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, 1998
[ ] 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 22, 1999 was approximately $2,087,400,914.
As of March 22, 1999, there were 103,642,379 shares of the registrant's
common stock outstanding.
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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
1999 Annual Meeting (the "Proxy
Statement") that are specifically
identified herein as incorporated by
reference into this Form 10-K.
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STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes, and incorporates by reference, "forward-looking
statements" within the meaning of the securities laws. All statements
regarding the Company's expected financial position, business and
financing plans are forward-looking statements. Forward-looking
statements also include representations of the Company's expectations or
beliefs concerning future events that involve risks and uncertainties,
including those associated with the effect of national and regional
economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail
environment, customer acceptance of both new designs and newly-introduced
product lines, financial difficulties encountered by customers, and the
integration of Sun Apparel, Inc. or other acquired businesses into the
Company's existing operations. 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, such expectations may prove to be incorrect. Important factors
that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed in this Report in
conjunction with the forward-looking statements. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
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PART I
ITEM 1. BUSINESS
Jones Apparel Group, Inc. (the "Company") is a leading
designer and marketer of better priced women's sportswear,
suits, dresses and jeanswear. 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 brands Lauren by Ralph Lauren
and Ralph 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 14 licenses for
the Evan-Picone brand name with select manufacturers of women's
and men's apparel and accessories.
On October 2, 1998, the Company acquired Sun Apparel, Inc. ("Sun").
Sun is a designer, manufacturer and distributor of jeanswear, sportswear
and related apparel for men, women and children under various licensed,
private label and Sun-owned brands, the most prominent of which is the
licensed brand Polo Jeans Company. Through its brand marketing and
development expertise, diversified product offerings, manufacturing
capabilities and comprehensive distribution network, Sun reaches a
broad range of consumers.
On March 2, 1999, the Company announced that it had entered into a
definitive agreement to acquire 100% of the common stock of Nine West
Group Inc. ("Nine West") in a merger transaction. Nine West is a
leading designer, developer and marketer of quality, fashionable footwear
and accessories. Nine West markets its products under internationally
recognized brands, including Nine West, Easy Spirit, Enzo Angiolini, Amalfi,
Bandolino and cK/Calvin Klein (under license). In addition, Nine West markets
shoes under the Company's Evan-Picone label under license.
Products
The Company's brands cover a broad array of categories for both the
women's and men's markets. Within those brands, various product
classifications include career and casual sportswear, jeanswear, dresses,
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, 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.
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The Company's major product categories are summarized in the
following table:
Private Label,
Career Casual Lifestyle Suits, Dresses
Sportswear Sportswear Collection and Other
-------------- ------------- -------------- ----------------
Industry Better Better Better Better, Moderate,
Categories Moderate Mass Market
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, Todd Oldham
Jones & Co, Ralph by
Jones Studio, Ralph Lauren,
Polo Jeans Lauren Jeans
Company Company
Product Skirts, Skirts, Skirts, Suits,
Offerings blouses, blouses, blouses, dresses,
pants, pants, pants, pants,
jackets, jackets, jackets, jeanswear
sweaters sweaters, sweaters,
casual tops, suits,
jeanswear coats,
jeanswear
The Company's success is enhanced by its ability to maintain a name brand or
designer image while its products are generally sold at the following retail
price points:
Skirts Blouses Casual Tops Suits &
Jackets and Pants and Sweaters and Bottoms Coats Dresses Jeanswear
- --------- --------- ------------ ----------- --------- --------- ---------
$150-$260 $70-$140 $55-$200 $22-$90 $220-$450 $125-$240 $13-$80
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 years. The results of operations of Sun are included in
the Company's operating results from the date of acquisition.
1998 1997 1996
------------ ------------ ------------
Career Sportswear $646,000 39% $613,000 45% $529,000 52%
Casual Sportswear $454,000 27% $323,000 24% $292,000 29%
Lifestyle Collection $413,000 25% $293,000 21% $59,000 6%
Suits, Dresses and Other $156,000 9% $143,000 10% $141,000 13%
Career Sportswear. The Company's flagship brand, Jones New York, offers
consumers a broad array of better sportswear primarily targeting the needs
of the career woman. 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 the better apparel sportswear market and includes misses,
petites and women's sizes.
The Company's Evan-Picone line of career sportswear has been positioned at
a price point between the Jones New York and Rena Rowan brands. Starting
with the Fall 1999 selling season, this brand will be repositioned to the
moderate market and will include misses sizes.
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A career sportswear line under the Joneswear label is sold to retail
accounts for the moderate market that do not carry the Jones New York or
Rena Rowan Career Sportswear Lines.
Casual Sportswear. Jones New York Sport offers a collection of casual
sportswear designed for weekend and informal workday dressing. Jones
New York Sport is offered in misses, petite and women's sizes. Jones &
Co, a business casual collection, offers options for the informal workplace
and business "dress down" days.
Jones Jeans, a denim and cotton-based collection, is available in misses,
petites and women's sizes. Joneswear Sport is a casual sportswear line sold
to selected retail accounts that do not carry other Jones New York casual
offerings. A collection of men's casual sportswear was introduced in August
1998 under the Jones New York label.
Polo Jeans Company, a division of Sun which the Company acquired in October
1998, provides a denim-based sportswear collection which targets the younger
market. The Polo Jeans brand is licensed, with the initial term expiring on
December 31, 2000 and may be renewed in five-year increments for up to 30
additional years if certain minimum sales levels are met (see "Licensed
Brands" below).
Lifestyle Collection. Jones New York Country is a collection of classic
country-styled casualwear which is distributed through the Company's own
retail outlets and certain specialty store chains.
Lauren by Ralph Lauren offers a collection of both casual and career
sportswear, suits, dresses and coats to the better market. The collection
is currently available in misses and petites sizes. Women's sizes will be
added for the Fall 1999 selling season. Lauren Jeans Company is a denim-based
product which the Company will offer in the Fall 1999 selling season to
complement the existing Lauren by Ralph Lauren lifestyle collection. The
Lauren by Ralph Lauren license expires on December 31, 2001, and is subject
to renewal for an additional three-year period, provided that certain minimum
sales levels are achieved (see "Licensed Brands" below).
The Company has an exclusive license to design and manufacture women's apparel
under the Ralph by Ralph Lauren brand name. The Ralph by Ralph Lauren Lifestyle
collection will be offered in July 1999 for the younger consumer in the 16-25
year old age range. This license expires on December 31, 2003 and is subject to
renewal for an additional three year period, if certain minimum sales levels are
met (see "Licensed Brands" below).
Private Label, Suits, Dresses & Other. The Company's Sun Division designs and
manufactures jeanswear and casual bottoms under private label brands, contract
manufacturing programs, licensed brands and Company-owned brands. The Company
recently acquired the worldwide rights to the Todd Oldham trademark for a broad
range of products, including apparel, footwear, cosmetics and accessories. A
denim-based junior sportswear line will be introduced for the Fall 1999 selling
season.
The Company produces suits under the brand names Jones New York and Saville.
Jones New York is a better priced brand. Saville targets the opening price
points for the better category and is distributed exclusively to one of the
Company's major accounts.
The Company offers collections of day and evening dresses in the better
category under the Jones New York and Evan-Picone brand names. Evan-Picone
Dress will remain in the better market through the Summer 1999 selling season
and then will be repositioned to the moderate market starting in 2000.
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Licensed Brands
The Company licenses three major brands from Polo Ralph Lauren: Lauren by
Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company.
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 Lauren trademark in the
United States and Canada, pursuant to license and design service agreements with
Polo Ralph Lauren, 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 May 1998, 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 Ralph by Ralph Lauren trademark in the
United States and Canada, pursuant to license and design service agreements
with Polo Ralph Lauren, which expire on December 31, 2003. 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.
As part of the acquisition of Sun, the Company obtained the right to sell
Polo Jeans products under exclusive long-term license and design agreements
that Sun entered into with Polo Ralph Lauren in 1995 (collectively, the "Polo
Jeans License"). Under the Polo Jeans License, Polo Ralph Lauren has granted
the Company an exclusive license for the design, manufacture and sale of men's
and women's jeanswear, sportswear, and related apparel under the Polo Jeans
trademarks in the United States and its territories. The initial term of the
license agreement expires on December 31, 2000 and may be renewed by the Company
in five year increments for up to 30 additional years if certain minimum sales
requirements are met. Subject to the Polo Ralph Lauren purchase option
described below, renewal of the Polo Jeans License by the Company after 2010
requires a one-time payment of $25.0 million or, at the Company's option, a
transfer of a 20% interest in its Polo Jeans business to Polo Ralph Lauren,
with no fees required for subsequent renewals.
Polo Ralph Lauren has an option exercisable on or before June 1, 2010, to
purchase the Company's Polo Jeans business at the end of 2010 for 80% of the
then fair value of the business as a going concern, assuming continuation of
the Polo Jeans License through 2030, payable in cash.
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 is 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.
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In accordance with standard industry practices for licensed products, Polo
Ralph Lauren has the right to approve the Company's designs for the Lauren by
Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company product lines.
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 130 contractors
located in the United States, approximately 50 in Mexico and approximately 330
in overseas locations. The Company also operates several manufacturing
facilities of its own. Approximately 25% of the Company's products were
manufactured in the United States and Mexico and 75% in other parts of the
world (primarily Asia) during 1998.
The Company believes that outsourcing a majority of its products 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 examine 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 garments manufactured
domestically and in Mexico are inspected upon receipt in either the Company's
warehouse facilities (where they are stored prior to shipment for cutting) or
at the contractor's warehouse. Fabrics for garments manufactured offshore 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
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buying agents located in other countries. All finished goods are shipped to
the Company's warehouses for final inspection and distribution.
Supplies
For its sportswear business, 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's primary raw material in its jeanswear business is denim, of
which approximately 95% is purchased from leading domestic mills. Denim
purchase commitments and prices are negotiated on a quarterly or semi-annual
basis. The Company performs its own extensive testing of denim, cotton twill
and other fabrics to ensure consistency and durability.
The Company does not have long-term formal arrangements with any of its
suppliers. The Company has experienced little difficulty in satisfying its
raw material requirements and considers its sources of supply adequate.
Marketing
During 1998, no single customer accounted for more than 10% of 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 16% of 1998 sales and sales to eight department
store customers currently owned by The May Department Stores Company ("May")
also accounted for approximately 16% of 1998 sales; the Company's ten largest
customer groups accounted for approximately 62% of sales in 1998. 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 is 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.
The Company distributes its sportswear products through approximately 840
customers, including department stores, specialty retailer accounts and direct
mail catalog companies throughout the United States and Canada, representing
approximately 6,200 locations. In addition, the Polo Jeans men's and women's
lines are sold in approximately 1,700 and 1,300 department store doors,
respectively, and 1,600 specialty store doors. The Company also markets its
Polo Jeans line through Polo Ralph Lauren retail stores.
The Company has a direct sales force of 354 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 and Los
Angeles. The Company also has a small number of independent sales
representatives. In addition, senior management is actively involved in
selling to major accounts.
Sportswear 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 sportswear
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
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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 the Company's
products in return for certain benefits.
The Company employs a cooperative advertising program for its branded
products, 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.
Both the Company and Sun have had national advertising campaigns for the
Lauren by Ralph Lauren and Polo Jeans Company products since their inception.
Beginning with the Fall 1998 season, the Company launched a national
advertising campaign for its Jones New York label, primarily in the print
media, encompassing both Company products and products of its licensees.
Given the strong recognition and brand loyalty already afforded its brands,
the Company believes these campaigns will serve to further enhance and
broaden its customer base. The Company also plans a creative campaign for
its new Ralph by Ralph Lauren label to be launched in Fall 1999.
Factory Outlet Stores
At December 31, 1998, the Company operated a total of 215 factory outlet
stores and six full price stores. Manufacturer's outlet malls are generally
located either in high traffic tourist areas or on major highways to vacation
destinations and major cities. The factory outlet stores operated by the
Company are located in 111 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
opened 47 and closed 45 stores in 1998 and opened 45 and closed 26 stores
in 1997. The Company plans to operate approximately 200 stores during 1999.
Licensing of Company Brands
As of December 31, 1998, 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
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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 1998, the Company received $10,797,000 of Jones New York (and
related names) licensing income.
As of December 31, 1998, the Company had 14 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, 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 1998, the Company received $5,368,000 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, Todd
Oldham, Code Bleu, 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, Ralph
by Ralph Lauren and Polo Jeans Company labels (see "Licensed Brands" 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.
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.
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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 has not
had a material impact on the Company's financial results.
Backlog
On December 31, 1998, the Company had unfilled customer orders of
approximately $704 million, compared to approximately $557 million of such
orders at December 31, 1997. These amounts include both confirmed 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
anticipate and respond to changing consumer demands, its 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 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 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, 1998, the Company had approximately 8,685 full-time
employees. This total includes approximately 6,995 in quality control,
production, design and distribution positions, approximately 845 in
administrative, sales, clerical and office positions and approximately
845 in the Company factory outlet and
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full-price retail stores. The Company also employs approximately 800 part-time
employees, of which approximately 755 work in the Company factory outlet and
full-price retail stores.
Approximately 340 of the Company's employees, all of whom are located in
Bristol, Pennsylvania, are members of the Teamsters Union, which has a four
year labor agreement with the Company expiring in March 2002. Approximately
130 employees, all of whom work in the Company's cutting facility in El Paso,
Texas, are covered by a collective bargaining agreement with Local 360, Union
of Needletrades, Industrial and Textile Employees, AFL-CIO, which expires
December 31, 1999. 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 are set forth below:
Approximate Area
Location Owned/leased Use in Square Feet
- ------------------------- ------------ ----------------------------------- ------------------
Bristol, Pennsylvania leased Headquarters and distribution 419,200
warehouse
Bristol, Pennsylvania leased Materials and distribution warehouses 310,400
Bristol, Pennsylvania leased Administrative and computer services 106,400
New York, New York leased Administrative, executive and sales offices 265,200
Vaughan, Canada leased Canadian headquarters and 125,000
distribution warehouse
Lawrenceburg, Tennessee leased Distribution warehouses 1,195,000
South Hill, Virginia owned Distribution warehouses 533,500
Rural Hall, North Carolina leased Materials and distribution warehouse 240,800
El Paso, Texas owned Administrative and preproduction facilities 50,000
El Paso, Texas owned Finishing, cutting, and distribution
warehouse facilities 385,000
El Paso, Texas leased Distribution warehouses 195,000
Ciudad Juarez, Mexico owned Production 66,850
Durango, Mexico owned Finishing and assembly facilities 209,600
As of December 31, 1998, the Company leased space for 215 outlet stores and
six full-price retail stores (aggregating approximately 700,000 square feet)
at locations across the United States under long-term leases (typically five
years). The average store size is approximately 3,166 square feet, ranging
from a minimum of 995 square feet to a maximum of 9,000 square feet. The
Company also leases regional sales offices and showrooms in Atlanta, Dallas
and Los Angeles. 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.
ITEM 3. LEGAL PROCEEDINGS
On or about January 13, 1999, 23 unidentified Asian garment workers filed a
purported class-action lawsuit against twenty-two garment manufacturers with
factories located in Saipan (part of the U.S. Commonwealth of the Northern
Mariana Islands). The lawsuit, filed in federal court in Saipan, alleges
violations of federal labor statutes and other laws. Also on or about
January 13, 1999, a similarly unidentified group of garment workers
represented by some of the same law firms which brought the Saipan case
filed a similar lawsuit in federal court in Los Angeles against eleven
Saipan garment manufacturers (including ten named in the first suit) and
seventeen U.S. clothing retailers and marketers, including the Company,
alleging violations of federal racketeering statutes and other laws based
on allegedly unfair and illegal treatment of
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foreign workers. Also on or about January 13, 1999, a third lawsuit was filed
in state court in San Francisco by a labor union and three nonprofit groups
asserting claims of unlawful and unfair business practices and misleading
advertising against all of the retailers and marketers named in the Los
Angeles action, including the Company, one additional retailer and other
unnamed defendants. The two suits against the Company seek unspecified
compensatory and punitive damages as well as injunctive relief. The
Company is reviewing the claims in the suits and has not answered or
otherwise responded to the suits. At this early stage, the Company is not
in a position to evaluate the likelihood of an unfavorable outcome.
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:
1998
High $29-1/4 $34-11/16 $37-3/4 $25-3/16
Low $18-3/4 $26-1/2 $17 $15-7/8
1997
High $20-11/16 $24-9/16 $28-19/32 $28-21/32
Low $16-1/16 $18-1/16 $23-5/16 $20-7/32
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 22, 1999 was $24-3/16 and on that
date there were 227 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 June 25, 1998.
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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, 1998. On October 2,
1998, the Company completed its acquisition of Sun Apparel, Inc. ("Sun").
The results of operations of Sun are included in the Company's operating
results from the date of acquisition.
(All amounts in thousands except income per share data)
Year Ended December 31, 1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
Income Statement Data
Net sales $1,669,432 $1,372,458 $1,021,042 $776,365 $633,257
Licensing income 15,797 15,013 13,036 10,314 8,487
---------- ---------- -------- -------- --------
Total revenues 1,685,229 1,387,471 1,034,078 786,679 641,744
Cost of goods sold 1,100,666 940,149 717,250 546,413 438,575
---------- ---------- -------- -------- --------
Gross profit 584,563 447,322 316,828 240,266 203,169
Selling, general and
administrative expense 319,994 250,685 186,572 139,135 115,307
Amortization
of goodwill 2,714 - - - -
---------- ---------- -------- -------- --------
Operating income 261,855 196,637 130,256 101,131 87,862
Interest expense 11,845 3,584 3,040 1,908 1,212
Interest income (1,801) (1,556) (547) (445) (695)
---------- ---------- -------- -------- --------
Income before provision
for income taxes 251,811 194,609 127,763 99,668 87,345
Provision for
income taxes 96,947 72,884 46,889 36,183 32,425
---------- ---------- -------- -------- --------
Net income $154,864 $121,725 $80,874 $63,485 $54,920
========== ========== ======== ======== ========
Per Share Data <F1>
Net income per share
Basic $1.52 $1.17 $0.77 $0.61 $0.53
Diluted $1.47 $1.13 $0.75 $0.60 $0.52
Dividends paid per share - - - - -
Weighted average number
of common shares
outstanding
Basic 101,614 103,797 104,667 104,260 103,313
Diluted 105,128 107,810 107,303 106,047 105,778
December 31, 1998 1997 1996 1995 1994
---------- -------- -------- -------- ---------
Balance Sheet Data
Working capital $ 457,955 $330,569 $293,970 $260,853 $204,221
Total assets 1,188,672 580,767 488,109 400,959 318,286
Short-term debt,
including current
portion of capital
lease obligations 6,522 4,199 3,067 2,327 1,859
Long-term debt,
including capital
lease obligations 414,653 27,290 12,141 10,151 8,029
Stockholders' equity 594,349 435,632 376,729 314,975 248,678
<F1> On May 6, 1998 and July 30, 1996, the Company's Board of Directors approved
two-for-one stock splits of the Company's common stock in the form of a 100%
stock dividend for shareholders of record as of June 25, 1998 and September
12, 1996, respectively. A total of 50,497,911 and 26,744,580 shares of common
stock were issued on June 25, 1998 and October 2, 1996, respectively, in
connection with the splits. 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 splits.
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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, 1998 1997 1996
------ ------ ------
Net sales 99.1% 98.9% 98.7%
Licensing income 0.9% 1.1% 1.3%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of goods sold 65.3% 67.8% 69.4%
------ ------ ------
Gross profit 34.7% 32.2% 30.6%
Selling, general and
administrative expenses 19.0% 18.1% 18.0%
Amortization of goodwill 0.2% - -
------ ------ ------
Operating income 15.5% 14.2% 12.6%
Interest expense 0.7% 0.3% 0.3%
Interest income (0.1%) (0.1%) (0.1%)
------ ------ ------
Income before provision
for income taxes 14.9% 14.0% 12.4%
Provision for income taxes 5.8% 5.3% 4.5%
------ ------ ------
Net income 9.2% 8.8% 7.8%
====== ====== ======
Totals may not agree due to rounding.
GENERAL
The following discussion provides information and analysis of the Company's
results of operations from 1996 through 1998, 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 27.7% for total
revenues and 41.8% for operating income from 1996 to 1998. Total revenues
and operating income in 1998 increased 21.5% and 33.2%, respectively, over 1997.
The Company believes that it has achieved this growth by enhancing the brand
equity of its labels through its focus on design, quality and value, and by
successfully adding new labels, such as Lauren by Ralph Lauren and Polo Jeans
Company. 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, such as the Ralph by
Ralph Lauren label which will debut for Fall 1999. The Company also plans to
reposition its Evan-Picone sportswear brand from the better to the moderate
price category for Fall 1999, placing the line in the much larger moderate
distribution channel. 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.
On October 2, 1998, the Company completed its acquisition of Sun Apparel,
Inc. ("Sun"). The results of operations of Sun are included in the Company's
operating results from the date of acquisition.
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RESULTS OF OPERATIONS
1998 Compared to 1997
Net Sales. Net sales in 1998 increased 21.6%, or $0.3 billion, to $1.7
billion, compared to $1.4 billion in 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. In addition,
the acquisition of Sun added $120.3 million of net sales during 1998. The
breakdown of net sales by category for both periods is as follows:
Percent
(In millions) 1998 1997 Increase Change
-------- -------- -------- ------
Career sportswear $645.8 $612.8 $33.0 5.4%
Casual sportswear 454.0 323.4 130.6 40.4%
Lifestyle collection 413.2 292.9 120.3 41.1%
Suits, dress, and other 156.4 143.4 13.0 9.1%
-------- -------- -------- ------
Net sales $1,669.4 $1,372.5 $296.9 21.6%
======== ======== ======== ======
The increase in Lifestyle collection was primarily due to a large increase in
shipments under the Lauren by Ralph Lauren label. The increase in casual was
due to increased shipments of Jones New York Sport, the addition of Polo Jeans
since the acquisition of Sun, and the initial shipments of the Jones New York
Men's collection during the third and fourth quarters of 1998.
Licensing Income. Licensing income increased $0.8 million to $15.8 million in
1998 compared to $15.0 million in 1997. Income from licenses under the Jones
New York label increased $1.4 million, while income from licenses under the
Evan-Picone label decreased $0.6 million.
Gross Profit. The gross profit margin was 34.7% in 1998 compared to 32.2% in
1997. The gross margin improvement was attributable to the significant increase
in sales of the Lifestyle collection and the inclusion of Polo Jeans sales since
the acquisition of Sun, both of which carry higher margins than the corporate
average, as well as lower overseas production costs due to the favorable impact
of currency devaluations in Asia and improved inventory management.
SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses)
of $320.0 million in 1998 represented an increase of $69.3 million over 1997.
As a percentage of total revenues, SG&A expenses increased to 19.0% in 1998 from
18.1% for 1997. The acquisition of Sun Apparel at the beginning of the fourth
quarter of 1998 accounted for $28.3 million of the increase. Retail store
operating expenses increased $11.0 million, reflecting an average of 227 stores
open during 1998 compared to an average of 208 for 1997.
Operating Income. The resulting 1998 operating income of $261.9 million
increased 33.2%, or $65.3 million, compared to $196.6 million during 1997.
The operating margin increased to 15.5% for 1998 from the 14.2% achieved
during 1997.
Net Interest Expense. Net interest expense was $10.0 million in 1998 compared
to $2.0 million in 1997. This increase is primarily due to interest on long-
term debt issued to finance the purchase of Sun Apparel.
Provision for Income Taxes. The effective income tax rate was 38.5% for 1998
compared to 37.5% for 1997. The increase was primarily due to higher state and
Canadian income tax provisions for 1998.
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Net Income. Net income increased 27.2% to $154.9 million in 1998, an increase
of $33.2 million over the net income of $121.7 million earned in 1997. Net
income as a percentage of total revenues was 9.2% in 1998 and 8.8% in 1997.
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. The increase was due primarily to
an increase in the number of units shipped and also, to a lesser extent, 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:
Percent
(In millions) 1997 1996 Increase Change
-------- -------- -------- ------
Career sportswear $612.8 $528.9 $83.9 15.9%
Casual sportswear 323.4 291.9 31.5 10.8%
Lifestyle collection 292.9 58.8 234.1 398.1%
Suits, dress, and other 143.4 141.4 2.0 1.4%
-------- -------- -------- ------
Net sales $1,372.5 $1,021.0 $351.5 34.4%
======== ======== ======== ======
The increase in Lifestyle collection was primarily due to a large increase in
shipments under the Lauren by Ralph Lauren label.
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 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 an average of
208 stores open during 1997 compared to an average of 185 for 1996.
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.
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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.
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. As of December 31, 1998, total cash and cash equivalents were
$129.0 million, an $88.9 million increase over the $40.1 million reported as of
December 31, 1997.
Cash Provided by Operations. Net cash provided by operations was $224.9
million in 1998, $110.6 million in 1997 and $70.7 million in 1996. The
increase for 1998 was primarily due to higher net income and a $66.3 million
decrease in inventories (net of the acquisition of Sun) compared to an increase
in the prior year. For 1997, the increase was primarily due to higher net
income and a decrease in trade receivables compared to an increase in the
prior year.
Cash Used in Investing Activities. Net cash used in investing activities
increased $114.4 million in 1998, primarily as a result of the acquisition of
Sun. In 1997, additional capital improvements and replacements, including cash
restricted for use in completing a warehouse facility, accounted for the
majority of the $8.0 million increase over the prior year.
Cash Provided by (Used in) Financing Activities. Net cash provided by
financing activities was $22.0 million in 1998, the result of long-term debt
issued for the acquisition and debt refinancing of Sun and additional
repurchases of the Company's common stock. In 1997, cash used in financing
activities of $57.2 million increased from $22.2 million in 1996 due primarily
to repurchases of the Company's common stock. The Company repurchased $108.1
million, $85.8 million and $33.6 million of its common stock on the open market
for 1998, 1997 and 1996, respectively, for a total of $227.5 million expended
under announced programs to acquire up to $300.0 million of such shares. The
Company may authorize additional share repurchases in the future depending
on, among other things, market conditions and the Company's financial condition.
Proceeds from the issuance of common stock to employees exercising stock options
amounted to $9.4 million, $12.5 million and $9.1 million in 1998, 1997 and 1996,
respectively.
In connection with the Sun acquisition, the Company replaced its existing
credit agreements with $265.0 million of 6.25% three-year Senior Notes due
2001, 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. The
Senior Notes, all of which were outstanding at December 31, 1998, pay interest
semiannually on April 1 and October 1 of each year. These notes contain certain
covenants, including, among others, restrictions on liens, sale-leaseback
transactions, and additional secured debt. The Senior Credit 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
is available for trade letters of credit or cash borrowings, and (iii) a $100.0
million Three-Year Term Loan Facility.
At December 31, 1998, $207.3 million was outstanding under the 364-Day
Revolving Credit Facility (which was comprised of the Company's letters of
credit outstanding on that date) and $100.0 million was outstanding under
the Company's Three-Year Term Loan Facility. Borrowings under the Senior
Credit Facilities may also be used for working capital and other general
corporate purposes, including permitted
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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 also has unsecured lines of credit for $50 million with First
Union National Bank and C$5 million with the Bank of Montreal. No amounts
were outstanding under these lines at December 31, 1998.
The Company believes that funds generated by operations, the Senior Notes,
the new Senior Credit Facilities and the other unsecured lines of credit
mentioned above will provide the financial resources sufficient to meet its
foreseeable working capital, letter of credit, capital expenditure and stock
repurchase requirements and any ongoing obligations to the former Sun
shareholders. However, the Company will have to obtain additional financing
to consummate the acquisition of Nine West Group Inc. (see Note 19 of Notes
to Consolidated Financial Statements).
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 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 the middle of 1999;
however, it may revise the estimated date of completion of this plan based upon
any unforeseen delays 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 the middle of 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 December 31, 1998, the Company had incurred approximately $445,000 in
direct external costs related to the Year 2000 issue. The Company does not
separately track the internal costs incurred for Year 2000 projects as such
costs are principally the related payroll costs for the management information
systems service group. 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
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20
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.
NEW ACCOUNTING STANDARDS
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 is currently reviewing
SFAS No. 133 and has of yet been unable to fully evaluate the impact, if any, it
may have on future operating results or financial statement disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENT OF MANAGEMENT RESPONSIBILITY
To the stockholders of Jones Apparel Group, Inc.
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 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
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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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 5, 1999, except as to
Note 19, which is as of March 2, 1999
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22
Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in thousands except per share data)
December 31, 1998 1997
---------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $129,024 $40,134
Accounts receivable, net of allowance
of $3,303 and $2,767 for doubtful accounts 169,225 91,747
Inventories 268,175 255,055
Receivable from and advances to contractors 19,207 7,833
Prepaid and refundable income taxes - 5,993
Deferred taxes 32,143 26,269
Prepaid expenses and other current assets 14,069 13,740
---------- --------
TOTAL CURRENT ASSETS 631,843 440,771
PROPERTY, PLANT AND EQUIPMENT, at cost,
less accumulated depreciation and amortization 156,043 81,934
CASH RESTRICTED FOR CAPITAL ADDITIONS - 11,193
GOODWILL, less accumulated amortization 323,009 -
OTHER INTANGIBLES, at cost, less
accumulated amortization 29,705 30,604
OTHER ASSETS 48,072 16,265
---------- --------
$1,188,672 $580,767
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and
capital lease obligations $6,522 $4,199
Accounts payable 100,282 90,429
Income taxes payable 13,654 -
Accrued interest 5,369 210
Accrued expenses and other current liabilities 48,061 15,364
---------- --------
TOTAL CURRENT LIABILITIES 173,888 110,202
---------- --------
NONCURRENT LIABILITIES:
Long-term debt 379,247 8,833
Obligations under capital leases 35,406 18,457
Other 5,782 6,107
---------- --------
TOTAL NONCURRENT LIABILITIES 420,435 33,397
---------- --------
TOTAL LIABILITIES 594,323 143,599
---------- --------
COMMITMENTS AND CONTINGENCIES
EXCESS OF NET ASSETS ACQUIRED OVER COST - 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 115,412
and 108,955 1,154 545
Additional paid-in capital 234,787 122,582
Retained earnings 593,781 438,917
Accumulated other comprehensive income (2,287) (1,524)
---------- --------
827,435 560,520
Less treasury stock,
11,918 and 6,767 shares, at cost (233,086) (124,888)
---------- --------
TOTAL STOCKHOLDERS' EQUITY 594,349 435,632
---------- --------
$1,188,672 $580,767
========== ========
See accompanying notes to consolidated financial statements
-22-
23
Jones Apparel Group, Inc.
Consolidated Statements of Income
(All amounts in thousands except per share data)
Year Ended December 31, 1998 1997 1996
---------- ---------- ----------
NET SALES $1,669,432 $1,372,458 $1,021,042
LICENSING INCOME 15,797 15,013 13,036
---------- ---------- ----------
Total revenues 1,685,229 1,387,471 1,034,078
COST OF GOODS SOLD 1,100,666 940,149 717,250
---------- ---------- ----------
Gross profit 584,563 447,322 316,828
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 319,994 250,685 186,572
AMORTIZATION OF GOODWILL 2,714 - -
---------- ---------- ----------
Operating income 261,855 196,637 130,256
INTEREST EXPENSE 11,845 3,584 3,040
INTEREST INCOME (1,801) (1,556) (547)
---------- ---------- ----------
Income before provision for
income taxes 251,811 194,609 127,763
PROVISION FOR INCOME TAXES 96,947 72,884 46,889
---------- ---------- ----------
NET INCOME $154,864 $121,725 $80,874
========== ========== ==========
EARNINGS PER SHARE
Basic $1.52 $1.17 $0.77
Diluted $1.47 $1.13 $0.75
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 101,614 103,797 104,667
Diluted 105,128 107,810 107,303
See accompanying notes to consolidated financial statements
-23-
24
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity
(All amounts in thousands)
CAPTION>
Total Accumulated
stock- Additional other
holders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
--------- ------- ---------- -------- ------------- ---------
BALANCE, DECEMBER 31, 1995 $314,975 $ 263 $ 84,172 $236,318 $ (1,140) $ (4,638)
YEAR ENDED DECEMBER 31, 1996:
Comprehensive income:
Net income 80,874 - - 80,874 - -
Foreign currency translation
adjustments (14) - - - (14) -
--------
Total comprehensive income 80,860
--------
Amortization of deferred
compensation in connection
with executive stock options 290 - 290 - - -
Exercise of stock options 9,068 6 9,825 - - (763)
Tax benefit derived from
exercise of stock options 5,157 - 5,157 - - -
Treasury stock acquired (33,584) - - - - (33,584)
Effect of 2-for-1 stock split - 267 (267) - - -
Registration of 1996
Stock Option Plan (37) - (37) - - -
-------- ------ -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1996 376,729 536 99,140 317,192 (1,154) (38,985)
YEAR ENDED DECEMBER 31, 1997:
Comprehensive income:
Net income 121,725 - - 121,725 - -
Foreign currency translation
adjustments (370) - - - (370) -
--------
Total comprehensive income 121,355
--------
Amortization of deferred
compensation in connection
with executive stock options
and related items 2,778 - 2,778 - - -
Exercise of stock options 12,506 9 12,597 - - (100)
Tax benefit derived from
exercise of stock options 8,067 - 8,067 - - -
Treasury stock acquired (85,803) - - - - (85,803)
-------- ------ -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1997 435,632 545 122,582 438,917 (1,524) (124,888)
YEAR ENDED DECEMBER 31, 1998:
Comprehensive income:
Net income 154,864 - - 154,864 - -
Foreign currency translation
adjustments (763) - - - (763) -
--------
Total comprehensive income 154,101
--------
Amortization of deferred
compensation in connection
with executive stock options
and related items 178 - 178 - - -
Stock issued relating to
Acquisition of Sun Apparel 97,344 54 97,290 - - -
Exercise of stock options 9,370 6 9 464 - - (100)
Tax benefit derived from
exercise of stock options 5,847 - 5,847 - - -
Effect of 2-for-1 stock split - 549 (549) - - -
Treasury stock acquired (108,098) - - - - (108,098)
Other (25) - (25) - - -
-------- ------ -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1998 $594,349 $1,154 $234,787 $593,781 $(2,287) $(233,086)
======== ====== ======== ======== ======== =========
See accompanying notes to consolidated financial statements
-24-
25
Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows
(All amounts in thousands)
Year Ended December 31, 1998 1997 1996
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $154,864 $121,725 $80,874
-------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities, net of acquisition of
Sun Apparel, Inc.:
Depreciation and amortization 21,226 14,594 8,948
Provision for losses on
trade receivables 188 1,870 800
Deferred taxes 4,958 (17,907) 7,233
Other 413 264 416
Decrease (increase) in:
Trade receivables (7,818) 18,917 (21,349)
Inventories 66,250 (40,961) (37,814)
Prepaid expenses and
other current assets (10,291) 1,264 10,624
Other assets (925) (6,273) (3,703)
Increase (decrease) in:
Accounts payable (16,978) 17,909 13,498
Taxes payable 18,838 (5,253) 6,673
Accrued expenses and other
current liabilities (5,866) 4,428 4,492
-------- ------- -------
Total adjustments 69,995 (11,148) (10,182)
-------- ------- -------
Net cash provided by
operating activities 224,859 110,577 70,692
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Sun Apparel, Inc.
net of cash acquired (121,006) - -
Capital expenditures (48,497) (32,149) (34,066)
Proceeds from disposition of assets 562 - 261
Increase (decrease) in cash
restricted for capital additions 11,193 (11,193) -
Acquisition of trademarks and licenses - - (1,492)
-------- ------- -------
Net cash used in
investing activities (157,748) (43,342) (35,297)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of 6.25% Senior Notes,
net of discount 264,735 - -
Debt issuance costs (7,568) - -
Refinancing of acquired long-term
debt of Sun Apparel (237,807) - -
Net borrowings under long-term
credit facilities 105,288 10,000 -
Borrowings under capital lease - 10,000 5,000
Principal payments on capital leases (3,936) (3,939) (2,623)
Purchases of treasury stock (108,098) (85,803) (33,584)
Proceeds from exercise of stock options 9,370 12,507 9,068
Other (25) - (37)
-------- ------- -------
Net cash provided by (used in)
financing activities 21,959 (57,235) (22,176)
-------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH (180) 49 2
-------- ------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 88,890 10,049 13,221
CASH AND CASH EQUIVALENTS, BEGINNING 40,134 30,085 16,864
-------- ------- -------
CASH AND CASH EQUIVALENTS, ENDING $129,024 $40,134 $30,085
======== ======= =======
See accompanying notes to consolidated financial statements
-25-
26
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, manufactures and
markets a broad range of women's career and casual sportswear, suits and
dresses and jeanswear for men, women and children. The Company sells its
products through a broad array of distribution channels, including better
specialty and department stores and mass merchandisers. The Company 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 Company considers itself to
be operating in one reportable business segment.
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 31-1/2 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.
-26-
27
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Other Intangibles
Other intangibles, which include trademarks and license agreements, are
amortized on a straight-line basis over the estimated useful lives of the
assets.
Goodwill
Goodwill recorded in connection with the acquisition of Sun Apparel, Inc. is
being amortized using the straight-line method over 30 years.
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." Where the functional currency of a foreign
subsidiary is its local currency, 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. Where the local
currency of a foreign subsidiary is not its functional currency, financial
statements are translated at either current or historical exchange rates, as
appropriate. These adjustments, along with gains and losses on currency
transactions, are reflected in the statements of consolidated operations.
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.
-27-
28
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Earnings per Share
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. The difference between reported basic
and diluted weighted-average common shares results from the assumption that all
dilutive stock options outstanding were exercised.
The following options to purchase shares of common stock were outstanding
during a portion of each year 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 and, therefore,
would be antidilutive.
1998 1997 1996
------ ------ ------
Number of options (in thousands) 4,447 3,180 480
Weighted-average exercise price $24.66 $23.84 $16.46
Cash Equivalents
The Company considers all highly liquid short-term investments to be
cash equivalents.
Long-Lived Assets
The Company reviews certain long-lived assets and identifiable intangibles
(including goodwill) 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
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 is currently reviewing SFAS No. 133
and has of yet been unable to fully evaluate the impact, if any, it may have on
future operating results or financial statement disclosures.
-28-
29
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 2. ACQUISITION OF SUN APPAREL
On October 2, 1998, the Company acquired Sun Apparel, Inc. ("Sun"), a
designer, manufacturer and distributor of jeanswear, sportswear and related
apparel for men, women and children. Sun markets its products under various
licensed private label and owned brands, the most prominent of which is the
Polo Jeans Company licensed from Polo Ralph Lauren. The purchase price was
$215.7 million (subject to additional contingent purchase price adjustments
as described below), with payments through December 31, 1998 amounting to
$127.5 million in cash and 4.4 million shares of common stock, valued for
financial reporting purposes at $18.00 per share as of September 10, 1998,
the date the definitive Acquisition and Merger Agreement was signed. The
Company also assumed Sun debt of $241.5 million (including accrued interest
and prepayment penalties), of which $237.8 million was refinanced in
conjunction with the closing of the transaction.
The acquisition has been accounted for under the purchase method of accounting
for business combinations. Accordingly, the consolidated financial statements
include the results of operations of Sun from the acquisition date. The
purchase price was allocated to Sun's assets and liabilities, tangible and
intangible, with the excess of the cost over the fair value of the net assets
acquired of approximately $325.7 million being amortized on a straight-line
basis over 30 years. As part of the purchase price allocation, $10 million
was recorded for severance payments and expected costs and losses from moving
and closing certain facilities currently located in El Paso, Texas, of which
$5 million remained accrued at December 31, 1998.
The terms of the Acquisition and Merger Agreement provide for additional
consideration of $2.00 to be paid for each $1.00 that Sun's earnings before
interest and taxes (as defined in the merger agreement) for each of the years
1998 through 2001 exceed certain targeted levels. Such additional consideration
will be paid 59% in cash and 41% in the Company's common stock, the value of
which will be determined by the prices at which the common stock trades in a
defined period preceding delivery in each year. Any additional consideration
paid will be recorded as goodwill when payment is made.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisition and
its related financing had taken place on January 1, 1997. These pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of the results of operations which actually would have resulted
had the acquisition occurred on January 1, 1997, or which may result in the
future.
December 31, 1998 1997
------------ ---------- ----------
Net sales (in thousands) $2,015,756 $1,732,130
Net income (in thousands) 169,100 116,381
Basic earnings per common share $1.61 $1.08
Diluted earnings per common share $1.56 $1.04
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30
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 3. INVENTORIES
Inventories are summarized as follows:
December 31, 1998 1997
------------ -------- --------
(In thousands)
Raw materials $33,928 $27,045
Work in process 43,041 41,294
Finished goods 191,206 186,716
-------- --------
$268,175 $255,055
======== ========
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
December 31, 1998 1997
------------ -------- --------
(In thousands)
Land and buildings $ 72,054 $ 37,893
Leasehold improvements 48,348 29,230
Machinery and equipment 87,863 31,979
Furniture and fixtures 14,829 9,666
Construction in progress 9,409 17,355
-------- --------
232,503 126,123
Less: accumulated depreciation and amortization 76,460 44,189
-------- --------
$156,043 $81,934
======== ========
Depreciation and amortization expense relating to property, plant and
equipment was $17,055,000, $11,869,000, and $8,711,000 in 1998, 1997, and
1996, respectively.
Included in property, plant and equipment are the following capitalized
leases:
December 31, 1998 1997
------------ -------- --------
(In thousands)
Buildings $48,585 $32,137
Machinery and equipment 5,911 3,759
Construction in progress - 9,937
-------- --------
54,496 45,833
Less: accumulated amortization 8,862 12,626
-------- --------
$45,634 $33,207
======== ========
-30-
31
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 5. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
Useful
lives
December 31, 1998 1997 (years)
------------ ------- ------- -----------
(In thousands)
Trademarks $32,972 $32,972 8 to 20
License agreements 6,652 5,319 5-1/2 to 19
------- -------
39,624 38,291
Less: accumulated amortization 9,919 7,687
------- -------
$29,705 $30,604
======= =======
NOTE 6. CREDIT FACILITIES
Until October 2, 1998, the Company had credit arrangements with seven
financial institutions which totaled $470,000,000. These lines, which could
be used for unsecured borrowings and letters of credit (issued primarily to
finance foreign inventory purchases), contained an aggregate sub-limit of
$170,000,000 for unsecured borrowings with rates depending on the borrowing
vehicle utilized. In connection with the acquisition of Sun on October 2,
1998, the Company replaced its existing credit agreements with $265,000,000
of 6.25% three-year Senior Notes due 2001 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 $550,000,000
under Senior Credit Facilities. Interest on the Senior Notes is payable
semiannually on April 1 and October 1 of each year. These notes contain
certain covenants, including, among others, restrictions on liens,
sale-leaseback transactions, and additional secured debt. The Senior Credit
Facilities consist of (i) a $150,000,000 Three-Year Revolving Credit Facility,
(ii) a $300,000,000 364-Day Revolving Credit Facility, the entire amount of
which will be available for trade letters of credit or cash borrowings, and
(iii) a $100,000,000 Three-Year Term Loan Facility.
Borrowings under the Senior Credit Facilities may 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 was committed for unexpired bank letters of credit at December 31,
1998 in the amount of $207,322,000 and there were no short-term borrowings
outstanding. The Company also has unsecured lines of credit with First Union
National Bank for $50,000,000 and the Bank of Montreal for C$5,000,000 to be
used for unsecured borrowings under which no amounts were outstanding at
December 31, 1998.
-31-
32
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
December 31, 1998 1997
------------ -------- --------
(In thousands)
6.25% Senior Notes due 2001, net of
unamortized discount of $243 $264,757 $ -
Term Loan due 2001, variable rate
(5.61% at December 31, 1998) 100,000 -
Mortgage payable, final payment due 2002,
variable rate (7.25% at December 31, 1998) 2,268 -
11% Mortgage payable, final payment due 2001 842 -
6.98% Industrial revenue bonds, final payment
due 2007 13,483 9,833
Other debt - 10
-------- --------
381,350 9,843
Less: current portion 2,103 1,010
-------- --------
$379,247 $ 8,833
======== ========
Long-term debt maturities for each of the next five years are $2,029,000 in
1999, $2,079,000 in 2000, $367,133,000 in 2001, $1,843,000 in 2002 and
$1,867,000 in 2003.
NOTE 8. OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
December 31, 1998 1997
------------ -------- --------
(In thousands)
Warehouses, office facilities and equipment $39,825 $21,646
Less: current portion 4,419 3,189
-------- --------
Obligations under capital leases - noncurrent $35,406 $18,457
======== ========
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, $17,917,000 of which remained unpaid as of December 31, 1998. 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 warehouse and office facilities in Bristol,
Pennsylvania. Two fifteen-year net leases run until March and October 2013,
respectively, and require minimum annual rent payments of $1,150,000 and
$772,000, respectively.
-32-
33
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company also leases various equipment under three to five year leases at
an aggregate annual rental of $1,639,000. The equipment has been capitalized
at its fair market value of $4,802,000, 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, 1998:
December 31,
------------
(In thousands)
1999 $ 6,997
2000 7,144
2001 5,442
2002 5,175
2003 5,100
Later years 28,369
--------
Total minimum lease payments 58,227
Less: amount representing interest 18,402
--------
Present value of net minimum lease payments $39,825
========
NOTE 9. 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 16%, 20% and 20% for the
years ended December 31, 1998, 1997 and 1996, respectively. Sales to department
stores owned by The May Department Stores Company ("May") accounted for 16%, 19%
and 20% for the years ended December 31, 1998, 1997 and 1996, respectively.
Federated and May accounted for approximately 30% of accounts receivable at
December 31, 1998.
NOTE 10. COMMITMENTS
(a) 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.
On or about January 13, 1999, 23 unidentified Asian garment workers filed a
purported class-action lawsuit against twenty-two garment manufacturers with
factories located in Saipan (part of the U.S. Commonwealth of the Northern
Mariana Islands). The lawsuit, filed in federal court in Saipan, alleges
violations of federal labor statutes and other laws. Also on or about January
13, 1999, a similarly unidentified group of garment workers represented by
some of the same law firms which brought the Saipan case filed a similar
lawsuit in federal court in Los Angeles against eleven Saipan garment
manufacturers (including ten named in the first suit) and seventeen U.S.
clothing retailers and marketers, including the Company, alleging violations
of federal racketeering statutes and other laws based on allegedly unfair and
illegal treatment of foreign workers. Also on or about January 13, 1999, a third
lawsuit was filed in state court in San Francisco by a labor union and three
nonprofit groups asserting claims of unlawful and unfair business practices and
-33-
34
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
misleading advertising against all of the retailers and marketers named in the
Los Angeles action, including the Company, one additional retailer and other
unnamed defendants. The two suits against the Company seek unspecified
compensatory and punitive damages as well as injunctive relief. The Company is
reviewing the claims in the suits and has not answered or otherwise responded
to the suits. At this early stage, the Company is not in a position to evaluate
the likelihood of an unfavorable outcome.
(b) ROYALTIES. Under exclusive licenses to manufacture certain items under
the Lauren by Ralph Lauren and Ralph by Ralph Lauren trademarks pursuant to
license and design service agreements with Polo Ralph Lauren Corporation
("Polo"), the Company is obligated to pay Polo a percentage of net sales of
Lauren by Ralph Lauren and Ralph by Ralph Lauren products. Minimum payments
of $7,000,000 are due for each of the years 2000 and 2001 under the Lauren by
Ralph Lauren agreements and minimum payments of $5,250,000 are due for each of
the years 2002 and 2003 under the Ralph by Ralph Lauren agreements. The Lauren
by Ralph Lauren agreements expire on December 31, 2001 and the Ralph by Ralph
Lauren agreements expire on December 31, 2003. Both sets of agreements provide
for renewal options upon expiration provided that certain sales levels have
been met.
Under a similar exclusive license to manufacture certain items under the Polo
Jeans Company trademark pursuant to license and design service agreements with
Polo, the Company is obligated to pay Polo a percentage of net sales of Polo
Jeans Company products. The Company is also obligated to spend on advertising
a percentage of net sales of these licensed products. The initial term of the
license and design service agreements expires December 31, 2000 and may be
renewed by the Company in five-year increments for up to 30 additional years
if certain sales requirements are met. Commencing in 2001, certain minimum
annual royalty payments are required if the Company exercises its renewal
options. Renewal after 2010 requires a one-time payment of $25 million or,
at the Company's option, a transfer of 20% interest in its Polo Jeanswear
business to Polo. Polo has a one-time right, in blockage of such renewal,
to purchase the Company's Polo Jeanswear business at the end of 2010 for 80%
of its then fair market value, as defined, payable in cash.
(c) LEASES. Total rent expense charged to operations for the years ended
December 31, 1998, 1997 and 1996 was $27,374,000, $22,159,000 and $18,888,000,
respectively.
The following is a schedule by year of future minimum rental payments required
under operating leases for the next five years:
December 31,
------------
(In thousands)
1999 $ 21,091
2000 18,902
2001 17,188
2002 12,016
2003 8,647
Later years 29,042
--------
$106,886
========
Certain of the leases provide for renewal options and the payment of real
estate taxes and other occupancy costs.
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35
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 11. INCOME TAXES
The following summarizes the provision for income taxes:
Year ended December 31, 1998 1997 1996
----------------------- --------- -------- ---------
(In thousands)
Current:
Federal $79,442 $78,811 $34,522
State and local 9,083 10,524 3,733
Foreign 3,464 1,456 1,401
-------- -------- --------
91,989 90,791 39,656
-------- -------- --------
Deferred:
Federal 2,680 (15,359) 7,722
State and local 2,060 (2,240) (489)
Foreign 218 (308) -
-------- -------- --------
4,958 (17,907) 7,233
-------- -------- --------
Provision for income taxes $96,947 $72,884 $46,889
======== ======== ========
The foreign and domestic components of income before provision for income
taxes were as follows:
Year ended December 31, 1998 1997 1996
----------------------- --------- -------- ---------
(In thousands)
United States $243,790 $192,482 $125,650
Canada 8,199 1,815 2,378
Other (178) 312 (265)
-------- -------- --------
Income before provision
for income taxes $251,811 $194,609 $127,763
======== ======== ========
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, 1998 1997 1996
----------------------- --------- -------- ---------
(In thousands)
Provision for Federal income
taxes at the statutory rate $88,134 $68,113 $44,717
State and local income taxes,
net of federal benefit 7,241 5,385 2,108
Amortization of goodwill 950 - -
Amortization of excess of net
assets acquired over cost (537) (645) (645)
Other items, net 1,159 31 709
-------- -------- --------
Provision for income taxes $96,947 $72,884 $46,889
======== ======== ========
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36
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company has not provided for U.S. Federal and foreign withholding taxes
on $7,668,000 of foreign subsidiaries' undistributed earnings as of December
31, 1998. 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:
Year ended December 31, 1998 1997
----------------------- -------- ---------
(In thousands)
Deferred tax assets:
Nondeductible accruals and allowances $31,299 $23,587
Depreciation and amortization 890 561
Other (net) 2,215 2,286
-------- --------
Net deferred tax asset $34,404 $26,434
======== ========
NOTE 12. COMMON STOCK
On May 6, 1998 and July 30, 1996, the Company's Board of Directors authorized
two-for-one stock splits of the Company's common stock in the form of a 100%
stock dividend for shareholders of record as of June 4, 1998 and September 12,
1996, respectively. In connection with the stock splits, the Board of Directors
approved increases in the number of shares authorized to 200,000,000. On June
25, 1998 and October 2, 1996, a total of 50,497,911 and 26,744,580 shares,
respectively, of common stock were issued in connection with these splits.
Under each stock split, the stated par value of each share was not changed
from $0.01. The issuance of authorized but unissued shares resulted in the
transfer of $549,000 in 1998 and $267,000 in 1996 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
both stock splits.
In 1995 and 1997, the Board of Directors authorized two separate repurchase
programs under which up to $100,000,000 of the Company's common stock was to
be repurchased in open market transactions. Under these programs, 10,137,941
shares have been acquired at a cost of $200,000,000.
In 1998, 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 commenced upon the full
utilization of the previous buy-back programs and has no time limit. As of
December 31, 1998, 1,715,959 shares had been acquired at a cost of $32,123,000.
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37
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 13. STATEMENT OF CASH FLOWS
Year ended December 31, 1998 1997 1996
----------------------- --------- -------- ---------
(In thousands)
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 6,015 $ 3,941 $ 3,207
Income taxes 75,650 96,251 32,110
Supplemental disclosures of
non-cash investing and
financing activities:
Acquisition of trademark - 6,107 -
Tax benefits related to
stock options 5,846 8,067 5,157
Detail of acquisitions:
Fair value of assets acquired $537,335 - -
Liabilities assumed (318,985) - -
Common stock issued (97,344) - -
-------- -------- --------
Net cash paid for acquisitions 121,006 - -
Cash acquired in acquisitions 6,537 - -
-------- -------- --------
Cash paid for acquisitions $127,543 - -
======== ======== ========
NOTE 14. STOCK OPTIONS
Under two stock option plans, the Company may grant stock options and other
awards from time to time to key employees, officers, directors, advisors and
independent consultants to the Company or to any of its subsidiaries. In
general, options become exercisable over a five-year period from the grant
date and expire 10 years after the date of grant. In certain cases for non-
employee directors, options become exercisable six months after the grant date
and expire 10 years after date of grant. Shares available for future option
grants at December 31, 1998, totaled 165,000.
The following table summarizes information about stock option transactions
(shares in thousands):
1998 1997 1996
---------------- --------------- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Outstanding at
beginning of year 9,848 $14.44 8,218 $9.09 6,101 $5.35
Granted 2,432 22.98 3,434 23.52 4,332 12.27
Exercised (1,049) 9.03 (1,766) 7.14 (2,063) 4.77
Cancelled (295) 19.13 (38) 10.73 (152) 7.46
------ ------ ------ ------ ------ ------
Outstanding at
December 31 10,936 $16.73 9,848 $14.44 8,218 $9.09
====== ====== ====== ====== ====== ======
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38
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information about stock options outstanding at
December 31, 1998 (shares in thousands):
Outstanding Exercisable
--------------------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Years of Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices of Options Life Price of Options Price
---------------- --------------------------------- -------------------
$0.20 to $10 2,179 5.0 $5.72 1,345 $5.05
$10 to $20 4,505 9.4 $18.56 919 $18.21
$20 to $30 4,192 8.9 $24.56 774 $24.12
$30 to $40 60 9.5 $33.69 - -
--------------------------------- -------------------
In total 10,936 7.9 $16.73 3,038 $12.08
================================= ===================
Pursuant to a provision in FASB Statement 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue using the intrinsic-value
method of accounting for stock-based awards granted to employees in accordance
with APB Opinion 25, "Accounting for Stock Issued to Employees." Accordingly,
the Company has only recognized compensation expense for its stock-based awards
to employees for options granted at below-market prices. The following table
reflects pro forma net income and earnings per share had the Company elected
to adopt the fair value approach of SFAS 123:
Year ended December 31, 1998 1997 1996
----------------------- --------- -------- ---------
(In thousands)
Net income (in thousands)
As reported $154,864 $121,725 $80,874
Pro forma $144,708 $116,120 $79,074
Basic earnings per share
As reported $1.52 $1.17 $0.77
Pro forma $1.42 $1.12 $0.76
Diluted earnings per share
As reported $1.47 $1.13 $0.75
Pro forma $1.38 $1.08 $0.74
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years.
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39
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The estimated fair value of each option granted included in the pro forma
results is calculated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: no dividends paid for all years; expected volatility of 40.1%,
34.7% and 38.9%; risk-free interest rates of 5.12%, 6.04% and 6.20%; and
expected lives of 3.6, 3.4 and 3.0 years. The weighted average fair values
of options at their grant date during 1998, 1997 and 1996, where the exercise
price equaled the market price on the grant date, were $9.65, $7.45 and $4.00,
respectively. The weighted average fair values of options at their grant date
during 1998, 1997 and 1996, where the exercise price was less than the market
price on the grant date, were $21.05, $17.86, and $4.23, respectively.
NOTE 15. UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the two years ended
December 31, 1998 is summarized as follows:
(In thousands except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1998
Net sales $380,151 $305,361 $495,728 $488,192
Total revenues 383,774 308,554 500,318 492,583
Gross profit 131,213 107,468 175,593 170,289
Operating income 64,019 41,062 97,251 59,523
Net income 38,610 25,038 59,098 32,118
Basic earnings per share $0.38 $0.25 $0.59 $0.31
Diluted earnings per share $0.37 $0.24 $0.57 $0.30
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
Basic earnings per share $0.28 $0.19 $0.47 $0.23
Diluted earnings per share $0.27 $0.18 $0.45 $0.22
NOTE 16. 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.
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40
Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
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 $1,521,000, $1,241,000 and $801,000 to the Plan during the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 18. SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION
On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate
reorganization under which two new wholly owned subsidiaries named Jones
Apparel Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings, Inc.
("Jones Holdings") were created. On that date, the operating assets of Jones
Apparel Group, Inc. were transferred to Jones USA and Jones USA assumed the
role of obligor of the Senior Notes due 2001 (which were issued on October 2,
1998 in conjunction with the acquisition of Sun Apparel, Inc.) with Jones
Apparel Group, Inc. remaining and Jones Holdings becoming co-obligors of the
Notes. The following condensed financial information represents, on a pro
forma basis, the results of Jones USA had the reorganization occurred on
January 1, 1996 (all amounts in thousands). Separate pro forma financial
statements and other disclosures concerning Jones USA and Jones Holdings are
not presented as such information is not considered material to the holders
of the Senior Notes.
Year ended December 31, 1998 1997 1996
----------------------- --------- -------- ---------
Current assets $506,182 $365,020 $331,104
Noncurrent assets 145,293 95,349 58,962
Current liabilities 238,170 256,605 199,043
Noncurrent liabilities 413,476 28,094 12,420
Excess of net assets
acquired over cost - 1,536 3,379
For the Year ended December 31, 1998 1997 1996
------------------------------- ---------- ---------- ---------
Total revenues $1,426,427 $1,261,159 $921,500
Gross profit 456,954 371,521 244,302
Operating income 160,987 112,946 56,820
Net income 80,254 61,358 30,616
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Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 19. SUBSEQUENT EVENTS
On March 2, 1999, the Company announced that it had entered into a definitive
agreement to acquire 100% of the common stock of Nine West Group Inc. ("Nine
West") in a merger transaction. Nine West is a leading designer, developer and
marketer of quality, fashionable footwear and accessories. Nine West markets
its products under internationally recognized brands, including Nine West,
Easy Spirit, Enzo Angiolini, Amalfi, Bandolino, and cK/Calvin Klein (under
license). In addition, Nine West markets shoes under the Company's Evan-Picone
label under license.
The Company will exchange approximately one-half of a share of its common
stock and $13 in cash for each Nine West Group common share. Based on a value
of the Company's common stock of $26 per share, the Company will pay
approximately $885 million for the Nine West common shares. Including
assumed debt, the transaction has a total value of approximately $1.4
billion. As of March 2, 1999, Nine West had approximately 34 million common
shares outstanding. The acquisition will be accounted for under the purchase
method of accounting. The transaction is expected to close by the end of
June 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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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 71 Chairman, Chief Executive Officer and Director
Jackwyn Nemerov 47 President and Director
Irwin Samelman 68 Executive Vice President, Marketing and Director
Wesley R. Card 51 Chief Financial Officer
Patrick M. Farrell 49 Vice President and Corporate Controller
Geraldine Stutz 70 Director
Howard Gittis 65 Director
Eric A. Rothfeld 47 President and Chief Executive
Officer of Sun Apparel, Inc. and Director
Mark J. Schwartz 41 Director
Each director who is not a full-time employee of the Company receives an
annual grant of options to purchase 2,000 shares of the Company's common
stock at an exercise price of $1.00 per share. Each option expires 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, Mr. Gittis and Mr. Schwartz. 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, Mr. Gittis and Mr. Schwartz 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 and Chief Executive Officer since 1975.
Prior to 1975, Mr. Kimmel occupied various executive offices, including
President 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.
-42-
43
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. 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 principal partner of 959 Group, a fashion and marketing
service since 1998. From 1993 until 1998, Ms. Stutz was a principal partner
of Panache Productions, a fashion and marketing service. Prior to 1993, 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' principal occupation during the past five years has been Vice
Chairman and Chief Administrative Officer and a director of MacAndrews &
Forbes Holdings Inc., a diversified holding company. In addition, Mr. Gittis
is a director of Golden State Bancorp, Inc., Golden State Holdings, Inc.,
Loral Space and Communications Ltd., M&F Worldwide Corp., Panavision, Inc.,
Revlon, Inc., Revlon Consumer Products Corporation, REV Holdings, Inc.,
Rutherford-Moran Oil Corporation and Sunbeam Corporation.
Mr. Rothfeld serves as President and Chief Executive Officer of Sun Apparel,
Inc, a wholly-owned subsidiary of the Company acquired in October 1998. Mr.
Rothfeld served as President of Sun from 1986 to September 1997, and as
Chairman and Chief Executive Officer of Sun from September 1997 until its
acquisition by the Company.
Mr. Schwartz is President and Chief Executive Officer of Palladin Capital
Group, Inc., a New York-based private merchant banking firm he founded in
1997. From 1994 to 1997, he was a principal, and most recently President,
of Rosecliff Inc., also a private merchant banking firm. He is currently a
Director of Platinum Entertainment, Inc., a full-service recorded music
company, and Balance Pharmaceuticals, Inc. During the past five years Mr.
Schwartz has managed acquisitions, and has served as the chairman or a
director, of various public and private corporations. From 1985 to 1994,
Mr. Schwartz was a member of the Investment Banking Division of Merrill
Lynch & Co. Mr. Schwartz will become the Chairman and Chief Executive
Officer of Nine West Group Inc. upon completion of its acquisition by the
Company, which is anticipated to occur by the end of June 1999.
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44
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) During the quarter ended December 31, 1998, a Current Report on Form 8-K,
dated October 2, 1998, was filed with the Commission by the Company
announcing the consummation of the acquisition of Sun Apparel, Inc.
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45
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 25, 1999
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 25, 1999
- ----------------- (Chief Executive Officer)
(Sidney Kimmel)
/s/ Jackwyn Nemerov President and Director March 25, 1999
- -------------------
(Jackwyn Nemerov)
/s/ Wesley R. Card Chief Financial Officer March 25, 1999
- ------------------ (Principal Financial Officer)
(Wesley R. Card)
/s/ Patrick M. Farrell Vice President and March 25, 1999
- ---------------------- Corporate Controller
(Patrick M. Farrell) (Principal Accounting Officer)
/s/ Irwin Samelman Executive Vice President, March 25, 1999
- ------------------ Marketing and Director
(Irwin Samelman)
Director
- -------------------
(Geraldine Stutz)
/s/ Howard Gittis Director March 25, 1999
- -----------------
(Howard Gittis)
/s/ Eric A. Rothfeld Director March 25, 1999
- --------------------
(Eric A. Rothfeld)
/s/ Mark J. Schwartz Director March 25, 1999
- --------------------
(Mark J. Schwartz)
-45-
46
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
- ------------ ------- ----------------------
(1) 2.1 2.1 Agreement and Plan of Merger dated September 10, 1998,
by and among the Company, SAI Acquisition Corp., Sun
Apparel, Inc. and the selling shareholders.
(2) 2.2 2.2 Agreement and Plan of Merger dated as of March 1, 1999
among the Company, Jill Acquisition Sub Inc. and Nine
West Group Inc.
* 3.1 Articles of Incorporation, as amended
(3) 3.3 3.3 By-Laws
(4) 3.4 3.4 Amendment to By-Laws
(5) 4.1 4.1 Exchange and Registration Rights Agreement dated
October 2, 1998, by and among the Company and Chase
Securities Inc., Merrill Lynch, Pierce Fenner & Smith
Incorporated and Bear, Stearns & Co. Inc.
(6) 4.2 4.2 Indenture dated as of October 2, 1998, by and between
the Company and The Chase Manhattan Bank, as trustee
(7) 4.3 4.3 Supplemental Indenture dated as of January 1, 1999, by
and between Jones Apparel Group, Inc., Jones Apparel
Group Holdings, Inc., Jones Apparel Group USA, Inc.
and The Chase Manhattan Bank, as trustee
(3) 10.5 10.1 Form of 1991 Stock Option Plan
(3) 10.7 10.2 Employment and Stock Option Agreements between the
Registrant and Herbert J. Goodfriend
(8) 10.29 10.3 Agreement between the Registrant and Herbert J.
Goodfriend with respect to consulting services
following termination of employment
(9) 10.33 10.4 Form of 1996 Stock Option Plan
(9) 10.40 10.5 License Agreement between the Registrant and Polo
Ralph Lauren, L.P., dated October 18, 1995#
(9) 10.41 10.6 Design Services Agreement between the Registrant and
Polo Ralph Lauren, L.P., dated October 18, 1995#
-46-
47
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
(10) 10.47 10.7 Letter Agreement between the Registrant and First
Union National Bank
(10) 10.48 10.8 Letter Agreement between the Registrant and
CoreStates Bank
(10) 10.49 10.9 Letter Agreement between the Registrant and BankBoston
(10) 10.50 10.10 Money Market Line Commercial Promissory Note between
the Registrant and BankBoston
(10) 10.51 10.11 Letter Agreement between the Registrant and The
Chase Manhattan Bank
(10) 10.52 10.12 Term Note and Unconditional Guaranty with First Union
National Bank
(6) 10.2 10.13 Amended and Restated 364-Day Credit Agreement dated as
of October 15, 1998, by and among the Company, as
Borrower, the Lenders referred to therein and First
Union National Bank, as Administrative Agent
(6) 10.3 10.14 Amended and Restated Three-Year Credit Agreement dated
as of October 15, 1998, by and among the Company, as
Borrower, the Lenders referred to therein and First
Union National Bank, as Administrative Agent
(7) 10.2 10.15 Master Joinder Agreement dated as of January 1,1999
to the Credit Agreements referred to therein, by an
among the Company, Jones Apparel Group USA, Inc. and
Jones Apparel Group Holdings, Inc. as credit parties,
and First Union National Bank, as Administrative Agent
(11) 10.53 10.16 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
(11) 10.54 10.17 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
(1) 10.1 10.18 Employment Agreement dated September 10, 1998, by and
between SAI Acquisition Corp. and Eric A. Rothfeld
* 10.19 License Agreement between the Registrant and Polo
Ralph Lauren, L.P., dated May 11, 1998#
* 10.20 Design Services Agreement between the Registrant and
Polo Ralph Lauren, L.P., dated May 11, 1998#
* 11 Computation of Earnings per Share
* 12 Computation of Ratio of Earnings to Fixed Charges
* 21 List of Subsidiaries
* 23 Consent of BDO Seidman, LLP
* 27 Financial Data Schedule (12)
* 27.1 Restated Financial Data Schedules for the Years ended
December 31, 1997 and 1996 (12)
* 27.2 Restated Financial Data Schedules for the Three Months
ended March 30, 1997, the Six Months ended June 29,
1997 and the Nine Months ended September 28, 1997 (12)
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48
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
* 27.3 Restated Financial Data Schedule for the Three Months
ended March 29, 1998 (12)
____________________
* 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 Current Report on Form 8-K dated
September 24, 1998.
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
March 2, 1999.
(3) Incorporated by Reference to the Company's Registration Statement on Form
S-1 (file No. 33-39742).
(4) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(5) Incorporated by reference to the Company's Form S-4, filed on December 9,
1998.
(6) Incorporated by reference to Shelf Registration Statement on Form S-3,
filed on October 28, 1998 (Registration No. 333-66223).
(7) Incorporated by reference to Form S-4/A, filed on January 25, 1999
(Registration No. 333-68587).
(8) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(9) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
(10) Incorporated by Reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(11) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the nine months ended September 27, 1998.
(12) Submitted as an exhibit only in the electronic format of this Annual Report
on Form 10-K submitted to the Securities and Exchange Commission.
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49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jones Apparel Group, Inc.
New York, New York
The audits referred to in our dated February 5, 1999, except as to Note 19,
which is as of March 2, 1999 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, 1998.
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 5, 1999, except as to Note 19,
which is as of March 2, 1999
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50
SCHEDULE II
JONES APPAREL GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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, 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
For the year ended
December 31, 1998:
Allowance for doubtful accounts $2,767 $(188) $ - $724 $3,303
<F1> Doubtful accounts written off (recovered) against accounts receivable.
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