UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10746
JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-0935166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(Address of principal (Zip Code)
executive offices)
(215) 785-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at November 6, 1998
$.01 par value 104,859,946
JONES APPAREL GROUP, INC.
Index
PART I. FINANCIAL INFORMATION Page No.
--------
Financial Statements:
Consolidated Balance Sheets
September 27, 1998 and December 31, 1997............ 3
Consolidated Statements of Income
Thirteen and Thirty-nine Weeks ended September 27,
1998 and September 28, 1998....................... 4
Consolidated Statement of Stockholders' Equity
Thirty-nine Weeks ended September 27, 1998.......... 5
Consolidated Statements of Cash Flows
Thirty-nine Weeks ended September 27, 1998 and
September 28, 1997................................ 6
Notes to Consolidated Financial Statements................. 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10 - 15
PART II. OTHER INFORMATION...................................... 16 - 17
- 2 -
JONES APPAREL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
September 27, December 31,
1998 1997
------------ -----------
(Unaudited)
ASSETS
CURRENT:
Cash and cash equivalents............................................................. $ 14,956 $ 40,134
Accounts receivable, net of allowance of $3,337 and $2,767 for doubtful accounts...... 255,978 91,747
Inventories........................................................................... 226,971 255,055
Receivable from and advances to contractors........................................... 17,571 7,833
Prepaid and refundable income taxes................................................... - 5,993
Deferred taxes........................................................................ 25,304 26,269
Prepaid expenses and other current assets............................................. 11,142 13,740
------- -------
TOTAL CURRENT ASSETS................................................................ 551,922 440,771
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $47,009 and $44,189.................................. 129,646 81,934
CASH RESTRICTED FOR CAPITAL ADDITIONS................................................... - 11,193
INTANGIBLES, less accumulated amortization of $8,618 and $7,687......................... 29,006 30,604
OTHER ASSETS............................................................................ 25,495 16,265
------- -------
$736,069 $580,767
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings................................................................. $ 37,929 $ -
Current portion of long-term debt and capital lease obligations....................... 5,825 4,199
Accounts payable...................................................................... 81,881 90,429
Taxes payable......................................................................... 30,329 -
Accrued expenses and other current liabilities........................................ 25,132 15,574
------- -------
TOTAL CURRENT LIABILITIES........................................................... 181,096 110,202
------- -------
NONCURRENT LIABILITIES:
Obligations under capital leases...................................................... 35,851 18,457
Long-term debt........................................................................ 12,338 8,833
Other................................................................................. 6,107 6,107
------- -------
TOTAL NONCURRENT LIABILITIES........................................................ 54,296 33,397
------- -------
TOTAL LIABILITIES................................................................... 235,392 143,599
------- -------
EXCESS OF NET ASSETS ACQUIRED OVER COST................................................. 154 1,536
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares authorized 1,000; none issued................ - -
Common stock, $.01 par value - shares authorized 200,000;
issued 109,963 and 108,955........................................................... 1,100 545
Additional paid in capital............................................................ 136,956 122,582
Retained earnings..................................................................... 561,663 438,917
Accumulated other comprehensive income................................................ (2,059) (1,524)
------- -------
697,660 560,520
Less treasury stock, 10,037 and 6,767 shares, at cost................................. (197,137) (124,888)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 500,523 435,632
------- -------
$736,069 $580,767
======= =======
<FN>
All amounts in thousands except per share data
See notes to consolidated financial statements
- 3 -
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- --------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales............................................... $495,727 $445,972 $1,181,240 $1,026,950
Licensing income........................................ 4,590 4,536 11,406 11,302
------- ------- --------- ---------
Total revenues.......................................... 500,317 450,508 1,192,646 1,038,252
Cost of goods sold...................................... 324,724 303,308 778,372 696,733
------- ------- --------- ---------
Gross profit............................................ 175,593 147,200 414,274 341,519
Selling, general and administrative expenses............ 78,342 67,818 211,942 183,547
------- ------- --------- ---------
Operating income........................................ 97,251 79,382 202,332 157,972
Net interest expense.................................... 1,156 1,081 2,745 1,710
------- ------- --------- ---------
Income before provision for income taxes................ 96,095 78,301 199,587 156,262
Provision for income taxes.............................. 36,997 29,363 76,841 58,504
------- ------- --------- ---------
Net income.............................................. $59,098 $48,938 $122,746 $97,758
======= ======= ========= =========
Earnings per share
Basic................................................. $0.59 $0.47 $1.22 $0.94
Diluted............................................... $0.57 $0.45 $1.17 $0.90
Weighted average common shares and
share equivalents outstanding
Basic................................................. 100,886 104,372 100,821 104,124
Diluted............................................... 104,426 108,634 104,613 108,184
<FN>
All amounts in thousands except per share data
See notes to consolidated financial statements
- 4 -
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Total Additional other
stockholders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
------------- ------- ----------- -------- ------------- ---------
Balance, December 31, 1997...................... $435,632 $545 $122,582 $438,917 ($1,524) ($124,888)
Thirty-nine weeks ended September 27, 1998:
Comprehensive income
Net income.................................... 122,746 - - 122,746 - -
Foreign currency translation adjustments...... (535) - - - (535) -
-------------
Total comprehensive income.................. 122,211
-------------
Amortization of deferred compensation in
connection with executive stock options........ 158 - 158 - - -
Exercise of stock options....................... 8,986 6 9,080 - - (100)
Tax benefit derived from exercise of
stock options................................... 5,685 - 5,685 - - -
Effect of 2-for-1 stock split................... - 549 (549) - - -
Treasury stock acquired......................... (72,149) - - - - (72,149)
------------- ------- ----------- -------- ------------- ---------
Balance, September 27, 1998..................... $500,523 $1,100 $136,956 $561,663 ($2,059) ($197,137)
============= ======= =========== ======== ============= =========
<FN>
All amounts in thousands
See notes to consolidated financial statements
- 5 -
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirty-nine weeks ended
------------------------------
September 27, September 28,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................................................. $122,746 $97,758
-------- -------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 11,254 11,494
Provision for losses on accounts receivable............................................... 825 2,009
Deferred taxes............................................................................ (3,174) (14,676)
Other..................................................................................... 362 154
(Increase) decrease in:
Trade receivables....................................................................... (165,353) (100,454)
Inventories............................................................................. 27,638 (62,623)
Prepaid expenses and other current assets............................................... (7,293) 2,691
Other assets............................................................................ (5,828) (4,780)
Increase (decrease) in:
Accounts payable........................................................................ (8,473) 21,064
Taxes payable........................................................................... 42,761 20,253
Accrued expenses and other current liabilities.......................................... 9,850 5,045
------- -------
Total adjustments..................................................................... (97,431) (119,823)
------- -------
Net cash provided by (used in) operating activities......................................... 25,315 (22,065)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (37,546) (21,743)
Decrease (increase) in cash restricted for capital additions.............................. 11,193 (6,022)
Other..................................................................................... (116) -
------- -------
Net cash used in investing activities....................................................... (26,469) (27,765)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings......................................................... 37,929 45,104
Proceeds from capital lease............................................................... - 10,000
Repayment of capital leases and long-term debt............................................ (3,785) (2,738)
Increase in long-term debt................................................................ 5,000 -
Acquisition of treasury stock............................................................. (72,149) (30,636)
Proceeds from exercise of stock options................................................... 8,986 10,291
------- -------
Net cash provided by (used in) financing activities......................................... (24,019) 32,021
------- -------
EFFECT OF EXCHANGE RATES ON CASH............................................................ (5) 39
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................... (25,178) (17,770)
CASH AND CASH EQUIVALENTS, beginning of period.............................................. 40,134 30,085
------- -------
CASH AND CASH EQUIVALENTS, end of period.................................................... $14,956 $12,315
======= =======
<FN>
All amounts in thousands
See notes to consolidated financial statements
- 6 -
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Jones Apparel
Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company").
The financial statements have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") for interim financial information and
in accordance with the requirements of Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. The consolidated financial statements included herein
should be read in conjunction with the consolidated financial statements and
the footnotes therein included within the Company's Annual Report on Form 10-K.
In the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The foregoing interim
results are not necessarily indicative of the results of operations for the
full year ending December 31, 1998. The Company reports interim results in
13 week quarters; however, the annual reporting period is the calendar year.
Certain reclassifications have been made to conform prior period data with
the current presentation.
2. Inventories
Inventories are summarized as follows (amounts in thousands):
September 27, December 31,
1998 1997
------------ -----------
Raw materials..................... $22,286 $27,045
Work in process................... 28,854 41,294
Finished goods.................... 175,831 186,716
-------- --------
$226,971 $255,055
======== ========
- 7 -
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Statement of Cash Flows
Cash payments made for interest for the thirty-nine weeks ended September 27,
1998 and September 28, 1997 were $4,039,000 and $2,892,000, respectively.
Cash payments made for income taxes for the thirty-nine weeks ended September
27, 1998 and September 28, 1997 were $49,518,000 and $52,892,000, respectively.
Property and equipment acquired through capital lease financing during the
thirty-nine weeks ended September 27, 1998 and September 28, 1997 amounted to
$21,310,000 and $220,000, respectively.
Reduction in income tax payments resulting from the exercise of employee stock
options during the thirty-nine weeks ended September 27, 1998 and September 28,
1997 were $5,685,000 and $6,389,000, respectively.
Under the provisions of the Company's 1991 Stock Option Plan, employees
exercising stock options during the thirty-nine weeks ended September 27, 1998
exchanged 3,826 shares of the Company's Common Stock (valued at $100,000) for
8,332 newly issued shares and during the thirty-nine weeks ended September 28,
1997 exchanged 4,244 shares of the Company's Common Stock (valued at $100,000)
for 17,926 newly issued shares.
4. New Accounting Standards
In 1997, the Financial Accounting Standards Board issued 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" and establishes new 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 an enterprise about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance.
SFAS No. 131 is effective for financial statement periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. The adoption of this standard 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which requires entities to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not expect results of
operations and financial position to be affected by implementation of this
new standard.
- 8 -
JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Capital Stock
On May 6, 1998, the Company's Board of Directors authorized 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 June 4, 1998, with stock certificates issued
on June 25, 1998. In connection with the Common Stock split, the Board of
Directors approved an increase in the number of shares authorized to
200,000,000. On June 25, 1998, a total of 50,497,911 shares of Common Stock
were issued in connection with the split. The stated par value of each share
was not changed from $0.01. All share and per share amounts have been restated
to retroactively reflect the stock split.
6. Subsequent Events
On September 10, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") to acquire 100% of the equity of Sun Apparel,
Inc. of El Paso, Texas ("Sun"). The acquisition was completed on October 2,
1998. Sun designs, manufactures and distributes jeanswear, sportswear and
related apparel for men, women and children. Sun markets its products under
the Polo Jeans Company brand, licensed from Polo Ralph Lauren, as well as other
owned, licensed and private label brands.
The Company purchased the equity of Sun for $216.6 million, comprised of
$137.8 million in cash and 4.4 million shares of common stock. For accounting
purposes, the common stock was valued at $18.00 per share (the closing price
on September 10, 1998, the date the Merger Agreement was signed and announced).
The Company also assumed Sun debt of $228.5 million, which was refinanced in
conjunction with the closing of the transaction. The Merger Agreement also
provides for potential additional future payments based on Sun's operating
performance. The acquisition will be accounted for using the purchase method
of accounting and the results of Sun will be included in the Company's
financial records from the date of acquisition.
Concurrently, the Company announced the issuance of $265 million of Senior
Notes due 2001, and a new $550 million bank credit facility to finance the
acquisition and the Company's working capital, general corporate and trade
letter of credit requirements.
- 9 -
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
General
The following discussion provides information and analysis of the Company's
results of operations for the thirteen and thirty-nine week periods ended
September 27, 1998 and September 28, 1997, respectively, 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.
Results of Operations
Statements of Income Expressed as a Percentage of Total Revenues
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- --------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales 99.1% 99.0% 99.0% 98.9%
Licensing income 0.9% 1.0% 1.0% 1.1%
-------- -------- -------- --------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 64.9% 67.3% 65.3% 67.1%
-------- -------- -------- --------
Gross profit 35.1% 32.7% 34.7% 32.9%
Selling, general and
administrative expenses 15.7% 15.1% 17.8% 17.7%
-------- -------- -------- --------
Operating income 19.4% 17.6% 17.0% 15.2%
Net interest expense 0.2% 0.2% 0.2% 0.2%
-------- -------- -------- --------
Income before provision
for income taxes 19.2% 17.4% 16.7% 15.1%
Provision for income taxes 7.4% 6.5% 6.4% 5.6%
-------- -------- -------- --------
Net income 11.8% 10.9% 10.3% 9.4%
======== ======== ======== ========
Totals may not agree due to rounding.
Quarter Ended September 27, 1998 Compared to Quarter Ended September 28, 1997
Net Sales. Net sales in the thirteen weeks ended September 27, 1998
(hereinafter referred to as the "third quarter of 1998") increased 11.1%, or
$49.7 million, to $495.7 million, compared to $446.0 million in the thirteen
weeks ended September 28, 1997 (hereinafter referred to as the "third quarter
of 1997"). The increase was due primarily to an increase in the number of
units shipped, as well as the impact of a higher average price per unit
resulting from the mix of products shipped. The breakdown of net sales by
category for both periods is as follows:
- 10 -
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Third Third
Quarter Quarter Increase/ Percent
(In millions) of 1998 of 1997 (Decrease) Change
------- ------- -------- -------
Career sportswear $197.3 $196.1 $1.2 0.6%
Casual sportswear 108.5 108.1 0.4 0.4%
Lifestyle collection 153.8 100.8 53.0 52.6%
Men's collection 6.9 0.0 6.9 N/A
Suits, dress, and other 29.2 41.0 (11.8) (28.8%)
------- ------- -------- -------
Net sales $495.7 $446.0 $49.7 11.1%
======= ======= ======== =======
The increase in Lifestyle collection was primarily due to a large increase
in shipments under the Lauren by Ralph Lauren label. The Jones New York Men's
collection was introduced with initial shipments beginning during the third
quarter of 1998. The decrease in suits, dress, and other was mainly the result
of a repositioning of the Saville Suit label.
Licensing Income. Licensing income increased $0.1 million to $4.6 million
in the third quarter of 1998 compared to $4.5 million in the third quarter
of 1997. Income from licenses under the Jones New York label increased $0.5
million, while income from licenses under the Evan-Picone label decreased
$0.4 million.
Gross Profit. The gross profit margin was 35.1% in the third quarter of 1998
compared to 32.7% in the third quarter of 1997. The gross profit improvement
was attributable to the significant increase in sales of the Lifestyle
collection, which carries higher margins than the corporate average and lower
overseas production costs due to the favorable impact of currency devaluations
in Asia.
SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses)
of $78.3 million in the third quarter of 1998 represented an increase of $10.5
million over the third quarter of 1997. As a percentage of total revenues, SG&A
expenses increased to 15.7% in the third quarter of 1998 from 15.1% for the
comparable period in 1997. While royalties and operating expenses added
significant expenses during the quarter, the effect was offset by the
proportionately larger increase in sales and gross profit. Retail store
operating expenses increased $2.6 million, reflecting the added cost of 18 more
stores in operation at the end of the third quarter of 1998 compared to the end
of the third quarter of 1997.
Operating Income. The resulting third quarter of 1998 operating income of
$97.3 million increased 22.5%, or $17.9 million, compared to $79.4 million
during the third quarter of 1997. The operating margin increased to 19.4%
for the third quarter of 1998 from the 17.6% achieved during the third quarter
of 1997.
Net Interest Expense. Net interest expense was $1.2 million in the third
quarter of 1998 compared to $1.1 million in the comparable period of 1997.
Provision for Income Taxes. The effective income tax rate was 38.5% for the
third quarter of 1998 compared to 37.5% for the third quarter of 1997. The
increase was primarily due to higher state income tax provisions for the third
quarter of 1998.
- 11 -
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net Income. Net income increased 20.8% to $59.1 million in the third quarter
of 1998, an increase of $10.2 million over the net income of $48.9 million
earned in the third quarter of 1997. Net income as a percentage of total
revenues was 11.8% in the third quarter of 1998 and 10.9% in the third quarter
of 1997.
Nine months Ended September 27, 1998 Compared to Nine months Ended
September 28, 1997
Net Sales. Net sales in the thirty-nine weeks ended September 27, 1998
(hereinafter referred to as the "first nine months of 1998") increased 15.0%,
or $0.2 billion, to $1.2 billion, compared to $1.0 billion in the thirty-nine
weeks ended September 28, 1997 (hereinafter referred to as the "first nine
months of 1997"). The increase was due primarily to an increase in the number
of units shipped, as well as the impact of a higher average price per unit
resulting from the mix of products shipped. The breakdown of net sales by
category for both periods is as follows:
First First
Nine Months Nine Months Increase/ Percent
(In millions) of 1998 of 1997 (Decrease) Change
---------- ---------- --------- -------
Career sportswear $505.3 $474.4 $30.9 6.5%
Casual sportswear 261.9 247.1 14.8 6.0%
Lifestyle collection 314.9 192.8 122.1 63.3%
Men's collection 6.9 0.0 6.9 N/A
Suits, dress, and other 92.2 112.7 (20.5) (18.2%)
---------- ---------- --------- -------
Net sales $1,181.2 $1,027.0 $154.2 15.0%
========== ========== ========= =======
The increase in Lifestyle collection was primarily due to a large increase in
shipments under the Lauren by Ralph Lauren label. The Jones New York Men's
collection was introduced with initial shipments beginning during the third
quarter of 1998. The decrease in suits, dress, and other was the result of the
termination of the Christian Dior suit license and a repositioning of the
Saville Suit label.
Licensing Income. Licensing income increased $0.1 million to $11.4 million
in the first nine months of 1998 compared to $11.3 million in the first nine
months of 1997. Income from licenses under the Jones New York label increased
$0.8 million while income from licenses under the Evan-Picone label decreased
$0.7 million.
Gross Profit. The gross profit margin was 34.7% in the first nine months of
1998 compared to 32.9% in the first nine months of 1997. The gross profit
improvement was attributable to the significant increase in sales of the
Lifestyle collection, which carries higher margins than the corporate average
and lower overseas production costs due to the favorable impact of currency
devaluations in Asia.
SG&A Expenses. Selling, general and administrative expenses of $211.9 million
in the first nine months of 1998 represented an increase of $28.4 million over
the first nine months of 1997. As a percentage of total revenues, SG&A expenses
increased to 17.8% in the first nine months of 1998 from 17.7% for the
comparable period in 1997. While advertising, royalties and operating
expenses added significant expenses during the quarter, the effect was offset
by the proportionately larger increase in sales and gross profit. Retail store
operating expenses increased $7.3 million, reflecting the added cost of 18 more
stores in operation at the end of the first nine months of 1998 compared to the
end of the first nine months of 1997.
- 12 -
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating Income. The resulting first nine months of 1998 operating income of
$202.3 million increased 28.1%, or $44.3 million, compared to $158.0 million
during the first nine months of 1997. The operating margin increased to 17.0%
for the first nine months of 1998 from the 15.2% achieved during the first nine
months of 1997.
Net Interest Expense. Net interest expense was $2.7 million in the first nine
months of 1998 compared to $1.7 million in the comparable period of 1997. The
change primarily reflects an increase in capital lease obligations and long-
term debt associated with the construction of warehouse facilities.
Provision for Income Taxes. The effective income tax rate was 38.5% for the
first nine months of 1998 compared to 37.4% for the first nine months of 1997.
The increase was primarily due to higher state income tax provisions for the
first nine months of 1998.
Net Income. Net income increased 25.6% to $122.7 million in the first nine
months of 1998, an increase of $24.9 million over the net income of $97.8
million earned in the first nine months of 1997. Net income as a percentage
of total revenues was 10.3% in the first nine months of 1998 and 9.4% in the
first nine months of 1997.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund working capital
needs, capital expenditures and 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.
Net cash provided by operations was $25.3 million in the first nine months of
1998, compared to net cash used in operations of $22.1 million in the first nine
months of 1997. The change primarily reflects the effect of higher net income
for the first nine months of 1998 and a $27.6 million decrease in inventories
compared to a $62.6 increase in inventories in 1997. These amounts were offset
by a larger increase in accounts receivables of $165.4 million in 1998 compared
to $100.5 million in 1997.
Net cash used in investing activities was $1.3 million lower in the first nine
months of 1998 than in the first nine months of 1997, as additional capital
improvements and replacements were offset by a decrease in restricted cash.
Expenditures for capital improvements, replacements and property under capital
leases for the full year 1998 are expected to approximate $55.0 million, of
which $17 million represents the cost of completing an additional warehouse
facility.
Net cash used in financing activities was $24.0 million in the first nine
months of 1998 compared to net cash provided by financing activities of $32.0
million in the first nine months of 1997. The principal reasons for the change
were a smaller increase in the amounts of short-term borrowings to fund working
capital requirements, the net decrease in proceeds from capital lease and long-
term debt and transactions involving the Company's Common Stock. The Company
repurchased $72.1 million and $30.6 million of its Common Stock on the open
market for the nine months ended September 27, 1998 and September 28, 1997,
respectively, under announced programs to acquire up to $200.0 million
- 13 -
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of such shares. On September 16, 1998, the Board of Directors authorized an
additional $100.0 million stock repurchase plan. The Company had repurchased
$196.2 million of its shares as of September 27, 1998, since first announcing
a stock repurchase program in December 1995. The Company may authorize
additional share repurchases in the future depending on, among other things,
market conditions and the Company's financial condition. Proceeds from the
issuance of common stock to employees exercising stock options amounted to
$9.1 million in the first nine months of 1998 compared to $10.3 million in
the first nine months of 1997.
Under the Company's credit agreements in place at the end of the third quarter
of 1998, $124.8 million was utilized for letters of credit and $37.9 million of
short-term borrowings were outstanding on September 27, 1998. In connection
with the acquisition of Sun Apparel, Inc. ("Sun") on October 2, 1998, the
Company replaced its existing credit agreements with $265.0 million of 6.25%
three-year Senior Notes and entered into an agreement with First Union National
Bank, as administrative agent, and other lending institutions to borrow an
aggregate principal amount of up to $550.0 million under Senior Credit
Facilities. These facilities consist of (i) a $150.0 million Three-Year
Revolving Credit Facility, (ii) a $300.0 million 364-Day Revolving Credit
Facility, the entire amount of which will be available for trade letters of
credit or cash borrowings, and (iii) a $100.0 million Term Loan Facility.
Upon the closing of the Sun acquisition, the Company drew down the Term
Loan Facility in its entirety and the Three-Year Revolving Credit Facility in
the amount of $125.0 million to finance a portion of the acquisition, the
refinancing of Sun's debt, related transactions and for its short-term
working capital needs. Upon the closing of the acquisition, approximately
$141.8 million was outstanding under the 364-Day Revolving Credit Facility,
which was comprised of both Sun's and the Company's letters of credit
outstanding on that date. Borrowings under the Senior Credit Facilities
may also be used for working capital and other general corporate purposes,
including permitted acquisitions and stock repurchases. The Senior Credit
Facilities are unsecured and require the Company to satisfy an earnings
before interest, taxes, depreciation, amortization and rent to interest expense
plus rents coverage ratio and a net worth maintenance covenant as well as other
restrictions, including (subject to exceptions) limiting the Company's ability
to incur additional indebtedness, prepay subordinated indebtedness, make
acquisitions, enter into mergers, and pay dividends.
The Company believes that funds generated by operations, the Senior Notes and
the new Senior Credit Facilities will provide the financial resources sufficient
to meet its foreseeable working capital, letter of credit, capital expenditure
and stock repurchase requirements and its ongoing obligations to the former Sun
shareholders.
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JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000
The Company uses various types of technology in the operations of its
business. Some of this technology incorporates date identification functions;
however, many of these date identification functions were developed to use only
two digits to identify a year. These date identification functions, if not
corrected, could cause their related technologies to fail or create erroneous
results on or before January 1, 2000.
The Company is continuing to assess, with both internal and external
resources, the impact of Year 2000 issues on its information and non-information
technology systems. As part of this process, the Company retained the services
of an independent consultant that specializes in Year 2000 evaluation and
remediation work. In addition, the Company has developed a plan with respect to
the Year 2000 readiness of its internal technology systems. This plan involves
(i) creating awareness inside the Company of Year 2000 issues, (ii) analyzing
the Company's Year 2000 state of readiness, (iii) testing, correcting and
updating systems and computer software as needed, and (iv) incorporating the
corrected or updated systems and software into the Company's business. The
Company is currently finalizing the assessment phase of this plan, and has moved
into the testing and correcting phase with respect to those technology systems
that have been identified as having Year 2000 issues. The Company anticipates
substantially completing the implementation of this plan by early 1999; however,
it may revise the estimated date of completion of this plan based upon any
unforeseen delays or costs in implementing such plan.
In a continuing effort to become more productive and competitive, the Company
replaces portions of its software and hardware when warranted by significant
business and/or technology changes. While these replacements are not
specifically intended to resolve the Year 2000 issue, the new software and
hardware is designed to function properly with respect to dates related to
the Year 2000 and beyond. The Company also has initiated discussions with its
significant suppliers, customers and financial institutions to ensure that
those parties have appropriate plans to remediate Year 2000 issues when their
systems interface with the Company's systems or may otherwise impact operations.
The Company anticipates substantially completing the implementation of this plan
by early 1999; however, there can be no assurances that such plan will be
completed by the estimated date or that the systems and products of other
companies on which the Company relies will not have an adverse effect on its
business, operations or financial condition.
As of September 27, 1998, the Company had incurred approximately $150,000 in
costs related to the Year 2000 issue. The Company believes that additional
costs related to the Year 2000 issue will not be material to its business,
operations or financial condition. However, estimates of Year 2000 related
costs are based on numerous assumptions and there is no certainty that estimates
will be achieved and actual costs could be materially greater than anticipated.
The Company anticipates that it will fund its additional Year 2000 costs from
current working capital.
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JONES APPAREL GROUP, INC.
OTHER INFORMATION
Part II.
Item 5. Other information
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 Quarterly Report, including,
without limitation, the statements under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.53 License Agreement dated as of August 1, 1995 by and between
PRL USA, Inc., as assignee of Polo Ralph Lauren Corporation,
successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc.,
as amended to date
Exhibit 10.54 Design Services Agreement dated as of August 1, 1995 by and
between Polo Ralph Lauren Corporation, successor to Polo Ralph
Lauren, L.P., and Sun Apparel, Inc., as amended to date
Exhibit 11 Computation of earnings per share
Exhibit 27 Financial data schedule dated September 27, 1998
(b) Reports on Form 8-K
During the quarter ended September 27, 1998, a Current Report on Form 8-K,
dated September 24, 1998, was filed with the Commission by the Company
announcing the acquisition of Sun Apparel, Inc.
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JONES APPAREL GROUP, INC.
OTHER INFORMATION (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
JONES APPAREL GROUP, INC.
(Registrant)
Date: November 10, 1998 By /s/ Sidney Kimmel
----------------------------
SIDNEY KIMMEL
Chief Executive Officer
By /s/ Wesley R. Card
----------------------------
WESLEY R. CARD
Chief Financial Officer
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