UNITED STATES 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, 2000 |
| [ ] | 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 (State or other jurisdiction of incorporation or organization) |
06-0935166 (I.R.S. Employer Identification No.) |
| 250 Rittenhouse Circle, Bristol, Pennsylvania (Address of principal executive offices) |
19007 (Zip Code) |
Registrant's telephone number, including area code: (215) 785-4000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class
Common Stock, $0.01 par value |
Name of each exchange on which registered 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 15, 2001 was approximately $4,120,244,090.
As of March 15, 2001, 120,257,255 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.................... 19
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.. 19
Item 6 Selected Financial Data................................................ 20
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 21
Item 7A Quantitative and Qualitative Disclosures About Market Risk............. 26
Item 8 Financial Statements and Supplementary Data............................ 27
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................... 53
PART III
Item 10 Directors and Executive Officers of the Registrant..................... 54
Item 11 Executive Compensation................................................. 55
Item 12 Security Ownership of Certain Beneficial Owners and Management......... 55
Item 13 Certain Relationships and Related Transactions......................... 55
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 55
Signatures...................................................................... 56
Index to Financial Statement Schedules.......................................... 57
Exhibit Index................................................................... 57
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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 proxy statement for the registrant's 2001 Annual Meeting of Stockholders (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. |
III |
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), "Nine West" means Nine West Group Inc. (acquired June 15, 1999), and "Victoria" means Victoria + Co Ltd. (acquired July 31, 2000). The results of Sun, Nine West and Victoria 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 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 collection sportswear, suits and dresses, casual sportswear and jeanswear for men, women and children, women's shoes and accessories, and costume jewelry. The Company has pursued a multi-brand strategy by marketing its products under several nationally known brands, including Jones New York, Evan-Picone, Rena Rowan, Nine West, Easy Spirit, Enzo Angiolini, Bandolino and Todd Oldham and the licensed brands Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company. Each brand is differentiated by its own distinctive styling and pricing strategy, and together they target a wide range of consumers. 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, Evan-Picone and Nine West brand names with select manufacturers of women's and men's products which the Company does not manufacture.
On July 31, 2000, the Company acquired 100% of the capital stock of Victoria
+ Co Ltd. Victoria is a leading designer and marketer of branded and private
label costume jewelry sold to better department and specialty stores. Victoria
markets its products under the national brand names Napier and Richelieu and
under several licensed brands, including Tommy Hilfiger and Givenchy, as well as
private labels. In addition, Victoria markets jewelry under the Company's
Nine West 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 the women's and,
to a lesser extent, the 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. New collections are introduced in four of
the principal selling seasons - Spring, Summer, Fall and Holiday. Each
season is comprised of a series of groups which have systematically spaced
shipment dates to ensure a fresh flow of goods to the retail floor.
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The following table summarizes selected aspects of the products sold under
both Company-owned and licensed brands:
Product Market Retail
Label Classification Segment Price Points
Jones New York Labels Jones New York Collection Sportswear Better $24 - $350
Skirts, blouses, pants, Jones New York Sport Casual Sportswear Better
jackets, sweaters, Jones Jeans Casual Sportswear Better
jeanswear, suits, Jones New York Country Lifestyle Better
dresses, casual tops 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 $18 - $129
Skirts, blouses, pants, Evan-Picone Dress Dresses Moderate
jackets, sweaters,
jeanswear, dresses,
casual tops
Nine West Labels Nine West Lifestyle Better $24 - $269
Skirts, blouses, pants, Nine and Company Lifestyle Moderate
jackets, sweaters, dresses,
outerwear, shorts,
casual tops
Other Labels Rena Rowan Collection Sportswear Better $23 - $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, handbags, small leather goods and costume jewelry. The following table summarizes selected aspects of the products sold under both Company-owned and licensed brands:
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Product Market Retail Price Points
Label Classification Segments Shoes Boots
Footwear
Nine West Contemporary Better $59 to $75 $79 to $159
Bandolino Modern Classics Moderate $39 to $59 $69 to $139
Easy Spirit Comfort/Fit Upper Moderate $39 to $75 $59 to $140
Active
Sport/Casuals
Enzo Sophisticated Better $69 to $85 $120 to $169
Angiolini Classics
Specialty Traditional/ Moderate/Lower $30 to $40 $45 to $65
Marketing Contemporary Moderate
Accessories Accessories
Nine West, Handbags and Small Upper Moderate/ $25 to $120
Enzo Angiolini Leather Goods Better
and Easy Spirit
Jones New York Handbags Better $35 to $160
Napier, Nine Costume and Better $7 to $250
West, Tommy Fashion Jewelry
Hilfiger and
Givenchy
Richelieu Costume Jewelry Moderate $8 to $90
Retail
The Company markets apparel, footwear and accessories directly to consumers through the Company's specialty retail stores operating in malls 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 open 10 to 15 and close 35 to 50 retail locations in 2001, including the remaining 9 & Co. and cK/Calvin Klein retail locations in operation as of December 31, 2000, which were closed during the first quarter of 2001.
Specialty Retail Stores. At December 31, 2000, the Company operated a total of 471 specialty retail stores (excluding 208 stores sold in January 2001 as part of Nine West's divestiture of operations in the United Kingdom). 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, legwear, outerwear, watches and sunglasses.
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The following table summarizes selected aspects of the Company's specialty
retail stores at December 31, 2000 (excluding the 208 stores sold in January
2001). Of these stores, 441 are located within the United States with the
remainder located primarily in Australia.
Retail Price Range Average
Shoes store size
Number of Brands and Type of (square
locations offered Boots Accessories Apparel locations feet)
Nine West 234 Primarily $50-$170 $18-$100 - Upscale and 1,588
Nine West regional malls and
urban retail centers
Easy Spirit 167 Easy Spirit $40-$150 $18-$120 - Upscale and 1,369
and Selby regional malls and
urban retail centers
Enzo Angiolini 57 Primarily $65-$165 $15-$200 - Upscale malls and 1,365
Enzo Angiolini urban retail centers
Other footwear 4 Various $30-$295 $12-$200 - Various 1,584
Apparel 9 Various - - $6-$2,500 Urban retail 4,077
locations and
regional malls
Outlet Stores. At December 31, 2000, the Company operated a total of 528 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 Company's jewelry stores focus on breadth of product line and value pricing and offer a distribution channel for the Company's residual and
discontinued wholesale inventories.
The following table summarizes selected aspects of the Company's outlet stores at December 31, 2000. Of these stores, 513 are located within the United States with the remainder located primarily in Canada.
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Average
Number of Brands Type of store size
locations offered locations (square feet)
Nine West 136 Primarily Manufacturer 2,657
Nine West outlet centers
Banister/Easy Spirit 119 Primarily Easy Spirit Manufacturer 4,292
outlet centers
Stein Mart (leased 86 All Company Strip 2,743
footwear departments) footwear brands centers
Jones New York 80 Primarily Manufacturer 4,032
Jones New York outlet centers
Jones New York Sport 22 Primarily Jones Manufacturer 2,673
New York Sport outlet centers
Jones New York Country 46 Jones New Manufacturer 2,817
York Country outlet centers
Others 39 Various Manufacturer 2,933
outlet centers
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 and also licenses the Polo Ralph Lauren brand in Canada.
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 Corporation. The initial term of the license and design service agreements expires December 31, 2001. The Company has exercised its option to renew the Lauren by Ralph Lauren agreements through December 31, 2006. 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 a result of the acquisition of Sun, 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 agreements expire on December 31, 2005 and may be renewed by the Company in five-year increments for up to 25 additional years if certain sales requirements are met. Renewal of the Polo Jeans License after 2010 requires a one-time payment by the Company 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 also has an option, exercisable on or before
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June 1, 2010, to purchase the Company's Polo Jeans Company business at the end of 2010 for a purchase price, payable in cash, equal to 80% of the then fair value of the business as a going concern, assuming continuation of the Polo Jeans License through 2030. 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 June 2000, the Company acquired an exclusive license to manufacture and market in Canada certain products under the Polo Jeans Company and Polo Ralph Lauren trademarks pursuant to license and design service agreements with Polo Ralph Lauren Corporation. The agreements expire on December 31, 2005 and are renewable for an additional five years provided that the Company achieves 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 result of the acquisition of Nine West, the Company obtained the exclusive right and license in perpetuity to produce women's footwear under the Capezio trademark and obtained rights in perpetuity under license agreements for the production of various other products under the Capezio trademark, some of which are sub-licensed to independent licensees (see "Licensing of Company Brands").
As a result of the acquisition of Victoria, the Company obtained the exclusive license to produce and sell costume jewelry in the United States and Canada under the Tommy Hilfiger trademark, which expires on December 31, 2004. Upon expiration, the Company has the right to renew the license for an additional three-year period, provided that it meets certain minimum sales levels. The agreement provides for payment by the Company of a percentage of net sales against guaranteed minimum royalty and advertising payments as set forth in the agreement. The Company also obtained the exclusive, worldwide license to produce, market and distribute costume jewelry under the Givenchy mark, which expires on December 31, 2002.
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.
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.
The Company's jewelry brands are developed by separate design teams. Each team presents styles that maintain each brand's distinct personality. A prototype is developed for each new product where appropriate. Most prototypes are produced in-house and samples are sent to vendors for cost estimates. After samples are evaluated and cost estimates are received, the lines are modified as needed for presentation for each selling season.
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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 provides design services to the Company for its licensed products and has the right to approve the Company's designs for the Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company product lines.
Manufacturing 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 64 contractors located in the United States, approximately 134 in Mexico and approximately 806 in overseas locations. The Company also operates several manufacturing facilities of its own. Approximately 27% of the Company's apparel products were manufactured in the United States and Mexico and 73% in other parts of the world (primarily Asia) during 2000.
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 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 mills located in the United States and Mexico. 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.
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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. When possible, 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.
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 and long-standing relationships developed by Victoria with third-party Asian manufacturers. 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 2000, approximately 50% of the Company's footwear products were manufactured by 14 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 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.
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During 2000, approximately 46% of the Company's footwear products (primarily fabric footwear) were manufactured by independent third parties located in China, with the remainder of footwear production (approximately 4%) originating primarily in Italy. The Company's handbags and small leather goods are sourced through the Company's own buying offices in Korea and Hong Kong, which utilize independent third party manufacturers in China. 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, handbag or small leather goods 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.
The Company does not have any contracts with any of its jewelry manufacturers but relies on long-standing relationships developed by Victoria, principally with third-party Asian manufacturers. The Company also has its own manufacturing facility to satisfy demand for products manufactured domestically (such as cosmetic containers) and to provide sufficient production capacity in the event of disruption in its outsourced manufacturing. Victoria has historically experienced little difficulty in satisfying finished goods requirements and considers its source of supplies adequate. Products have historically been purchased from Asian manufacturers in preset U. S. dollar prices, effectively minimizing the effects of adverse fluctuations in exchange rates.
During 2000, approximately 87% of jewelry products were manufactured by independently-owned jewelry manufacturers in Asia, with the remainder produced primarily in the United States and Austria. The Company believes that the quality and cost of products manufactured by its suppliers provide it with the ability to remain competitive. Sourcing the majority of its products enables the Company to better control costs and avoid significant capital expenditures, work in process inventory, and costs of managing a larger production workforce. Victoria's history as a manufacturer gives it the requisite experience and knowledge to manage its vendors effectively.
Forecasts for basic jewelry products are produced on a rolling 12-week basis and are adjusted based on point of sale information from retailers. Manufacturing of fashion jewelry products is based on marketing forecasts and sales plans; actual orders are received several weeks after such forecasts are produced. Quality control testing is performed on-site by domestic employees or private firms in the country of manufacture and quality assurance checks are also performed upon receipt of finished goods at Company distribution facilities.
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Marketing
During 2000, 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 2000 sales, and sales to ten department store customers currently owned by Federated Department Stores, Inc. ("Federated") also accounted for approximately 14% of 2000 sales. The Company's ten largest customer groups accounted for approximately 56% of sales in 2000. 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.
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 introduces new handbag and small leather goods collections at market shows that occur four times each year in New York City. Jewelry products are marketed in New York City showrooms through individual customer appointments and at five industry-wide market shows each year. Retailers visit Company showrooms at these times to view various product lines and merchandise.
The Company promotes its footwear, handbag and small leather goods businesses 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 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 handbags and small leather goods, 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
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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.
Most wholesale jewelry customers outsource product management and merchandising to the Company. The Company works closely with these retailers to create long-term sales programs, which include choosing among the Company's diverse product lines and implementing sales programs at the store level. A team of sales representatives and sales managers monitor product performance against plan and are responsible for inventory management, using point-of-sale information to respond to shifts in consumer preferences. Management uses this information to adjust product mix and inventory requirements. Retailers are also provided with customized displays and store-level merchandising designed to maximize sales and inventory turnover. By providing retailers with in-store product management, the Company establishes close relationships with retailers, allowing it to maximize product sales and increase floor space allocated to its product lines.
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 national advertising campaigns for Jones New York (primarily in the print media encompassing both Company products and products of its licensees), Nine West (footwear, apparel, jewelry and licensed products, primarily in fashion magazines), Easy Spirit (advertised on television and in fashion, lifestyle, health and fitness magazines), Enzo Angiolini (in fashion magazines), Napier (in fashion magazines), and the licensed Tommy Hilfiger and Givenchy jewelry lines. 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 in-house creative services departments oversee the conception, production and execution of virtually all aspects of these activities. 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 produce and sell certain 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 cover products including men's tailored clothing and overcoats, women's intimate apparel, women's rainwear, men's and women's outerwear, leather outerwear and woolen coats, belts, women's swimwear, umbrellas, costume jewelry, hair accessories, legwear, women's slippers, women's sleepwear, men's small leather goods, men's formal wear and men's and women's sunglasses and optical eyewear. 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 2000, the Company received $11.5 million of gross licensing revenues under these agreements.
The Company has entered into various license agreements under which independent licensees produce and sell certain products under the Company's Evan-Picone trademarks in accordance with designs furnished or approved by the Company in the United States, Canada and various other territories. These licenses cover products including men's tailored clothing, women's sunglasses, women's optical wear and women's hosiery. These licenses provide for the payment to the Company of a percentage of the licensee's net sales
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of the licensed products against guaranteed minimum royalty payments which typically increase over the term of the agreement. During 2000, the Company received $2.5 million of gross licensing revenues 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, outerwear, belts, slippers, watches, sunglasses and optical eyewear. 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.
The Company has also entered into foreign distribution and license agreements under which independent licensees have the exclusive right to distribute and sell at retail (and, in some cases, at wholesale) footwear, handbags and small leather goods under the Nine West trademark and to own and operate Nine West retail stores in certain countries. These licenses provide for the payment to the Company of commissions on the sale to the licensees 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 for Turkey, Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Emirates, portions of South America and Asia, Mexico, Canada, the United Kingdom, Ireland and the Channel Islands.
Under rights obtained in perpetuity under license agreements for the production of various non-footwear products under the Capezio trademark, the Company has entered into various sub-license agreements under the Capezio trademark with independent licensees with respect to the manufacture and marketing of products including watches, knitwear and cold weather accessories, rainwear, handbags, belts and hair accessories.
During 2000, the Company received $12.0 million of gross licensing revenues under the Nine West licenses and other similar agreements, including revenues from the sub-licensing of the Capezio trademark.
Trademarks
The Company utilizes a variety of trademarks which it owns, including Jones New York, Jones New York Sport, Jones Wear, Jones New York Country, Jones Jeans, Rena Rowan, Evan-Picone, Todd Oldham, Code Bleu, Executive Suite, Nine West, Easy Spirit, Enzo Angiolini, Bandolino, Banister, Calico, 9 & Co., Westies, Napier and Richelieu. 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 and, in some cases, for retail store services, in the United States and certain other countries. The expiration dates of the United States trademark registrations for the Company's material registered trademarks are as follows, with its other registered foreign and domestic trademarks expiring at various dates through 2018, all of which are subject to renewal if, in the case of domestic and certain foreign registrations, the marks are still in use for the goods and services covered by such registrations.
Trademark Expires in Trademark Expires in
Jones New York 2006 Jones New York Sport 2004
Rena Rowan 2005 Evan-Picone 2003
Nine West 2003 Enzo Angiolini 2005
Easy Spirit 2007 Bandolino 2001
Napier 2009
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
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Company by Ralph Lauren, Polo Ralph Lauren, Capezio, Givenchy and Tommy Hilfiger 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.
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, China, 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, 2000, the Company had unfilled customer orders of approximately $1.0 billion, compared to approximately $1.1 billion of such orders at December 31, 1999. 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 Victoria during 2000, a comparison
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of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments.
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 sourcing products from suppliers who are well capitalized or 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, 2000, the Company had approximately 13,860 full-time employees. This total includes approximately 7,845 in quality control, production, design and distribution positions, approximately 1,820 in administrative, sales, clerical and office positions and approximately 4,195 in the Company's retail stores. The Company also employs approximately 4,760 part-time employees, of which approximately 4,300 work in the Company's retail stores.
Approximately 250 of the Company's employees located in Bristol, Pennsylvania are members of the Teamsters Union, which has a collective bargaining agreement with the Company expiring in March 2002. Approximately 80 of the Company's employees located in Vaughan, Ontario are members of the Laundry and Linen Drivers and Industrial Workers Union, which has a collective bargaining agreement with the Company expiring in March 2003. Nine of the Company's employees located in El Paso, Texas are represented by the Union of Needletrades, Industrial and Textile Employees, AFL-CIO, which had a collective bargaining agreement which expired on December 31, 1999. Approximately 1,985 of the Company's employees located in Mexico are members of an affiliate of the Cofederacion de Trabajadores Mexicanos, which has a collective bargaining agreement expiring on January 1, 2002. 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:
Owned/ Approximate Area
Location 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 415,787
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 437,310
El Paso, Texas owned Administrative, warehouse and
preproduction facility 165,000
El Paso, Texas owned Distribution warehouse 110,000
El Paso, Texas leased Distribution warehouses 400,500
Ciudad Juarez, Mexico owned Production 66,850
Durango, Mexico owned Finishing, assembly and warehouse facilities 553,760
White Plains, New York leased Administrative and computer services 366,460
West Deptford, New Jersey leased Distribution warehouses 831,725
Providence, Rhode Island leased Distribution warehouses and
product development 92,500
The Company has signed a lease for an additional 620,000 square foot distribution facility in El Paso, Texas, which is under construction and is expected to become operational during 2001. This distribution facility will replace the existing 400,500 square feet of leased warehouse facilities located in El Paso, Texas. The Company's joint venture company leases office and distribution facilities in Australia.
The Company subleases approximately 200,000 square feet of its White Plains facilities to an independent company. The Company owns a 105,000 square foot closed factory in Meriden, Connecticut, and a 150,000 square foot finishing facility in El Paso, Texas, both of which it intends to sell.
The Company's retail stores are leased pursuant to long-term leases, typically five to seven 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 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 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.
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:
2000
High $31.875 $32.5625 $29.1875 $35.00
Low $20.125 $21.25 $22.0625 $23.3125
1999
High $32.50 $35.875 $34.875 $33.00
Low $21.50 $27.50 $24.75 $24.8125
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 15, 2001 was $37.15, and on that date there were 365 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.
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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, 2000. The Company completed its acquisitions of Sun, Nine West and Victoria on October 2, 1998, June 15, 1999, and July 31, 2000, respectively. The results of operations of Sun, Nine West and Victoria are included in the Company's operating results from the respective dates of acquisition.
(All amounts in millions except net income per share data)
Year Ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------
Income Statement Data
Net sales $4,120.5 $3,129.8 $1,669.4 $1,372.5 $1,021.0
Licensing income (net) 22.2 20.9 15.8 15.0 13.1
----------------------------------------------------
Total revenues 4,142.7 3,150.7 1,685.2 1,387.5 1,034.1
Cost of goods sold 2,433.4 1,876.9 1,098.3 940.2 717.3
Purchase accounting adjustments
to cost of goods sold(1) 3.1 84.6 2.4 - -
----------------------------------------------------
Gross profit 1,706.2 1,189.2 584.5 447.3 316.8
Selling, general and
administrative expenses 1,064.7 788.7 320.0 250.7 186.5
Amortization of goodwill 36.9 22.3 2.7 - -
----------------------------------------------------
Operating income 604.6 378.2 261.8 196.6 130.3
Interest expense and financing costs 103.8 66.9 11.8 3.6 3.0
Interest income (2.3) (3.3) (1.8) (1.6) (0.5)
----------------------------------------------------
Income before provision
for income taxes 503.1 314.6 251.8 194.6 127.8
Provision for income taxes 201.2 126.2 96.9 72.9 46.9
----------------------------------------------------
Net income $ 301.9 $ 188.4 $ 154.9 $ 121.7 $ 80.9
====================================================
Per Share Data (2)
Net income per share
Basic $2.54 $1.65 $1.52 $1.17 $0.77
Diluted $2.48 $1.60 $1.47 $1.13 $0.75
Dividends paid per share - - - - -
Weighted average common
shares outstanding
Basic 119.0 114.1 101.6 103.8 104.7
Diluted 121.9 118.0 105.1 107.8 107.3
December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------
Balance Sheet Data
Working capital $ 294.9 $ 469.2 $ 457.9 $ 330.6 $ 294.0
Total assets 2,979.2 2,792.0 1,188.7 580.8 488.1
Short-term debt and current
portion of long-term debt
and capital lease obligations 499.8 266.9 6.5 4.2 3.1
Long-term debt, including
capital lease obligations 576.2 834.2 414.6 27.3 12.1
Stockholders' equity 1,477.2 1,241.0 594.4 435.6 376.7
(1) Reflects a non-cash increase in cost of goods sold attributable to the fair value of inventory over cost, recorded as a result of the acquisitions of Victoria, Nine West and Sun as required by the purchase method of accounting.
(2) All share and per share amounts have been restated to retroactively reflect 2-for-1 stock splits in 1998 and 1996.
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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, 2000 1999 1998
-----------------------------------------------------------------------
Net sales 99.5% 99.3% 99.1%
Licensing income (net) 0.5% 0.7% 0.9%
--------------------------
Total revenues 100.0% 100.0% 100.0%
Cost of goods sold 58.7% 59.6% 65.2%
--------------------------
Gross profit before purchase
accounting adjustments 41.3% 40.4% 34.8%
Purchase accounting adjustments 0.1% 2.7% 0.1%
--------------------------
Gross profit 41.2% 37.7% 34.7%
Selling, general and administrative expenses 25.7% 25.0% 19.0%
Amortization of goodwill 0.9% 0.7% 0.2%
--------------------------
Operating income 14.6% 12.0% 15.5%
Interest expense and financing costs 2.5% 2.1% 0.7%
Interest income (0.1%) (0.1%) (0.1%)
--------------------------
Income before provision for income taxes 12.1% 10.0% 14.9%
Provision for income taxes 4.9% 4.0% 5.7%
--------------------------
Net income 7.3% 6.0% 9.2%
==========================
Totals may not agree due to rounding.
GENERAL
The following discussion provides information and analysis of the Company's results of operations from 1998 through 2000, and its liquidity and capital resources. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein.
The Company completed its acquisitions of Sun, Nine West and Victoria on October 2, 1998, June 15, 1999, and July 31, 2000, respectively. The results of operations of the acquired companies 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.
The Company operates in three reportable segments: wholesale apparel, wholesale footwear and accessories, and retail.
The Company has achieved compound annual growth rates of 56.8% for total revenues and 52.0% for operating income from 1998 to 2000. Total revenues and operating income in 2000 increased 31.5% and 59.9%, respectively, over 1999.
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, Nine West and Napier brands through acquisitions. Through this diversification, the Company has evolved 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 and amount of selling space in which its products are offered, as well as to introduce new product
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extensions, such as the Nine West apparel and the Jones New York accessory labels introduced for Fall 2000 and the repositioning of the Bandolino and Evan-Picone labels to the moderate market segment. The Company has also benefitted from a trend among its major retail accounts to concentrate their women's apparel, footwear and accessories buying among a narrowing group of vendors.
RESULTS OF OPERATIONS
2000 Compared to 1999
The Company sold its Asian operations in August 2000 and its United Kingdom operations in January 2001. The Asian and United Kingdom operations provided $0.7 million and $165.7 million in revenues, respectively, during 2000, with losses on disposal in the amounts of $1.0 million and $12.1 million, respectively, recorded in the retail segment. Offsetting these losses was a gain on the sale of an unused Company trademark during 2000 for a gain of $10.5 million, which was recorded under "other" for segment reporting.
Revenues. Total revenues for 2000 increased 31.5%, or $992.0 million,
to $4.1 billion, compared to $3.2 billion for 1999. The revenue growth
resulted primarily from the net sales of product lines added as a result of the
Nine West and Victoria acquisitions ($790.4 million and $61.8 million of the
increase, respectively). The breakdown of total revenues for both periods
is as follows:
Percent
(In millions) 2000 1999 Increase Change
---------------------------------------------
Wholesale apparel $2,168.0 $1,994.7 $173.3 8.7%
Wholesale footwear
and accessories 940.0 464.5 475.5 102.4%
Retail 1,012.5 670.6 341.9 51.0%
Other 22.2 20.9 1.3 6.2%
---------------------------------------------
Total revenues $4,142.7 $3,150.7 $992.0 31.5%
=============================================
Wholesale apparel revenues increased as a result of increases in shipments of the licensed Polo Ralph Lauren products, including Lauren by Ralph Lauren, Ralph by Ralph Lauren and Polo Jeans Company. These increases were partially offset by lower shipments of Rena Rowan products. The increases in wholesale footwear and accessories and retail revenues are primarily the result of Nine West results being included for the full year 2000 compared to only approximately 29 weeks during 1999, and product lines added as a result of the Victoria acquisition.
Gross Profit. The gross profit margin increased to 41.2% in 2000 compared to 37.7% in 1999. Gross profit was negatively impacted during 2000 and 1999 by adjustments of $3.1 million and $84.6 million required under purchase accounting to write up acquired Victoria and Nine West inventories, respectively, to market value upon acquisition; without these charges, the gross profit margins for 2000 and 1999 would have been 41.3% and 40.4%, respectively. Wholesale apparel gross profit margins decreased to 34.7% in 2000 compared to 37.0% in 1999 resulting from clearing excess inventories through off-price channels and additional air freight charges to ensure on-time delivery caused by concerted merchandising changes made to certain product lines. Wholesale footwear and accessories gross profit margins increased to 37.4% from 16.6%, primarily due to solid performance by the core brands and the discontinuance of marginally-performing brands and the effects of higher-margin product lines obtained from the Victoria acquisition. Retail gross profit margins also increased to 53.5% from 50.2%, primarily due to the closing of underperforming domestic stores and certain international operations as part of the restructuring of Nine West in 2000 and the clearance of excess Nine West inventory in 1999.
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SG&A Expenses. Selling, general and administrative ("SG&A") expenses of $1.1 billion in 2000 represented an increase of $0.3 billion over 1999, primarily the result of Nine West results being included for the full year 2000 compared to only approximately 29 weeks during 1999 ($259.8 million of the increase). As a percentage of total revenues, SG&A expenses increased to 25.7% in 2000 from 25.0% in 1999.
Operating Income. The resulting 2000 operating income of $604.6 million increased 59.9%, or $226.4 million, over the $378.2 million for 1999. The operating margin increased to 14.6% in 2000 from 12.0% in 1999 due to the factors discussed above, partially offset by the amortization of goodwill resulting from the Nine West and Victoria acquisitions. Excluding the cost of sales purchase accounting adjustments, the operating margins would have been 14.7% for both years.
Net Interest Expense. Net interest expense was $101.5 million in 2000 compared to $63.6 million in 1999, primarily as a result of the debt incurred to finance the Nine West and Victoria acquisitions and the repurchase of the Company's common stock during 2000.
Provision for Income Taxes. The effective income tax rate was 40.0% for 2000 compared to 40.1% for 1999.
Net Income. Net income increased 60.2% to $301.9 million in 2000, an increase of $113.5 million over the net income of $188.4 million earned in 1999. Net income as a percentage of total revenues was 7.3% in 2000 and 6.0% in 1999. Excluding the amortization of goodwill and the cost of sales purchase accounting adjustments, net income for 2000 and 1999 would have been $340.7 million ($2.79 per diluted share) and $260.6 million ($2.21 per diluted share), respectively.
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
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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. 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 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 and 1998 would have been $260.6 million ($2.21 per diluted share) and $159.1 million ($1.51 per diluted share), respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements have been to fund acquisitions, working capital needs, capital expenditures and repurchases of the Company's common stock on the open market. The Company has historically relied primarily on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance its operations and expansion. As of December 31, 2000, total cash and cash equivalents were $60.5 million, an increase of $13.5 million from the $47.0 million reported as of December 31, 1999.
Cash Provided by Operations. Net cash provided by operations was $339.2 million in 2000, $247.8 million in 1999 and $224.9 million in 1998. The change in 2000 from the prior period was primarily due to higher net income before depreciation and amortization, offset by a larger increase in accounts receivable, including a $67.0 million payment in the first quarter of 2000 to discontinue Nine West's five-year Receivables Facility (see "Cash (Used in) Provided by Financing Activities"). The increase for 1999 was primarily due to higher net income before depreciation and amortization charges, with increases in trade receivables and decreases in accrued expenses and other liabilities offset by decreases in inventories, prepaid expenses and other current assets and increases in accounts payable.
Cash Used in Investing Activities. Net cash used in investing activities was $134.7 million in 2000, $506.4 million in 1999 and $157.7 million in 1998, with the decrease for 2000 and the increase for 1999 primarily due to the acquisition of Nine West in 1999.
During 2000, $20.0 million in loans were made to company officers, of which $18.0 million was loaned to the Company's Chairman and Chief Executive Officer for his purchase of a residence in New York City. This loan, which replaced an arrangement under which the Chairman has been provided the use of a Company-owned apartment, is secured by the residence and bears interest at the applicable federal rate under Internal Revenue Service ("IRS") regulations.
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<PAGE> 25
Cash (Used in) Provided by Financing Activities. Financing activities used $190.7 million of cash in 2000, primarily due to purchases of the Company's common stock and the refinancing of $71.0 million of acquired Victoria debt.
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 $93.9 million of Nine West's 9% Series B Senior Subordinated Notes due 2007, $185.2 million of Nine West's 5.5% Convertible Subordinated Notes Due 2003 (the "Nine West Convertible Notes") and $64.9 million of Nine West's 8.375% Series B Senior Notes due 2005 (the "Nine West Senior Notes"). The Company has assumed all obligations under the Nine West Convertible Notes and the Nine West Senior Notes, of which $130.1 million remained outstanding on December 31, 2000. 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.
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.
The Company repurchased $121.9 million, $2.8 million and $108.1 million of its common stock on the open market for 2000, 1999 and 1998, respectively. As of December 31, 2000, a total of $356.9 million has been expended under announced programs to acquire up to $500.0 million of such shares. The Company may authorize additional share repurchases in the future depending on, among other things, market conditions and the Company's financial condition. Proceeds from the issuance of common stock to employees exercising stock options amounted to $27.6 million, $14.1 million and $9.4 million in 2000, 1999 and 1998, respectively.
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 exceed certain targeted levels. This additional consideration is to be paid 59% in cash and 41% in the Company's common stock, the value of which will be determined by the prices at which the common stock trades in a defined period preceding delivery in each year. On April 5, 2000, the Company paid $26.6 million in cash and issued 669,323 shares of common stock (valued at $18.3 million) as additional consideration for the Sun acquisition related to 1999 earnings, which was recorded as additional goodwill in the second quarter of 2000. The calculation for 2000 has not been finalized and will be paid and recorded as additional goodwill in the second quarter of 2001.
The terms of the acquisition agreement for Victoria require the Company to pay the former Victoria shareholders additional consideration of $3.00 for each $1.00 of Victoria's earnings before interest and taxes (as defined in the securities purchase agreement) for each of the 12-month periods ending June 30, 2001 through 2003 that exceed certain targeted levels. This additional consideration is to be paid 50% in cash and 50% 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 the first quarter of 2000, the Company terminated a five-year Receivables Facility (created in 1995 and amended in 1998) which permitted Nine West to obtain up to $132.0 million of funding based on the sale, without recourse, of eligible Nine West accounts receivable. As a result of this termination, reported net accounts receivable will no longer be reduced by proceeds received under the Receivables Facility. This termination did not affect the Company's liquidity.
At December 31, 2000, the Company had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.45 billion under Senior Credit Facilities. These facilities, of which
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the entire amount is available for letters of credit or cash borrowings, provide for a $750.0 million 364-Day Revolving Credit Facility (increased from $500.0 million during the second quarter of 2000) and a $700.0 million Five-Year Revolving Credit Facility. At December 31, 2000, $283.4 million in letters of credit was outstanding under the 364-Day Revolving Credit Facility and $225.0 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 net worth maintenance covenant and a coverage ratio of earnings before interest, taxes, depreciation, amortization and rent to interest expense plus rents, as well as other restrictions, including (subject to exceptions) limitations on the Company's ability to incur additional indebtedness, prepay subordinated indebtedness, make acquisitions, enter into mergers, and pay dividends.
The Company also has a total of approximately $20.2 million of unsecured foreign lines of credit in Australia and Canada under which $3.3 million was outstanding at December 31, 2000.
In February 2001, the Company issued 20-year, zero coupon convertible senior debt securities. Gross proceeds of the offering were $402.5 million. The securities carry a 3.5% yield to maturity with a face value of $805.6 million and are convertible into common stock initially at $50.925 per share. The proceeds were used to repay amounts then outstanding under the Senior Credit Facilities and for general corporate purposes.
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 and Victoria shareholders.
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 Nos. 137 and 138, is effective for all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 will not have a material impact on operating results or financial statement disclosures.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 summarizes certain of
the SEC's views in applying accounting principles generally accepted in the
United States to revenue recognition in financial statements. SAB 101 was
adopted in 2000 and had no material impact on the Company's revenue recognition
policy.
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,
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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. The potential decrease in fair value of the Company's fixed rate long-term debt instruments resulting from a hypothetical 10% adverse change in interest rates was approximately $74.8 million at December 31, 2000. The Company employs an interest rate hedging strategy utilizing swaps to effectively float a portion of its interest rate exposure on its fixed rate financing arrangements.
The primary interest rate exposures on floating rate financing arrangements and interest rate swaps are with respect to United States, Canadian and Australian short-term rates. The Company had approximately $1.5 billion in variable rate financing arrangements at December 31, 2000. As of December 31, 2000, a hypothetical immediate 10% adverse change in interest rates, as they relate to the Company's outstanding variable rate financial instruments, would have had a $1.5 million unfavorable impact over a one-year period on the Company's earnings and cash flows.
FOREIGN CURRENCY EXCHANGE RATES
The Company is exposed to market risk related to changes in foreign currency
exchange rates. The Company has assets and liabilities denominated in
certain foreign currencies related to international subsidiaries, but has not
hedged translation risk on these assets and liabilities due to the ability to
hold them for an indefinite period. The Company does not expect that a
sudden or significant change in foreign exchange rates would have a material
impact on results of operations, financial position, or 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 accounting principles generally accepted in the United States 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 auditing standards generally accepted in the United States, and included a review of financial controls and tests of accounting records and procedures as they considered necessary in the circumstances.
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The Audit Committee of the Board of Directors, which consists of independent, non-executive directors, meets regularly with management, the internal auditors and the independent accountants to review accounting, reporting, auditing and internal control matters. The committee has direct and private access to both internal and external auditors.
/s/ Sidney Kimmel /s/ Wesley R. Card
Sidney Kimmel
Wesley R. Card
Chairman
Chief Financial Officer
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Jones Apparel Group, Inc.
We have audited the accompanying consolidated balance sheets of Jones Apparel Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 2, 2001
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Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in millions except per share data)
December 31, 2000 1999
- ---------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 60.5 $ 47.0
Accounts receivable 398.0 271.1
Inventories 557.2 619.6
Prepaid and refundable income taxes - 34.5
Deferred taxes 70.6 98.9
Prepaid expenses and other current assets 95.4 59.5
-------------------
TOTAL CURRENT ASSETS 1,181.7 1,130.6
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated
depreciation and amortization 222.5 239.8
GOODWILL, less accumulated amortization 1,086.8 989.9
OTHER INTANGIBLES, at cost, less accumulated amortization 371.6 345.4
OTHER ASSETS 116.6 86.3
-------------------
$2,979.2 $2,792.0
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current portion of long-term
debt and capital lease obligations $ 499.8 $ 266.9
Accounts payable 210.9 205.1
Income taxes payable 13.1 -
Accrued restructuring costs 29.5 61.1
Accrued employee compensation 32.8 35.0
Accrued expenses and other current liabilities 100.7 93.3
-------------------
TOTAL CURRENT LIABILITIES 886.8 661.4
-------------------
NONCURRENT LIABILITIES:
Long-term debt 547.2 801.5
Obligations under capital leases 29.0 32.7
Other 39.0 55.4
-------------------
TOTAL NONCURRENT LIABILITIES 615.2 889.6
-------------------
TOTAL LIABILITIES 1,502.0 1,551.0
-------------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares authorized 1.0;
none issued - -
Common stock, $.01 par value - shares authorized 200.0;
issued 137.6 and 134.6 1.4 1.4
Additional paid-in capital 752.0 693.0
Retained earnings 1,084.1 782.2
Accumulated other comprehensive income (2.4) 0.3
-------------------
1,835.1 1,476.9
Less treasury stock, 17.5 and 12.0 shares, at cost (357.9) (235.9)
-------------------
TOTAL STOCKHOLDERS' EQUITY 1,477.2 1,241.0
-------------------
$2,979.2 $2,792.0
===================
See accompanying notes to consolidated financial statements
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Jones Apparel Group, Inc.
Consolidated Statements of Income
(All amounts in millions except per share data)
Year Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------
NET SALES $4,120.5 $3,129.8 $1,669.4
LICENSING INCOME (NET) 22.2 20.9 15.8
----------------------------------
Total revenues 4,142.7 3,150.7 1,685.2
COST OF GOODS SOLD 2,433.4 1,876.9 1,098.3
PURCHASE ACCOUNTING ADJUSTMENTS
TO COST OF GOODS SOLD (1) 3.1 84.6 2.4
----------------------------------
Gross profit 1,706.2 1,189.2 584.5
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,064.7 788.7 320.0
AMORTIZATION OF GOODWILL 36.9 22.3 2.7
----------------------------------
Operating income 604.6 378.2 261.8
INTEREST EXPENSE AND FINANCING COSTS 103.8 66.9 11.8
INTEREST INCOME (2.3) (3.3) (1.8)
----------------------------------
Income before provision for income taxes 503.1 314.6 251.8
PROVISION FOR INCOME TAXES 201.2 126.2 96.9
----------------------------------
NET INCOME $301.9 $188.4 $154.9
==================================
EARNINGS PER SHARE
Basic $2.54 $1.65 $1.52
Diluted $2.48 $1.60 $1.47
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 119.0 114.1 101.6
Diluted 121.9 118.0 105.1
(1) Reflects a non-cash increase in cost of goods sold attributable to the
fair value of inventory over cost, recorded as a result of the acquisitions of
Victoria, Nine West and Sun as required by the purchase method of accounting.
See accompanying notes to consolidated financial statements
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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, 1998 $ 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)
YEAR ENDED DECEMBER 31, 2000:
Comprehensive income:
Net income 301.9 - - 301.9 - -
Foreign currency translation adjustments (2.7) - - - (2.7) -
-----
Total comprehensive income 299.2
-----
Amortization of deferred compensation in
connection with executive stock options 1.1 - 1.1 - - -
Stock issued as additional consideration for
acquisition of Sun 18.3 - 18.3 - - -
Exercise of stock options 27.6 - 27.7 - - (0.1)
Tax benefit derived from exercise of stock options 11.9 - 11.9 - - -
Treasury stock acquired (121.9) - - - - (121.9)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $1,477.2 $1.4 $752.0 $1,084.1 $(2.4) $(357.9)
=======================================================================================================================
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, 2000 1999 1998
- ---------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $301.9 $188.4 $154.9
--------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities,
net of acquisitions:
Amortization of goodwill 36.9 22.3 2.7
Depreciation and other amortization 72.4 53.1 18.5
Provision for losses on trade receivables - 5.4 0.2
Deferred taxes 64.1 40.8 4.9
Other 5.4 0.1 0.5
Decrease (increase) in:
Accounts receivable, including a $67.0
payment in 2000 to terminate Nine
West's accounts receivable
securitization program (135.1) (59.2) (7.8)
Inventories 45.3 84.5 66.3
Prepaid expenses and other current assets (2.2) 33.7 (10.3)
Other assets (0.7) (17.3) (0.9)
Increase (decrease) in:
Accounts payable 3.9 44.9 (17.0)
Taxes payable, net of prepaid and
refundable income taxes 58.0 (41.2) 18.8
Accrued expenses and other liabilities (110.7) (107.7) (5.9)
--------------------------------
Total adjustments 37.3 59.4 70.0
--------------------------------
Net cash provided by operating activities 339.2 247.8 224.9
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (29.1) (436.2) (121.0)
Additional consideration paid for
acquisition of Sun (26.6) (20.1) -
Capital expenditures (46.8) (29.7) (48.5)
Acquisition of intangibles (2.0) (29.6) -
Loans to officers (20.0) - -
Other (10.2) 9.2 11.8
--------------------------------
Net cash used in investing activities (134.7) (506.4) (157.7)
--------------------------------
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 debt (71.0) - (237.8)
Net borrowings under long-term
credit facilities (20.9) 136.3 105.3
Principal payments on capital leases (4.5) (4.4) (4.0)
Purchases of treasury stock (121.9) (2.8) (108.1)
Proceeds from exercise of stock options 27.6 14.1 9.4
Other - (0.2) -
--------------------------------
Net cash (used in) provided by
financing activities (190.7) 176.9 21.9
--------------------------------
EFFECT OF EXCHANGE RATES ON CASH (0.3) (0.3) (0.2)
--------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 13.5 (82.0) 88.9
CASH AND CASH EQUIVALENTS, BEGINNING 47.0 129.0 40.1
--------------------------------
CASH AND CASH EQUIVALENTS, ENDING $ 60.5 $ 47.0 $129.0
================================
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 collection 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 accounting principles generally accepted in the United States 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 high quality financial
institutions and the U.S. Government and, by policy, limits the amount of credit
exposure in any one financial instrument. 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.
Derivative Financial Instruments
Derivative financial instrument contracts are used by the Company when deemed
appropriate to manage exposure to changes in interest rates and foreign currency
exchange rates. Differentials to be paid or received under interest rate
contracts are recognized in income over the life of the contracts as adjustments
to interest expense. Gains and losses on contracts designated as hedges of
existing assets and liabilities denominated in foreign currencies are recognized
in income. The Company does not use financial instruments for trading or
other speculative purposes.
Inventories
Inventories are valued at the lower of cost or market. Approximately 79%
and 74% of inventories were determined by using the FIFO (first in, first out)
method of valuation as of December 31, 2000 and 1999, 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 31.5 years.
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<PAGE> 34
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
consolidated statements of income.
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.
Shipping and Handling Costs
Shipping and handling costs billed to customers are recorded as revenue.
The costs associated with shipping goods to customers are recorded as a cost of
sales.
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 $50.2 million, $37.5 million and $11.3 million in 2000,
1999 and 1998, 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.
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<PAGE> 35
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 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.
2000 1999 1998
----------------------------
Number of options (in millions) 5.8 3.3 4.4
Weighted-average exercise price $31.51 $37.60 $24.66
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 Nos. 137 and 138, is effective for
all fiscal years beginning after June 15, 2000. The adoption of SFAS No.
133 will not have a material impact on operating results or financial statement
disclosures.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. SAB 101 was adopted in 2000 and had no material impact on the Company's revenue recognition policy.
35
<PAGE> 36
ACQUISITIONS
On July 31, 2000, the Company purchased 100% of the outstanding securities of Victoria, a privately-held corporation. Victoria is a leading designer and marketer of branded and private label costume jewelry. The total purchase price was $93.8 million, including $16.8 million in cash payments (of which $2.0 million is payable in 2002) and the assumption of $77.0 million of Victoria's funded debt and accrued interest. This funded debt was refinanced by the Company through its existing credit facilities. In addition, the stockholders of Victoria are entitled to receive future payments in the form of cash and common stock of the Company if certain earnings targets are met in 2001, 2002 and 2003.
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 Victoria from the acquisition date. The purchase price was allocated to Victoria's assets and liabilities, tangible and intangible (as determined by an independent appraiser), with the excess of the purchase price over the fair value of the net assets acquired of approximately $40.1 million being amortized on a straight-line basis over 30 years.
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 $466.1 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.
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 (as determined by an independent appraiser), with the excess of the purchase price over the fair value of the net assets acquired of approximately $712.5 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, 1999. 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, 1999, or which may result in the future.
Year Ended December 31, 2000 1999 -------------------------------------------------------------------
Total revenues (in millions) $4,179.3 $4,033.3 Net income (in millions) $275.1 $186.4 Basic earnings per common share $2.31 $1.50 Diluted earnings per common share $2.26 $1.45
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of Nine West and Sun, the Company assessed and formulated plans to restructure certain operations of each company. These plans involved the closure of manufacturing facilities, certain offices, foreign subsidiaries, and selected domestic and international retail locations. The objectives of the plans were to eliminate unprofitable or marginally profitable lines of business and reduce overhead expenses. The accrual of these costs and liabilities is as follows:
36
<PAGE> 37
Balance at Net Payments and Balance at
(In millions) December 31, 1999 Additions Reductions December 31, 2000
----------------- --------- ------------ -----------------
Severance and other employee costs $26.7 $13.5 $32.6 $ 7.6
Closing of retail stores 15.0 (10.2) 0.2 4.6
Consolidation of facilities 14.4 3.4 4.7 13.1
Other 5.0 (0.2) 0.6 4.2
----------------- --------- ------------ -----------------
Total $61.1 $ 6.5 $38.1 $29.5
================= ========= ============ =================
Estimated severance payments and other employee costs of $7.6 million accrued at December 31, 2000 relate to the remaining estimated severance for approximately 675 employees at locations to be closed. Employee groups affected (totaling an estimated 4,100 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 2000, $32.6 million of the reserve was utilized (relating to severance and related costs for approximately 1,520 employees).
Accrued liabilities for the closing of Nine West retail stores of $4.6 million at December 31, 2000 relate primarily to lease obligations and other closing costs for the remaining 15 stores to be closed after December 31, 2000 from the 250 stores originally identified to be closed.
The $13.1 million accrued at December 31, 2000 for the consolidation of facilities relate primarily to expected costs to be incurred, including lease obligations, for closing certain Nine West facilities in connection with consolidating their operations into other existing Company facilities.
The net addition of $6.5 million relating to the Nine West acquisition was recorded as an increase to goodwill. Any additional costs relating to Nine West or Sun will be charged to operations in the period in which they occur.
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31, 2000 1999
---------------------------------------------------------------------
(In millions)
Accounts receivable $410.4 $176.3
Securitized interest in accounts receivable - 121.4
Allowance for doubtful accounts (12.4) (26.6)
------------------
$398.0 $271.1
==================
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 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%. During the first quarter of 2000, the Company terminated this facility.
37
<PAGE> 38
INVENTORIES
Inventories are summarized as follows:
December 31, 2000 1999
---------------------------------------------------------------------
(In millions)
Raw materials $ 30.0 $ 25.6
Work in process 52.7 42.5
Finished goods 474.5 551.5
------------------
$557.2 $619.6
==================
PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
December 31, 2000 1999
---------------------------------------------------------------------
(In millions)
Land and buildings $ 81.6 $ 80.9
Leasehold improvements 116.3 128.4
Machinery and equipment 151.2 132.3
Furniture and fixtures 64.9 73.8
Construction in progress 14.4 9.3
------------------
428.4 424.7
Less: accumulated depreciation and amortization 205.9 184.9
------------------
$222.5 $239.8
==================
Depreciation and amortization expense relating to property, plant and equipment was $51.1 million, $38.0 million and $17.1 million in 2000, 1999 and 1998, respectively.
Included in property, plant and equipment are the following capitalized
leases:
December 31, 2000 1999
---------------------------------------------------------------------
(In millions)
Buildings $ 48.6 $ 48.6
Machinery and equipment 4.7 4.0
------------------
53.3 52.6
Less: accumulated amortization 13.1 9.5
------------------
$ 40.2 $ 43.1
==================
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<PAGE> 39
OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
Useful
lives
December 31, 2000 1999 (years)
---------------------------------------------------------------------------------
(In millions)
Trademarks $358.1 $346.1 8 to 30
License agreements 44.9 33.3 5.5 to 19
Other 2.9 - 5
------------------
405.9 379.4
Less: accumulated amortization 34.3 34.0
------------------
$371.6 $345.4
==================
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, 2000, the Company had outstanding two fixed-to-floating interest rate swaps with an aggregate notional principal amount of $200.0 million. The Company's 2000 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 Company's interest rate swaps have expiration dates of June 2004 and June 2006.
At December 31, 2000 and 1999, the fair values of cash and cash equivalents, receivables and accounts payable approximated carrying values due to the short-term nature of these instruments. The estimated fair values of other financial instruments subject to fair value disclosures, determined based on broker quotes or quoted market prices or rates for the same or similar instruments, and the related carrying amounts are as follows:
December 31, 2000 1999
-----------------------------------------------------------------------------------------
(In millions) Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Short-term borrowings $ 228.3 $ 228.3 $ 256.1 $ 256.1
Long-term debt, including current portion 813.7 772.5 808.2 803.2
Interest rate swaps - 5.1 - (3.9)
-------- -------- -------- --------
$1,042.0 $1,005.9 $1,064.3 $1,055.4
======== ======== ======== ========
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<PAGE> 40
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, 2000 or 1999.
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.
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%, 14% and 16% of consolidated total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Sales to department stores owned by Federated Department Stores, Inc. ("Federated") accounted for 14%, 14% and 16% of consolidated total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. May and Federated accounted for approximately 23% of accounts receivable at December 31, 2000.
CREDIT FACILITIES
At December 31, 2000, the Company had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.45 billion under Senior Credit Facilities. These facilities, of which the entire amount is available for letters of credit or cash borrowings, provide for a $750.0 million 364-Day Revolving Credit Facility (increased from $500.0 million during the second quarter of 2000) and a $700.0 million Five-Year Revolving Credit Facility. At December 31, 2000, $283.4 million in letters of credit was outstanding under the 364-Day Revolving Credit Facility and $225.0 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 similar credit arrangements with several lending institutions to borrow an aggregate principal amount of up to $550.0 million under Senior Credit Facilities.
The Company also has various unsecured foreign lines of credit in Australia and Canada aggregating approximately $20.2 million, under which $3.3 million was outstanding at December 31, 2000. The weighted-average interest rate of the Company's credit facilities was 7.3% at December 31, 2000.
40
<PAGE> 41
LONG-TERM DEBT
Long-term debt consists of the following:
December 31, 2000 1999
---------------------------------------------------------------------
(In millions)
6.25% Senior Notes due 2001, net of unamortized
discount of $0.1 and $0.2 $264.9 $264.8
5.5% Convertible Subordinated Notes due 2003 0.5 0.5
7.50% Senior Notes due 2004, net of unamortized
discount of $1.0 and $1.3 174.0 173.7
8.375% Series B Senior Notes due 2005, net of
unamortized discount of $0.5 and $0.6 129.1 129.0
7.875% Senior Notes due 2006, net of unamortized
discount of $1.7 and $2.0 223.3 223.0
9% Series B Senior Subordinated Notes due 2007 0.1 0.1
6.98% Industrial revenue bonds, final payment
due 2008 10.4 12.0
Other debt 11.4 5.1
-----------------
813.7 808.2
Less: current portion 266.5 6.7
-----------------
$547.2 $801.5
=================
Long-term debt maturities for each of the next five years are $266.5 million in 2001, $4.1 million in 2002, $3.2 million in 2003, $177.7 million in 2004 and $137.6 million in 2005. All of 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, 2000 1999
---------------------------------------------------------------------
(In millions)
Warehouses, office facilities and equipment $ 34.0 $ 36.8
Less: current portion 5.0 4.1
-------------------
Obligations under capital leases - noncurrent $ 29.0 $ 32.7
===================
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, $12.9 million of which remained unpaid as of December 31, 2000. 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.
41
<PAGE> 42
The Company also leases various equipment under three to five-year leases at an aggregate annual rental of $1.8 million. The equipment has been capitalized at its fair market value of $4.2 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, 2000:
Year Ending December 31,
------------------------
(In millions)
2001 $ 9.7
2002 10.2
2003 3.2
2004 2.8
2005 2.5
Later years 18.5
------
Total minimum lease payments 46.9
Less: amount representing interest 12.9
------
Present value of net minimum lease payments $ 34.0
======
COMMITMENTS AND CONTINGENCIES
(a) CONTINGENT LIABILITIES. 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. A minimum payment of $7.0 million is due for the year 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 Company exercised its option in January 2001 to renew the Lauren by Ralph Lauren agreements through December 31, 2006, with minimum payments for each of the years in this renewal period set at 90% of the actual payments due for 2001. The Ralph by Ralph Lauren agreements expire on December 31, 2003 and each provides for an additional renewal option through December 31, 2006 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 agreements expire on December 31, 2005 and may be renewed by the Company in five-year increments for up to 25 additional years if certain sales requirements are met. Renewal of the Polo Jeans Company license after 2010 requires a one-time payment by the Company of $25.0 million or, at the Company's option, a transfer of a 20% interest in its Polo Jeans Company business to Polo (with no fees required for subsequent renewals). Polo also 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 a purchase price, payable in cash, equal to 80% of the then fair market value of the business as a going concern, assuming continuation of the Polo Jeans license through 2030.
42
<PAGE> 43
In June 2000, the Company acquired an exclusive license to manufacture and market in Canada certain products under the Polo Jeans Company and Polo Ralph Lauren trademarks pursuant to license and design service agreements with Polo. The agreements provide for payment by the Company of a percentage of net sales of the licensed products against guaranteed minimum royalty and design service payments of C$1.3 million in 2001, C$1.5 million in 2002, C$1.6 million in 2003, C$2.3 million in 2004 and C$2.5 million in 2005. The Company is also obligated to spend on advertising a percentage of net sales of these licensed products. The agreements expire on December 31, 2005 and are renewable for an additional five years provided that the Company achieves certain minimum sales levels.
As a result of the acquisition of Victoria, the Company obtained the exclusive license to produce and sell costume jewelry in the United States and Canada under the Tommy Hilfiger trademark, which expires on December 31, 2004. Upon expiration, the Company has the right to renew the license for an additional three-year period, provided that it meets certain minimum sales levels. The agreement provides for payment by the Company of a percentage of net sales against guaranteed minimum royalty and advertising payments as set forth in the agreement. The Company also obtained the exclusive, worldwide license to produce, market and distribute costume jewelry under the Givenchy mark, which expires on December 31, 2002. Minimum royalties under these agreements amount to $1.6 million in 2001, $1.8 million in 2002, $1.5 million in 2003 and $1.9 million in 2004.
(c) LEASES. Total rent expense charged to operations for the years ended December 31, 2000, 1999 and 1998 was $152.1 million, $106.5 million and $27.4 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)
2001 $ 85.3
2002 78.5
2003 70.2
2004 59.0
2005 50.1
Later years 151.9
------
$495.0
======
Certain of the leases provide for renewal options and the payment of real
estate taxes and other occupancy costs.
COMMON STOCK
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, 2000, 17.4 million shares had been acquired at a cost of $356.9 million. There is no time limit for the utilization of the amounts remaining under any uncompleted programs.
43
<PAGE> 44
INCOME TAXES
The following summarizes the provision for income taxes:
Year Ended December 31, 2000 1999 1998
---------------------------------------------------------------------------------
(In millions)
Current:
Federal $114.9 $ 81.0 $ 79.4
State and local 9.6 4.5 9.1
Foreign 12.6 (0.1) 3.5
------------------------------
137.1 85.4 92.0
------------------------------
Deferred:
Federal 55.3 24.5 2.7
State and local 8.5 8.1 2.0
Foreign 0.3 8.2 0.2
------------------------------
64.1 40.8 4.9
------------------------------
Provision for income taxes $201.2 $126.2 $96.9
==============================
The domestic and foreign components of income before provision for income
taxes were as follows:
Year Ended December 31, 2000 1999 1998
---------------------------------------------------------------------------------
(In millions)
United States $480.6 $293.4 $243.8
Foreign 22.5 21.2 8.0
------------------------------
Income before provision for income taxes $503.1 $314.6 $251.8
==============================
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, 2000 1999 1998
---------------------------------------------------------------------------------
(In millions)
Provision for Federal income taxes
at the statutory rate $176.1 $110.1 $ 88.1
State and local income taxes, net of
federal benefit 11.8 7.9 7.2
Amortization of goodwill 13.0 7.8 0.9
Amortization of excess of net assets
acquired over cost - - (0.5)
Other items, net 0.3 0.4 1.2
-----------------------------
Provision for income taxes $201.2 $126.2 $ 96.9
=============================
The Company has not provided for U.S. Federal and foreign withholding taxes on $18.9 million of foreign subsidiaries' undistributed earnings as of December 31, 2000. Such earnings are intended to be reinvested indefinitely.
44
<PAGE> 45
The following is a summary of the significant components of the Company's deferred tax assets and liabilities:
December 31, 2000 1999
---------------------------------------------------------------------
(In millions)
Deferred tax assets (liabilities):
Nondeductible accruals and allowances $ 67.1 $ 82.6
Depreciation and amortization 37.4 45.8
Intangible asset valuation (76.9) (65.4)
Loss carryforwards 18.3 -
Other (net) 15.9 31.7
------------------
Net deferred tax asset $ 61.8 $ 94.7
==================
Included in:
Current assets $ 70.6 $ 98.9
Accrued expenses and other current liabilities - (4.2)
Noncurrent liabilities (8.8) -
------------------
Net deferred tax asset $ 61.8 $ 94.7
==================
As of December 31, 2000, the Company had capital loss carryforwards of $43.0 million, which expire in 2005, and operating loss carryforwards of $5.6 million, which expire in 2019.
STATEMENT OF CASH FLOWS
Year Ended December 31, 2000 1999 1998
---------------------------------------------------------------------------------
(In millions)
Detail of acquisitions:
Fair value of assets acquired $131.0 $1,742.7 $537.3
Liabilities assumed (101.9) (884.8) (319.0)
Common stock and options issued - (421.7) (97.3)
------------------------------
Net cash paid for acquisitions 29.1 436.2 121.0
Cash acquired in acquisitions 0.8 29.8 6.5
------------------------------
Cash paid for acquisitions $ 29.9 $ 466.0 $127.5
==============================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 96.4 $ 66.4 $ 6.0
Income taxes 78.6 119.3 75.7
Supplemental disclosures of non-cash investing
and financing activities:
Equipment acquired through capital
lease financing 1.3 1.8 21.6
Tax benefits related to stock options 11.9 8.4 5.9
Common stock issued as additional
consideration for acquisition of Sun 18.3 14.3 -
45
<PAGE> 46
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, 2000, totaled 2.1 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
(options in millions):
2000 1999 1998
--------------- --------------- ---------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------- --------------- ---------------
Outstanding at beginning of year 12.6 $22.29 10.9 $16.73 9.8 $14.44
Nine West option conversions - - 0.9 $56.22 - -
Granted 6.2 $26.20 2.6 $29.99 2.4 $22.98
Exercised (2.3) $12.12 (1.4) $9.59 (1.0) $9.03
Cancelled/forfeited (0.8) $34.23 (0.4) $43.51 (0.3) $19.13
--------------- --------------- ---------------
Outstanding at December 31 15.7 $24.70 12.6 $22.29 10.9 $16.73
=============== =============== ===============
The following table summarizes information about stock options outstanding at December 31, 2000 (options in millions):
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 to $15 1.9 4.9 $10.24 1.4 $9.63
$15 to $30 12.0 8.5 $25.06 3.1 $24.07
$30 to $45 1.6 8.2 $33.45 1.0 $33.89
$45 to $70 0.2 5.6 $66.47 0.2 $66.47
--------------------------------- ---------------------
In total 15.7 8.0 $24.70 5.7 $24.12
================================= =====================
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<PAGE> 47
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, 2000 1999 1998
---------------------------------------------------------------------------------
(In millions)
Net income (in millions)
As reported $301.9 $188.4 $154.9
Pro forma $284.0 $176.4 $144.7
Basic earnings per share
As reported $2.54 $1.65 $1.52
Pro forma $2.39 $1.55 $1.42
Diluted earnings per share
As reported $2.48 $1.60 $1.47
Pro forma $2.33 $1.49 $1.38
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 2000, 1999 and 1998, respectively: no dividends paid for all years; expected volatility of 46.8%, 42.4% and 40.1%; risk-free interest rates of 5.83%, 5.56% and 5.12%; and expected lives of 3.8, 3.3 and 3.6 years. The weighted average fair values of options at their grant date during 2000, 1999 and 1998, where the exercise price equaled the market price on the grant date, were $9.07, $10.33 and $9.65, respectively, and where the exercise price was less than the market price on the grant date, were $24.67, $22.00 and $21.05, respectively. The weighted average fair value of options at their grant date during 2000 where the exercise price exceeded the market price on the grant date was $7.79.
EMPLOYEE BENEFIT PLANS
The Company maintains the Jones Apparel Group, Inc. Retirement Plan (the "Jones 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 Jones Plan. Under the Jones Plan, participants 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 participant. All employee contributions into the Jones Plan are 100% vested.
For the period January 1, 1998 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. The Company's matching contributions prior to 2000 vest over a five-year period. Effective January 1, 2000, the Company elected to
47
<PAGE> 48
make the Jones 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. The Company contributed approximately $3.3 million, $1.5 million and $1.5 million to the Jones Plan during the years ended December 31, 2000, 1999 and 1998, respectively.
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. At December 31, 2000, the benefit obligation, fair value of plan assets and accrued benefit cost under the Cash Balance Plan were $30.4 million, $31.7 million and $0.2 million, respectively. The net periodic benefit cost to the Company for 2000 was $1.2 million.
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 with the Savings Plan, the "Savings Plans"), established for employees designated by Nine West's retirement committee. Prior to January 1, 2001, the Savings Plan allowed each participant to contribute up to 15.0% (limited to 6.0% for highly compensated employees) of the participant's salary for the year. Nine West made matching contributions to the Savings Plan equal to 50.0% of the participant's contribution up to 6.0% of the participant's salary. The Supplemental Plan allowed each participant to contribute up to 15.0% of the participant's salary for the year. Nine West made matching contributions to the Supplemental Plan equal to 50.0% of the participant's contribution up to 6.0% of the participant's salary, limited to a maximum of $5,000 for 2000. At the end of the plan year, discrimination testing determined the amount of Supplemental Plan contributions, not to exceed 6.0%, that would be transferred into the Savings Plan. Effective January 1, 2001, the Company elected to make the Savings Plan a "Safe Harbor Plan" under Section 401(k)(12) of the Code, under which Company matching contributions will mirror those under the Jones Plan. At the same time, the Supplemental Plan was frozen, with no future contributions being made by either the Company or the participants. The cost of Nine West's defined contribution plans to the Company was $0.9 million and $0.3 million in 2000 and 1999, respectively.
In connection with the acquisition of Victoria, the Company assumed additional plans in which certain Victoria employees participate.
Victoria maintains a deferred contribution retirement plan under Section 401(k) of the Code (the "Victoria Plan"). The Victoria Plan allows each participant to contribute a stated percentage of the participant's salary for the year, subject to limitations under the Code. Victoria makes matching contributions to the Victoria Plan equal to 40.0% of each participant's contribution up to 6.0% of the participant's salary and can also make discretionary contributions. The cost of the Victoria Plan to the Company was $0.1 million since the acquisition.
Victoria also maintains The Napier Company Retirement Plan for certain Associates of Victoria (the "Napier Plan"). All benefits under the Napier Plan are frozen at the amounts earned by the participants as of December 31, 1995. The Company's funding policy is to make no less than the minimum annual contributions required by applicable regulations. The assets of the Napier Plan have been invested in a diversified portfolio of equity and debt securities. At December 31, 2000, the benefit obligation, fair value of plan assets and prepaid benefit cost under the Napier Plan were $7.7 million, $7.8 million and $1.6 million, respectively. The net periodic benefit cost to the Company for 2000 was $0.1 million.
48
<PAGE> 49
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 than 10% of consolidated net revenues in 2000, 1999 or 1998. 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, 2000, 1999 and 1998.
(In millions) Wholesale
Wholesale Footwear & Other &
Apparel Accessories Retail Eliminations Consolidated
---------------------------------------------------------
For the year ended December 31, 2000
Revenues from external customers $2,168.0 $ 940.0 $1,012.5 $ 22.2 $4,142.7
Intersegment revenues 87.9 108.6 - (196.5) -
---------------------------------------------------------
Total revenues 2,255.9 1,048.6 1,012.5 (174.3) 4,142.7
---------------------------------------------------------
Segment income $ 351.6 $ 226.4 $ 90.9 $ (27.4) 641.5
============================================
Amortization of goodwill (36.9)
Net interest expense (101.5)
--------
Income before provision
for income taxes $ 503.1
========
Depreciation and other amortization $ 30.9 $ 2.0 $ 24.1 $ 15.4 $ 72.4
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 $ 9.0 $ 42.2 $ (32.6) 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
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<PAGE> 50
(In millions) Wholesale
Wholesale Footwear & Other &
Apparel Accessories Retail Eliminations Consolidated
---------------------------------------------------------
Total assets
December 31, 2000 $1,767.9 $ 808.9 $ 202.3 $ 200.1 $2,979.2
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
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, 2000 1999 1998
---------------------------------------------------------------------------------
(In millions)
Revenues from external customers:
United States $3,774.5 $2,941.2 $1,617.4
Foreign countries 368.2 209.5 67.8
--------------------------------
$4,142.7 $3,150.7 $1,685.2
================================
Long-lived assets:
United States $1,756.3 $1,580.7 $ 551.1
Foreign countries 41.2 80.7 3.5
--------------------------------
$1,797.5 $1,661.4 $ 554.6
================================
SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION
Certain of the Company's subsidiaries function as co-issuers, obligors and co-obligors (fully and unconditionally guaranteed on a joint and several basis) of the outstanding debt of Jones Apparel Group, Inc. ("Jones"), including Jones Apparel Group USA, Inc. ("Jones USA"), Jones Apparel Group Holdings, Inc. ("Jones Holdings") and Nine West (collectively, including Jones, the "Issuers").
On January 1, 1999, 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 either co-issuers or 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 either a co-issuer or 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.
Condensed consolidating balance sheets, condensed consolidating statements of income and condensed consolidating statements of cash flows for the Issuers and the Company's other subsidiaries are provided for 2000 and 1999. In addition, condensed consolidating statements of income and condensed consolidating statements of cash flows are provided for Jones and the Company's other subsidiaries for 1998. These condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information. Separate financial statements and other disclosures concerning Jones for 2000 and 1999 are not presented as Jones has no independent operations or assets subsequent to the corporate reorganization. There are no contractual restrictions on distributions from Jones USA, Jones Holdings or Nine West to Jones.
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<PAGE> 51
Condensed Consolidating Balance Sheets
(In millions)
December 31, 2000 December 31, 1999
---------------------------------------- ---------------------------------------
Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated
---------------------------------------- ---------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45.5 $ 15.0 $ - $ 60.5 $ 38.9 $ 8.1 $ - $ 47.0
Accounts receivable - net 288.2 109.8 - 398.0 170.2 104.9 (4.0) 271.1
Inventories 404.4 159.7 (6.9) 557.2 463.9 164.3 (8.6) 619.6
Prepaid and refundable income taxes 4.8 - (4.8) - 34.1 0.4 - 34.5
Deferred taxes 58.7 11.9 - 70.6 94.0 3.5 1.4 98.9
Prepaid expenses and other current assets 86.2 10.3 (1.1) 95.4 47.9 12.5 (0.9) 59.5
---------------------------------------- ---------------------------------------
TOTAL CURRENT ASSETS 887.8 306.7 (12.8) 1,181.7 849.0 293.7 (12.1) 1,130.6
Property, plant and equipment - net 166.4 56.1 - 222.5 198.3 41.5 - 239.8
Due from affiliates 844.4 558.0 (1,402.4) - 897.0 407.7 (1,304.7) -
Goodwill - net 1,067.2 408.6 (389.0) 1,086.8 969.8 337.0 (316.9) 989.9
Other intangibles - net 277.4 94.2 - 371.6 289.1 56.3 - 345.4
Investments in subsidiaries 2,396.0 21.4 (2,417.4) - 2,131.4 19.5 (2,150.9) -
Other assets 57.3 51.3 8.0 116.6 49.3 44.0 (7.0) 86.3
---------------------------------------- ---------------------------------------
$5,696.5 $1,496.3 $(4,213.6) $2,979.2 $5,383.9 $1,199.7 $(3,791.6) $2,792.0
======================================== =======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current portion
of long-term debt and capital
lease obligations $ 499.1 $ 0.7 $ - $ 499.8 $ 266.6 $ 0.3 $ - $ 266.9
Accounts payable 166.6 44.3 - 210.9 159.3 45.8 - 205.1
Income taxes payable 13.5 4.4 (4.8) 13.1 - - - -
Accrued expenses and other
current liabilities 126.1 37.9 (1.0) 163.0 161.1 29.4 (1.1) 189.4
---------------------------------------- ---------------------------------------
TOTAL CURRENT LIABILITIES 805.3 87.3 (5.8) 886.8 587.0 75.5 (1.1) 661.4
---------------------------------------- ---------------------------------------
NONCURRENT LIABILITIES:
Long-term debt 537.9 9.3 - 547.2 801.5 - - 801.5
Obligations under capital leases 28.9 0.1 - 29.0 32.6 0.1 - 32.7
Due to affiliates 1,129.7 272.7 (1,402.4) - 1,147.9 156.8 (1,304.7) -
Other 29.2 1.9 7.9 39.0 56.7 5.8 (7.1) 55.4
---------------------------------------- ---------------------------------------
TOTAL NONCURRENT LIABILITIES 1,725.7 284.0 (1,394.5) 615.2 2,038.7 162.7 (1,311.8) 889.6
---------------------------------------- ---------------------------------------
TOTAL LIABILITIES 2,531.0 371.3 (1,400.3) 1,502.0 2,625.7 238.2 (1,312.9) 1,551.0
---------------------------------------- ---------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 1,047.3 - (1,045.9) 1.4 1,028.9 - (1,027.5) 1.4
Additional paid-in capital 1,214.6 567.4 (1,030.0) 752.0 1,155.6 506.7 (969.3) 693.0
Retained earnings 1,262.3 561.9 (740.1) 1,084.1 807.4 457.7 (482.9) 782.2
Accumulated other comprehensive income (0.8) (4.3) 2.7 (2.4) 2.2 (2.9) 1.0 0.3
---------------------------------------- ---------------------------------------
3,523.4 1,125.0 (2,813.3) 1,835.1 2,994.1 961.5 (2,478.7) 1,476.9
Less treasury stock (357.9) - - (357.9) (235.9) - - (235.9)
---------------------------------------- ---------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,165.5 1,125.0 (2,813.3) 1,477.2 2,758.2 961.5 (2,478.7) 1,241.0
---------------------------------------- ---------------------------------------
$5,696.5 $1,496.3 $(4,213.6) $2,979.2 $5,383.9 $1,199.7 $(3,791.6) $2,792.0
======================================== =======================================
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<PAGE> 52
Condensed Consolidating Statements of Income
(In millions)
Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998
-------------------------------------- -------------------------------------- --------------------------------------
Elim- Cons- Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated Jones Others inations olidated
-------------------------------------- -------------------------------------- --------------------------------------
Net sales $3,269.8 $ 951.5 $ (100.8) $4,120.5 $2,396.5 $ 837.9 $ (104.6) $3,129.8 $1,426.4 $ 360.0 $ (117.0) $1,669.4
Licensing income (net) 12.0 10.2 - 22.2 6.7 14.2 - 20.9 - 15.8 - 15.8
-------------------------------------- -------------------------------------- --------------------------------------
Total revenues 3,281.8 961.7 (100.8) 4,142.7 2,403.2 852.1 (104.6) 3,150.7 1,426.4 375.8 (117.0) 1,685.2
Cost of goods sold 1,897.5 640.5 (101.5) 2,436.5 1,513.2 547.4 (99.1) 1,961.5 969.3 246.0 (114.6) 1,100.7
-------------------------------------- -------------------------------------- --------------------------------------
Gross profit 1,384.3 321.2 0.7 1,706.2 890.0 304.7 (5.5) 1,189.2 457.1 129.8 (2.4) 584.5
Selling, general and
administrative expenses 906.6 163.0 (4.9) 1,064.7 654.9 135.0 (1.2) 788.7 295.9 27.0 (2.9) 320.0
Amortization of goodwill 36.0 13.4 (12.5) 36.9 12.9 11.5 (2.1) 22.3 - 2.7 - 2.7
-------------------------------------- -------------------------------------- --------------------------------------
Operating income 441.7 144.8 18.1 604.6 222.2 158.2 (2.2) 378.2 161.2 100.1 0.5 261.8
Net interest (income)
expense and
financing costs 122.5 (21.0) - 101.5 82.9 (19.3) - 63.6 26.5 (16.5) - 10.0
-------------------------------------- -------------------------------------- --------------------------------------
Income before provision
for income taxes and
equity in earnings
of subsidiaries 319.2 165.8 18.1 503.1 139.3 177.5 (2.2) 314.6 134.7 116.6 0.5 251.8
Provision for income taxes 135.4 64.2 1.6 201.2 59.8 68.0 (1.6) 126.2 54.1 42.8 - 96.9
Equity in earnings of
subsidiaries (439.7) (2.6) 442.3 - (218.0) (3.5) 221.5 - (60.3) (4.5) 64.8 -
-------------------------------------- -------------------------------------- --------------------------------------
Net income $ 623.5 $ 104.2 $ (425.8) $ 301.9 $ 297.5 $ 113.0 $ (222.1) $ 188.4 $ 140.9 $ 78.3 $ (64.3) $ 154.9
====================================== ====================================== ======================================
Condensed Consolidating Statements of Cash Flows Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998
-------------------------------------- -------------------------------------- --------------------------------------
Elim- Cons- Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated Jones Others inations olidated
-------------------------------------- -------------------------------------- --------------------------------------
Net cash provided by
operating activities $ 269.5 $ 69.7 $ - $ 339.2 $ 213.8 $ 34.0 $ - $ 247.8 $ 137.1 $ 87.8 $ - $ 224.9
-------------------------------------- -------------------------------------- --------------------------------------
Cash flows from investing
activities:
Acquisitions, net of
cash acquired (14.9) (14.2) - (29.1) (436.2) - - (436.2) (127.5) 6.5 - (121.0)
Additional consideration
paid for acquisition
of Sun (26.6) - - (26.6) (20.1) - - (20.1) - - - -
Capital expenditures (23.9) (22.9) - (46.8) (17.5) (12.2) - (29.7) (38.6) (9.9) - (48.5)
Acquisition of intangibles (1.0) (1.0) - (2.0) - (29.6) - (29.6) - - - -
Loans to officers (20.0) - - (20.0) - - - - - - - -
Other (10.4) 0.2 - (10.2) 9.1 0.1 - 9.2 11.2 0.6 - 11.8
-------------------------------------- -------------------------------------- --------------------------------------
Net cash used in
investing activities (96.8) (37.9) - (134.7) (464.7) (41.7) - (506.4) (154.9) (2.8) - (157.7)
-------------------------------------- -------------------------------------- --------------------------------------
Cash flows from financing
activities:
Issuance of Senior
Notes, net - - - - 390.8 - - 390.8 257.1 - - 257.1
Repurchase of Nine West
Senior Notes - - - - (356.9) - - (356.9) - - - -
Refinancing of acquired
long-term debt (71.0) - - (71.0) - - - - (237.8) - - (237.8)
Net borrowings (payments)
under long-term
credit facilities (30.4) 9.5 - (20.9) 139.4 (3.1) - 136.3 105.3 - - 105.3
Purchases of treasury
stock (121.9) - - (121.9) (2.8) - - (2.8) (108.1) - - (108.1)
Proceeds from exercise
of stock options 27.6 - - 27.6 14.1 - - 14.1 9.4 - - 9.4
Net intercompany
borrowings (payments) 34.4 (34.4) - - 95.3 (95.3) - - (1.2) 1.2 - -
Other items (4.0) (0.5) - (4.5) (4.3) (0.3) - (4.6) (3.9) (0.1) - (4.0)
-------------------------------------- -------------------------------------- --------------------------------------
Net cash (used in)
provided by
financing activities (165.3) (25.4) - (190.7) 275.6 (98.7) - 176.9 20.8 1.1 - 21.9
-------------------------------------- -------------------------------------- --------------------------------------
Effect of exchange rates
on cash (0.8) 0.5 - (0.3) - (0.3) - (0.3) - (0.2) - (0.2)
-------------------------------------- -------------------------------------- --------------------------------------
Net increase (decrease) in
cash and cash equivalents 6.6 6.9 - 13.5 24.7 (106.7) - (82.0) 3.0 85.9 - 88.9
Cash and cash equivalents,
beginning 38.9 8.1 - 47.0 14.2 114.8 - 129.0 11.2 28.9 - 40.1
-------------------------------------- -------------------------------------- --------------------------------------
Cash and cash equivalents,
ending $ 45.5 $ 15.0 $ - $ 60.5 $ 38.9 $ 8.1 $ - $ 47.0 $ 14.2 $ 114.8 $ - $ 129.0
====================================== ====================================== ======================================
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<PAGE> 53
RELATED PARTY TRANSACTIONS
During 2000, $20.0 million in loans were made to two company officers. A total of $18.0 million was loaned to the Company's Chairman and Chief Executive Officer for his purchase of a residence in New York City. This loan, which replaced an arrangement under which the Chairman has been provided the use of a Company-owned apartment, is secured by the residence and bears interest at the applicable federal rate under IRS regulations. A total of $2.0 million was loaned to the Company's President and also bears interest at the applicable federal rate under IRS regulations.
SUBSEQUENT EVENT
In February 2001, the Company issued 20-year, zero coupon convertible senior debt securities. Gross proceeds of the offering were $402.5 million. The securities carry a 3.5% yield to maturity with a face value of $805.6 million and are convertible into common stock initially at $50.925 per share. The proceeds were used to repay amounts then outstanding under the Senior Credit Facilities and for general corporate purposes.
UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the two years ended December 31, 2000 is summarized as follows:
First Second Third Fourth
(In millions except per share data) Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
2000
Net sales $1,077.5 $ 901.1 $1,185.6 $ 956.3
Total revenues 1,082.4 906.6 1,191.5 962.2
Gross profit 437.8 378.9 488.8 400.7
Operating income 143.8 118.2 212.8 129.8
Net income 70.6 55.5 112.3 63.5
Basic earnings per share $0.59 $0.47 $0.95 $0.53
Diluted earnings per share $0.58 $0.46 $0.93 $0.52
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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
53
<PAGE> 54
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 73 Chairman, Chief Executive Officer and Director Jackwyn Nemerov 49 President and Director Irwin Samelman 70 Executive Vice President, Marketing and Director Wesley R. Card 53 Chief Financial Officer Patrick M. Farrell 51 Senior Vice President and Corporate Controller Geraldine Stutz 72 Director Howard Gittis 67 Director Eric A. Rothfeld 49 President and Chief Executive Officer of Sun and 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.
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.
54
<PAGE> 55
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the captions
"EXECUTIVE COMPENSATION" and "EMPLOYMENT AND COMPENSATION
ARRANGEMENTS" is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" is incorporated
herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the captions "CERTAIN TRANSACTIONS" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" are incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. 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, 2000 and 1999
Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998
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
During the quarter ended December 31, 2000, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission, dated December 14, 2000, announcing that the United States District Court for the Southern District of New York in White Plains gave final approval to the previously-reported antitrust settlement agreement by the Company and Nine West 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.
55
<PAGE> 56
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 26, 2001 |
JONES APPAREL GROUP, INC. By: /s/ Sidney
Kimmel
|
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, 2000 (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 Sidney Kimmel |
Chairman and Director (Principal Executive Officer) |
March 26, 2001 |
| /s/ Jackwyn Nemerov Jackwyn Nemerov |
President and Director |
March 26, 2001 |
| /s/ Wesley R. Card Wesley R. Card |
Chief Financial Officer (Principal Financial Officer) |
March 26, 2001 |
| /s/ Patrick M. Farrell Patrick M. Farrell |
Senior Vice President and Corporate Controller (Principal Accounting Officer) |
March 26, 2001 |
| /s/ Irwin Samelman Irwin Samelman |
Executive Vice President, Marketing and Director |
March 26, 2001 |
| /s/ Geraldine Stutz Geraldine Stutz |
Director |
March 26, 2001 |
| /s/ Howard Gittis Howard Gittis |
Director |
March 26, 2001 |
| /s/ Eric A. Rothfeld Eric A. Rothfeld |
Director |
March 26, 2001 |
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<PAGE> 57
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.
(20) 2.1 2.3 Securities Purchase and Sale Agreement dated as of July 31, 2000, by and among
the Company, Jones Apparel Group Holdings, Inc., Victoria + Co Ltd. and the
Shareholders and Warrantholders of Victoria + Co Ltd.
(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.
(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.
57
<PAGE> 58
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
(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) 4.8 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.
* 4.22 Indenture dated as of February 1, 2001 among Jones Apparel Group, Inc., Jones
Apparel Group Holdings, Inc., Jones Apparel Group USA, Inc., Nine West Group
Inc., as Issuers and The Bank of New York, as Trustee, including Form of Zero
Coupon Convertible Senior Notes due 2021.
* 4.23 Registration Rights Agreement dated February 1, 2001 among Jones Apparel Group,
Inc., Jones Apparel Group Holdings, Inc., Jones Apparel Group USA, Inc., Nine
West Group Inc., Salomon Smith Barney Inc. and Bear, Stearns & Co. Inc.
(4) 10.5 10.1 Form of 1991 Stock Option Plan.+
(14) 10.33 10.2 Form of 1996 Stock Option Plan.+
(19) Annex A 10.3 Form of 1999 Stock Incentive Plan.+
(14) 10.40 10.4 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated
October 18, 1995.#
(14) 10.41 10.5 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P.,
dated October 18, 1995.#
(6) 10.2 10.6 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 10.7 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 10.8 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 10.9 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.#
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<PAGE> 59
Incorporated
by Reference Exhibit
to Exhibit Nos. Description of Exhibit
(15) 10.54 10.10 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.#
(1) 10.1 10.11 Employment Agreement dated September 10, 1998, by and between SAI Acquisition
Corp. and Eric A. Rothfeld.+
(3) 10.16 10.12 License Agreement between the Registrant and Polo Ralph Lauren, L.P., dated May
11, 1998.#
(3) 10.17 10.13 Design Services Agreement between the Registrant and Polo Ralph Lauren, L.P.,
dated May 11, 1998.#
(9) 10.1 10.14 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 10.15 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 10.16 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 10.17 Employment Agreement dated as of June 15, 1999 between the Registrant and
Mark J. Schwartz.+
(17) 4.5 10.18 Jones Apparel Group, Inc. 1999 Stock Option Plan.+
(18) Annex B 10.19 Jones Apparel Group, Inc. Executive Annual Incentive Plan.+
(20) 10.1 10.20 Agreement Regarding Termination of Nine West Trade Receivables Master Trust
Securitization Transaction, dated as of March 3, 2000, entered into by and among
Nine West Funding Corporation, The Bank of New York, in its capacity as trustee,
Nine West Group Inc., Nine West Footwear Corporation, Jones Apparel Group, Inc.,
Corporate Receivables Corporation, Citibank, N.A. and the other financial
institutions parties to the Amended and Restated Certificate Purchase Agreement
and Citicorp North America, Inc. as the program agent.
(21) 10.1 10.21 Third Amended and Restated 364-Day Credit Agreement dated as of June 13, 2000,
by and among Jones Apparel Group USA, Inc., the Additional Obligors referred to
therein, the Lenders referred to therein, Chase Securities Inc. and Salomon Smith
Barney Inc., as Joint Lead Arrangers, First Union National Bank, as Administrative
Agent, and The Chase Manhattan Bank and Citibank, N.A., as Syndication Agents.
(22) 10.1 10.22 Employment Agreement dated as of July 1, 2000 between the Registrant and Sidney
Kimmel.+
(22) 10.2 10.23 Employment Agreement dated as of July 1, 2000 between the Registrant and Jackwyn
Nemerov.+
(22) 10.3 10.24 Employment Agreement dated as of July 1, 2000 between the Registrant and Wesley R.
Card.+
(22) 10.4 10.25 Employment Agreement dated as of July 1, 2000 between the Registrant and Irwin
Samelman.+
(20) 99.1 99.1 Decision and Order of the Federal Trade Commission In the Matter of Nine West
Group Inc., Docket No. C-3937, dated April 11, 2000.
* 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.
____________________
* 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).
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<PAGE> 60
(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) Incorporated by reference to the Company's Proxy Statement for the Company's 2000 Annual Meeting
of Stockholders.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three months
ended April 2, 2000.
(21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the six months ended
July 2, 2000.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the nine months ended
October 1, 2000.
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<PAGE> 61
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jones Apparel Group, Inc.
New York, New York
The audits referred to in our report dated February 2, 2001 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 statements schedule listed in the accompanying index for each of the three years ended December 31, 2000. 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 2, 2001
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SCHEDULE II
JONES APPAREL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(In Millions)
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 (1) period
- ------------ ---------- ---------- ----------- ---------- ---------
For the year ended
December 31, 1998:
Allowance for doubtful accounts $ 2.8 $0.2 $ 0.4 (2) $ 0.1 $ 3.3
For the year ended
December 31, 1999:
Allowance for doubtful accounts $ 3.3 $5.4 $20.5 (3) $ 2.6 $26.6
For the year ended
December 31, 2000:
Allowance for doubtful accounts $26.6 $ - $ - $14.2 $12.4
(1) Doubtful accounts written off against accounts receivable.
(2) Addition due to the acquisition of Sun Apparel, Inc. on October 2, 1998.
(3) Addition due to the acquisition of Nine West Group Inc. on June 15, 1999.
62