 million to $196.6 million, compared to $130.3 million during 1996. The operating margin increased to 14.2% in 1997 from 12.6% in 1996 as a result of the higher gross profit margins during 1997. Net Interest Expense Net interest expense was $2.0 million in 1997 compared to $2.5 million in 1996. The primary reason for the change was an increase in interest income of $1.0 million, which offset higher interest on capital leases for additional warehouse facilities constructed during 1997. Provision for Income Taxes The effective income tax rate for 1997 was 37.5% compared to 36.7% in 1996. The increase was primarily due to higher state income tax provisions for 1997. Net Income Net income increased 50.5% to $121.7 million in 1997, an increase of $40.8 million over the net income of $80.9 million earned in 1996. Net income as a percentage of total revenues was 8.8% in 1997 compared to 7.8% in 1996. 1996 Compared to 1995 Net Sales Net sales in 1996 increased 31.5%, or $244.6 million, to $1,021.0 million, compared to $776.4 million in 1995, due primarily to an increase in the number of units shipped. Career sportswear sales increased 20.5%, or $89.8 million, to $528.9 million in 1996 compared to $439.1 million in 1995. Casual sportswear sales in 1996 increased 39.7%, or $83.0 million, to $291.9 million compared to $208.9 million in 1995. Lifestyle collection sales in 1996 increased $56.7 million to $58.8 million, compared to $2.1 million in 1995, primarily due to the 1996 introduction of the Lauren by Ralph Lauren label. Net sales for the Company's suit, dress and other category increased 12.0%, or $15.1 million, to $141.4 million in 1996 compared to $126.3 million in 1995. Licensing Income Licensing income increased $2.7 million to $13.0 million in 1996 as compared to $10.3 million in 1995. Income from licenses under the Jones New York label increased $2.1 million, while income from licenses under the Evan-Picone label rose $0.6 million. Gross Profit The gross profit margin was 30.6% in 1996 compared to 30.5% in 1995. The increase was primarily attributable to the impact of higher gross profit margins from the Company's major product lines, as well as the introduction of the new Lauren by Ralph Lauren label, which carries higher margins than the corporate average. SG&A Expenses SG&A expenses of $186.6 million in 1996 represented an increase of $47.5 million over $139.1 million in 1995. As a percentage of total revenues, SG&A expenses increased to 18.0% in 1996 from 17.7% in 1995. Expenses associated with the Lauren by Ralph Lauren product advertising and royalties and associated operating costs, as well as the Company's overall sales growth, added significant expenses during 1996. Retail store operating expenses increased $10.2 million, reflecting the added cost of 25 new stores in operation at the end of 1996. -16- 17 Operating Income The resulting 1996 operating income of $130.3 million increased $29.2 million, as compared to $101.1 million during 1995. The operating margin decreased to 12.6% in 1996 from 12.9% in 1995, largely as a result of the higher percentage of SG&A expenses to sales during 1996. Net Interest Expense Net interest expense was $2.5 million in 1996 compared to $1.5 million in 1995. The primary reasons for the change were higher average overall borrowings and interest on capital leases for additional warehouse facilities during 1996. Provision for Income Taxes The effective income tax rate for 1996 was 36.7% as compared to 36.3% in 1995. The increase was primarily due to higher state income tax provisions for 1996. Net Income Net income increased 27.4% to $80.9 million in 1996, an increase of $17.4 million over the net income of $63.5 million earned in 1995. Net income as a percentage of total revenues was 7.8% in 1996, compared to 8.1% in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements have been to fund working capital needs, capital expenditures and, beginning in 1995, to repurchase the Company's Common Stock on the open market. The Company has historically relied primarily on internally generated funds, trade credit and bank borrowings to finance its operations and expansion. As of December 31, 1997, total cash and cash equivalents were $40.1 million, a $10.0 million increase over the $30.1 million reported as of December 31, 1996. Net cash provided by operations was $110.6 million, $70.7 million and $8.9 million in 1997, 1996 and 1995, respectively. The $39.9 million improvement for 1997 was primarily due to a higher net income and a decrease in trade receivables compared to an increase in the previous two years. While fourth quarter 1997 sales increased 33.7% over 1996, accounts receivable at the end of 1997 decreased $18.9 million from 1996. This was due to the provision for allowances that will be granted to customers and fourth quarter shipments occurring earlier than in prior years, allowing cash collections on a greater portion of the resulting receivables before the end of the year. Inventories increased $41.0 million in 1997, $37.8 million in 1996 and $53.1 million in 1995, all of which reflected the inventory levels required to meet anticipated wholesale shipments for the first quarter of the following year and the net addition of 19 retail stores in 1997, 25 in 1996, and 42 in 1995. Net cash used in investing activities increased to $43.3 million, an increase of $8.0 million over 1996. Cash used in investing activities has been primarily for the opening of additional warehouse facilities (including, in 1997, cash restricted for use in completing warehouse facilities under construction at the end of the year), new retail stores and existing store renovations, computer system hardware and software upgrades and a $1.5 million payment made in 1996 to satisfy all future royalty obligations to the former owner of the Evan-Picone trademark. In addition, to support anticipated growth in the number of units shipped, the Company has committed to the construction of additional warehouse facilities in 1998. These facilities, including related equipment, are estimated to cost $28.0 million and the Company plans to finance all or a portion of the construction through capital lease financing and long-term debt. Net cash provided by (used in) financing activities was $(57.2) million in 1997, $(22.2) million in 1996 and $2.4 million in 1995. The principal reasons for the changes were: (i) $10.0 and $5.0 million in proceeds from capital leases in 1997 and 1996, respectively, for construction of additional warehouse facilities; (ii) issuance of $10.0 million in long-term debt in 1997 for construction of an additional warehouse facility; and (iii) -17- 18 transactions involving the Company's Common Stock. In 1997 and 1996, the Company repurchased $85.8 million and $33.6 million, respectively, of its Common Stock on the open market under two announced programs under which the Company is authorized to acquire an aggregate of up to $200.0 million of such shares. As of December 31, 1997, $100.0 million had been expended pursuant to the first stock repurchase program (the maximum authorized) and an additional $24.0 million had been expended under the second program. Proceeds from the issuance of common stock to employees exercising stock options amounted to $12.5 million, $9.1 million and $4.7 million in 1997, 1996 and 1995, respectively. As of December 31, 1997, the Company had credit arrangements with six United States financial institutions which totaled $425.0 million (see Note 5 of Notes to Consolidated Financial Statements). These lines, which may be used for unsecured borrowings and letters of credit (issued primarily to finance foreign inventory purchases), contain an aggregate sub-limit of $170.0 million for unsecured borrowings with rates depending on the borrowing vehicle utilized. At December 31, 1997, $153.7 million was utilized for letters of credit and there were no short-term borrowings outstanding. The Company also has a line of credit with a Canadian institution for C$4.0 million to be used for unsecured borrowings under which no amounts were outstanding at December 31, 1997. The Company believes that funds generated by operations and the bank credit arrangements will provide the financial resources sufficient to meet its foreseeable working capital, letter of credit, capital expenditure and stock repurchase requirements. THE YEAR 2000 The Company is currently evaluating the impact of the Year 2000 on its management and information systems. At this time, management believes that the impact of the Year 2000 will have no material effect on its operations or financial results. INFLATION The Company believes that the relatively moderate rates of inflation which have been experienced in the United States and Canada, where it competes, have not had a significant effect on its net sales or profitability. SEASONALITY OF BUSINESS Historically, the Company's sales and profit levels fluctuate by quarter. As a result, the Company experiences seasonal increases and decreases in its working capital requirements. These patterns result primarily from the timing of shipments for each season; however, the timing of seasonal shipments can vary from quarter to quarter. Fall merchandise is shipped principally in the third quarter while Spring merchandise is shipped primarily in the first quarter. Summer and Holiday/Resort goods, the smaller of the seasons, are shipped primarily in the second and fourth quarters, respectively. For an analysis of quarterly historical operating trends, see Note 14 of Notes to Consolidated Financial Statements. NEW ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board issued two new disclosure standards. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments -18- 19 by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of and enterprise about which separate financial information is available that is evaluated regularly by Management in deciding how to allocate resources and in assessing performance. Both SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of these standards is not expected to have a material effect on the Company's financial position or results of operations. The Company is currently reviewing SFAS No. 131 and has of yet been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended which represent 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, and financial difficulties encountered by customers. All statements other than statements of historical facts included in this Annual Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition," are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Report. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA STATEMENT OF MANAGEMENT RESPONSIBILITY The management of Jones Apparel Group, Inc. is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this report. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and properly reflect the effects of certain estimates and judgements made by management. The Company's management maintains an effective system of internal control that is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed in accordance with management's authorization. The system is continuously monitored by direct management -19- 20 review, the independent accountants and by internal auditors who conduct an extensive program of audits throughout the Company. The Company's consolidated financial statements have been audited by BDO Seidman, LLP, independent accountants. Their audits were conducted in accordance with generally accepted auditing standards, and included a review of financial controls and tests of accounting records and procedures as they considered necessary in the circumstances. The Audit Committee of the Board of Directors, which consists of outside directors, meets regularly with management, the internal auditors and the independent accountants to review accounting, reporting, auditing and internal control matters. The committee has direct and private access to both internal and external auditors. /s/ Sidney Kimmel /s/ Wesley R. Card Sidney Kimmel Wesley R. Card Chairman Chief Financial Officer REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Jones Apparel Group, Inc. We have audited the accompanying consolidated balance sheets of Jones Apparel Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jones Apparel Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York February 6, 1998 -20- 21 Jones Apparel Group, Inc. Consolidated Balance Sheets (All amounts in thousands except per share data) December 31, 1997 1996 ------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $40,134 $30,085 Accounts receivable, net of allowance of $2,767 and $2,263 for doubtful accounts 91,747 112,678 Inventories 255,055 214,437 Receivable from and advances to contractors 7,833 11,490 Prepaid and refundable income taxes 5,993 - Deferred taxes 26,269 9,708 Prepaid expenses and other current assets 13,740 11,432 -------- -------- TOTAL CURRENT ASSETS 440,771 389,830 PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization 81,934 61,696 CASH RESTRICTED FOR CAPITAL ADDITIONS 11,193 - INTANGIBLES, at cost, less accumulated amortization 30,604 26,288 OTHER ASSETS 16,265 10,295 -------- -------- $580,767 $488,109 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $4,199 $3,067 Accounts payable 90,429 72,569 Income taxes payable - 8,959 Accrued expenses and other current liabilities 15,574 11,265 -------- -------- TOTAL CURRENT LIABILITIES 110,202 95,860 -------- -------- NONCURRENT LIABILITIES: Obligations under capital leases 18,457 12,134 Long-term debt 8,833 7 Other 6,107 - -------- -------- TOTAL NONCURRENT LIABILITIES 33,397 12,141 -------- -------- TOTAL LIABILITIES 143,599 108,001 -------- -------- COMMITMENTS AND CONTINGENCIES - - EXCESS OF NET ASSETS ACQUIRED OVER COST 1,536 3,379 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - shares authorized 1,000; none issued - - Common stock, $.01 par value - shares authorized 100,000;issued 54,478 and 53,595 545 536 Additional paid-in capital 122,582 99,140 Retained earnings 438,917 317,192 Cumulative foreign currency translation adjustment (1,524) (1,154) -------- -------- 560,520 415,714 Less treasury stock, 3,384 and 1,600 shares, at cost (124,888) (38,985) -------- -------- TOTAL STOCKHOLDERS' EQUITY 435,632 376,729 -------- -------- $580,767 $488,109 ======== ======== See accompanying notes to consolidated financial statements -21- 22 Jones Apparel Group, Inc. Consolidated Statements of Income (All amounts in thousands except per share data) Year Ended December 31, 1997 1996 1995 ---------- ---------- -------- NET SALES $1,372,458 $1,021,042 $776,365 LICENSING INCOME 15,013 13,036 10,314 ---------- ---------- -------- Total revenues 1,387,471 1,034,078 786,679 COST OF GOODS SOLD 940,149 717,250 546,413 ---------- ---------- -------- Gross profit 447,322 316,828 240,266 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 250,685 186,572 139,135 ---------- ---------- -------- Operating income 196,637 130,256 101,131 INTEREST EXPENSE 3,584 3,040 1,908 INTEREST INCOME (1,556) (547) (445) ---------- ---------- -------- Income before provision for income taxes 194,609 127,763 99,668 PROVISION FOR INCOME TAXES 72,884 46,889 36,183 ---------- ---------- -------- NET INCOME $121,725 $80,874 $63,485 ========== ========== ======== EARNINGS PER SHARE Basic $2.35 $1.55 $1.22 Diluted $2.26 $1.51 $1.20 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 51,899 52,333 52,130 Diluted 53,905 53,651 53,024 See accompanying notes to consolidated financial statements -22- 23 Jones Apparel Group, Inc. Consolidated Statements of Stockholders' Equity (All amounts in thousands) CAPTION> Cumulative foreign Total Additional currency Stock- Common paid-in Retained translation Treasury holders' stock capital earnings adjustments stock equity ---- -------- -------- ------- --------- -------- BALANCE, JANUARY 1, 1995 $259 $76,711 $172,916 $(1,208) $ - $248,678 YEAR ENDED DECEMBER 31, 1995: Amortization of deferred compensation in connection with executive stock options - 232 - - - 232 Net income - - 63,485 - - 63,485 Exercise of stock options 4 4,730 (83) - 168 4,819 Tax benefit derived from exercise of stock options - 2,499 - - - 2,499 Stock tendered as payment for options exercised - - - - (168) (168) Treasury stock acquired - - - - (4,638) (4,638) Foreign currency translation adjustments - - - 68 - 68 --- -------- -------- ------- ------- -------- BALANCE, DECEMBER 31, 1995 263 84,172 236,318 (1,140) (4,638) 314,975 YEAR ENDED DECEMBER 31, 1996: Amortization of deferred compensation in connection with executive stock options - 290 - - - 290 Net income - - 80,874 - - 80,874 Exercise of stock options 6 9,825 - - - 9,831 Tax benefit derived from exercise of stock options - 5,157 - - - 5,157 Stock tendered as payment for options exercised - - - - (763) (763) Treasury stock acquired - - - - (33,584) (33,584) Effect of 2-for-1 stock split 267 (267) - - - - Registration of 1996 Stock Option Plan - (37) - - - (37) Foreign currency translation adjustments - - - (14) - (14) --- -------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 1996 536 99,140 317,192 (1,154) (38,985) 376,729 YEAR ENDED DECEMBER 31, 1997: Amortization of deferred compensation in connection with executive stock options and related items - 2,778 - - - 2,778 Net income - - 121,725 - - 121,725 Exercise of stock options 9 12,597 - - - 12,606 Tax benefit derived from exercise of stock options - 8,067 - - - 8,067 Stock tendered as payment for options exercised - - - - (100) (100) Treasury stock acquired - - - - (85,803) (85,803) Foreign currency translation adjustments - - - (370) - (370) ---- -------- -------- ------- --------- -------- BALANCE, DECEMBER 31, 1997 $545 $122,582 $438,917 $(1,524) $(124,888) $435,632 ==== ======== ======== ======= ========= ======== See accompanying notes to consolidated financial statements -23- 24 Jones Apparel Group, Inc. Consolidated Statements of Cash Flows (All amounts in thousands) Year Ended December 31, 1997 1996 1995 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $121,725 $80,874 $63,485 -------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,594 8,948 6,724 Provision for losses on trade receivables 1,870 800 (464) Deferred taxes (17,907) 7,233 7,622 Other 264 416 40 Decrease (increase) in: Trade receivables 18,917 (21,349) (17,873) Inventories (40,961) (37,814) (53,077) Prepaid expenses and other current assets 1,264 10,624 (10,746) Other assets (6,273) (3,703) (5,027) Increase (decrease) in: Accounts payable 17,909 13,498 13,371 Taxes payable (5,253) 6,673 4,116 Accrued expenses and other current liabilities 4,428 4,492 768 -------- ------- ------- Total adjustments (11,148) (10,182) (54,546) -------- ------- ------- Net cash provided by operating activities 110,577 70,692 8,939 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (32,149) (34,066) (16,013) Proceeds from disposition of assets - 261 635 Increase in cash restricted for capital additions (11,193) - - Acquisition of trademarks and licenses - (1,492) (28) -------- ------- ------- Net cash used in investing activities (43,342) (35,297) (15,406) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt and capital leases (3,939) (2,623) (2,606) Purchases of treasury stock (85,803) (33,584) (4,638) Proceeds from issuance of long-term debt 10,000 - - Proceeds from capital leases 10,000 5,000 5,000 Proceeds from exercise of stock options 12,507 9,068 4,651 Other - (37) - Net cash provided by (used in) -------- ------- ------- financing activities (57,235) (22,176) 2,407 -------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH 49 2 (202) -------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,049 13,221 (4,262) CASH AND CASH EQUIVALENTS, BEGINNING 30,085 16,864 21,126 -------- ------- ------- CASH AND CASH EQUIVALENTS, ENDING $40,134 $30,085 $16,864 ======== ======= ======= See accompanying notes to consolidated financial statements -24- 25 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Jones Apparel Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. The Company designs, contracts for the manufacture of, and markets a broad range of women's career and casual sportswear, suits and dresses. The Company sells its products to better specialty and department stores and also operates its own network of factory outlet stores. In addition, the Company licenses the use of several of its brand names to select manufacturers of women's and men's apparel and accessories. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents in investment-grade, short-term debt instruments with quality financial institutions and the U.S. Government and, by policy, limits the amount of credit exposure in any one financial vehicle. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collectibility of all accounts receivable. Financial Instruments The fair value of cash and cash equivalents and receivables approximate their carrying value due to their short-term maturities. The fair value of long-term debt instruments, including the current portion, approximates the carrying value and is estimated based on the current rates offered to the Company for debt of similar maturities. Inventories Inventories are stated at the lower of cost or market. Wholesale inventories are determined using the first-in, first-out method while retail inventories are determined using the retail method. Property, Plant, Equipment and Depreciation Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets ranging from three to twenty years. Leased Property Under Capital Leases Property under capital leases is amortized over the lives of the respective leases or the estimated useful lives of the assets. Intangibles Intangibles, which include trademarks and license agreements, are amortized on a straight-line basis over the estimated useful lives of the assets. -25- 26 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) Excess of Net Assets Acquired Over Cost The excess of net assets acquired over cost of acquired businesses is amortized using the straight-line method over a five year period. Foreign Currency Translation The financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translations." Balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the period. Gains and losses resulting from translation are accumulated in a separate component of stockholders' equity. Segment data is not provided as foreign operations are not material. Treasury Stock Treasury stock is recorded at net acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. Revenue Recognition Sales are recognized upon shipment of products or, in the case of retail sales, at the time of register receipt. Allowances for estimated returns are provided when sales are recorded. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Current tax assets and liabilities are recognized for the estimated Federal, foreign, state and local income taxes payable or refundable on the tax returns for the current year. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary timing differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax provisions are based on the changes to the respective assets and liabilities from period to period. Stock Options The Company uses the intrinsic value method of accounting for employee stock options as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock. The compensation cost is recognized over the vesting period of the options. Earnings per Share During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which provides for the calculation of "basic" and "diluted" earnings per share. This Statement, effective for financial statements issued for periods ending after December 15, 1997, requires restatement of all prior-period EPS data presented. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options. All periods presented have been restated to comply with the provisions of SFAS No. 128. Cash Equivalents The Company considers all highly liquid short-term investments to be cash equivalents. -26- 27 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) Long-Lived Assets The Company reviews certain long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In that regard, the Company assesses the recoverability of such assets based upon estimated non-discounted cash flow forecasts. Presentation of Prior Year Data Certain reclassifications have been made to conform prior year data with the current presentation. New Accounting Standards Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of and enterprise about which separate financial information is available that is evaluated regularly by Management in deciding how to allocate resources and in assessing performance. Both SFAS Nos. 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. The adoption of these standards is not expected to have a material effect on the Company's financial position or results of operations. The Company is currently reviewing SFAS No. 131 and has of yet been unable to fully evaluate the impact, if any, it may have on future financial statement disclosures. NOTE 2. INVENTORIES Inventories are summarized as follows: December 31, 1997 1996 (In thousands) -------- -------- Raw materials $27,045 $38,571 Work in process 41,294 37,682 Finished goods 186,716 138,184 -------- -------- $255,055 $214,437 ======== ======== -27- 28 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 3. PROPERTY, PLANT AND EQUIPMENT Major classes of property, plant and equipment are as follows: December 31, 1997 1996 (In thousands) ------- ------- Land and buildings $37,893 $36,763 Leasehold improvements 29,230 24,712 Machinery and equipment 31,979 25,340 Furniture and fixtures 9,666 6,932 Construction in progress 17,355 1,076 ------- ------- 126,123 94,823 Less: accumulated depreciation and amortization 44,189 33,127 ------- ------- $81,934 $61,696 ======= ======= Included in property, plant and equipment are the following capitalized leases: December 31, 1997 1996 (In thousands) ------- ------- Buildings $32,137 $31,006 Machinery and equipment 3,759 3,538 Construction in progress 9,937 - ------- ------- 45,833 34,544 Less: accumulated amortization 12,626 10,243 ------- ------- $33,207 $24,301 ======= ======= At December 31, 1997, the Company had commitments to construct additional warehouse facilities. These facilities, which will be completed during 1998, will cost an estimated $28,000,000 in the aggregate. As of December 31, 1997, a total of $9,937,000 had been expended on these projects and the Company had $11,193,000 in cash on hand restricted for use in their completion. -28- 29 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 4. INTANGIBLE ASSETS Intangible assets consist of the following: Useful lives December 31, 1997 1996 (years) (In thousands) ------- ------- ---------- Trademarks $32,972 $26,865 15 to 20 License agreements 5,319 5,319 51/2 to 19 ------- ------- 38,291 32,184 Less: accumulated amortization 7,687 5,896 ------- ------- $30,604 $26,288 ======= ======= NOTE 5. SHORT-TERM BORROWINGS At December 31, 1997, the Company had credit arrangements with six United States financial institutions which totaled $425,000,000. These lines, which may be used for unsecured borrowings and letters of credit (issued primarily to finance foreign inventory purchases), contain an aggregate sub-limit of $170,000,000 for unsecured borrowings with rates depending on the borrowing vehicle utilized. At December 31, 1997, the estimated aggregate interest rate on the lines was 7.1%. The Company was committed for unexpired bank letters of credit at December 31, 1997 in the amount of $153,744,000 and there were no short-term borrowings outstanding. The Company also has a line of credit with a Canadian institution for C$4,000,000 to be used for unsecured borrowings under which no amounts were outstanding at December 31, 1997. NOTE 6. LONG-TERM DEBT Long-term debt consists of the following: December 31, 1997 1996 (In thousands) ------ ------ 7.125% Industrial revenue bonds, due 2007 $9,833 $ - Other debt 10 48 ------ ------ 9,843 48 Less: current portion 1,010 41 ------ ------ $8,833 $ 7 ====== ====== During 1997, the Company issued $10.0 million of long-term debt to finance construction of a new warehouse facility. The aggregate maturities for long-term debt for the five years after December 31, 1997 are approximately $1,000,000 per year. -29- 30 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 7. OBLIGATIONS UNDER CAPITAL LEASES Obligations under capital leases consist of the following: December 31, 1997 1996 (In thousands) ------- ------- Warehouses, office facilities and equipment $21,646 $15,160 Less: current portion 3,189 3,026 ------- ------- Obligations under capital leases - noncurrent $18,457 $12,134 ======= ======= The Company occupies a warehouse and office facility which is leased from an affiliated real estate partnership which is 50% owned by the Company's Chairman. The lease runs until March 15, 1998. Minimum annual rent payments are $1,000,000. The lease was capitalized at the fair market value of the facility which approximated the present value of the minimum lease payments. Upon the expiration of the lease, the Company has agreed to purchase the property from the partnership for $10,500,000, which approximates fair market value, and enter into a sale and leaseback arrangement with an unrelated third party. The Company occupies warehouse and office facilities leased from the City of Lawrenceburg, Tennessee. Four ten-year net leases run until February 2004, July 2005, May 2006 and April 2007, respectively, and require minimum annual rent payments of $500,000, $500,000, $500,000, and $1,000,000, respectively, plus accrued interest. In connection with these leases, the Company guaranteed $25,000,000 of Industrial Development Bonds issued in order to construct the facilities, $20,417,000 of which remained unpaid as of December 31, 1997. The financing agreement with the issuing authority (i) requires the Company to maintain stipulated levels of insurance and tangible net worth, (ii) requires the Company to maintain minimum ratios of cash flow to debt service and liabilities to tangible net worth and (iii) contains certain other restrictions. The Company also leases various equipment under three to five year leases at an aggregate annual rental of $767,000. The equipment has been capitalized at its fair market value of $2,650,000, which approximates the present value of the minimum lease payments. The following is a schedule by year of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments as of December 31, 1997: Year Ending December 31, (In thousands) 1998 $4,638 1999 4,254 2000 3,523 2001 3,345 2002 3,166 Later years 8,994 ------- Total minimum lease payments 27,920 Less: amount representing interest 6,274 ------- Present value of net minimum lease payments $21,646 ======= -30- 31 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 8. SIGNIFICANT CUSTOMERS A significant portion of the Company's sales are to retailers throughout the United States and Canada. Sales to department stores owned by Federated Department Stores, Inc. ("Federated") accounted for 20%, 20% and 21% for the years ended December 31, 1997, 1996 and 1995, respectively. Sales to department stores owned by The May Department Stores Company ("May") accounted for 19%, 20% and 19% for the years ended December 31, 1997, 1996 and 1995, respectively. Federated and May accounted for approximately 43% of accounts receivable at December 31, 1997. NOTE 9. COMMITMENTS (a) LEASES. Total rent expense charged to operations for the years ended December 31, 1997, 1996 and 1995 was $22,159,000, 18,888,000 and $15,359,000, respectively. The following is a schedule by year of future minimum rental payments required under operating leases for the next five years: Year Ending December 31, (In thousands) 1998 $18,059 1999 17,320 2000 15,124 2001 13,416 2002 8,506 Later years 17,617 ------- $90,042 ======= Certain of the leases provide for renewal options and the payment of real estate taxes and other occupancy costs. (b) CONTINGENT LIABILITIES. Various lawsuits and claims arising during the normal course of business are pending against the Company and its consolidated subsidiaries. In the opinion of management, the ultimate liability, if any, resulting from these matters will have no significant effect on the Company's consolidated financial position, results of operations or liquidity. (c) ROYALTIES. Under an exclusive license to manufacture certain items under the Lauren by Ralph Lauren trademark pursuant to license and design service agreements with Polo Ralph Lauren Corporation, the Company is obligated to pay Polo Ralph Lauren Corporation a percentage of net sales of Lauren by Ralph Lauren products. Under these agreements, minimum payments of $7,000,000 are due for each of the years 2000 and 2001. The license and design service agreements expire on December 31, 2001 and provide for certain renewal options at that time. -31- 32 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 10. INCOME TAXES The following summarizes the provision for income taxes: Year ended December 31, 1997 1996 1995 (In thousands) ------- ------- ------- Current: Federal $78,811 $34,522 $23,236 State and local 10,524 3,733 3,030 Foreign 1,456 1,401 2,295 ------- ------- ------- 90,791 39,656 28,561 ------- ------- ------- Deferred: Federal (15,359) 7,722 7,653 State and local (2,240) (489) (31) Foreign (308) - - ------- ------- ------- (17,907) 7,233 7,622 ------- ------- ------- Provision for income taxes $72,884 $46,889 $36,183 ======= ======= ======= The foreign and domestic components of income before provision for income taxes were as follows: Year ended December 31, 1997 1996 1995 (In thousands) -------- -------- ------- United States $192,482 $125,650 $94,224 Canada 1,815 2,378 2,666 Other 312 (265) 2,778 -------- -------- ------- Income before provision for income taxes $194,609 $127,763 $99,668 ======== ======== ======= -32- 33 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The provision for income taxes on adjusted historical income differs from the amounts computed by applying the applicable Federal statutory rates due to the following: Year ended December 31, 1997 1996 1995 (In thousands) ------- -------- ------- Provision for Federal income taxes at the statutory rate $68,113 $44,717 $34,884 State and local income taxes, net of federal benefit 5,385 2,108 1,949 Amortization of excess of net assets acquired over cost (645) (645) (645) Other items, net 31 709 (5) ------- ------- ------- Provision for income taxes $72,884 $46,889 $36,183 ======= ======= ======= The Company has not provided for U.S. Federal and foreign withholding taxes on $2,727,000 of foreign subsidiaries' undistributed earnings as of December 31, 1997. Such earnings are intended to be reinvested indefinitely. The following is a summary of the significant components of the Company's deferred tax assets and liabilities: December 31, 1997 1996 (In thousands) ------- ------- Deferred tax assets: Nondeductible accruals and allowances $23,587 $ 8,009 Depreciation and amortization 561 1,118 Other (net) 2,286 1,042 ------- ------- Net deferred tax asset $26,434 $10,169 ======= ======= -33- 34 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 11. COMMON STOCK On July 30, 1996, the Company's Board of Directors approved a two-for-one stock split of the Company's Common Stock in the form of a 100% stock dividend for shareholders of record as of September 12, 1996. Concurrently, the number of authorized shares of Common Stock was increased to 100,000,000. On October 2, 1996, a total of 26,744,580 shares of Common Stock were issued in connection with the split. The stated par value of each share remained at $0.01. The issuance of authorized but unissued shares resulted in the transfer of $267,000 from additional paid-in capital to common stock, representing the par value of the shares issued. All share and per share amounts have been restated to retroactively reflect the stock split. In 1995, the Board of Directors authorized the repurchase of up to $100,000,000 of the Company's Common Stock in open market transactions over a two-year period ending in December, 1997. The program expired on October 27, 1997, through which date 2,823,394 shares had been acquired at a cost of $100,000,000. In 1997, the Board of Directors authorized an additional program to repurchase the Company's Common Stock from time to time in open market transactions not to exceed $100,000,000 in aggregate price. This program was to commence upon the earlier of December 15, 1997 or the full utilization of the previous buy-back program and has no time limit. As of December 31, 1997, 530,106 shares had been acquired at a cost of $24,025,000, leaving $75,975,000 available for future repurchases at that date. NOTE 12. STATEMENT OF CASH FLOWS Cash interest payments during the years ended December 31, 1997, 1996 and 1995 were $3,941,000, $3,207,000 and $2,118,000, respectively. Cash income tax payments during the years ended December 31, 1997, 1996 and 1995 were $96,251,000, $32,110,000 and $23,068,000, respectively. In connection with an agreement entered into for the formal acquisition of and payment for a currently utilized trademark, the Company recorded a $6,107,000 intangible asset and an offsetting long-term liability. Reductions in income tax payments resulting from the exercise of employee stock options during the years ended December 31, 1997, 1996 and 1995 were $8,067,000, $5,157,000 and $2,499,000, respectively. Under the provisions of the Company's 1991 Stock Option Plan, employees exercising stock options during the year ended December 31, 1997 exchanged 2,122 shares of the Company's Common Stock (valued at $100,000) for 8,163 newly issued shares, during the year ended December 31, 1996 exchanged 28,000 shares of the Company's Common Stock (valued at $763,000) for 67,430 newly issued shares and during the year ended December 31, 1995 exchanged 11,536 shares of the Company's Common Stock (valued at $168,000) for 24,000 newly issued shares. -34- 35 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 13. STOCK OPTIONS At December 31, 1997, the Company has two stock option plans, which are described below. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for the plans. Under APB Opinion 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized. Under the Company's 1991 and 1996 Stock Option Plans, options to purchase an aggregate of not more than 5,000,000 shares and 4,000,000 shares, respectively, of common stock may be granted from time to time to key employees, officers, directors, advisors and independent consultants to the Company or to any of its subsidiaries. The Plans are administered by the Board of Directors, which has empowered a committee of directors to administer the Plans. Under both plans, the per share exercise price for incentive stock options ("ISOs") will not be less than 100% of the fair market value of a share of the common stock on the date the option is granted (110% of fair market value on the date of grant of an ISO if the optionee owns more than 10% of the Company). Under the 1991 Plan, the per share exercise price for non- qualified stock options ("NQSOs") will not be less than 75% of the fair market value on the date the option is granted. The 1996 Plan has no restrictions on NQSO pricing. Under the 1991 Plan, options may be granted for a term to be determined by the committee of not less than one or more than ten years from the date of grant; under the 1996 Plan, options may be granted for a term of not less than six months or more than ten years from the date of grant. FASB Statement 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value-based method prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: no dividends paid for all years; expected volatility of 34.7%, 38.9% and 40.7%; risk-free interest rates of 6.04%, 6.20% and 6.16%; and expected lives of 3.4, 3.0 and 3.0 years. Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table. December 31, 1997 1996 1995 -------- ------- ------- Net income (in thousands) As reported $121,725 $80,874 $63,485 Pro forma 116,120 79,074 63,387 Basic earnings per share As reported $2.35 $1.55 $1.22 Pro forma $2.24 $1.51 $1.22 Diluted earnings per share As reported $2.26 $1.51 $1.20 Pro forma $2.15 $1.47 $1.20 -35- 36 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The following table contains information on stock options for the three year period ended December 31, 1997: Exercise Weighted Option price range average shares per share price --------- ------------------ ------ Outstanding, January 1, 1995 3,726,366 $0.40 to $16.125 $9.65 Granted 180,000 $12.00 to $17.75 $14.28 Exercised 777,766 $0.40 to $14.25 $6.20 Forfeited 78,000 $7.00 to $16.125 $13.63 --------- ------------------ ------ Outstanding, December 31, 1995 3,050,600 $0.40 to $17.75 $10.71 Granted 2,166,000 $14.715 to $34.375 $24.53 Exercised 1,031,230 $0.40 to $14.5625 $9.53 Forfeited 76,200 $7.00 to $24.00 $14.93 --------- ------------------ ------ Outstanding, December 31, 1996 4,109,170 $0.40 to $34.375 $18.17 Granted 1,717,000 $1.00 to $51.50 $47.04 Exercised 883,118 $7.00 to $36.625 $14.28 Forfeited 18,800 $12.375 to $24.75 $21.46 --------- ------------------ ------ Outstanding, December 31, 1997 4,924,252 $0.40 to $51.50 $28.88 ========= ================== ====== Exercisable at year-end 1995 980,400 $0.40 to $15.0625 $8.93 1996 733,770 $0.40 to $17.50 $9.56 1997 894,854 $0.40 to $34.375 $13.90 1991 Plan 1996 Plan --------- --------- Available for future grants 1995 938,334 - 1996 49,534 2,799,000 1997 3,134 1,147,200 Exercise price Exercise price Total less than market equal to market options ---------------- --------------- ------- Weighted-average fair value of: Options granted in 1995 - $4.74 $4.74 Options granted in 1996 $8.46 $8.00 $8.01 Options granted in 1997 $35.72 $14.90 $15.20 -36- 37 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) The following table summarizes information about stock options outstanding at December 31, 1997. Range of exercise prices: $0.40 $11.25 $21.125 $32.625 $44.00 $0.40 to to to to to to $9.50 $19.625 $24.3125 $39.25 $51.50 $51.50 ------- --------- --------- ------- --------- --------- Outstanding Options Number outstanding at December 31, 1997 361,167 1,044,867 1,579,218 324,000 1,615,000 4,924,252 Weighted-average remaining contractual life (years) 3.4 6.9 8.6 9.0 9.8 8.3 Weighted-average exercise price $5.86 $13.55 $23.97 $34.53 $47.61 $28.88 Exercisable options Number outstanding at December 31, 1997 261,169 373,067 253,618 7,000 - 894,854 Weighted-average exercise price $4.61 $13.16 $23.98 $34.38 - $13.90 NOTE 14. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION Unaudited interim consolidated financial information for the two years ended December 31, 1997 is summarized as follows: First Second Third Fourth (In thousands except per share data) Quarter Quarter Quarter Quarter -------- -------- -------- -------- 1997 Net sales $317,990 $262,988 $445,972 $345,508 Total revenues 321,455 266,289 450,508 349,219 Gross profit 106,571 87,747 147,201 105,803 Operating income 47,475 31,115 79,383 38,664 Net income 29,540 19,280 48,938 23,967 Diluted earnings per share $0.55 $0.36 $0.90 $0.45 1996 Net sales $260,350 $193,275 $309,019 $258,398 Total revenues 262,926 195,934 313,228 261,990 Gross profit 75,369 63,691 99,706 78,062 Operating income 32,652 21,534 49,788 26,282 Net income 20,339 13,338 30,878 16,319 Diluted earnings per share $0.38 $0.25 $0.58 $0.30 -37- 38 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 15. EMPLOYEE BENEFIT PLAN The Company maintains the Jones Apparel Group, Inc. Retirement Plan (the "Plan") under Section 401(k) of the Internal Revenue Code. Full-time employees not covered by a collective bargaining agreement and meeting certain other requirements are eligible to participate in the Plan. Under the Plan, employees may elect to have up to 10% of their salary deferred and deposited with a qualified trustee, who in turn invests the money in a variety of investment vehicles as selected by each employee. From January 1, 1995 through March 31, 1996, the Company matched 30% of each participant's contributions with the Company's contribution limited to a maximum of 1.8% of the employee's total compensation for employees earnings less than $150,000 per year. For employees earning over $150,000 per year, the Company matched 25% of each participant's contributions with the Company's contribution limited to a maximum of 1% of the employee's total compensation. On April 1, 1996, the Company matching contribution rates were increased to 50% and 3.0% of total compensation, respectively, for employees earning up to $150,000 per year and 35% and 2.1% of total compensation, respectively, for employees earning over $150,000 per year. Contributions and salary deferrals are subject to limitations imposed by the Internal Revenue Code. The Company may, at its sole discretion, contribute additional amounts to all employees on a pro rata basis. All employee contributions into the Plan are 100% vested, while the Company's matching contributions vest over a five-year period. The Company contributed approximately $1,241,000, $801,000 and $369,000 to the Plan during the years ended December 31, 1997, 1996 and 1995, respectively. -38- 39 Jones Apparel Group, Inc. Notes to Consolidated Financial Statements (Continued) NOTE 16. EARNINGS PER SHARE Basic and diluted earnings per share for each of the three years ended December 31, 1997, 1996 and 1995 are calculated as follows (in thousands except per share amounts): Net Per-share Income Shares Amount -------- ------ ------ For the year ended December 31, 1997: Basic earnings per share $121,725 51,899 $2.35 Effect of assumed conversion of employee stock options - 2,006 $0.09 -------- ------ ------ Diluted earnings per share $121,725 53,905 $2.26 ======== ====== ====== For the year ended December 31, 1996: Basic earnings per share $80,874 52,333 $1.55 Effect of assumed conversion of employee stock options - 1,318 $0.04 ------- ------ ------ Diluted earnings per share $80,874 53,651 $1.51 ======= ====== ====== For the year ended December 31, 1995: Basic earnings per share $63,485 52,130 $1.22 Effect of assumed conversion of employee stock options - 894 $0.02 ------- ------ ------ Diluted earnings per share $63,485 53,024 $1.20 ======= ====== ====== Options to purchase 1,590,000 shares of common stock at exercise prices ranging from $45 5/16 to $51 1/2 per share were outstanding during a portion of 1997 but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. These options, which expire between July 22 and December 12, 2007, were all outstanding at the end of 1997. -39- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers The directors and executive officers of the Company are as follows: Name Age Office - --------------------- --- ----------------------------------- Sidney Kimmel 70 Chairman and Director Herbert J. Goodfriend 71 Vice Chairman and Director Jackwyn Nemerov 46 President Irwin Samelman 67 Executive Vice President, Marketing and Director Wesley R. Card 50 Chief Financial Officer Patrick M. Farrell 48 Vice President and Corporate Controller Geraldine Stutz 69 Director Howard Gittis 64 Director Each director who is not a full-time employee of the Company will receive an annual grant of options to purchase 1,000 shares of the Company's common stock at an exercise price of $1.00 per share. Each option will expire on the tenth anniversary of its date of grant, and will be exercisable, in whole or in part, commencing six months from the date of grant and thereafter during the exercise period. Officers are appointed by the Board of Directors. The Board of Directors has appointed an Audit Committee consisting of Ms. Stutz and Mr. Gittis. The Audit Committee meets periodically to review and make recommendations with respect to the Company's internal controls and financial reports, and in connection with such reviews, has met with appropriate Company financial personnel and the Company's independent certified public accountants. The Board of Directors has also appointed a Stock Option Committee consisting of Ms. Stutz and Mr. Gittis to administer the 1991 and 1996 Stock Option Plans and a Compensation Committee consisting of Ms. Stutz and Mr. Gittis to determine cash and other incentive compensation to be paid to the Company's executive officers. Mr. Kimmel founded the Jones Apparel Division of W.R. Grace & Co. in 1970. Mr. Kimmel has served as Chairman since 1975. Prior to 1975, Mr. Kimmel occupied various executive offices including President -40- 41 of Jones New York and Vice President of John Meyer of Norwich. Prior to founding Jones, Mr. Kimmel was employed by W.R. Grace & Co. and was President of Villager, Inc., a sportswear company. Mr. Goodfriend joined the Company in 1990 after serving as the Company's legal counsel for the previous three years and has served as a director since July 1991. Before joining Jones, Mr. Goodfriend served as a director of Villager, Inc. and Venice Industries, Inc. In addition, Mr. Goodfriend is engaged in the practice of law and is of counsel to the firm of Phillips Nizer Benjamin Krim & Ballon LLP, which performs legal services for the Company. Ms. Nemerov was appointed President in January 1997. She joined the Company in 1985 and served as President of the Company's casual sportswear divisions and the Lauren by Ralph Lauren division. Prior to joining Jones, Ms. Nemerov was President of the Gloria Vanderbilt division of Murjani, Inc. from 1980 through 1985. Mr. Samelman has been Executive Vice President, Marketing of the Company since 1991 and has served as a director since July 1991. In addition, from 1987 to 1991, Mr. Samelman provided marketing consulting services to the Company through Samelman Associates, Inc., a private consulting company controlled by him. Prior thereto, Mr. Samelman was Regional Marketing Manager of Russ Togs, Inc. and Vice President of Villager, Inc. Mr. Card joined the Company in 1990. Prior to joining Jones, Mr. Card held the positions of Executive Vice President and Chief Financial Officer of Carolyne Roehm, Inc., and Corporate Vice President, Controller and Assistant Secretary of Warnaco, Inc. Mr. Farrell was appointed Vice President and Corporate Controller in November 1997. He joined the Company in 1994 as Director of Internal Audit and served as Vice President, Finance and Administration of Retail Operations of the Company since 1995. Prior to joining the Company, Mr. Farrell was Director of Internal Audit for Crystal Brands, Inc. Ms. Stutz has been a director of the Company since July 1991. Since 1993, Ms. Stutz has been a principal partner of Panache Productions, a fashion and marketing service. During the previous five years, she was Publisher of Panache Press at Random House, a book publisher. From 1960 until 1986, Ms. Stutz was President of Henri Bendel. Ms. Stutz serves on the Board of Directors of Tiffany & Co., The Theatre Development Fund and The Actors' Fund. Mr. Gittis has been a director of the Company since April 1992. During the past five years, Mr. Gittis' principal occupation has been Director and Vice Chairman of MacAndrews & Forbes Holdings Inc., a diversified holding company. In addition, Mr. Gittis is a director of Andrews Group Incorporated, California Federal Bank, a Federal Savings Bank, Consolidated Cigar Corporation, Consolidated Cigar Holdings Inc., First Nationwide Holdings Inc., First Nationwide (Parent) Holdings Inc., Loral Space and Communications Ltd., Mafco Consolidated Group Inc., Pneumo Abex Corporation, Power Control Technologies, Inc., Revlon, Inc., Revlon Consumer Products Corporation, Revlon Worldwide Corporation and Rutherford-Moran Oil Corporation. Key Employees The following persons, although not executive officers of the Company, make significant business contributions to the Company: Rena Rowan was the original creator of the Jones New York line and served as the division's Chief Designer from 1970 to 1982. She is currently Vice President, Design of the Company. From 1991 to 1993, Ms. -41- 42 Rowan was an executive vice president of the Company. Prior to the inception of Jones New York, Ms. Rowan was employed by Villager, Inc. and Rosenau, Inc. Anita Britt, Director of Investor Relations and Financial Planning, joined the Company in December 1993. Prior to joining the Company, Ms. Britt was Director of Internal Audit of American Reliance Group, Inc. Howard Buerkle has been President of Retail Operations for the Company since 1989. From 1986 through 1989, Mr. Buerkle was President of the retail division of Inwear/Martinique. Ellen Daniel, President of the Evan-Picone Collection division, joined Jones in 1994. From 1982 through 1994, Ms. Daniel was employed by Liz Claiborne, most recently as Senior Vice President - Corporate Design Director. Ira Dansky joined the Company in 1996 as General Counsel. Prior to joining the Company, Mr. Dansky was engaged in private law practice from 1987 through 1996, prior to which he served as Associate General Counsel of Xerox Corporation. Ronald Harrison, Vice President of Manufacturing, joined the Company in 1981. Mr. Harrison had been Plant Manager for Chief Apparel, Inc. from 1965 through 1981. Joseph Hiess was appointed President of the Jones New York Men's Sportswear division in August 1997. Prior to his appointment, Mr. Hiess served as head of Design and Marketing of JJ Farmer, a menswear company he founded in 1986 and subsequently sold to Salant Corporation in 1993. Barbara Kennedy has been President of the Jones New York Dress Division since August 1991. From 1983 through August 1991, Ms. Kennedy was employed by Bloomingdale's in various capacities, most recently as Vice President, Merchandise Manager. Gary R. Klocek has been Controller of Jones Apparel Group, Inc. since August 1987. Prior to joining Jones, Mr. Klocek held various positions with Atlantic Richfield Company ("ARCO") from 1979 through 1987, his last position being Manager of Cost and Inventory Control for one of ARCO's subsidiaries. Jeffrey Levy, President of Rena Rowan, joined the Company in 1990. Prior to joining Jones, Mr. Levy was Vice President of Sales and National Sales Manager, of Russ Togs, Inc. from 1984 through 1990. Benny Lin, Senior Vice President - Creative Director, joined Jones Apparel Group in December 1995. Mr. Lin had been Fashion Director at Macy's East prior to joining the Company. Martin Marlowe joined Jones Apparel Group in 1992 as Vice President of Foreign Manufacturing. Prior to joining Jones, Mr. Marlowe was President of Jodi International, an apparel importer, from 1988 to 1992. Helen Merril, President of the Evan-Picone Dress Divisions, joined Jones Apparel Group in October 1993. Prior to joining the Company, Ms. Merril held the positions of President of Scassi Dress of De Peche Corporation and President of Nippon Boutique of Albert Nippon Inc. Susan Metzger, Vice President of Sales for the Lauren by Ralph Lauren division, joined the Company in May 1996. Prior to joining Jones Apparel Group, Ms. Metzger held the positions of Vice President of Sales of Chaus, Inc. and Sales Manager of JH Collectibles. Heather Pech, President of the Jones New York Sport Collection division, joined the Company in 1990. Ms. Pech had been Account Executive at Calvin Klein, Inc. prior to joining Jones. -42- 43 Deanna Randall, who joined the Company in 1981, has held various sales and marketing positions with the Company, and is currently President of the Jones New York career division. Susan Rieland, President of Casual Design, joined the Company in 1994. Ms. Rieland had been Account Executive at Rafaella prior to joining Jones. John Sammaritano, Vice President of Distribution, joined Jones in 1975. Mr. Sammaritano had been Vice President of Distribution for Villager, Inc. from 1964 through 1975. Richard Shaw, President of Jones Apparel Group Canada, Inc., joined the Company in May 1997. Prior to joining the Company, Mr. Shaw served as President of Liz Claiborne Canada, which he helped launch in 1987. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Proxy Statement under the captions "EXECUTIVE COMPENSATION" and "EMPLOYMENT AND COMPENSATION ARRANGEMENTS" is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Proxy Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Proxy Statement under the captions "CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" are incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. The schedule and report of independent certified public accountants thereon, listed on the Index to Financial Statement Schedules attached hereto. 2. The Exhibits, which are listed on the Exhibit Index attached hereto. (b) No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report. -43- 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to the Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 26, 1998 JONES APPAREL GROUP, INC. (Registrant) By: /s/ Sidney Kimmel Sidney Kimmel, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------------------- ----------------------------- -------------- /s/ Sidney Kimmel Chairman and Director March 26, 1998 - ----------------- (Chief Executive Officer) (Sidney Kimmel) /s/ Wesley R. Card Chief Financial Officer March 26, 1998 - ------------------ (Principal Financial Officer) (Wesley R. Card) /s/ Patrick M. Farrell Vice President and March 26, 1998 - ---------------------- Corporate Controller (Patrick M. Farrell) (Principal Accounting Officer) /s/ Herbert J. Goodfriend Vice Chairman and Director March 26, 1998 - ------------------------- (Herbert J. Goodfriend) /s/ Irwin Samelman Executive Vice President, March 26, 1998 - ------------------ Marketing and Director (Irwin Samelman) /s/ Geraldine Stutz Director March 26, 1998 - ------------------- (Geraldine Stutz) /s/ Howard Gittis Director March 26, 1998 - ----------------- (Howard Gittis) -44- 45 JONES APPAREL GROUP, INC. INDEX TO FINANCIAL STATEMENT SCHEDULES Report of Independent Certified Public Accountants on Schedule Schedule II. Valuation and qualifying accounts Schedules other than those listed above have been omitted since the information is not applicable, not required or is included in the respective financial statements or notes thereto. EXHIBIT INDEX Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- (5) 3.1 3.1 Articles of Incorporation, as amended (1) 3.3 3.3 By-Laws (3) 3.4 3.4 Amendment to By-Laws (1) 10.2 10.2 Lease Agreement between the Registrant and Bristol Associates, L.P., re: 250 Rittenhouse Circle (1) 10.5 10.5 Form of 1991 Stock Option Plan+ (1) 10.7 10.7 Employment and Stock Option Agreements between the Registrant and Herbert J. Goodfriend+ (2) 10.17 10.17 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee (2) 10.18 10.18 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1995 (2) 10.19 10.19 Lease agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg (4) 10.26 10.26 Series 1996 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee (4) 10.27 10.27 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1996 (4) 10.28 10.28 First Amendment to Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg (4) 10.29 10.29 Agreement between the Registrant and Herbert J. Goodfriend with respect to consulting services following termination of employment -45- 46 Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- (5) 10.30 10.30 Series 1996 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee (5) 10.31 10.31 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1996 (5) 10.32 10.32 Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg (5) 10.33 10.33 Form of 1996 Stock Option Plan+ (5) 10.34 10.34 Letter Agreement between the Registrant and CoreStates Bank (5) 10.35 10.35 Master Short Term Borrowing Agreement between the Registrant and CoreStates Bank (5) 10.36 10.36 Letter Agreement between the Registrant and First Union National Bank (5) 10.37 10.37 Letter Agreement between the Registrant and the Bank of New York (5) 10.38 10.38 Letter Agreement between the Registrant and Bank of Boston (5) 10.39 10.39 Money Market Line Commercial Promissory Note between the Registrant and Bank of Boston (5) 10.40 10.40 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# (5) 10.41 10.41 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P., dated October 18, 1995# (5) 10.42 10.42 Lease Agreement between the Registrant and The Shelton Companies (5) 10.43 10.43 Letter Agreement between the Registrant and Israel Discount Bank of New York * 10.44 Series 1997 Note Agreement with The Industrial Development Board of the City of Lawrenceburg, Tennessee * 10.45 Industrial Development Board of the City of Lawrenceburg Taxable Revenue Note, Series 1997 * 10.46 Amendment to Lease Agreement between the Registrant and the Industrial Development Board of the City of Lawrenceburg * 10.47 Letter Agreement between the Registrant and First Union National Bank -46- 47 Incorporated by Reference Exhibit to Exhibit Nos. Description of Exhibit - ------------ ------- ---------------------- * 10.48 Letter Agreement between the Registrant and CoreStates Bank * 10.49 Letter Agreement between the Registrant and BankBoston * 10.50 Money Market Line Commercial Promissory Note between the Registrant and BankBoston * 10.51 Letter Agreement between the Registrant and The Chase Manhattan Bank * 10.52 Term Note and Unconditional Guaranty with First Union National Bank * 11 Computation of Earnings per Share * 21 List of Subsidiaries * 23 Consent of BDO Seidman, LLP * 27 Financial Data Schedule (6) * 27.1 Restated Financial Data Schedule for 1996 and 1995 (6) * 27.2 Restated Financial Data Schedule for 1997 interim periods (6) * 27.3 Restated Financial Data Schedule for 1996 interim periods (6) ____________________ * Filed herewith. # Portions deleted pursuant to application for confidential treatment under Rule 24B-2 of the Securities Exchange Act of 1934. + Management contract or compensatory plan or arrangement. (1) Incorporated by Reference to the Company's Registration Statement on Form S-1 (file No. 33-39742). (2) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (3) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (4) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (5) Incorporated by Reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (6) Exhibit 27 is submitted as an exhibit only in the electronic format of this Annual Report on Form 10-K submitted to the Securities and Exchange Commission.) -47- 48 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Jones Apparel Group, Inc. New York, New York The audits referred to in our dated February 6, 1998 relating to the consolidated financial statements of Jones Apparel Group, Inc. and subsidiaries, which is contained in Item 8 of Form 10-K, included the audits of the financial statement schedule listed in the accompanying index for each of the three years ended December 31, 1997. The financial statement schedule is the responsibility of management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York February 6, 1998 -48- 49 SCHEDULE II JONES APPAREL GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (In Thousands) Column A Column B Column C Column D Column E - ------------------------------- ---------- ------------------------- ---------- --------- Additions ------------------------- Balance at Charged to Charged to Balance beginning costs and other Deductions at end of Description of period expenses accounts <F1> period - ------------ ---------- ---------- ----------- ---------- --------- For the year ended December 31, 1995: Allowance for doubtful accounts $2,560 $(464) $ - $(161) $2,257 For the year ended December 31, 1996: Allowance for doubtful accounts $2,257 $(800) $ - $(806) $2,263 For the year ended December 31, 1997: Allowance for doubtful accounts $2,263 $(1,870) $ - $2,374 $2,767 <F1> Doubtful accounts written off (recovered) against accounts receivable. -49-