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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, 1999
[ ] 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 10, 2000 was approximately $2,549,460,550.
As of March 10, 2000, 117,438,010 shares of the registrant's common stock
were outstanding.
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TABLE OF CONTENTS
Page
----
PART I
Item 1 Business......................................................... 4
Item 2 Properties....................................................... 18
Item 3 Legal Proceedings................................................ 19
Item 4 Submission of Matters to a Vote of Security Holders.............. 20
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 21
Item 6 Selected Financial Data.......................................... 22
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 23
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 28
Item 8 Financial Statements and Supplementary Data...................... 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 56
PART III
Item 10 Directors and Executive Officers of the Registrant............... 56
Item 11 Executive Compensation........................................... 57
Item 12 Security Ownership of Certain Beneficial Owners and Management... 57
Item 13 Certain Relationships and Related Transactions................... 57
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 58
Signatures................................................................ 59
Index to Financial Statement Schedules.................................... 60
Exhibit Index............................................................. 60
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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
2000 Annual Meeting of Stockholders
(the "Proxy Statement") that are
specifically identified herein as
incorporated by reference into this
Form 10-K.
=====================================================
DEFINITIONS
As used in this Report, unless the context requires otherwise, the "Company"
means Jones Apparel Group, Inc. and consolidated subsidiaries, "Sun" means Sun
Apparel, Inc. (acquired October 2, 1998), and "Nine West" means Nine West Group
Inc. (acquired June 15, 1999). The results of Sun and Nine West are included
in the Company's operating results from the respective dates of acquisition
and, therefore, the Company's operating results for all periods presented are
not comparable.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes, and incorporates by reference, "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. All statements regarding the Company's expected financial
position, business and financing plans are forward-looking statements.
The words "believes," "expects," "plans," "intends," "anticipates" and
similar expressions identify forward-looking statements. Forward-looking
statements also include representations of the Company's expectations or
beliefs concerning future events that involve risks and uncertainties,
including those associated with the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within the prevailing retail environment, customer
acceptance of both new designs and newly-introduced product lines, financial
difficulties encountered by customers, the effects of vigorous competition in
the markets in which the Company operates, the integration of Nine West, Sun,
or other acquired businesses into the Company's existing operations, the
termination or non-renewal of the licenses with Polo Ralph Lauren Corporation,
the Company's extensive foreign operations and manufacturing, pending
litigation and investigations, changes in the costs of raw materials, labor
and advertising, and the Company's ability to secure and protect trademarks
and other intellectual property rights. All statements other than statements
of historical facts included in this Report, including, without limitation,
the statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, such expectations may prove to
be incorrect. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed in this Report in conjunction with the forward-looking statements.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
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PART I
ITEM 1. BUSINESS
General
Jones Apparel Group, Inc. is a leading designer and marketer of a broad
range of women's career sportswear, suits, and dresses, casual sportswear
and jeanswear for men, women and children, and women's shoes and
accessories. 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, Ralph by Ralph Lauren and Polo Jeans Company. 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 various
licenses for the Jones New York and Evan-Picone brand names with select
manufacturers of women's and men's apparel and accessories.
On June 15, 1999, the Company acquired 100% of the common stock of 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, Bandolino and cK/Calvin Klein (under license).
In addition, Nine West markets shoes and accessories under the Company's
Evan-Picone label and, beginning in 2000, accessories under the Jones New York
label.
Operating Segments
The Company's operations are comprised of wholesale apparel, wholesale
footwear and accessories, and retail segments. The Company identifies
operating segments based on, among other things, the way that the Company's
management organizes the components of the Company's business for purposes of
allocating resources and assessing performance. Segment revenues are generated
from the sale of apparel, footwear and accessories through wholesale channels
and the Company's own retail locations. See "Business Segment and Geographic
Area Information" in the Notes to Consolidated Financial Statements.
Wholesale Apparel
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 develops 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 following table summarizes selected aspects of the products sold:
Product Market Retail
Label Classification Segment Price Points
---------------------- --------------------- ---------- ------------
Jones New York Labels Jones New York Collection Sportswear Better $24 - $300
Skirts, blouses, pants, Jones New York Sport Casual Sportswear Better
jackets, sweaters, Jones & Co Casual Sportswear Better
jeanswear, suits, Jones Jeans Casual Sportswear Better
dresses, casual tops Jones New York Country Lifestyle Better
Jones New York Dress Dresses Better
Jones New York Suit Suits Better
Jones Wear Collection Sportswear Moderate
Jones Wear Sport Casual Sportswear Moderate
Evan-Picone Labels Evan-Picone Lifestyle Moderate $20 - $119
Skirts, blouses, pants, Evan-Picone Dress Dresses Moderate
jackets, sweaters,
jeanswear, dresses,
casual tops
Other Labels Rena Rowan Collection Sportswear Better $16 - $159
Skirts, blouses, pants, Todd Oldham Casual Sportswear Better
jackets, sweaters,
jeanswear, dresses,
casual tops
Labels Under License Lauren by Ralph Lauren Lifestyle Better $20 - $450
Skirts, blouses, Ralph by Ralph Lauren Lifestyle Better
pants, jackets, Lauren Jeans Company Lifestyle Better
sweaters, jeanswear, Polo Jeans Company Casual Sportswear Better
suits, dresses, Lauren Dress Lifestyle Better
casual tops, coats
Wholesale Footwear and Accessories
The Company's wholesale footwear and accessories operations include the sale
of both brand name and private label footwear and/or accessories through eight
branded divisions, the Jervin private label division and the Accessories
division. The Accessories division produces and sells handbags and small
leather goods primarily under the Nine West brand.
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The following table summarizes selected aspects of the products sold:
Retail Price Points
Product Market --------------------------
Label Classification Segments Shoes Boots
- -------------- ------------------------ ---------------- ---------- ------------
Footwear
- --------
Nine West Contemporary Upper Moderate $50 to $75 $80 to $160
Bandolino Modern Classics Upper Moderate $40 to $60 $70 to $140
Calico Value/Affordable Fashion Lower Moderate $30 to $50 $60 to $65
cK/Calvin Dress Tailored Bridge $45 to $165 $105 to $265
Klein Casual
Seasonal Sport
Easy Spirit Comfort/Fit Upper Moderate $40 to $85 $70 to $125
Active
Sport/Casuals
Enzo Sophisticated Better $60 to $90 $100 to $165
Angiolini Classics
Evan-Picone Contemporary Moderate $40 to $60 $50 to $90
9 & Co. Junior/Trend Moderate $30 to $60 $55 to $100
Selby Lifestyle Classics/ Upper Moderate $60 to $80 $90 to $150
Comfort
Specialty Traditional/ Moderate/Lower $25 to $40 $40 to $50
Marketing/ Contemporary Moderate
Westies
Jervin All Moderate/ $20 to $50 $40 to $90
Private Label Lower Moderate
Accessories Accessories
- ----------- -----------
Primarily Handbags and small Moderate/Better $30 to $120
Nine West leather goods
cK/Calvin Handbags and Bridge $35 to $200
Klein small leather goods
Jones New York Handbags Better $45 to $170
Retail
The Company markets apparel, footwear and accessories directly to consumers
through the Company's specialty retail stores operating in malls, department
store concessions and urban retail centers throughout the world as well as the
Company's various value-based ("outlet") stores.
The Company's ongoing evaluation of its retail operations has led to a
decision to close many of its underperforming locations. The Company plans to
close 120 to 135 domestic retail locations in 2000, including the eight 9 & Co.
retail locations in operation as of December 31, 1999. The Company is also
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actively seeking to sell its Asian retail and wholesale footwear and accessories
businesses and plans to close 40 to 50 international retail locations in 2000,
excluding those in Asia.
Specialty Retail Stores. At December 31, 1999, the Company operated a total
of 970 specialty retail stores. These stores sell either footwear and
accessories or apparel (or a combination of these products) primarily under
their respective brand names. The Company's Nine West, Easy Spirit and
Enzo Angiolini retail stores offer selections of exclusive products not
marketed to the Company's wholesale customers. Certain of the Company's
specialty retail stores also sell products licensed by the Company, including
belts, jewelry, legwear, outerwear, watches and sunglasses.
The following table summarizes selected aspects of the Company's specialty
retail stores at December 31, 1999. Of these stores, 574 are located within
the United States with the remainder located primarily in Europe and Asia.
Retail Price Range
------------------------------- Average
Shoes Handbags store size
Number of Brands and and small Type of (square
locations offered Boots leather goods Apparel locations feet)
--------- --------------- -------- ------------- ------- -------------------- --------
Nine West 430 Primarily $40-$170 $18-$100 - Upscale and 1,284
Nine West regional malls,
urban retail centers
department store
concessions
Easy Spirit 216 Easy Spirit $45-$130 $22-$99 - Upscale and 1,384
and Selby regional malls,
urban retail centers
Enzo Angiolini 90 Primarily $65-$165 $15-$200 - Upscale malls, 1,179
Enzo Angiolini urban retail centers,
department store
concessions
9 & Co. 8 9 & Co. $30-$89 $12-$35 - Regional malls, 1,569
urban retail centers
cK/Calvin Klein 18 cK/Calvin Klein $65-$295 $20-$200 - Upscale malls, 1,064
department store
concessions
Pied a Terre 32 Pied a Terre and $100-$280 - - Urban retail 1,109
cK/Calvin Klein locations, regional
malls, department
store concessions
Shoe Studio 170 Bertie, $35-$300 - - Department store 1,546
Roland Cartier, concessions
Roberto Vianni,
Vivaldi,
Jacques Michel,
Nine West
and others
Jones New York 2 Jones New York - - $20-$230 Urban retail 2,855
locations
Jones New York 2 Jones New - - $30-$300 Urban retail 3,516
Country York Country locations
Todd Oldham 2 Todd Oldham - - $15-$410 Urban retail 1,432
and TO2 locations
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Outlet Stores. At December 31, 1999, the Company operated a total of 590
outlet stores. The Company's shoe stores focus on breadth of product line as
well as value pricing and offer a distribution channel for the Company's
residual inventories. The majority of the shoe stores' merchandise consists of
new production of current and proven prior season's styles, with the remainder
of the merchandise consisting of discontinued styles from the Company's
specialty retail footwear stores and wholesale divisions. The apparel stores
focus on breadth of product line, customer service and value pricing.
The apparel merchandise is all first-quality new production styles. In addition
to its own brand name merchandise, these stores also sell merchandise produced
by licensees of the Company.
The following table summarizes selected aspects of the Company's outlet stores
at December 31, 1999. Of these stores, 575 are located within the United States
with the remainder located primarily in Europe and Australia.
Average
Number of Brands Type of store size
locations offered locations (square feet)
--------- -------------- --------------- -----------
Nine West Outlet 158 Primarily Manufacturer 2,613
Nine West outlet centers
Easy Spirit Outlet 35 Easy Spirit Manufacturer 2,413
and Selby outlet centers
Banister 115 All Company Manufacturer 4,618
footwear brands outlet centers
Stein Mart (leased 83 All Company Strip 2,777
footwear departments) footwear brands centers
Enzo Angiolini Outlet 9 Enzo Angiolini Manufacturer 2,350
outlet centers
Jones New York 79 Primarily Manufacturer 3,770
Jones New York outlet centers
Jones New York Sport 26 Jones New York Manufacturer 2,365
Sport and outlet centers
Jones & Co
Jones New York Men's 7 Jones New York Manufacturer 1,765
outlet centers
Evan-Picone 3 Evan-Picone Manufacturer 2,152
outlet centers
Jones New York Country 42 Jones New Manufacturer 2,747
York Country outlet centers
Factory Finale 13 All Company Manufacturer 3,148
apparel brands outlet centers
Jones Company Store 9 All Company Manufacturer 4,774
apparel brands outlet centers
Executive Suite 10 Jones New York Manufacturer 2,176
Suit And outlet centers
Executive Suite
Rena Rowan 1 Rena Rowan Manufacturer 3,700
and Saville outlet centers
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Licensed Brands
The Company licenses three major brands from Polo Ralph Lauren Corporation:
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 five-year period, provided that it meets certain minimum sales
levels. 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 dresses, 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 levels. 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 in 1998, the Company obtained the right to
sell Polo Jeans Company products under long-term license and design agreements
which 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
Company by Ralph Lauren 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 provided that it meets certain minimum sales levels. The Company has
met the sales requirements and has exercised its first renewal option, which
will expire on December 31, 2005. 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 Company 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 Company 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.
As result of the acquisition of Nine West, the Company obtained the exclusive
right to produce and sell footwear and accessories under the cK/Calvin Klein
trademark and women's footwear under the Capezio trademark and obtained rights
under license agreements for the production of various other products under the
Capezio trademark.
Design
Each apparel 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 apparel 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.
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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.
The Company's footwear brands are developed by separate design teams which
independently interpret global lifestyle, clothing, footwear and accessories
trends. To research and confirm such trends, the teams travel extensively in
Asia, Europe and major American markets, conduct extensive market research on
retailer and consumer preferences, and subscribe to fashion and color
information services. Each team presents styles that maintain each brand's
distinct personality. Samples are refined and then produced. After the
samples are evaluated, lines are modified further for presentation at each
season's shoe shows.
In accordance with standard industry practices for licensed products, the
Company has the right to approve the concepts and designs of all products
produced and distributed by the Company's licensees. Similarly, Polo Ralph
Lauren and Calvin Klein, Inc. provide design services to the Company for
their respective licensed products and have the right to approve the Company's
designs for the Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans
Company product lines, and the cK/Calvin Klein product lines, respectively.
Manufacturing and Quality Control
Apparel
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 107 contractors
located in the United States, approximately 106 in Mexico and approximately
425 in overseas locations. The Company also operates several manufacturing
facilities of its own. Approximately 33% of the Company's apparel products
were manufactured in the United States and Mexico and 67% in other parts of
the world (primarily Asia) during 1999.
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.
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 buying agents located in other
countries. All finished goods are shipped to the Company's warehouses for
final inspection and distribution.
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
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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 open account.
The Company's primary raw material in its jeanswear business is denim, of
which approximately 98% 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.
The Company's apparel 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 only a portion of total projected demand with options
to purchase additional volume if demand meets the plan. Since piece goods for
a line usually are not cut until the first few weeks of a marketing period,
the Company is able to tailor production schedules and styles to current market
demands and minimize excess inventory 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.
Footwear and Accessories
To provide a steady source of footwear and accessories inventory, the Company
relies on long-standing relationships developed by Nine West with Brazilian
and Chinese manufacturers, working through independent buying agents, and
third party manufacturers in other countries. Allocation of production among
the Company's footwear and accessories manufacturing resources is determined
based upon a number of factors, including manufacturing capabilities, delivery
requirements and pricing.
During 1999, approximately 54% of the Company's footwear products were
manufactured by 18 independently owned footwear manufacturers in Brazil.
As a result of the number of entrepreneurial factory owners, the highly
skilled labor force, the modern, efficient vertically-integrated factories
and the availability of high-quality raw materials, the Brazilian manufacturers
are able to produce significant quantities of moderately priced, high-quality
leather footwear. The largest of these Brazilian factories operate tanneries
for processing leather and produce lasts, heels and other footwear components
as well as finished goods, and source raw materials worldwide based on input
from the Company. The Company believes that its relationships with its
Brazilian manufacturers provide it with a responsive and active source of
supply of its products and, accordingly, give the Company a significant
competitive advantage. The Company also believes that purchasing a
significant percentage of its products in Brazil allows it to maximize
production
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flexibility while limiting its capital expenditures, work-in-process inventory
and costs of managing a larger production work force. Because of the
sophisticated manufacturing techniques and vertical integration of
these manufacturers, individual production lines can be quickly changed from
one style to another, and production of certain styles can be completed in as
few as four hours, from uncut leather to boxed footwear.
Historically, instability in Brazil's political and economic environment has
not had a material adverse effect on Nine West's financial condition or results
of operations. The Company cannot predict, however, the effect that future
changes in economic or political conditions in Brazil could have on the
economics of doing business with its Brazilian manufacturers. Although the
Company believes that it could find alternative manufacturing sources for those
products which it currently sources in Brazil, the establishment of new
manufacturing relationships would involve various uncertainties, and the loss
of a substantial portion of its Brazilian manufacturing capacity before the
alternative sourcing relationships were fully developed could have a material
adverse effect on the Company's financial condition or results of operations.
During 1999, approximately 37% of the Company's footwear products (primarily
fabric footwear) were manufactured by independent third parties located in
China, with the remainder of footwear production originating in Korea and other
countries in the Far East, Italy, Spain and Uruguay. The Company's accessories
are sourced through the Company's own buying offices in Korea and Hong Kong,
which utilize independent third party manufacturers in China and Indonesia.
The price paid by the Company for any style of footwear is determined after
a physical sample of the style is produced, and is dependent on, among other
things, the materials used and the quantity ordered for such style of footwear.
Once a price list by style has been prepared and agreed to with a manufacturer,
changes in prices generally occur only as a result of substitution of materials
at the request of the Company. During the past year, there have been moderate
increases in the general price of leather; however, those price increases have
generally been offset by savings from increased manufacturing efficiencies and,
as a result, generally have not been reflected in the selling price of the
Company's products. Products have historically been purchased from the
Brazilian and Asian manufacturers in pre-set United States dollar prices,
and therefore, the Company generally has not been adversely affected by
fluctuations in exchange rates.
The Company places its projected orders for each season's styles with its
manufacturers prior to the time the Company has received all of its customers'
orders. Because of the Company's close working relationships with its third
party manufacturers (which allow for flexible production schedules and
production of large quantities of footwear within a short period of time),
most of the Company's orders are finalized only after it has received orders
from a majority of its customers. As a result, the Company believes that, in
comparison to its competitors, it is better able to meet sudden demands for
particular designs, more quickly exploit market trends as they occur, reduce
inventory risk and more efficiently fill reorders booked during a particular
season.
The Company does not have any contracts with any of its footwear or
accessories manufacturers but, with respect to footwear imported from Brazil,
relies on long-standing relationships with its Brazilian manufacturers directly
and through its independent buying agent, Bentley Services Inc. (the "Agent").
The Agent and its affiliates have overseen the activities of the Brazilian
manufacturers for more than 15 years. In consultation with the Company, the
Agent selects the proper manufacturer for the style being produced, monitors
the manufacturing process, inspects finished goods and coordinates shipments
of finished goods to the United States. Nine West entered into a five-year
contract with the Agent effective January 1, 1992, which has been extended for
an additional five years, which provides that the Agent, its owners, employees,
directors and affiliates will not act as a buying agent for, or sell leather
footwear manufactured in Brazil to, other importers, distributors or retailers
for resale in the United States, Canada or the United Kingdom. As compensation
for services rendered, the Agent receives a percentage of the sales price of
the merchandise shipped to the Company. Paramont Trading S.A., an affiliate
of the Agent, serves as the Company's agent in China. In addition to the Agent
and Paramont Trading S.A., the Company utilizes its own buying offices
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in Hong Kong, Italy and Korea. Neither the Agent or Paramont Trading S.A. nor
any of their principals are affiliates of the Company.
Marketing
During 1999, 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 eight department store
customers currently owned by The May Department Stores Company ("May") accounted
for approximately 14% of 1999 sales, and sales to eight department store
customers currently owned by Federated Department Stores, Inc. ("Federated")
accounted for approximately 14% of 1999 sales. The Company's ten largest
customer groups accounted for approximately 58% of sales in 1999. While the
Company believes that purchasing decisions are generally made independently by
each department store customer (including the stores in the May and Federated
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 has a sales force for apparel products of approximately 385 sales
people (excluding employees in the Company's retail stores), which includes
individuals located in the Company's New York, Toronto and Dallas showrooms.
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.
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 apparel 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 introduces new collections of footwear at industry-wide shoe
shows, held four times yearly in New York City and semi-annually in Las Vegas,
and at regional shoe shows throughout the year. The Company also introduces
new accessory collections at market shows that occur four times each year in
New York City. After each show, members of the Company's 38-person direct
sales force visit customers to review the lines and take orders. The Company
presently has footwear and accessories showrooms in New York City and Dallas
and a cK/Calvin Klein Shoes and Bags showroom in New York City, where buyers
view and place orders for the Company's products.
The Company promotes its footwear and accessories business with certain
department stores and specialty retail stores by bringing its retail and sales
planning expertise to those retailers. Under this program, members of branded
division management who have extensive retail backgrounds work with the
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retailer to create a "focus area" or "concept shop" within the store that
displays the full collection of an entire brand in one area. These individuals
assist the department and specialty retail stores by: providing advice about
appropriate product assortment and product flow; making recommendations about
when a product should be re-ordered; providing sales guidance, including the
training of store personnel; and developing advertising programs with the
retailer to promote sales of the Company's products. In addition, the Company's
sales force and, for accessories, field merchandising associates recommend how
to display the Company's products and educate store personnel about the Company
and its products. The goal of this approach is to promote high retail
sell-throughs of the Company's products. With this approach, customers are
encouraged to devote greater selling space to the Company's products, and the
Company is better able to assess consumer preferences, the future ordering
needs of its customers, and inventory requirements.
Advertising and Promotion
The Company employs a cooperative advertising program for its branded
products, whereby it shares the cost of its wholesale customers' advertising
and promotional expenses in newspapers, magazines and other media up to a
preset maximum percentage of the customer's purchases. An important part
of the marketing program includes prominent displays of the Company's
products in wholesale customers' sales catalogs as well as in-store shop
displays.
National advertising campaigns have existed for the Lauren by Ralph Lauren,
Ralph by Ralph Lauren and Polo Jeans Company products since their inception.
The Company also has 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's footwear brands and accessories are positioned and marketed
through consistent, integrated communication programs, including national
advertising, special events, product packaging and in-store visual support.
The Easy Spirit brand is advertised on television and in lifestyle, health
and fitness magazines. The Company's in-house creative services department
oversees the conception, production and execution of virtually all aspects of
these activities. The Company produces national advertising campaigns for its
Nine West, Enzo Angiolini and Easy Spirit brands in major fashion magazines.
Under the Company's license agreement with Calvin Klein, Inc. (the "License
Agreement"), the Company has agreed to meet certain thresholds based on
Revenues (as defined in the License Agreement) for cooperative, trade and
local advertising for the cK/Calvin Klein retail locations, and consumer
advertising and promotion of licensed products and the licensed trademark.
The Company also believes that its retail network promotes brand name
recognition and supports the merchandising of complete lines by, and the
marketing efforts of, its wholesale customers.
Licensing of Company Brands
The Company has entered into various 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 the United States, Canada and various other territories. Current
licenses include men's tailored clothing and overcoats, women's intimate
apparel, women's rainwear, outerwear, leather outerwear and woolen coats,
handbags, belts, scarves, women's swimwear, umbrellas, eyewear, costume
jewelry, hair accessories, and cosmetic travel accessories. These licenses
provide 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 typically increase over the term of the agreement. During 1999, the
Company received $12.7 million of licensing income under these agreements.
The Company has entered into various license agreements under which
independent licensees sell products under the Company's Evan-Picone
trademarks in accordance with designs furnished or approved
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by the Company in the United States, Canada and various other territories.
These licenses include men's tailored clothing and topcoats, men's and
women's eyeglass frames, men's underwear, men's and women's socks and
women's hosiery. These licenses provide 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 typically increase
over the term of the agreement. During 1999, the Company received
$4.2 million of licensing income under these agreements.
The Company has entered into various license agreements, primarily
under the Nine West trademark, with independent licensees with respect
to the manufacture and marketing of footwear and non-footwear products,
including legwear, eyewear, jewelry, children's shoes, outerwear, belts,
slippers and watches. These licenses provide 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 typically
increase over the term of the agreement. During 1999, the Company
received $6.7 million of licensing income under these agreements.
The Company has also entered into foreign license agreements under
which independent licensees have the exclusive right to distribute and
sell at retail (and, in some cases, at wholesale) Nine West branded footwear
and to own and operate Nine West footwear and handbag stores in certain
countries. These licenses provide for the payment to the Company of
commissions on the sale of certain licensed products, as well as a
percentage of the licensee's net sales of all licensed products against
guaranteed minimum royalty payments which typically increase over the
term of the agreement. The Company has entered into such licenses in
Turkey, Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United
Arab Emirates, portions of South America and Canada.
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, Evan-Picone,
Picone Sport, Picone Studio, Evan-Picone Sport, Todd Oldham, Times Seven
Todd Oldham, Code Bleu, Executive Suite, Bandolino, Banister, Calico, Nine
West Cloud 9, Cobbie Cuddlers, Easy Spirit, Enzo Angiolini, Joyce, 9 & Co.,
Nine West, Nine West Kids, NW, Pappagallo, Pied a Terre, Red Cross, Selby
and Westies. The Company has registered or applied for registration for
these and other trademarks for use on a variety of items of apparel,
footwear, accessories and related products in the United States and
Canada. In addition, the Company has registered or has pending applications
for certain of its trademarks in certain other countries. In the United
Kingdom, the Company, through its subsidiary, The Shoe Studio Group Limited,
owns registrations for certain trademarks, including Bertie, Roland Cartier,
Roberto Vianni and Vivaldi, for use on footwear and/or accessories. The
federal trademark registrations for the Company's material registered
trademarks, Jones New York, Jones New York Sport, Rena Rowan, Evan-Picone,
Nine West, Enzo Angiolini and Easy Spirit, expire in 2006, 2004, 2002, 2003,
2008, 2008 and 2008, respectively, with its other registered foreign and
domestic trademarks expiring at various dates through 2017, all of which
are subject to renewal if the marks are still in use for the goods and
services covered by such registrations. The Company carefully monitors
trademark expiration dates to ensure uninterrupted registration of its
material trademarks. The Company also licenses the Lauren by Ralph Lauren,
Ralph by Ralph Lauren, Polo Jeans Company by Ralph Lauren, cK/Calvin
Klein and Capezio trademarks (see "Licensed Brands" above).
The Company also holds numerous patents and has several patent applications
pending in the United States Patent and Trademark Office and in certain other
countries. The Company regards its trademarks and other proprietary rights
as valuable assets which are critical in the marketing of its products. The
Company vigorously protects its trademarks and patents against infringement.
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Imports and Import Restrictions
The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. Imports into the United States
are affected by, among other things, the cost of transportation and the
imposition of import duties and restrictions. The United States, Brazil and
other countries in which the Company's products might be manufactured may,
from time to time, impose new quotas, duties, tariffs or other restrictions,
or adjust presently prevailing quotas, duty or tariff levels, which could
affect the Company's operations and its ability to import products at current
or increased levels. The Company cannot predict the likelihood or frequency
of any such events occurring.
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's imported products are also subject to United States customs
duties and, in the ordinary course of business, the Company is from time to
time subject to claims by the United States Customs Service for duties and
other charges.
The 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.
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.
Backlog
On December 31, 1999, the Company had unfilled customer orders of
approximately $1.1 billion, compared to approximately $704 million of such
orders at December 31, 1998. 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 mix of
product, 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. Backlog is also
affected by a continuing trend among customers to reduce the lead time on
their orders. Due to these factors, as well as the acquisition of Nine
West during 1999, a comparison of unfilled orders from period to period
is not necessarily meaningful and may not be indicative of eventual actual
shipments.
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Competition
Competition is intense in the sectors of the apparel, footwear and accessory
industries in which the Company participates. The Company competes with many
other manufacturers and retailers, 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 quickly to changing consumer demands, its brand names and range of
products and its ability to operate within the industries' 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. The Company believes that, during
the past few years, major department stores and specialty retailers have been
increasingly unwilling to source products 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, 1999, the Company had approximately 15,980 full-time
employees. This total includes approximately 8,885 in quality control,
production, design and distribution positions, approximately 2,195 in
administrative, sales, clerical and office positions and approximately 4,900 in
the Company's retail stores. The Company also employs approximately 6,370 part-
time employees, of which approximately 6,250 work in the Company's retail
stores.
Approximately 245 of the Company's employees 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 120 of the Company's
employees located in Cincinnati, Ohio are members of the Independent Shoe
Workers Union. The Company is currently negotiating the terms of a three-year
extension of its contract with the Independent Shoe Workers Union, which expired
on December 31, 1999. The Company anticipates that the amended agreement will
be finalized during the first quarter of 2000. Approximately 3,115 of the
Company's employees located in Durango, Mexico are members of an affiliate of
the Cofederacion de Trabajadores Mexicanos, which has a one-year contract
expiring on January 1, 2001. The Company considers its relations with its
employees to be satisfactory.
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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 warehouse 453,057
Bristol, Pennsylvania leased Administrative and computer services 112,422
New York, New York leased Administrative, executive and sales offices 406,457
Vaughan, Canada leased Canadian headquarters and 125,000
distribution warehouse
Lawrenceburg, Tennessee leased Distribution warehouses 1,199,100
South Hill, Virginia owned Distribution warehouses 533,500
Rural Hall, North Carolina leased Materials and distribution warehouse 232,200
El Paso, Texas owned Administrative, warehouse and preproduction
facilities 155,000
El Paso, Texas leased Administrative services 33,250
El Paso, Texas owned Finishing facilities 170,000
El Paso, Texas owned Distribution warehouse 110,000
El Paso, Texas leased Distribution warehouses 505,000
Ciudad Juarez, Mexico owned Production 66,850
Durango, Mexico owned Finishing, assembly and warehouse facilities 210,000
Durango, Mexico leased Finishing and warehouse facilities 70,800
White Plains, New York leased Administrative and computer services 366,460
West Deptford, New Jersey leased Distribution warehouses 720,466
Cincinnati, Ohio leased Distribution warehouses 489,254
The Company's joint venture companies lease distribution facilities in Hong
Kong, Taiwan, Thailand, Singapore and Australia. The Company also utilizes
third party warehousing services in the Netherlands, the United Kingdom, Japan
and Canada for the receipt, processing and distribution of merchandise
internationally. The Company believes that these facilities are suitable for
its domestic and international distribution needs.
The Company also owns several closed factories in Kentucky and Indiana with
an aggregate of approximately 170,240 square feet of space, which the Company
intends to donate to the municipalities in which the facilities are located.
The Company also subleases a 101,179 square foot building located in Stamford,
Connecticut to two independent companies and a portion of its White Plains
facility.
The Company's domestic retail stores are leased pursuant to long-term leases,
typically three to five years for apparel stores and ten years for footwear and
accessories stores. Certain leases allow the Company to terminate its
obligations after a predetermined period (generally one to three years) in the
event that a particular location does not achieve specified sales volume. Many
leases include clauses that provide for contingent payments based on sales
volumes, and many leases contain escalation clauses for increases in operating
costs and real estate taxes.
The Company's international retail locations consist of specialty retail
stores and concessions. The retail stores are leased pursuant to leases that
extend for terms which range from five to 25 years. The concessions are
located in Europe and Asia and are operated pursuant to either leases with
certain department stores or other arrangements with third parties which are
generally cancelable upon between one to six months' notice by either party.
Rental payments for certain specialty retail concessions are based solely on
percentage of sales volume.
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.
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ITEM 3. LEGAL PROCEEDINGS
The Company was named as one of multiple defendants in two lawsuits initiated
in early 1999 challenging working conditions for foreign contract workers in
independently-owned garment factories in Saipan (part of the U.S. Commonwealth
of the Northern Mariana Islands). One suit was filed in federal court in Los
Angeles by several anonymous plaintiffs on behalf of a purported class of
garment workers and was subsequently transferred to federal court in Hawaii;
the second was filed in state court in San Francisco by a labor union and three
nonprofit groups. In February 2000, the Company reached an agreement with
counsel for plaintiffs on proposed terms to settle all claims in these two
suits. The Company agreed to make a cash payment of $1,550,000 and to include
in future supply contracts with Saipan manufacturers a requirement for a program
of independent monitoring of workplace conditions and contractor compliance with
agreed standards and applicable laws. The Company's payment and those of the 15
other U.S.-based clothing companies who have reached similar settlement
agreements will fund the Saipan monitoring program, payments to settling workers
and attorneys' fees. The proposed settlements will not become final until they
have been reviewed and approved, after notice to affected members of the
proposed class, by the federal court in Hawaii.
On March 6, 2000, the Company and Nine West entered into settlement agreements
with the Attorneys General of the 50 States, the District of Columbia, Puerto
Rico, the Virgin Islands, American Samoa, the Northern Mariana Islands and Guam
(the "States"), and with the Federal Trade Commission, resolving allegations
that Nine West engaged in violations of the antitrust laws by coercing retailers
to adhere to resale prices of its products. Both agreements are without any
admission of liability on the part of Nine West.
The agreement with the States resolves ongoing investigations and a parens
patriae action brought on behalf of consumers in the United States District
Court for the Southern District of New York in White Plains. The settlement
consists of injunctive relief in the form of a consent decree which specifies
the manner in which Nine West may implement its resale pricing policies with
its retailer customers, along with a payment of $34.0 million which will be
used to benefit consumers. The settlement requires court approval.
In a separate settlement on March 6, 2000, Nine West agreed to a consent
order with the Federal Trade Commission which also specifies the manner in
which Nine West may implement its resale pricing policies with its retailer
customers. This consent order, which resolves an ongoing investigation by
the FTC, is subject to final FTC approval after a 30-day comment period.
Since January 13, 1999, more than 25 putative class actions have been filed
on behalf of purchasers of Nine West's footwear in four separate federal
courts. These federal complaints allege that Nine West violated Section 1
of the Sherman Act by engaging in a conspiracy with its retail distributors
to fix the minimum prices at which the footwear marketed by Nine West was
sold to the public and seek injunctive relief, unspecified compensatory and
treble damages, and attorneys' fees. All of these putative federal class
action complaints have been transferred and consolidated into a single action
in the United States District Court for the Southern District of New York.
On April 9, 1999, Nine West and certain retail distributors named as co-
defendants in the action moved to dismiss the complaint, and on January 7,
2000, the motion was denied. Discovery in the consolidated action began in
February 2000. On March 10, 2000, the court suspended discovery in the
consolidated action and set in motion the process for considering the
approval of the settlement agreement with the States.
In addition, five putative class actions based on the same alleged
conduct have been filed in state courts in New York, the District of
Columbia, Wisconsin, California and Minnesota alleging violations of those
states' respective antitrust laws. The five state actions likewise seek
injunctive relief, unspecified compensatory and treble damages, and
attorneys' fees. Nine West moved to dismiss each of these state actions
or, in the alternative, to stay them pending resolution of the consolidated
federal action pending in the Southern District of New York. On October 29,
1999, the state court in Westchester County, New York granted Nine West's
motion to dismiss. On October 22, 1999, the state court in San Diego,
California granted
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Nine West's demurrer to the amended complaint filed in California,
dismissing that action with prejudice. The plaintiffs have appealed
the decisions in the New York and California state court actions. On
July 27, 1999, the state court in Hennepin County, Minnesota granted Nine
West's motion to stay the action in that state pending a decision on the
motion to dismiss filed in federal court in the Southern District in New
York, and reserved decision as to Nine West's motion to dismiss until
after that time. A hearing on Nine West's motion to dismiss is currently
scheduled for April 4, 2000. On February 23, 2000, the state court in
Dane County, Wisconsin stayed the action filed in that court pending
resolution of class certification in the consolidated federal action.
The Superior Court of the District of Columbia denied Nine West's motion
to dismiss in an opinion dated February 18, 2000. A scheduling order was
entered and discovery in that action has begun.
The Company believes that the settlement with the States, if approved
by the United States District Court for the Southern District of New York,
should effectively resolve these pending federal and state class actions
which cover the same claims.
On March 3, 4 and 5, 1999, four purported stockholder class action
suits were filed against the Company, Nine West and the members of Nine
West's Board of Directors in the Delaware Court of Chancery. These
complaints alleged, among other things, that the defendants breached
their fiduciary duties to Nine West stockholders by failing to maximize
stockholder value in connection with entering into the merger agreement
with the Company. In February and March 2000, all four actions were
dismissed without prejudice, pursuant to court approval of stipulations
by counsel for the plaintiffs.
The Company has been named as a defendant in various actions and
proceedings, including actions brought by certain employees whose
employment has been terminated arising from its ordinary business
activities. Although the amount of any liability that could arise
with respect to these actions cannot be accurately predicted, in the
opinion of the Company, any such liability will not have a material
adverse financial effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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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:
1999
High $32-3/8 $35-7/8 $34-7/8 $33
Low $21-1/2 $27-1/2 $24-3/4 $24-7/8
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
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 10, 2000 was $25-1/2 and on that date
there were 326 holders of record of the Company's common stock. However, many
shares are held in "street name;" therefore, the number of holders of record
may not represent the actual number of shareholders. 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, 1999. The Company completed its acquisitions of Sun
and Nine West on October 2, 1998 and June 15, 1999, respectively. The results
of operations of Sun and Nine West are included in the Company's operating
results from the date of acquisition.
(All amounts in millions except net income per share data)
Year Ended December 31, 1999 1998 1997 1996 1995
--------- --------- -------- -------- --------
Income Statement Data
Net sales $3,129.8 $1,669.4 $1,372.5 $1,021.0 $776.4
Licensing income (net) 20.9 15.8 15.0 13.1 10.3
--------- --------- -------- -------- --------
Total revenues 3,150.7 1,685.2 1,387.5 1,034.1 786.7
Cost of goods sold 1,876.9 1,098.3 940.2 717.3 546.4
Purchase accounting
adjustments to cost
of goods sold 84.6 2.4 - - -
--------- --------- -------- -------- --------
Gross profit 1,189.2 584.5 447.3 316.8 240.3
Selling, general and
administrative expenses 788.7 320.0 250.7 186.5 139.1
Amortization
of goodwill 22.3 2.7 - - -
--------- --------- -------- -------- --------
Operating income 378.2 261.8 196.6 130.3 101.2
Interest expense and
financing costs 66.9 11.8 3.6 3.0 1.9
Interest income (3.3) (1.8) (1.6) (0.5) (0.4)
--------- --------- -------- -------- --------
Income before provision
for income taxes 314.6 251.8 194.6 127.8 99.7
Provision for
income taxes 126.2 96.9 72.9 46.9 36.2
--------- --------- -------- -------- --------
Net income $ 188.4 $ 154.9 $ 121.7 $ 80.9 $ 63.5
========= ========= ======== ======== ========
Per Share Data
Net income per share
Basic $1.65 $1.52 $1.17 $0.77 $0.61
Diluted $1.60 $1.47 $1.13 $0.75 $0.60
Dividends paid per share - - - - -
Weighted average number
of common shares
outstanding
Basic 114.1 101.6 103.8 104.7 104.3
Diluted 118.0 105.1 107.8 107.3 106.0
December 31, 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance Sheet Data
Working capital $ 469.2 $ 457.9 $ 330.6 $ 294.0 $ 260.9
Total assets 2,792.0 1,188.7 580.8 488.1 401.0
Short-term debt and
current portion of
long-term debt and
capital lease
obligations 266.9 6.5 4.2 3.1 2.3
Long-term debt,
including capital
lease obligations 834.2 414.6 27.3 12.1 10.2
Stockholders' equity 1,241.0 594.4 435.6 376.7 315.0
[FN]
Reflects a non-cash increase in cost of goods sold attributable to the
fair value of inventory over FIFO cost, recorded as a result of the
acquisitions of Nine West and Sun as required by the purchase method of
accounting.
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, 1999 1998 1997
- ----------------------- ------ ------ ------
Net sales 99.3% 99.1% 98.9%
Licensing income (net) 0.7% 0.9% 1.1%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Cost of goods sold 59.6% 65.2% 67.8%
------ ------ ------
Gross profit before purchase
accounting adjustments 40.4% 34.8% 32.2%
Purchase accounting adjustments 2.7% 0.1% -
------ ------ ------
Gross profit 37.7% 34.7% 32.2%
Selling, general and
administrative expenses 25.0% 19.0% 18.1%
Amortization of goodwill 0.7% 0.2% -
------ ------ ------
Operating income 12.0% 15.5% 14.2%
Interest expense 2.1% 0.7% 0.3%
Interest income (0.1%) (0.1%) (0.1%)
------ ------ ------
Income before provision
for income taxes 10.0% 14.9% 14.0%
Provision for income taxes 4.0% 5.7% 5.3%
------ ------ ------
Net income 6.0% 9.2% 8.8%
====== ====== ======
Totals may not agree due to rounding.
GENERAL
The following discussion provides information and analysis of the Company's
results of operations from 1997 through 1999, 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.
On October 2, 1998, the Company completed its acquisition of Sun and on June
15, 1999, the Company completed its acquisition of Nine West. The results of
operations of Sun and Nine West are included in the Company's operating results
from the respective dates of acquisition. Accordingly, the financial position
and results of operations presented and discussed herein are not directly
comparable between years.
Upon the acquisition of Nine West, the Company redefined the operating
segments it uses for financial reporting purposes. The Company operates in
three reportable segments: wholesale apparel, wholesale footwear and
accessories, and retail. Historical data has been restated to reflect these
changes.
The Company has achieved compound annual growth rates of 50.7% for total
revenues and 38.7% for operating income from 1997 to 1999. Total revenues and
operating income in 1999 increased 87.0% and 44.4%, respectively, over 1998.
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 through
strategic moves which provide significant diversification to the business by
successfully adding new labels, such as licensing the Lauren by Ralph Lauren
brand and obtaining the Polo Jeans Company and Nine West brands through
acquisitions. Through this diversification, the Company is evolving into a
multidimensional resource in apparel, footwear and accessories. The Company
has leveraged the strength of its brands to increase both the number of
locations
-23-
24
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
introduced for Fall 1999. The Company also repositioned its Evan-Picone
sportswear brand from the better to the moderate price category for Fall 1999,
marketing 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,
footwear and accessories vendors.
The Company is in the process of evaluating the various international
operations acquired as part of the Nine West acquisition and whether they fit
into the strategic long-term plans of the Company.
RESULTS OF OPERATIONS
1999 Compared to 1998
Revenues. Total revenues for 1999 increased 87.0%, or $1.5 billion, to
$3.2 billion, compared to $1.7 billion for 1998. The revenue growth resulted
primarily from the net sales of product lines added as a result of the Sun and
Nine West acquisitions ($475.9 million and $957.2 million of the increase,
respectively). The breakdown of total revenues for both periods is as follows:
Percent
(In millions) 1999 1998 Increase Change
---------------------------------------
Wholesale apparel $1,994.7 $1,500.3 $ 494.4 33.0%
Wholesale footwear
and accessories 464.5 - 464.5 -
Retail 670.6 169.1 501.5 296.6%
Other 20.9 15.8 5.1 32.3%
---------------------------------------
Total Revenues $3,150.7 $1,685.2 $1,465.5 87.0%
=======================================
Wholesale apparel revenues increased primarily as a result of the acquisition
of Sun, increases in shipments of Lauren by Ralph Lauren products and initial
shipments of the Ralph by Ralph Lauren line, partially offset by planned lower
shipments of Jones New York collection products. The wholesale footwear and
accessories revenues and the increases in retail and other revenues are the
result of the acquisition of Nine West.
Gross Profit. The gross profit margin increased to 37.7% in 1999 compared
to 34.7% in 1998. Wholesale apparel gross profit margins increased to 37.0%
in 1999 compared to 32.4% in 1998, resulting from lower overseas production
costs and continued improvement in inventory management. Retail gross profit
margins also increased to 50.2% from 48.9%, primarily due to the acquisition
of Nine West. Gross profit was negatively impacted during 1999 by an $84.6
million adjustment required under purchase accounting to mark up acquired Nine
West inventory to market value upon acquisition; without this charge, the
gross profit margin for 1999 would have been 40.4%.
SG&A Expenses. Selling, general and administrative ("SG&A") expenses of
$788.7 million in 1999 represented an increase of $468.7 million over 1998.
As a percentage of total revenues, SG&A expenses increased to 25.0% in 1999
from 19.0% for 1998. Sun and Nine West accounted for $107.6 million and
$318.3 million, respectively, of the increase, with the remainder primarily
due to increased royalty and advertising expenses.
Operating Income. The resulting 1999 operating income of $378.2 million
increased 44.4%, or $116.4 million, over the $261.8 million for 1998. The
operating margin decreased to 12.0% in 1999 from 15.5% in 1998 due to the
factors discussed above and the amortization of goodwill resulting from the
Sun and Nine
-24-
25
West acquisitions. Excluding the cost of sales purchase accounting adjustment,
the operating margin for 1999 would have been 14.7%.
Net Interest Expense. Net interest expense was $63.6 million in 1999 compared
to $10.0 million in 1998, primarily as a result of the debt incurred to finance
the Sun and Nine West acquisitions.
Provision for Income Taxes. The effective income tax rate was 40.1% for 1999
compared to 38.5% for 1998. The increase was primarily due to the
nondeductibility of goodwill amortization in 1999.
Net Income. Net income increased 21.6% to $188.4 million in 1999, an increase
of $33.5 million over the net income of $154.9 million earned in 1998. Net
income as a percentage of total revenues was 6.0% in 1999 and 9.2% in 1998.
Excluding the amortization of goodwill resulting from the Sun and Nine West
acquisitions and the cost of sales purchase accounting adjustment, net income
for 1999 would have been $260.6 million ($2.21 per diluted share).
1998 Compared to 1997
Revenues. Total revenues for 1998 increased 21.5%, or $0.3 billion, to $1.7
billion, compared to $1.4 billion for 1997. The revenue growth resulted from
the net sales of product lines added as a result of the Sun acquisition ($120.3
million) and an overall increase in the number of units shipped, as well as the
impact of a higher average price per unit resulting from the mix of products
shipped. The breakdown of total revenues for both periods is as follows:
Percent
(In millions) 1998 1997 Increase Change
---------------------------------------
Wholesale apparel $1,500.3 $1,218.6 $ 281.7 23.1%
Retail 169.1 153.9 15.2 9.9%
Other 15.8 15.0 0.8 5.3%
---------------------------------------
Total Revenues $1,685.2 $1,387.5 $ 297.7 21.5%
=======================================
Wholesale apparel revenues increased as a result of the acquisition of Sun and
increases in shipments of Lauren by Ralph Lauren, Jones New York Sport, Jones
New York Country and Rena Rowan products as well as the initial shipments of
Jones New York Mens products. Retail revenues increased primarily due to having
approximately 20 more stores in operation on average in 1998 than in 1997.
Gross Profit. The gross profit margin increased to 34.7% in 1998 compared
to 32.2% in 1997. Wholesale apparel gross profit margins increased to 32.4% in
1998 compared to 29.2% in 1997, resulting from the significant sales increase
in Lauren by Ralph Lauren products and the sales of Polo Jeans Company products
since the acquisition of Sun, both of which carry higher margins than the
corporate average, as well as lower overseas production costs and the favorable
impact of currency devaluations in Asia. Retail gross profit margins decreased
to 48.9% in 1998 from 51.1% in 1997. Gross profit was negatively impacted
during 1998 by a $2.4 million adjustment required under purchase accounting to
mark up acquired Sun inventory to market value upon acquisition; without this
charge, the gross profit margin for 1998 would have been 34.8%.
SG&A 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. Sun accounted for
$28.3 million of the increase, with the remainder primarily due to $11.0 million
of increased retail operating expenses from additional stores opened during the
year as well as increased royalty and advertising expenses.
-25-
26
Operating Income. The resulting 1998 operating income of $261.8 million
increased 33.2%, or $65.2 million, over the $196.6 million for 1997. The
operating margin increased to 15.5% in 1998 from the 14.2% achieved during
1997. Excluding the cost of sales purchase accounting adjustment, the operating
margin for 1998 would have been 15.7%.
Net Interest Expense. Net interest expense was $10.0 million in 1998 compared
to $2.0 million in 1997, primarily as a result of the debt incurred to finance
the Sun acquisition.
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.
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.
Excluding the amortization of goodwill resulting from the Sun acquisition and
the cost of sales purchase accounting adjustment, net income for 1998 would have
been $159.1 million ($1.51 per diluted share).
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund acquisitions,
working capital needs, capital expenditures and repurchases of the Company's
common stock on the open market. The Company has historically relied primarily
on internally generated funds, trade credit, bank borrowings and the issuance of
notes to finance its operations and expansion. As of December 31, 1999, total
cash and cash equivalents were $47.0 million, a decrease of $82.0 million from
the $129.0 million reported as of December 31, 1998.
Cash Provided by Operations. Net cash provided by operations was $247.8
million in 1999, $224.9 million in 1998 and $110.5 million in 1997. The
increase for 1999 was primarily due to higher net income before non-cash
depreciation and amortization charges. Increases in trade receivables and
decreases in accrued expenses and other liabilities were offset by decreases in
inventories, prepaid expenses and other current assets and increases in accounts
payable. 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.
Cash Used in Investing Activities. Net cash used in investing activities was
$506.4 million for 1999, an increase of $348.7 million over 1998. This increase
was primarily due to the acquisition of Nine West. Net cash used in investing
activities increased $114.4 million in 1998, primarily as a result of the
acquisition of Sun.
Cash Provided by (Used in) Financing Activities. Financing activities
provided $176.9 million of cash in 1999, primarily from the issuance of $400.0
million of senior notes as well as a $136.3 million increase in bank borrowings,
offset by $356.9 million in payments related to the repurchase of a portion of
Nine West's outstanding notes. In connection with the Nine West acquisition,
the Company issued $175.0 million of 7.50% Senior Notes due 2004 and $225.0
million of 7.875% Senior Notes due 2006. In addition to financing the cash
portion of the acquisition, the proceeds of these notes and the increase in
bank borrowings were also used to repurchase substantially all of Nine West's
$94.0 million of 9% Series B Senior Subordinated Notes due 2007 (the "Nine West
Subordinated Notes") and $186.1 million of Nine West's 5.5% Convertible
Subordinated Notes Due 2003 (the "Nine West Convertible Notes"), as well as
$64.9 million of Nine West's 8.375% Series B Senior Notes due 2005 (the "Nine
West Senior Notes").
Financing activities provided $21.9 million of cash 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
-26-
27
1997, financing activities used $57.2 million of cash, due primarily to
repurchases of the Company's common stock.
The Company repurchased $2.8 million, $108.1 million and $85.8 million of
its common stock on the open market for 1999, 1998 and 1997, respectively,
As of December 31, 1999, a total of $234.9 million has been expended under
announced programs to acquire up to $300.0 million of such shares. On
January 31, 2000, the Company announced an additional program to repurchase
up to $200.0 million of its common stock on the open market. 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 $14.1 million, $9.4 million and $12.5 million in 1999,
1998 and 1997, respectively.
As part of the acquisition of Nine West, the Company has assumed all
obligations under the Nine West Convertible Notes and the Nine West
Series B Senior Notes, of which $130.2 million remained outstanding on
December 31, 1999. All the Company's notes pay interest semiannually
and contain certain covenants, including, among others, restrictions on
liens, sale-leaseback transactions, and additional secured debt.
The terms of the acquisition agreement for Sun require the Company to pay
the former Sun shareholders additional consideration of $2.00 for each $1.00
of Sun's earnings before interest and taxes (as defined in the merger agreement)
for each of the years 1998 through 2001 that exceeds certain targeted levels.
This additional consideration is to be paid 59% in cash and 41% in the Company's
common stock, the value of which will be determined by the prices at which the
common stock trades in a defined period preceding delivery in each year. During
1999, the Company paid $20.1 million in cash and issued 586,550 shares of common
stock (valued at $14.3 million) of additional consideration for the Sun
acquisition related to 1998 earnings. The calculation for 1999 has not been
finalized and will be paid in the second quarter of 2000 and will be recorded
as additional goodwill.
In connection with the Nine West acquisition, the Company entered into new
and amended agreements with First Union National Bank, as administrative agent,
and other lending institutions to borrow an aggregate principal amount of up to
$1.2 billion under Senior Credit Facilities. These facilities, of which the
entire amount is available for letters of credit or cash borrowings, provide
for a $500.0 million 364-day Revolving Credit Facility and a $700.0 million
Five-Year Revolving Credit Facility. At December 31, 1999, $266.4 million was
outstanding under the 364-Day Revolving Credit Facility (comprised solely of
outstanding letters of credit) and $250.0 million in cash borrowings was
outstanding under the Company's Five-Year Revolving Credit Facility.
Borrowings under the Senior Credit Facilities may also be used for working
capital and other general corporate purposes, including permitted acquisitions
and stock repurchases. The Senior Credit Facilities are unsecured and require
the Company to satisfy both a coverage ratio of earnings before interest, taxes,
depreciation, amortization and rent to interest expense plus rents and a net
worth maintenance covenant, as well as other restrictions, including (subject
to exceptions) limitations on the Company's ability to incur additional
indebtedness, prepay subordinated indebtedness, make acquisitions, enter into
mergers, and pay dividends.
As of December 31, 1999, Nine West had sold $188.4 million of outstanding
trade accounts receivable into a five-year Receivables Facility (created in
1995 and amended in 1998) which permitted Nine West to obtain up to $132.0
million of funding based on the sale, without recourse, of eligible Nine West
accounts receivable. Nine West had received proceeds under the Receivables
Facility of $67.0 million, which are reported as a reduction in accounts
receivable. The Company plans to terminate this Receivables Facility during
the first quarter of 2000. As a result of this termination, reported net
accounts receivable will no longer be reduced by proceeds received under the
Receivables Facility. This termination will not affect the Company's liquidity.
The Company also has a total of approximately $25.9 million of unsecured
foreign lines of credit in Europe, Australia and Canada, under which $6.1
million was outstanding at December 31, 1999.
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28
The Company believes that funds generated by operations, proceeds from
issuance of the various notes discussed above, the Senior Credit Facilities
and the foreign lines of credit will provide the financial resources sufficient
to meet its foreseeable working capital, letter of credit, capital expenditure
and stock repurchase requirements and any ongoing obligations to the former Sun
shareholders.
YEAR 2000
The Company completed its Year 2000 software program conversions and
compliance programs during the fourth quarter of 1999. The total external costs
for such programs was approximately $1.1 million. Subsequent to December 31,
1999, the Company has not experienced any Year 2000 problems either internally
or from outside sources. The Company has no reason to believe that Year 2000
failures will materially affect it in the future. However, since it may take
several additional months before it is known whether the Company or third party
suppliers, vendors or customers may have undergone Year 2000 problems, no
assurances can be given that the Company will not experience losses or
disruptions due to Year 2000 computer-related problems. The Company will
continue to monitor the operation of its computers and microprocessor-based
devices for any Year 2000 problems.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by SFAS No. 137, is effective for all fiscal years beginning after June 15,
2000. The Company is currently reviewing SFAS No. 133 and is not yet able to
fully evaluate the impact, if any, it may have on future operating results or
financial statement disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in the Company's financial instruments represents
the potential loss in fair value, earnings or cash flows arising from adverse
changes in interest rates or foreign currency exchange rates. The Company
manages this exposure through regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial instruments.
Company policy allows the use of derivative financial instruments for
identifiable market risk exposures, including interest rate and foreign currency
fluctuations. The Company does not enter into derivative financial contracts
for trading or other speculative purposes. The following quantitative
disclosures were derived using quoted market prices, yields and theoretical
pricing models obtained through independent pricing sources for the same or
similar types of financial instruments, taking into consideration the underlying
terms, such as the coupon rate, term to maturity and imbedded call options.
Certain items such as lease contracts, insurance contracts, and obligations for
pension and other post-retirement benefits were not included in the analysis.
INTEREST RATES
The Company's primary interest rate exposures relate to its fixed and variable
rate debt and interest rate swaps. At December 31, 1999, the carrying value of
amounts outstanding under the Company's borrowing arrangements approximated its
fair value. The potential change in fair value resulting from a hypothetical
10% adverse change in interest rates was approximately $16 million at December
31, 1999.
The Company employs an interest rate hedging strategy utilizing swaps to
effectively float a portion of its interest rate exposure on its fixed rate
financing arrangements. The primary interest rate exposures on
-28-
29
floating rate financing arrangements are with respect to United States,
United Kingdom and Australian short-term local currency rates. The Company had
approximately $1.3 billion in variable rate financing arrangements at December
31, 1999. As of December 31, 1999, a hypothetical immediate 10% adverse change
in interest rates, as they relate to the Company's variable rate financial
instruments, would have had a $2.0 million unfavorable impact over a one-year
period on the Company's earnings and cash flows.
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
-29-
30
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, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999.
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 4, 2000
Except as to "Subsequent Events"
which is as of March 14, 2000
-30-
31
Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in millions except per share data)
December 31, 1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 47.0 $ 129.0
Accounts receivable 271.1 169.2
Inventories 619.6 268.2
Prepaid and refundable income taxes 34.5 -
Deferred taxes 98.9 32.1
Prepaid expenses and other current assets 59.5 33.3
--------- --------
TOTAL CURRENT ASSETS 1.130.6 631.8
PROPERTY, PLANT AND EQUIPMENT, at cost,
less accumulated depreciation and amortization 239.8 156.1
GOODWILL, less accumulated amortization 989.9 323.0
OTHER INTANGIBLES, at cost, less
accumulated amortization 345.4 29.7
OTHER ASSETS 86.3 48.1
--------- --------
$ 2,792.0 $1,188.7
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt and current portion of
long-term debt and capital lease obligations $ 266.9 $ 6.5
Accounts payable 205.1 100.3
Income taxes payable - 13.6
Accrued restructuring costs 61.1 4.5
Accrued employee compensation 34.1 11.9
Accrued expenses and other current liabilities 94.2 37.1
--------- --------
TOTAL CURRENT LIABILITIES 661.4 173.9
--------- --------
NONCURRENT LIABILITIES:
Long-term debt 801.5 379.2
Obligations under capital leases 32.7 35.4
Other 55.4 5.8
--------- --------
TOTAL NONCURRENT LIABILITIES 889.6 420.4
--------- --------
TOTAL LIABILITIES 1,551.0 594.3
--------- --------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares
authorized 1.0; none issued - -
Common stock, $.01 par value - shares
authorized 200.0; issued 134.6
and 115.4 1.4 1.2
Additional paid-in capital 693.0 234.8
Retained earnings 782.2 593.8
Accumulated other comprehensive income 0.3 (2.3)
--------- --------
1,476.9 827.5
Less treasury stock,
12.0 and 11.9 shares, at cost (235.9) (233.1)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 1,241.0 594.4
--------- --------
$2,792.0 $1,188.7
========= ========
See accompanying notes to consolidated financial statements
-31-
32
Jones Apparel Group, Inc.
Consolidated Statements of Income
(All amounts in millions except per share data)
Year Ended December 31, 1999 1998 1997
--------- --------- ---------
NET SALES $ 3,129.8 $ 1,669.4 $ 1,372.5
LICENSING INCOME(NET) 20.9 15.8 15.0
--------- --------- ---------
Total revenues 3,150.7 1,685.2 1,387.5
COST OF GOODS SOLD 1,876.9 1,098.3 940.2
PURCHASE ACCOUNTING ADJUSTMENTS
TO COSTS OF GOODS SOLD 84.6 2.4 -
--------- --------- ---------
Gross profit 1,189.2 584.5 447.3
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 788.7 320.0 250.7
AMORTIZATION OF GOODWILL 22.3 2.7 -
--------- --------- ---------
Operating income 378.2 261.8 196.6
INTEREST EXPENSE AND
FINANCING COSTS 66.9 11.8 3.6
INTEREST INCOME (3.3) (1.8) (1.6)
--------- --------- ---------
Income before provision for
income taxes 314.6 251.8 194.6
PROVISION FOR INCOME TAXES 126.2 96.9 72.9
--------- --------- ---------
NET INCOME $ 188.4 $ 154.9 $ 121.7
========= ========= =========
EARNINGS PER SHARE
Basic $1.65 $1.52 $1.17
Diluted $1.60 $1.47 $1.13
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 114.1 101.6 103.8
Diluted 118.0 105.1 107.8
Reflects a non-cash increase in cost of goods sold attributable to the fair
value of inventory over FIFO cost, recorded as a result of the acquisitions
of Nine West and Sun as required by the purchase method of accounting.
See accompanying notes to consolidated financial statements
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33
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders' Equity
(All amounts in millions)
Total Accumulated
stock- Additional other
holders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
--------- ------- ---------- -------- ------------- ---------
BALANCE, JANUARY 1, 1997 $ 376.7 $ 0.5 $ 99.1 $ 317.2 $ (1.1) $ (39.0)
YEAR ENDED DECEMBER 31, 1997:
Comprehensive income:
Net income 121.7 - - 121.7 - -
Foreign currency translation
adjustments (0.4) - - - (0.4) -
--------
Total comprehensive income 121.3
--------
Amortization of deferred
compensation in connection
with executive stock options
and related items 2.8 - 2.8 - - -
Exercise of stock options 12.5 - 12.6 - - (0.1)
Tax benefit derived from
exercise of stock options 8.1 - 8.1 - - -
Treasury stock acquired (85.8) - - - - (85.8)
--------- ------- ---------- -------- ------------- ---------
BALANCE, DECEMBER 31, 1997 435.6 0.5 122.6 438.9 (1.5) (124.9)
YEAR ENDED DECEMBER 31, 1998:
Comprehensive income:
Net income 154.9 - - 154.9 - -
Foreign currency translation
adjustments (0.8) - - - (0.8) -
--------
Total comprehensive income 154.1
--------
Amortization of deferred
compensation in connection
with executive stock options 0.2 - 0.2 - - -
Stock issued relating to
Acquisition of Sun 97.3 0.1 97.2 - - -
Exercise of stock options 9.4 9.5 - - (0.1)
Tax benefit derived from
exercise of stock options 5.9 - 5.9 - - -
Effect of 2-for-1 stock split - 0.6 (0.6) - - -
Treasury stock acquired (108.1) - - - - (108.1)
--------- ------- ---------- -------- ------------- ---------
BALANCE, DECEMBER 31, 1998 594.4 1.2 234.8 593.8 (2.3) (233.1)
YEAR ENDED DECEMBER 31, 1999:
Comprehensive income:
Net income 188.4 - - 188.4 - -
Foreign currency translation
adjustments 2.6 - - - 2.6 -
--------
Total comprehensive income 191.0
--------
Amortization of deferred
compensation in connection
with executive stock options 0.1 - 0.1 - - -
Stock issued relating to
acquisition of Nine West 421.7 0.2 421.5 - - -
Stock issued as additional
consideration for acquisition
of Sun 14.3 - 14.3 - - -
Exercise of stock options 14.1 - 14.1 - - -
Tax benefit derived from
exercise of stock options 8.4 - 8.4 - - -
Treasury stock acquired (2.8) - - - - (2.8)
Other (0.2) - (0.2) - - -
--------- ------- ---------- -------- ------------- ---------
BALANCE, DECEMBER 31, 1999 $ 1,241.0 $ 1.4 $ 693.0 $ 782.2 $ 0.3 $ (235.9)
========== ======= ========== ======== ============= =========
See accompanying notes to consolidated financial statements
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Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows
(All amounts in millions)
Year Ended December 31, 1999 1998 1997
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 188.4 $ 154.9 $ 121.7
-------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities, net of acquisitions:
Amortization of goodwill 22.3 2.7 -
Depreciation and other amortization 53.1 18.5 14.6
Provision for losses on
trade receivables 5.4 0.2 1.9
Deferred taxes 40.8 5.0 (17.9)
Other 0.1 0.4 0.3
Decrease (increase) in:
Trade receivables (59.2) (7.8) 18.9
Inventories 84.5 66.3 (41.0)
Prepaid expenses and
other current assets 33.7 (10.3) 1.3
Other assets (17.3) (0.9) (6.3)
Increase (decrease) in:
Accounts payable 44.9 (17.0) 17.9
Taxes payable (41.2) 18.8 (5.3)
Accrued expenses and other
current liabilities (107.7) (5.9) 4.4
-------- ------- -------
Total adjustments 59.4 70.0 (11.2)
-------- ------- -------
Net cash provided by
operating activities 247.8 224.9 110.5
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Nine West,
net of cash acquired (436.2) - -
Acquisition of Sun,
net of cash acquired - (121.0) -
Additional consideration paid for
acquisition of Sun (20.1) - -
Capital expenditures (29.7) (48.5) (32.1)
Acquisition of intangibles (29.6) - -
Increase (decrease) in cash
restricted for capital additions - 11.2 (11.2)
Proceeds from sale of property,
plant and equipment 9.2 0.6 -
-------- ------- -------
Net cash used in
investing activities (506.4) (157.7) (43.3)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Senior Notes,
net of discount 396.4 264.7 -
Debt issuance costs (5.6) (7.6) -
Repurchase of Nine West Senior Notes (344.0) - -
Premiums paid on repurchase of Nine West
Senior Notes (12.9) - -
Refinancing of acquired long-term - (237.8) -
Net borrowings under long-term
credit facilities 136.3 105.3 10.0
Borrowings under capital lease - - 10.0
Principal payments on capital leases (4.4) (4.0) (3.9)
Purchases of treasury stock (2.8) (108.1) (85.8)
Proceeds from exercise of stock options 14.1 9.4 12.5
Other (0.2) - -
-------- ------- -------
Net cash provided by (used in)
financing activities 176.9 21.9 (57.2)
-------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH (0.3) (0.2) -
-------- ------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS (82.0) 88.9 10.0
CASH AND CASH EQUIVALENTS, BEGINNING 129.0 40.1 30.1
-------- ------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 47.0 $ 129.0 $ 40.1
======== ======= =======
See accompanying notes to consolidated financial statements
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Jones Apparel Group, Inc.
Notes to Consolidated Financial Statements
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 sportswear, suits, and dresses, casual
sportswear and jeanswear for men, women and children, and women's shoes and
accessories. 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 retail and
factory outlet stores. In addition, the Company licenses the use of several
of its brand names to select manufacturers of women's and men's apparel
and accessories.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash
investments 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 valued at the lower of cost or market. Approximately 74%
and 88% of inventories were determined by using the FIFO (first in, first out)
method of valuation as of December 31, 1999 and 1998, respectively; the
remainder were determined by the weighted average cost and retail methods.
The Company makes provisions for obsolete or slow moving inventories as
necessary to properly reflect inventory value.
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.
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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.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method of accounting. Goodwill recorded in connection with acquisitions is
being amortized using the straight-line method over 30 years.
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.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Translation." 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.
Defined Benefit Plans
The Company's funding policy is to make the minimum annual contributions
required by applicable regulations.
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.
Advertising Expense
The Company records national advertising campaign costs as an expense when
the advertising takes place and cooperative advertising costs as incurred.
Advertising expense was $51.7 million, $14.7 million and $5.4 million in 1999,
1998 and 1997, respectively.
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 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 SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, compensation cost for stock
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37
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount the employee must pay
to acquire the stock. The compensation cost is recognized over the vesting
period of the options.
Earnings per Share
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.
1999 1998 1997
------ ------ ------
Number of options (in millions) 3.3 4.4 3.2
Weighted-average exercise price $37.60 $24.66 $23.84
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 SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years
beginning after June 15, 2000. The Company is currently reviewing SFAS No.
133 and is not yet able to fully evaluate the impact, if any, it may have on
future operating results or financial statement disclosures.
ACQUISITIONS
On June 15, 1999, the Company acquired Nine West, a leading designer,
developer and marketer of women's footwear and accessories. In the acquisition,
the Company purchased all the outstanding shares of Nine West's common stock
for a total purchase price of $466.0 million in cash and approximately 17.1
million shares of common stock, valued for financial reporting purposes at
$24.35 per share (the average closing price for the week containing March 1,
1999, the date the definitive Agreement and Plan of Merger was signed).
In addition, the Company assumed $493.7 million of Nine West's outstanding
debt, a portion of which has been refinanced.
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38
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 Nine West from the acquisition date. The
purchase price was allocated to Nine West's assets and liabilities, tangible and
intangible, with the excess of the purchase price over the fair value of the net
assets acquired (as determined by an independent appraiser) of approximately
$663.7 million being amortized on a straight-line basis over 30 years.
On October 2, 1998, the Company acquired Sun, a designer, manufacturer and
distributor of jeanswear, sportswear and related apparel for men, women and
children. The purchase price was $215.7 million (subject to additional
contingent purchase price adjustments as described below) consisting of $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 terms of the Acquisition and Merger Agreement with the former shareholders
of Sun 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. During 1999, additional consideration paid to the former Sun
shareholders amounted to $20.1 million in cash and 0.6 million shares of common
stock, valued for financial reporting purposes at approximately $24.44 per
share.
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.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if both acquisitions and
their related financing had taken place on January 1, 1998. 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, 1998, or which may result in the
future.
Year Ended December 31, 1999 1998
----------------------- --------- ---------
Total revenues (in millions) $3,950.3 $3,963.7
Net income (in millions) $224.7 $172.8
Basic earnings per common share $1.84 $1.42
Diluted earnings per common share $1.79 $1.38
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of Nine West and Sun, the Company
assessed and formulated preliminary plans to restructure certain operations of
each company. These plans involved the closure of manufacturing facilities,
certain offices, foreign subsidiaries, and selected domestic and international
retail locations. The objectives of the plans were to eliminate unprofitable
or marginally profitable lines of business
-38-
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and reduce overhead expenses. The accrual of these costs and liabilities
was recorded as an increase to goodwill and include:
Balance at Net Reductions and Balance at
(in millions) December 31, 1998 Additions Payments December 31, 1999
----------------- --------- -------------- -----------------
Severance and other employee costs $4.5 $ 53.0 $30.8 $26.7
Closing of retail stores - 17.0 2.0 15.0
Consolidation of facilities - 16.0 1.6 14.4
Other - 16.6 11.6 5.0
----------------- --------- -------------- -----------------
Total $4.5 $102.6 $46.0 $61.1
================= ========= ============== =================
Estimated severance payments and other employee costs of $26.7 million
accrued at December 31, 1999 relate to the remaining estimated severance
for approximately 1,720 employees at locations to be closed, costs associated
with employees transferring to continuing offices and other related costs.
Employee groups affected (totaling an estimated 3,600 employees) include
retail sales personnel at closed store locations, accounting, administrative,
customer service and management personnel at closed facilities, manufacturing
and production personnel at closed plant locations and duplicate corporate
headquarters management and administrative personnel. During the year ended
December 31, 1999, payments of $30.8 million to approximately 1,880 employees
were made and charged against the reserve.
Accrued liabilities for the closing of Nine West retail stores of $15.0
million at December 31, 1999 relate primarily to lease obligations and other
closing costs for the remaining 195 stores to be closed after December 31,
1999 from the approximately 250 stores originally identified to be closed.
The $14.4 million accrued at December 31, 1999 for the consolidation of
facilities relate primarily to expected costs to be incurred, including
lease obligations, for closing certain Nine West facilities in connection
with consolidating their operations into other existing Company facilities.
The Company's plans have not been finalized in all areas, and additional
restructuring costs may result as the Company continues to evaluate and assess
the impact of duplicate responsibilities and office locations, underperforming
retail locations and international operations. Any additional costs relating
to Nine West incurred before June 15, 2000 will be recorded as additional
goodwill; after that date, additional costs will be charged to operations in
the period in which they occur. Any additional costs for Sun will be charged
to operations in the period in which they occur.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31, 1999 1998
------------ --------- ---------
(In millions)
Accounts receivable $ 176.3 $ 172.5
Securitized interest in accounts receivable 121.4 -
Allowance for doubtful accounts (26.6) (3.3)
--------- ---------
$ 271.1 $ 169.2
========= =========
As of December 31, 1999, the Company had an agreement with a financial
institution under which it could sell, without recourse, its interest in
certain trade accounts receivable. As of December 31, 1999, the
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Company had sold $188.4 million of outstanding trade accounts receivable,
had received proceeds of $67.0 million and had a subordinated interest in
the remaining outstanding receivables of $121.4 million. The level of the
Company's securitized interests in outstanding receivables sold under the
agreement was capped at $132.0 million and the program had an effective
interest rate of 6.5%. The Company plans to terminate this agreement in
the first quarter of 2000.
INVENTORIES
Inventories are summarized as follows:
December 31, 1999 1998
------------ --------- ---------
(In millions)
Raw materials $ 25.6 $ 33.9
Work in process 42.5 43.1
Finished goods 551.5 191.2
--------- ---------
$ 619.6 $ 268.2
========= =========
PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
December 31, 1999 1998
------------ --------- ---------
(In millions)
Land and buildings $ 80.9 $ 72.1
Leasehold improvements 128.4 48.3
Machinery and equipment 132.3 87.9
Furniture and fixtures 73.8 14.8
Construction in progress 9.3 9.4
--------- ---------
424.7 232.5
Less: accumulated depreciation and amortization 184.9 76.4
--------- ---------
$ 239.8 $ 156.1
========= =========
Depreciation and amortization expense relating to property, plant and
equipment was $38.0 million, $17.1 million, and $11.9 million in 1999, 1998,
and 1997, respectively.
Included in property, plant and equipment are the following capitalized
leases:
Year Ended December 31, 1999 1998
----------------------- --------- ---------
(In millions)
Buildings $ 48.6 $ 48.6
Machinery and equipment 4.0 5.9
--------- ---------
52.6 54.5
Less: accumulated amortization 9.5 8.9
--------- ---------
$ 43.1 $ 45.6
========= =========
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At December 31, 1999, the Company had $11.8 million in commitments for
construction of a laundry facility in Durango, Mexico, to be completed in
early 2001. As of December 31, 1999, approximately $3.1 million had been
expended on this project.
OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
Useful
lives
December 31, 1999 1998 (years)
------------ --------- --------- ---------
Trademarks $ 346.1 $ 33.0 8 to 30
License agreements 33.3 6.6 5.5 to 19
--------- ---------
379.4 39.6
Less: accumulated amortization 34.0 9.9
--------- ---------
$ 345.4 $ 29.7
========= =========
FINANCIAL INSTRUMENTS
The Company, as a result of its global operating and financing activities,
is exposed to changes in interest rates and foreign currency exchange rates
which may adversely affect results of operations and financial condition.
In seeking to minimize the risks and/or costs associated with such activities,
the Company manages exposure to changes in interest rates and foreign currency
exchange rates through its regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial instruments.
The instruments eligible for utilization include forward, option and swap
agreements. The Company does not use financial instruments for trading
or other speculative purposes.
At December 31, 1999, the Company had outstanding two fixed-to-floating
interest rate swaps with an aggregate notional principal amount of $200.0
million. The Company's 1999 weighted average interest rate on long-term debt
of 7.3% was not significantly impacted by outstanding financial instruments.
Differentials which occur due to changes in interest rates are recognized in
interest expense during the period to which the payment/receipt relates.
The fair value of these instruments was an unfavorable $3.9 million, based on
a commonly accepted pricing methodology using market prices as of December 31,
1999. The Company's interest rate swaps have expiration dates ranging from
June 2004 to June 2006.
Gains and losses arising from foreign currency exchange contracts are
recorded when the related hedged transaction occurs. The Company had no
net outstanding foreign exchange contracts as of December 31, 1999 or 1998.
Financial instruments expose the Company to counterparty credit risk for
nonperformance and to market risk for changes in interest and currency rates.
The Company manages exposure to counterparty credit risk through specific
minimum credit standards, diversification of counterparties and procedures to
monitor the amount of credit exposure. The Company's financial instrument
counterparties are substantial investment or commercial banks with significant
experience with such instruments. The Company also has procedures to monitor
the impact of market risk on the fair value and costs of its financial
instruments considering reasonably possible changes in interest and currency
rates.
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CREDIT FACILITIES
In connection with the Nine West acquisition, the Company entered into new
and amended variable-rate financing agreements with First Union National Bank,
as administrative agent, and other lending institutions to borrow an aggregate
principal amount of up to $1.2 billion under Senior Credit Facilities. These
facilities, of which the entire amount is available for letters of credit or
cash borrowings, provide for a $500.0 million 364-day Revolving Credit Facility
and a $700.0 million Five-Year Revolving Credit Facility. At December 31, 1999,
$266.4 million was outstanding under the 364-Day Revolving Credit Facility
(comprised solely of outstanding letters of credit) and $250.0 million in cash
borrowings was outstanding under the Company's Five-Year Revolving Credit
Facility. Borrowings under the Senior Credit Facilities may also be used for
working capital and other general corporate purposes, including permitted
acquisitions and stock repurchases. The Senior Credit Facilities are unsecured
and require the Company to satisfy both a coverage ratio of earnings before
interest, taxes, depreciation, amortization and rent to interest expense plus
rents and a net worth maintenance covenant, as well as other restrictions,
including (subject to exceptions) limitations on the Company's ability to incur
additional indebtedness, prepay subordinated indebtedness, make acquisitions,
enter into mergers, and pay dividends.
Prior to the Nine West acquisition, the Company had credit arrangements
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 Credit Facilities consisted 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 was available for
trade letters of credit or cash borrowings, and (iii) a $100.0 million
Three-Year Term Loan Facility.
The Company also has various unsecured foreign lines of credit in Europe,
Australia and Canada aggregating approximately $25.9 million, under which $6.1
million was outstanding at December 31, 1999. The weighted-average interest
rate of the Company's credit facilities was 7.0% at December 31, 1999.
LONG-TERM DEBT
Long-term debt consists of the following:
December 31, 1999 1998
------------ --------- ---------
(In millions)
6.25% Senior Notes due 2001, net of unamortized
discount of $0.2 and $0.2 $ 264.8 $ 264.8
5.5% Convertible Subordinated Notes due 2003 0.5 -
7.50% Senior Notes due 2004, net of unamortized
discount of $1.3 173.7 -
8.375% Series B Senior Notes due 2005, net of
unamortized discount of $0.6 129.0 -
7.875% Senior Notes due 2006, net of unamortized
discount of $2.0 223.0 -
9% Series B Senior Subordinated Notes due 2007 0.1 -
Term Loan due 2001, variable rate - 100.0
6.98% Industrial revenue bonds, final payment due 2008 12.0 13.5
Mortgage payable, variable rate - 2.2
11% Mortgage payable - 0.8
Other debt 5.0 -
--------- ---------
808.1 381.3
Less: current portion 6.6 2.1
--------- ---------
$ 801.5 $ 379.2
========= =========
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Long-term debt maturities for each of the next five years are $6.6 million in
2000, $266.5 million in 2001, $1.6 million in 2002, $2.0 million in 2003 and
$176.5 million in 2004.
In connection with the acquisition of Nine West, the Company issued $175.0
million of 7.50% Senior Notes due 2004 and $225.0 million of 7.875% Senior
Notes due 2006. In addition to financing the cash portion of the acquisition,
the proceeds of these notes and the increase in bank borrowings were also used
to repurchase substantially all of Nine West's $94.0 million of 9% Series B
Senior Subordinated Notes due 2007 and $186.1 million of Nine West's 5.5%
Convertible Subordinated Notes Due 2003 as well as $64.9 million of Nine West's
8.375% Series B Senior Notes due 2005. As part of the acquisition of Nine West,
the Company has assumed all obligations under the Nine West Convertible Notes
and the Nine West Series B Senior Notes. All the Company's notes pay interest
semiannually and contain certain covenants, including, among others,
restrictions on liens, sale-leaseback transactions, and additional secured debt.
OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
December 31, 1999 1998
------------ --------- ---------
(In millions)
Warehouses, office facilities and equipment $ 36.8 $ 39.8
Less: current portion 4.1 4.4
--------- ---------
Obligations under capital leases - noncurrent $ 32.7 $ 35.4
========= =========
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 $0.5 million, $0.5 million, $0.5 million, and $1.0 million,
respectively, plus accrued interest. In connection with these leases, the
Company guaranteed $25.0 million of Industrial Development Bonds issued in
order to construct the facilities, $15.4 million of which remained unpaid as
of December 31, 1999. The financing agreement with the issuing authority
requires the Company to comply with the same financial covenants required by
the Company's Senior Credit Facilities (see "Credit Facilities").
The Company also leases warehouse and office facilities in Bristol,
Pennsylvania. Two 15-year net leases run until March and October 2013,
respectively, and require minimum annual rent payments of $1.2 million and
$0.8 million, respectively.
The Company also leases various equipment under three to five-year leases
at an aggregate annual rental of $1.0 million. The equipment has been
capitalized at its fair market value of $3.4 million, 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, 1999:
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Year Ending December 31,
------------------------
(In millions)
2000 $ 6.5
2001 6.1
2002 5.5
2003 5.0
2004 4.6
Later years 24.5
-------
Total minimum lease payments 52.2
Less: amount representing interest 15.4
-------
Present value of net minimum lease payments $ 36.8
=======
SIGNIFICANT CUSTOMERS
A significant portion of the Company's sales are to retailers throughout the
United States and Canada. The Company has two significant customers in its
wholesale apparel and wholesale footwear and accessories operating segments.
Sales to department stores owned by The May Department Stores Company ("May")
accounted for 14%, 16%, and 19% of consolidated total revenues for the years
ended December 31, 1999, 1998 and 1997, respectively. Sales to department
stores owned by Federated Department Stores, Inc. ("Federated") accounted for
14%, 16%, and 20% of consolidated total revenues for the years ended December
31, 1999, 1998 and 1997, respectively. May and Federated accounted for
approximately 29% of accounts receivable at December 31, 1999.
COMMITMENTS AND CONTINGENCIES
(a) CONTINGENT LIABILITIES. The Federal Trade Commission is currently
conducting an inquiry with respect to Nine West's resale pricing policies to
determine whether Nine West violated the federal antitrust laws by agreeing
with others to restrain the prices at which retailers sell footwear and other
products marketed by Nine West. In addition, Attorneys General from the States
of Florida, New York, Ohio and Texas are conducting similar inquiries.
Since January 13, 1999, more than 25 purported class actions have been
filed on behalf of purchasers of Nine West's footwear in four separate
federal courts, which were subsequently consolidated into a single action.
These federal complaints allege that Nine West violated Section 1 of the
Sherman Act by engaging in a conspiracy with its retail distributors to fix
the minimum prices at which the footwear marketed by Nine West was sold to
the public. In addition, five purported class actions based on the same
alleged conduct have been filed in state courts in New York, the District
of Columbia, Wisconsin, California and Minnesota alleging violations of
those states' respective antitrust laws. The federal class action and the
five state actions seek injunctive relief, unspecified compensatory and
treble damages, and attorneys' fees. The Company does not anticipate that
the inquiries or lawsuits will result in a material adverse effect on its
financial position or results of operations. Settlements of these suits,
if any, will be recorded as additional goodwill.
On March 3, 4 and 5, 1999, four purported stockholder class action suits
were filed against the Company, Nine West and the members of Nine West's
Board of Directors in the Delaware Court of Chancery. These complaints
alleged, among other things, that the defendants breached their fiduciary
duties to Nine West stockholders by failing to maximize stockholder value
in connection with entering into the merger agreement with the Company.
The Company believes that the complaints are without merit and is prepared
to defend vigorously against the complaints.
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The Company has been named as a defendant in various actions and proceedings,
including actions brought by certain employees whose employment has been
terminated arising from its ordinary business activities. Although the amount
of any liability that could arise with respect to these actions cannot be
accurately predicted, in the opinion of the Company, any such liability will
not have a material adverse effect on its financial position or results of
operations.
(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
$7.0 million are due for each of the years 2000 and 2001 under the Lauren by
Ralph Lauren agreements and minimum payments of $5.3 million 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. The Company exercised its renewal option
in January 2000. 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 $25.0 million or, at the Company's option, a
transfer of 20% interest in its Polo Jeans Company business to Polo. Polo
has a one-time right, in blockage of such renewal, to purchase the Company's
Polo Jeans Company business at the end of 2010 for 80% of its then fair
market value, as defined, payable in cash.
Under a similar exclusive license to manufacture certain items under the
cK/Calvin Klein trademark pursuant to a license agreement with Calvin Klein,
Inc., the Company is obligated to pay Calvin Klein a percentage of net sales of
cK/Calvin Klein products. The Company is also obligated to spend on advertising
a percentage of net sales of these licensed products. The license expires on
January 31, 2002 and may be renewed subject to certain conditions.
(c) LEASES. Total rent expense charged to operations for the years ended
December 31, 1999, 1998 and 1997 was $106.5 million, $27.4 million and $22.2
million, respectively.
The following is a schedule of future minimum rental payments
required under operating leases for the next five years:
Year Ending December 31,
------------------------
(In millions)
2000 $ 110.4
2001 101.8
2002 90.7
2003 79.5
2004 66.8
Later years 342.5
--------
$ 791.7
========
Certain of the leases provide for renewal options and the payment of real
estate taxes and other occupancy costs.
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INCOME TAXES
The following summarizes the provision for income taxes:
Year Ended December 31, 1999 1998 1997
----------------------- --------- --------- ---------
(In millions)
Current:
Federal $ 81.0 $ 79.4 $ 78.8
State and local 4.5 9.1 10.5
Foreign (0.1) 3.5 1.5
--------- --------- ---------
85.4 92.0 90.8
--------- --------- ---------
Deferred:
Federal 24.5 2.7 (15.4)
State and local 8.1 2.0 (2.2)
Foreign 8.2 0.2 (0.3)
--------- --------- ---------
40.8 4.9 (17.9)
--------- --------- ---------
Provision for income taxes $ 126.2 $ 96.9 $ 72.9
========= ========= =========
The domestic and foreign components of income before provision for income
taxes were as follows:
Year Ended December 31, 1999 1998 1997
----------------------- --------- --------- ---------
(In millions)
United States $ 293.4 $ 243.8 $ 192.5
Foreign 21.2 8.0 2.1
--------- --------- ---------
Income before provision for
income taxes $ 314.6 $ 251.8 $ 194.6
========= ========= =========
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, 1999 1998 1997
----------------------- --------- --------- ---------
(In millions)
Provision for Federal income taxes
at the statutory rate $ 110.1 $ 88.1 $ 68.1
State and local income taxes, net
of federal benefit 7.9 7.2 5.4
Amortization of goodwill 7.0 0.9 -
Amortization of excess of net assets
acquired over cost - (0.5) (0.6)
Other items, net 1.2 1.2 -
--------- --------- ---------
Provision for income taxes $ 126.2 $ 96.9 $ 72.9
========= ========= =========
The Company has not provided for U.S. Federal and foreign withholding taxes
on $16.9 million of foreign subsidiaries' undistributed earnings as of December
31, 1999. Such earnings are intended to be reinvested indefinitely.
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The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
December 31, 1999 1998
------------ --------- ---------
(In millions)
Deferred tax assets (liabilities):
Nondeductible accruals and allowances $ 82.6 $ 29.4
Depreciation and amortization 45.8 2.8
Intangible asset valuation (65.4) -
Other (net) 31.7 2.2
--------- ---------
Net deferred tax asset $ 94.7 $ 34.4
========= =========
Included in:
Current assets $ 98.9 $ 32.1
Other assets - 2.3
Accrued expenses and other current liabilities (4.2) -
--------- ---------
Net deferred tax asset $ 94.7 $ 34.4
========= =========
STATEMENT OF CASH FLOWS
Year Ended December 31, 1999 1998 1997
----------------------- --------- --------- ---------
(In millions)
Detail of acquisitions:
Fair value of assets acquired $ 1,742.7 $ 537.3 -
Liabilities assumed (884.8) (319.0) -
Common stock and options issued (421.7) (97.3) -
--------- --------- ---------
Net cash paid for acquisitions 436.2 121.0 -
Cash acquired in acquisitions 29.8 6.5 -
--------- --------- ---------
Cash paid for acquisitions $ 466.0 127.5 -
========= ========= =========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 66.4 $ 6.0 $ 3.9
Income taxes 119.3 75.7 96.3
Supplemental disclosures of non-cash
investing and financing activities:
Equipment acquired through
capital lease financing 1.8 21.6 0.4
Acquisition of trademarks - - 6.1
Tax benefits related to stock options 8.4 5.9 8.1
Common stock issued as additional
consideration for acquisition of Sun 14.3 - -
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COMMON STOCK
On May 6, 1998, the Company's Board of Directors authorized a two-for-one
stock split of the Company's common stock in the form of a 100% stock dividend
for shareholders of record as of June 4, 1998, with stock certificates issued
on June 25, 1998. In connection with the common stock split, the Board of
Directors approved an increase in the number of shares authorized to 200.0
million. On June 25, 1998, a total of 50,497,911 shares of common stock were
issued in connection with the split. The stated par value of each share was
not changed from $0.01. All share and per share amounts have been restated to
retroactively reflect the stock split.
The Board of Directors has authorized several repurchase programs to
repurchase the Company's common stock from time to time in open market
transactions totaling $500.0 million. As of December 31, 1999, 12.0 million
shares had been acquired at a cost of $234.9 million. There is no time limit
for the utilization of the amounts remaining under any uncompleted programs.
STOCK OPTIONS
Under three 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, 1999, totaled 7.7 million.
In connection with the acquisition of Nine West, out-of-the-money stock
options for Nine West common stock held by Nine West employees were converted
to fully-vested options to purchase the Company's common stock. Under the
terms of the Agreement and Plan of Merger, each option to purchase one share of
Nine West's common stock was converted into an option to purchase .5011 shares
of the Company's common stock, and each option was adjusted to reduce the
exercise price by $13.00. An aggregate of options to purchase 1.8 million
shares of Nine West common stock were converted to options to purchase
0.9 million shares of the Company's common stock at a weighted average value
of $56.22 per share.
The following table summarizes information about stock option transactions
(shares in millions):
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------ ------ ------ ------ ------
Outstanding at beginning of year 10.9 $16.73 9.8 $14.44 8.2 $ 9.09
Nine West option conversions 0.9 $56.22 - - - -
Granted 2.6 $29.99 2.4 $22.98 3.4 $23.52
Exercised (1.4) $ 9.59 (1.0) $ 9.03 (1.8) $ 7.14
Cancelled/forfeited (0.4) $43.51 (0.3) $19.13 - $10.73
------ ------ ------ ------ ------ ------
Outstanding at December 31 12.6 $22.29 10.9 $16.73 9.8 $14.44
====== ====== ====== ====== ====== ======
The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in millions):
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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 1.3 4.0 $ 5.44 1.1 $ 4.97
$10 to $20 4.0 7.4 $14.72 1.5 $13.56
$20 to $30 5.3 8.4 $25.43 1.6 $24.52
$30 to $40 1.3 9.4 $32.41 0.1 $34.94
$40 to $50 0.3 9.5 $42.41 0.3 $42.41
$50 to $60 0.1 9.5 $52.41 0.1 $52.41
$60 to $70 0.3 9.5 $67.59 0.3 $67.59
------------------------------------ ----------------------
In total 12.6 7.8 $22.29 5.0 $21.04
==================================== ======================
Pursuant to a provision in SFAS No. 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 Accounting Principles Board 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 No. 123:
Year Ended December 31, 1999 1998 1997
----------------------- --------- --------- ---------
Net income (in millions)
As reported $188.4 $154.9 $121.7
Pro forma $176.4 $144.7 $116.1
Basic earnings per share
As reported $1.65 $1.52 $1.17
Pro forma $1.55 $1.42 $1.12
Diluted earnings per share
As reported $1.60 $1.47 $1.13
Pro forma $1.49 $1.38 $1.08
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.
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 1999, 1998 and 1997,
respectively: no dividends paid for all years; expected volatility of 42.4%,
40.1% and 34.7%; risk-free interest rates of 5.56%, 5.12% and 6.04%; and
expected lives of 3.3, 3.6 and 3.4 years. The
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weighted average fair values of options at their grant date during 1999, 1998
and 1997, where the exercise price equaled the market price on the grant date,
were $10.33, $9.65 and $7.45, respectively, and where the exercise price was
less than the market price on the grant date, were $22.00, $21.05 and $17.86,
respectively.
EMPLOYEE BENEFIT PLANS
The Company maintains the Jones Apparel Group, Inc. Retirement Plan (the
"Plan") under Section 401(k) of the Internal Revenue Code (the "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 15% 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.
For the period January 1, 1997 through December 31, 1999, the Company matched
50% of each participant's contributions with the Company's contribution limited
to a maximum of 3.0% 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 35% of each participant's contributions with the Company's
contribution limited to a maximum of 2.1% of the employee's total compensation.
Effective January 1, 2000, the Company elected to make the Plan a "Safe Harbor
Plan" under Section 401(k)(12) of the Code. As a result of this election, the
Company makes a fully-vested safe harbor matching contribution for all eligible
participants amounting to 100% of the first 3% of the participant's salary
deferred and 50% of the next 2% of salary deferred, subject to maximums set by
the Department of the Treasury.
Contributions and salary deferrals are subject to limitations imposed by the
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 $1.5 million, $1.5
million and $1.2 million to the Plan during the years ended December 31, 1999,
1998 and 1997, respectively.
In connection with the acquisition of Nine West, the Company acquired
additional plans in which certain Nine West employees participate.
Nine West maintains the Pension Plan for Associates of Nine West Group Inc.
(the "Cash Balance Plan"). The Cash Balance Plan expresses retirement benefits
as an account balance which increases each year through interest credits and,
for service prior to February 15, 1999, through service credits, as well. The
Company's funding policy is to make the minimum annual contributions required by
applicable regulations. The assets of the Cash Balance Plan have been invested
in commingled funds which invest primarily in common stock and investment grade
bonds.
Nine West also maintains two Supplemental Executive Retirement Plans ("SERPs"
and, together with the Cash Balance Plan, the "Pension Plans") in which certain
key employees and officers are eligible to participate. The SERPs provide
supplemental pension benefits that are not available under the defined benefit
pension plan. Benefits paid under the SERPs are based on length of service and
final compensation, without regard to the Code, and are reduced by the full
amount of benefits payable under the Cash Balance Plan. The SERPs are unfunded,
and benefits thereunder are paid from the general assets of the Company.
Effective December 31, 1995, the SERPs were amended to freeze the total benefit
payable to participants. As participants accrue future benefits in the
qualified pension plan, the benefits payable under the SERPs decrease.
In connection with the acquisition, Nine West made an irrevocable contribution
to a trust established under one of the SERPs in an amount sufficient to pay
those SERP participants all SERP benefits to which they were entitled as of
June 15, 1999.
Nine West maintains the Nine West Group Inc. 401(k) Savings Plan (the
"Savings Plan") and a non-qualified compensation plan, the Supplemental Savings
Plan (the "Supplemental Plan" and, together
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with the Savings Plan, the "Savings Plans"), established for employees
designated by Nine West's retirement committee. The Savings Plan allows each
participant to contribute up to 15.0% (limited to 6.0% for highly compensated
employees) of their salary for the year. Nine West makes matching contributions
to the Savings Plan equal to 50.0% of the participants contribution up to 6.0%
of their salary. The Supplemental Plan allows each participant to contribute
up to 15.0% of his or her salary for the year. Nine West makes matching
contributions to the Supplemental Plan equal to 50.0% of the participant's
contribution up to 6.0% of their salary, limited to a maximum of $5,000 for
1999. At the end of the plan year, discrimination testing will determine
the amount of Supplemental Plan contributions, not to exceed 6.0%, that
will be transferred into the Savings Plan. In addition to the Savings Plans,
Nine West's United Kingdom and Asian subsidiaries have defined contribution
plans with terms similar to those of the Savings Plan. The cost of Nine
West's defined contribution plans to the Company was $0.3 million since
the acquisition.
Net periodic pension costs from the acquisition of Nine West until December
31, 1999 related to the Pension Plans include the following components (in
millions):
Interest cost $ 1.6
Less: expected return on plan assets 1.9
------
Net periodic benefit cost $(0.3)
======
The assumptions used to develop accrued pension costs at the end of 1999, as
well as costs in the following year, are:
Discount rate 7.5%
Rate of increase in compensation levels 4.5%
Expected long-term rate of return on assets 9.0%
The funded status and the related accrued pension costs for the Pension Plans
at December 31, 1999 are (in millions):
Change in benefit obligation:
Benefit obligation at date of Nine West acquisition $52.5
Interest cost 1.6
Actuarial gain (4.4)
Benefits paid (13.0)
-----
Benefit obligation at December 31, 1999 $36.7
=====
Change in plan assets:
Fair value of plan assets at date of
Nine West acquisition $48.1
Actual return on plan assets 7.0
Employer contributions 0.8
Benefits paid (13.0)
-----
Fair value of plan assets at December 31, 1999 $42.9
=====
Funded (unfunded) status $ 6.1
Unrecognized net (gain) loss (9.4)
-----
Prepaid (accrued) benefit cost $(3.3)
=====
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BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
Upon the acquisition of Nine West, the Company redefined the operating
segments it uses for financial reporting purposes. Historical data has been
restated to reflect these changes.
The Company's operations are comprised of three reportable segments:
wholesale apparel, wholesale footwear and accessories, and retail. The Company
identifies operating segments based on, among other things, the way that the
Company's management organizes the components of the Company's business for
purposes of allocating resources and assessing performance. Segment revenues
are generated from the sale of apparel, footwear and accessories through
wholesale channels and the Company's own retail locations. The wholesale
segments include wholesale operations with third party department and retail
stores while the retail segment includes retail operations by Company-owned
retail stores. No individual country other than the United States accounted
for more that 10% of consolidated net revenues in 1999, 1998 or 1997.
The Company defines segment profit as operating income before amortization of
goodwill, interest expense and income taxes. Summarized below are the Company's
segment sales and income (loss) by reportable segments for the years ended
December 31, 1999, 1998 and 1997.
(In millions) Wholesale
Wholesale Footwear & Other &
Apparel Accessories Retail Eliminations Consolidated
--------- ----------- -------- ------------ -------------
For the year ended December 31, 1999
Revenues from external customers $ 1,994.7 $ 464.5 $ 670.6 $ 20.9 $ 3,150.7
Intersegment revenues 97.5 79.7 - (177.2) -
--------- ----------- -------- ------------ -------------
Total revenues 2,092.2 544.2 670.6 (156.3) 3,150.7
--------- ----------- -------- ------------ -------------
Segment income $ 381.9 $ 8.9 $ 42.2 $ (32.5) 400.5
========= =========== ======== ============
Amortization of goodwill (22.3)
Net interest expense (63.6)
-------------
Income before provision
for income taxes $ 314.6
=============
Depreciation and other amortization $ 23.8 $ 2.5 $ 11.3 $ 15.5 $ 53.1
For the year ended December 31, 1998
Revenues from external customers $ 1,500.3 $ - $ 169.1 $ 15.8 $ 1,685.2
Intersegment revenues 112.0 - - (112.0) -
--------- ----------- -------- ------------ -------------
Total revenues 1,612.3 - 169.1 (96.2) 1,685.2
--------- ----------- -------- ------------ -------------
Segment income $ 281.2 $ - $ 18.1 $ (34.8) 264.5
========= =========== ======== ============
Amortization of goodwill (2.7)
Net interest expense (10.0)
-------------
Income before provision
for income taxes $ 251.8
=============
Depreciation and other amortization $ 12.6 $ - $ 3.8 $ 2.1 $ 18.5
For the year ended December 31, 1997
Revenues from external customers $ 1,218.6 $ - $ 153.9 $ 15.0 $ 1,387.5
Intersegment revenues 104.0 - - (104.0) -
--------- ----------- -------- ------------ -------------
Total revenues 1,322.6 - 153.9 (89.0) 1,387.5
--------- ----------- -------- ------------ -------------
Segment income $ 201.5 $ - $ 25.5 $ (30.4) 196.6
========= =========== ======== ============
Net interest expense (2.0)
-------------
Income before provision
for income taxes $ 194.6
=============
Depreciation and other amortization $ 9.5 $ - $ 3.3 $ 1.8 $ 14.6
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53
(In millions) Wholesale
Wholesale Footwear & Other &
Apparel Accessories Retail Eliminations Consolidated
--------- ----------- -------- ------------ ------------
Total assets:
December 31, 1999 $ 1,661.5 $ 766.7 $ 433.0 $ (69.2) $ 2,792.0
December 31, 1998 684.9 - 70.6 433.2 1,188.7
December 31, 1997 477.1 - 57.1 46.6 580.8
Revenues from external customers and long-lived assets excluding deferred
taxes related to operations in the United States and foreign countries are as
follows:
On or for the Year Ended December 31, 1999 1998 1997
------------------------------------- --------- --------- ---------
(In millions)
Revenues from external customers:
United States $ 2,941.2 $ 1,617.4 $ 1,326.0
Foreign countries 209.5 67.8 61.5
--------- --------- ---------
$ 3,150.7 $ 1,685.2 $ 1,387.5
========= ========= =========
Long-lived assets:
United States $ 1,580.7 $ 551.1 $ 138.4
Foreign countries 80.7 3.5 1.4
--------- --------- ---------
$ 1,661.4 $ 554.6 $ 139.8
========= ========= =========
SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION
Certain of the Company's subsidiaries function as obligors and co-obligors
of the Company's outstanding debt, including Jones Apparel Group USA, Inc.
("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings") and Nine
West.
On January 1, 1999, Jones Apparel Group, Inc. ("Jones") consummated a
corporate reorganization under which two new wholly owned subsidiaries, Jones
USA and Jones Holdings, were created. On that date, the operating assets of
Jones were transferred to Jones USA. Jones and Jones Holdings function as
co-obligors with respect to the outstanding debt securities of Jones USA and
certain of the outstanding debt securities of Nine West. In addition, Nine
West functions as a co-obligor with respect to all of Jones USA's outstanding
debt securities, and Jones USA functions as a co-obligor with respect to the
outstanding debt securities of Nine West as to which Jones and Jones Holdings
function as co-obligors.
The following summarized financial information represents the results of
Jones USA for 1999, Nine West since the date of acquisition and pro forma
information for Jones USA for 1998 and 1997, assuming the reorganization had
taken place on January 1, 1997 (all amounts in millions). Separate financial
statements and other disclosures concerning Jones USA, Nine West and Jones
Holdings are not presented, because management has determined that such
information is not material to the holders of the outstanding debt.
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54
Other and
Jones USA Nine West Eliminations Consolidated
--------- --------- ------------ ------------
On or for the year ended December 31, 1999:
Current assets $ 1,205.0 $ 528.3 $ (602.7) $ 1,130.6
Noncurrent assets 153.9 1,035.7 467.6 1,657.2
Current liabilities 646.5 491.8 (478.6) 659.7
Noncurrent liabilities 709.1 183.4 (5.4) 887.1
Total revenues 1,420.5 982.6 747.6 3,150.7
Gross profit 530.9 359.0 299.3 1,189.2
Operating income 201.0 23.2 154.0 378.2
Net income 82.2 (0.6) 106.8 188.4
On or for the year ended December 31, 1998:
Current assets $ 506.2 $ - $ 125.6 $ 631.8
Noncurrent assets 145.3 - 411.6 556.9
Current liabilities 238.2 - (64.3) 173.9
Noncurrent liabilities 413.5 - 6.9 420.4
Total revenues 1,426.4 - 258.8 1,685.2
Gross profit 457.0 - 127.5 584.5
Operating income 161.0 - 100.8 261.8
Net income 80.3 - 74.6 154.9
On or for the year ended December 31, 1997:
Current assets $ 365.0 $ - $ 75.8 $ 440.8
Noncurrent assets 95.3 - 44.7 140.0
Current liabilities 256.6 - (146.4) 110.2
Noncurrent liabilities 28.1 - 5.3 33.4
Excess of net assets acquired
over cost 1.5 - - 1.5
Total revenues 1,261.2 - 126.3 1,387.5
Gross profit 371.5 - 75.8 447.3
Operating income 112.9 - 83.7 196.6
Net income 61.4 - 60.3 121.7
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UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the two years ended
December 31, 1999 is summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- --------- -------
(In millions except per share data)
1999
Net sales $ 574.8 $ 505.9 $ 1,139.4 $ 909.7
Total revenues 579.1 510.4 1,146.7 914.5
Gross profit 214.3 199.9 439.4 335.6
Operating income 95.9 62.1 151.9 68.3
Net income 54.4 31.9 75.0 27.1
Basic earnings per share $0.53 $0.29 $0.61 $0.22
Diluted earnings per share $0.51 $0.28 $0.59 $0.22
1998
Net sales $ 380.1 $ 305.4 $ 495.7 $ 488.2
Total revenues 383.8 308.5 500.3 492.6
Gross profit 131.2 107.4 175.6 170.3
Operating income 64.0 41.1 97.2 59.5
Net income 38.6 25.1 59.1 32.1
Basic earnings per share $0.38 $0.25 $0.59 $0.31
Diluted earnings per share $0.37 $0.24 $0.57 $0.30
SUBSEQUENT EVENTS
On March 6, 2000, the Company announced that it had entered into
settlement agreements with the Attorneys General of the 50 States, the
District of Columbia, Puerto Rico, the Virgin Islands, American Samoa,
the Northern Mariana Islands and Guam, and with the Federal Trade
Commission ("FTC"), resolving allegations that Nine West engaged in
violations of the antitrust laws by coercing retailers to adhere to
resale prices of its products (see "Commitments and Contingencies").
Both agreements are without any admission of liability on the part of
Nine West.
The settlement with the States, which resolves ongoing investigations
and a lawsuit filed on March 6, 2000, consists of a consent decree which
specifies the manner in which Nine West may implement its resale pricing
policies with its retailer customers, along with a payment of $34.0
million which will be used to benefit consumers. The settlement requires
court approval and, if approved by the court, should effectively resolve
the pending federal and state class actions that cover the same claims.
The $34.0 million payment will be recorded as additional goodwill.
In a separate settlement, Nine West has agreed to a consent order with
the FTC which also specifies the manner in which Nine West may implement
its resale pricing policies with its retailer customers. This consent
order, which resolves an ongoing FTC investigation, is subject to final
FTC approval after a comment period.
As of March 14, 2000, all of the stockholder class action lawsuits
challenging Nine West's entry into the merger agreement with the
Company were dismissed without prejudice.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Office
------------------ --- ------------------------------------------------
Sidney Kimmel 72 Chairman, Chief Executive Officer and Director
Jackwyn Nemerov 48 President and Director
Irwin Samelman 69 Executive Vice President, Marketing and Director
Wesley R. Card 52 Chief Financial Officer
Patrick M. Farrell 50 Senior Vice President and Corporate Controller
Geraldine Stutz 71 Director
Howard Gittis 66 Director
Eric A. Rothfeld 48 President and Chief Executive Officer of Sun and
Director
Mark J. Schwartz 42 Director
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.
Ms. Nemerov joined the Company in 1985, and from 1995 to 1997 served as
President of the Company's casual sportswear divisions and the Lauren by
Ralph Lauren division. She was elected President of the Company in early 1997.
Mr. Samelman has been Executive Vice President, Marketing of Jones since 1991.
Mr. Card has been Chief Financial Officer of the Company since 1990.
Mr. Farrell was appointed Vice President and Corporate Controller in November
1997 and Senior Vice President in September 1999. 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 from 1995 to 1997.
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Ms. Stutz has been a principal partner of GSG Group, a fashion and marketing
service, since 1993. 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. and Sunbeam Corporation.
Mr. Rothfeld serves as President and Chief Executive Officer of Sun. 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 Jones.
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 currently is a
Director of Platinum Entertainment, Inc., 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.
For the period from June 15, 1999 through February 6, 2000, Mr. Schwartz served
as Chairman and Chief Executive Officer of Nine West.
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.
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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. Financial Statements.
The following financial statements of the Company are included in
Item 8 of this report:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements (includes certain
supplemental financial information required by Item 8 of Form 10-K)
2. The schedule and report of independent certified public accountants
thereon, listed in the Index to Financial Statement Schedules
attached hereto.
3. The exhibits listed in the Exhibit Index attached hereto.
(b) Reports on Form 8-K
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 17, 2000 JONES APPAREL GROUP, INC.
(Registrant)
By: /s/ Sidney Kimmel
-----------------------
Sidney Kimmel, Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
this page to this Annual Report on Form 10-K for the year ended December 31,
1999 (the "Form 10-K") constitutes and appoints Sidney Kimmel, Wesley R. Card
and Patrick M. Farrell and each of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to the Form 10-K, and file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and grants unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might and could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
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 17, 2000
- ----------------------- (Principal Executive Officer)
Sidney Kimmel
/s/ Jackwyn Nemerov President and Director March 17, 2000
- -----------------------
Jackwyn Nemerov
/s/ Wesley R. Card Chief Financial Officer March 17, 2000
- ----------------------- (Principal Financial Officer)
Wesley R. Card
/s/ Patrick M. Farrell Senior Vice President and March 17, 2000
- ----------------------- Corporate Controller
Patrick M. Farrell (Principal Accounting Officer)
/s/ Irwin Samelman Executive Vice President, March 17, 2000
- ----------------------- Marketing and Director
Irwin Samelman
/s/ Geraldine Stutz Director March 17, 2000
- -----------------------
Geraldine Stutz
/s/ Howard Gittis Director March 17, 2000
- -----------------------
Howard Gittis
/s/ Eric A. Rothfeld Director March 17, 2000
- -----------------------
Eric A. Rothfeld
/s/ Mark J. Schwartz Director March 17, 2000
- -----------------------
Mark J. Schwartz
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60
JONES APPAREL GROUP, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Certified Public Accountants on Schedule II.
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) 2.1 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) 3.1 3.1 Articles of Incorporation, as amended.
(4) 3.3 3.3 By-Laws.
(5) 3.3 3.4 Amendment to By-Laws.
(6) 4.1 4.1 Form of Certificate evidencing shares of common stock of
the Company.
(7) 4.1 4.2 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) 10.1 4.3 Indenture dated as of October 2, 1998, by and between
the Company and The Chase Manhattan Bank, as trustee,
including Form of 6.25% Senior Notes Due 2001.
(8) 4.3 4.4 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.
(9) 4.1 4.5 Second Supplemental Indenture for 8-3/8% Series B Senior
Notes due 2005 dated as of June 15, 1999, among Jack
Asset Sub Inc., Jones Apparel Group, Inc., Jones Apparel
Group Holdings, Inc., Jones Apparel Group USA, Inc., and
The Bank of New York, as trustee.
(9) 4.2 4.6 Second Supplemental Indenture for 9% Series B Senior
Notes due 2005 dated as of June 2, 1999, between Nine
West Group Inc., Jack Asset Sub Inc., Jill Acquisition
Sub Inc. and The Bank of New York, as trustee.
(9) 4.3 4.7 Second Supplemental Indenture for 6.25% Senior Notes
Due 2001 dated as of June 15, 1999, among Jones Apparel
Group, Inc., Jones Apparel Group Holdings, Inc., Jones
Apparel Group USA, Inc., Jack Asset Sub Inc., and The
Chase Manhattan Bank, as trustee.
(9) 4.4 4.8 Second Supplemental Indenture for 5-1/2% Convertible
Subordinated Notes Due 2003 dated as of June 15, 1999,
between Jack Asset Sub Inc., Jill Acquisition Sub Inc.
and Chase Manhattan Bank, as trustee.
(9) 4.5 4.9 Exchange and Note Registration Rights Agreement dated
June 15, 1999 among the Company, Bear, Stearns & Co.
Inc., Chase Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Salomon Smith Barney Inc.,
BancBoston Robertson Stephens Inc., Banc of America
Securities LLC, ING Baring Furman Selz LLC, Lazard
Freres & Co. LLC, Tucker Anthony Cleary Gull, Brean
Murray & Co., Inc., and The Buckingham Research
Group Incorporated.
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Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
(9) 4.6 4.10 Senior Note Indenture dated as of June 15, 1999 among
Jones Apparel Group, Inc. Jones Apparel Group Holdings,
Inc. Jones Apparel Group USA, Inc., Nine West Group Inc.,
and The Bank of New York, as trustee, including Form of
7.50% Senior Notes due 2004 and Form of 7.875% Senior
Notes due 2006.
(10) 4.2 4.11 Form of Nine West Group Inc. Definitive 5-1/2%
Convertible Subordinated Note Due 2003.
(10) 4.3 4.12 Form of Nine West Group Inc. Restricted Global 5-1/2%
Convertible Subordinated Note Due 2003.
(10) 4.4 4.13 Form of Nine West Group Inc. Regulation S Global 5-1/2%
Convertible Subordinated Note Due 2003.
(10) 4.5 4.14 Indenture, dated as of June 26, 1996, between Nine West
Group Inc., as issuer, and Chemical Bank, as trustee,
relating to Nine West's 5-1/2% Convertible Subordinated
Notes Due 2003.
(11) 4.1 4.15 Senior Note Indenture dated as of July 9, 1997 among Nine
West Group Inc. and Nine West Development Corporation,
Nine West Distribution Corporation, Nine West Footwear
Corporation and Nine West Manufacturing Corporation, as
Guarantors, and The Bank of New York, as Trustee.
(12) 4.7.1 4.16 Supplemental Indenture, dated as of September 15, 1998,
among Nine West Group Inc. and Nine West Manufacturing II
Corporation, Nine West Development Corporation, Nine West
Distribution Corporation, Nine West Footwear Corporation
and Nine West Manufacturing Corporation (collectively,
the "Existing Guarantors"), as Guarantors, and The Bank
of New York, as Trustee under the Senior Note Indenture
dated as of July 9, 1997.
(11) 4.2 4.17 Senior Subordinated Note Indenture dated as of July 9,
1997 among Nine West Group Inc. and Nine West Development
Corporation, Nine West Distribution Corporation, Nine
West Footwear Corporation and Nine West Manufacturing
Corporation, as Guarantors, and The Bank of New York,
as Trustee.
(12) 4.8.1 4.18 Supplemental Indenture, dated as of September 15, 1998,
among Nine West Group Inc. and Nine West Manufacturing II
Corporation, the Existing Guarantors and The Bank of New
York, as Trustee under the Senior Subordinated Note
Indenture dated as of July 9, 1997.
(11) 4.6 4.19 Form of Nine West Group Inc. 8-3/8% Series B Senior Notes
due 2005.
(11) 4.6 4.20 Form of Nine West Group Inc. 9% Series B Senior
Subordinated Notes due 2007.
(13) 4.6 4.21 Form of Nine West Group Inc. Unrestricted Global 5-1/2%
Convertible Subordinated Note Due 2003.
(4) 10.5 10.1 Form of 1991 Stock Option Plan.+
(14) 10.33 10.2 Form of 1996 Stock Option Plan.+
(14) 10.40 10.3 License Agreement between the Registrant and Polo Ralph
Lauren, L.P., dated October 18, 1995.#
(14) 10.41 10.4 Design Services Agreement between the Registrant and Polo
Ralph Lauren, L.P., dated October 18, 1995.#
(6) 10.2 10.5 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 10.6 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.
(8) 10.2 10.7 Master Joinder Agreement dated as of January 1, 1999 to
the Credit Agreements referred to therein, by and 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.
(15) 10.53 10.8 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.#
(15) 10.54 10.9 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.#
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Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
- ------------ ------- ----------------------
(1) 10.1 10.10 Employment Agreement dated September 10, 1998, by and
between SAI Acquisition Corp. and Eric A. Rothfeld.
(3) 10.16 10.11 License Agreement between the Registrant and Polo Ralph
Lauren, L.P., dated May 11, 1998.#
(3) 10.17 10.12 Design Services Agreement between the Registrant and Polo
Ralph Lauren, L.P., dated May 11, 1998.#
(9) 10.1 10.13 Second Amended and Restated 364-Day Credit Agreement
dated as of June 15, 1999 among Jones Apparel Group USA,
Inc. and the Additional Obligors referred to therein, the
Lenders referred to therein, and First Union National
Bank, as Administrative Agent.
(9) 10.2 10.14 Five-Year Credit Agreement dated as of June 15, 1999
among Jones Apparel Group USA Inc. and the Additional
Obligors referred to therein, the Lenders referred to
therein, and First Union National Bank, as
Administrative Agent.
(16) 10.1 10.15 Letter Agreement, dated July 22, 1999, among Nine West
Group Inc., Nine West Funding Corporation, Corporate
Receivables Corporation, the Liquidity Providers named
therein, Citicorp North America, Inc. and The Bank of
New York, extending the term of the Amended and Restated
Series 1995-1 Certificate Purchase Agreement.
(16) 10.2 10.16 Employment Agreement dated as of June 15, 1999 between
the Registrant and Mark J. Schwartz.+
(17) 4.5 10.17 Jones Apparel Group, Inc. 1999 Stock Option Plan.+
(18) Annex B 10.18 Jones Apparel Group, Inc. Executive Annual Incentive
Plan.+
* 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. (19)
____________________
* 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 Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 filed on April 3, 1991 (Registration No. 33-39742).
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993.
(6) Incorporated by reference to the Company's Shelf Registration Statement on
Form S-3, filed on October 28, 1998 (Registration No. 333-66223).
(7) Incorporated by reference to the Company's Form S-4, filed on December 9,
1998 (Registration No. 333-68587).
(8) Incorporated by reference to the Company's Form S-4/A, filed on January 25,
1999 (Registration No. 333-68587).
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the six months ended July 4, 1999.
(10) Incorporated by reference to the Nine West Group Inc. Annual Report on
Form 10-K for the 52 weeks ended January 31, 1999.
(11) Incorporated by reference to the Nine West Group Inc. Registration
Statement on Form S-4, filed on August 21, 1997 (Registration No.
333-34085).
(12) Incorporated by reference to the Nine West Group Inc. Quarterly Report on
Form 10-Q for the nine months ended October 31,1998.
(13) Incorporated by reference to Amendment No. 1 to the Nine West Group Inc.
Registration Statement on Form S-3, filed on August 21, 1997 (Registration
No. 333-12545).
(14) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine months ended September 27, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the nine months ended October 3, 1999.
(17) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on August 23, 1999 (Registration No. 333-85795).
(18) Incorporated by reference to the Company's Proxy Statement for the
Company's 1999 Annual Meeting of Stockholders.
(19) 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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63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jones Apparel Group, Inc.
New York, New York
The audits referred to in our dated February 4, 2000, except as to
"Subsequent Events" which is as of March 14, 2000 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, 1999. The
financial statement schedule is the responsibility of management. Our
responsibility is to express an opinion on the financial statements
schedule based upon our audits.
In our opinion, such financial statements schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 4, 2000, except as to
"Subsequent Events", which
is as of March 14, 2000
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64
SCHEDULE II
JONES APPAREL GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(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 period
- ------------ ---------- ---------- ----------- ---------- ---------
For the year ended
December 31, 1997:
Allowance for doubtful accounts $2,263 $1,870 $ - $1,366 $ 2,767
For the year ended
December 31, 1998:
Allowance for doubtful accounts $2,767 $188 $ 396 $ 48 $ 3,303
For the year ended
December 31, 1999:
Allowance for doubtful accounts $3,303 $5,391 $20,495 $2,593 $26,596
[FN]
Doubtful accounts written off (recovered) against accounts receivable.
Addition due to the acquisition of Sun Apparel, Inc. on October 2, 1998.
Addition due to the acquisition of Nine West Group Inc. on June 15, 1999.
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