UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10746
JONES APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 06-0935166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Rittenhouse Circle
Bristol, Pennsylvania 19007
(Address of principal (Zip Code)
executive offices)
(215) 785-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 11, 1998
$.01 par value 104,593,903
<PAGE>
JONES APPAREL GROUP, INC.
Index
PART I. FINANCIAL INFORMATION Page No.
--------
Financial Statements:
Consolidated Balance Sheets
April 4, 1999 and December 31, 1998................. 3
Consolidated Statements of Income
Quarters ended April 4, 1999 and March 29, 1998..... 4
Consolidated Statements of Stockholders' Equity
Quarters ended April 4, 1999 and March 29, 1998..... 5
Consolidated Statements of Cash Flows
Quarters ended April 4, 1999 and March 29, 1998..... 6
Notes to Consolidated Financial Statements................. 7 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10 - 14
PART II. OTHER INFORMATION...................................... 15 - 16
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JONES APPAREL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 4, December 31,
1999 1998
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents............................................................. $ 96,513 $ 129,024
Accounts receivable, net of allowance of $5,447 and $3,303 for doubtful accounts...... 328,040 169,225
Inventories........................................................................... 274,046 268,175
Receivable from and advances to contractors........................................... 19,725 19,207
Deferred taxes........................................................................ 29,900 32,143
Prepaid expenses and other current assets............................................. 15,601 14,069
--------- ---------
TOTAL CURRENT ASSETS................................................................ 763,825 631,843
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $81,801 and $76,460.................................. 154,211 156,043
GOODWILL, less accumulated amortization of $5,418 and $2,714............................ 319,638 323,009
OTHER INTANGIBLES, less accumulated amortization of $10,488 and $9,919.................. 31,182 29,705
OTHER ASSETS............................................................................ 53,847 48,072
--------- ---------
$1,322,703 $1,188,672
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations....................... $ 6,247 $ 6,522
Accounts payable...................................................................... 133,949 100,282
Income taxes payable.................................................................. 39,467 13,654
Accrued interest...................................................................... 1,473 5,369
Accrued expenses and other current liabilities........................................ 71,187 48,061
--------- ---------
TOTAL CURRENT LIABILITIES........................................................... 252,323 173,888
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt........................................................................ 378,831 379,247
Obligations under capital leases...................................................... 34,482 35,406
Other................................................................................. 5,758 5,782
--------- ---------
TOTAL NONCURRENT LIABILITIES........................................................ 419,071 420,435
--------- ---------
TOTAL LIABILITIES................................................................... 671,394 594,323
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - shares authorized 1,000; none issued................ - -
Common stock, $.01 par value - shares authorized 200,000;
issued 115,571 and 115,412........................................................... 1,156 1,154
Additional paid in capital............................................................ 237,059 234,787
Retained earnings..................................................................... 648,180 593,781
Accumulated other comprehensive income................................................ (2,000) (2,287)
--------- ---------
884,395 827,435
Less treasury stock, 11,918 shares, at cost........................................... (233,086) (233,086)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 651,309 594,349
--------- ---------
$1,322,703 $1,188,672
========= =========
<FN>
All amounts in thousands except per share data
See notes to consolidated financial statements
</TABLE>
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<TABLE>
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Quarter ended
--------------------------
April 4, March 29,
1999 1998
------------ ------------
<S> <C> <C>
Net sales............................................... $574,808 $380,151
Licensing income........................................ 4,287 3,623
------- -------
Total revenues.......................................... 579,095 383,774
Cost of goods sold...................................... 364,766 252,561
------- -------
Gross profit............................................ 214,329 131,213
Selling, general and administrative expenses............ 115,758 67,193
Amortization of goodwill................................ 2,703 -
------- -------
Operating income........................................ 95,868 64,020
Net interest expense.................................... 6,689 1,239
------- -------
Income before provision for income taxes................ 89,179 62,781
Provision for income taxes.............................. 34,780 24,171
------- -------
Net income.............................................. $54,399 $38,610
======= =======
Earnings per share
Basic................................................. $0.53 $0.38
Diluted............................................... $0.51 $0.37
Weighted average common shares and
share equivalents outstanding
Basic................................................. 103,595 100,733
Diluted............................................... 107,167 104,327
<FN>
All amounts in thousands except per share data
See notes to consolidated financial statements
</TABLE>
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JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
Accumulated
Total Additional other
stockholders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
------------- ------- ----------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997...................... $435,632 $545 $122,582 $438,917 ($1,524) ($124,888)
Quarter ended March 29, 1998:
Comprehensive income
Net income.................................... 38,610 - - 38,610 - -
Foreign currency translation adjustments...... 98 - - - 98 -
-------------
Total comprehensive income.................. 38,708
-------------
Amortization of deferred compensation in
connection with executive stock options........ 73 - 73 - - -
Exercise of stock options....................... 4,276 2 4,374 - - (100)
Tax benefit derived from exercise of
stock options.................................. 2,595 - 2,595 - - -
Treasury stock acquired......................... (41,159) - - - - (41,159)
------------- ------- ----------- -------- ------------- ---------
Balance, March 29, 1998......................... $440,125 $ 547 $129,624 $477,527 ($1,426) ($166,147)
============= ======= =========== ======== ============= =========
<CAPTION>
Accumulated
Total Additional other
stockholders' Common paid-in Retained comprehensive Treasury
equity stock capital earnings income stock
------------- ------- ----------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998...................... $594,349 $1,154 $234,787 $593,781 ($2,287) ($233,086)
Quarter ended April 4, 1999:
Comprehensive income
Net income.................................... 54,399 - - 54,399 - -
Foreign currency translation adjustments...... 287 - - - 287 -
-------------
Total comprehensive income.................. 54,686
-------------
Amortization of deferred compensation in
connection with executive stock options........ 48 - 48 - - -
Exercise of stock options....................... 1,366 2 1,364 - - -
Tax benefit derived from exercise of
stock options.................................. 885 - 885 - - -
Other........................................... (25) - (25) - - -
------------- ------- ----------- -------- ------------- ---------
Balance, April 4, 1999.......................... $651,309 $1,156 $237,059 $648,180 ($2,000) ($233,086)
============= ======= =========== ======== ============= =========
<FN>
All amounts in thousands
See notes to consolidated financial statements
</TABLE>
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<TABLE>
JONES APPAREL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Quarter ended
---------------------------
April 4, March 29,
1999 1998
--------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................................................. $ 54,399 $ 38,610
-------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 10,427 3,308
Provision for losses on accounts receivable............................................... 2,392 213
Deferred taxes............................................................................ 1,093 (2,912)
Other..................................................................................... 481 179
(Increase) decrease in:
Trade receivables....................................................................... (161,039) (101,336)
Inventories............................................................................. (5,615) 12,399
Prepaid expenses and other current assets............................................... (1,995) 1,306
Other assets............................................................................ (5,127) (338)
Increase (decrease) in:
Accounts payable........................................................................ 33,650 (9,097)
Taxes payable........................................................................... 26,672 37,912
Accrued expenses and other current liabilities.......................................... 19,049 1,721
-------- --------
Total adjustments..................................................................... (80,012) (56,645)
-------- --------
Net cash used in operating activities....................................................... (25,613) (18,035)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................................... (5,130) (6,795)
Adjustments to acquisition of Sun Apparel, Inc. .......................................... 668 -
Acquisition of trademarks................................................................. (2,046) -
Decrease in cash restricted for capital additions......................................... - 2,011
Other..................................................................................... 39 (122)
-------- --------
Net cash used in investing activities....................................................... (6,469) (4,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings......................................................... - 36,111
Net payments under long-term credit facilities............................................ (499) (255)
Principal payments on capitalized leases.................................................. (1,138) (830)
Acquisition of treasury stock............................................................. - (41,159)
Proceeds from exercise of stock options................................................... 1,366 4,276
Other..................................................................................... (148) -
-------- --------
Net cash used in financing activities....................................................... (419) (1,857)
-------- --------
EFFECT OF EXCHANGE RATES ON CASH............................................................ (10) 29
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................... (32,511) (24,769)
CASH AND CASH EQUIVALENTS, beginning of period.............................................. 129,024 40,134
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................................................... $ 96,513 $ 15,365
======== ========
<FN>
All amounts in thousands
See notes to consolidated financial statements
</TABLE>
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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Jones Apparel
Group, Inc. and its wholly-owned subsidiaries (collectively, the "Company").
The financial statements have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") for interim financial information and
in accordance with the requirements of Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. The consolidated financial statements included herein
should be read in conjunction with the consolidated financial statements and
the footnotes therein included within the Company's Annual Report on Form 10-K.
In the opinion of management, the information presented reflects all
adjustments necessary for a fair statement of interim results. All such
adjustments are of a normal and recurring nature. The foregoing interim
results are not necessarily indicative of the results of operations for the
full year ending December 31, 1999. The Company reports interim results in
13 week quarters; however, the annual reporting period is the calendar year.
2. Inventories
Inventories are summarized as follows (amounts in thousands):
April 4, December 31,
1999 1998
-------- ------------
Raw materials.......................... $ 34,915 $ 33,928
Work in process........................ 43,043 43,041
Finished goods......................... 196,088 191,206
-------- --------
$274,046 $268,175
======== ========
3. Statement of Cash Flows
Quarter Ended: April 4, December 31,
(In thousands) 1999 1998
-------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest.............................. $ 11,717 $ 1,556
Income taxes.......................... 4,392 1,406
Supplemental disclosures of non-cash
investing and financing activities:
Equipment acquired through capital
lease financing...................... - 12,054
Tax benefits related to stock options 885 2,595
- 7 -
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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires entities to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company is currently reviewing SFAS No. 133
and has of yet been unable to fully evaluate the impact, if any, it may have on
future operating results or financial statement disclosures.
5. Capital Stock
On May 6, 1998, the Company's Board of Directors authorized a two-for-one
stock split of the Company's common stock in the form of a 100% stock dividend
for shareholders of record as of June 4, 1998, with stock certificates issued
on June 25, 1998. In connection with the common stock split, the Board of
Directors approved an increase in the number of shares authorized to
200,000,000. On June 25, 1998, a total of 50,497,911 shares of common stock
were issued in connection with the split. The stated par value of each share
was not changed from $0.01. All share and per share amounts have been restated
to retroactively reflect the stock split.
6. Pending Acquisition
On March 2, 1999, the Company announced that it had entered into a definitive
agreement to acquire 100% of the common stock of Nine West Group Inc. ("Nine
West") in a merger transaction. Nine West is a leading designer, developer
and marketer of quality, fashionable footwear and accessories. Nine West
markets its products under internationally recognized brands, including Nine
West, Easy Spirit, Enzo Angiolini, Amalfi, Bandolino and cK/Calvin Klein
(under license). In addition, Nine West markets shoes under the Company's
Evan-Picone label under license.
The Company will exchange approximately one-half of a share of its common
stock and $13 in cash for each Nine West common share. For accounting purposes,
the shares of the Company's common stock issued to Nine West shareholders will
be valued at $24.35, the average closing market price of the Company's common
stock during the week the acquisition was announced. Total consideration to
be paid for the Nine West common shares and outstanding options will be
approximately $924 million, with the transaction having a total value (including
assumed debt) of approximately $1.4 billion. As of March 2, 1999, Nine West had
approximately 34 million common shares outstanding. The acquisition will be
accounted for under the purchase method of accounting. The transaction is
expected to close by the end of June 1999.
- 8 -
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JONES APPAREL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Supplemental Pro Forma Condensed Financial Information
On January 1, 1999, Jones Apparel Group, Inc. consummated a corporate
reorganization under which two new wholly-owned subsidiaries named Jones Apparel
Group USA, Inc. ("Jones USA") and Jones Apparel Group Holdings, Inc. ("Jones
Holdings") were created. On that date, the operating assets of Jones Apparel
Group, Inc. were transferred to Jones USA and Jones USA assumed the role of
obligor of the Senior Notes due 2001 (the "Senior Notes") with Jones Apparel
Group, Inc. remaining and Jones Holdings becoming co-obligors of the Senior
Notes (which were issued on October 2, 1998 in conjunction with the acquisition
of Sun Apparel, Inc.). The following condensed financial information represents
the results of Jones USA for the first quarter of 1999 and pro forma information
for the first quarter of 1998 assuming the reorganization had taken place on
January 1, 1998 (all amounts in thousands). Separate pro forma financial
statements and other disclosures concerning Jones USA and Jones Holdings are not
presented as such information is not considered material to the holders of the
Senior Notes.
March 29, 1998
On or for the quarter ended: April 4, 1999 (pro forma)
------------- --------------
Current assets $592,838 $453,064
Noncurrent assets 146,892 109,014
Current liabilities 327,467 497,184
Noncurrent liabilities 412,236 38,530
Excess of net assets acquired over cost - 1,075
Total revenues 404,941 355,472
Gross profit 139,844 114,739
Operating income 53,862 43,953
Net income 28,502 25,332
- 9 -
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JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The following discussion provides information and analysis of the Company's
results of operations for the quarters ended April 4, 1999 and March 29, 1998,
respectively, and its liquidity and capital resources. The following discussion
and analysis should be read in conjunction with the Company's Consolidated
Financial Statements included elsewhere herein.
Results of Operations
Statements of Income Expressed as a Percentage of Total Revenues
Quarter ended
----------------------
April 4, March 29,
1999 1998
-------- --------
Net sales 99.3% 99.1%
Licensing income 0.7% 0.9%
-------- --------
Total revenue 100.0% 100.0%
Cost of goods sold 63.0% 65.8%
-------- --------
Gross profit 37.0% 34.2%
Selling, general and administrative expenses 20.0% 17.5%
Amortization of goodwill 0.5% -
-------- --------
Operating income 16.6% 16.7%
Net interest expense 1.2% 0.3%
-------- --------
Income before provision for income taxes 15.4% 16.4%
Provision for income taxes 6.0% 6.3%
-------- --------
Net income 9.4% 10.1%
======== ========
Totals may not agree due to rounding.
Quarter Ended April 4, 1999 Compared to Quarter Ended March 29, 1998
Net Sales. Net sales for the thirteen weeks ended April 4, 1999 (hereinafter
referred to as the "first quarter of 1999") increased 51.2%, or $194.6 million,
to $574.8 million, compared to $380.2 million for the thirteen weeks ended March
29, 1998 (hereinafter referred to as the "first quarter of 1998"). The increase
was due to an increase in the number of units shipped, primarily the result of
four additional shipping days in the first quarter of 1999 compared to the first
quarter of 1998 (approximately $40.0 million of the increase) and the inclusion
of product lines added as part of the Sun Apparel, Inc. ("Sun") acquisition in
the fourth quarter of 1998 ($143.3 million of the increase). The breakdown of
net sales by category for both periods is as follows:
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JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
First First
Quarter Quarter Increase/ Percent
(In millions) of 1999 of 1998 (Decrease) Change
------- ------- -------- -------
Career sportswear $167.4 $171.5 $(4.1) (2.4%)
Casual sportswear 202.8 84.2 118.6 140.9%
Lifestyle collection 132.5 92.6 39.9 43.1%
Suits, dress, and other 72.1 31.9 40.3 126.7%
------- ------- -------- -------
Net sales $574.8 $380.2 $194.7 51.2%
======= ======= ======== =======
The decrease in Career sportswear is primarily attributable to a decrease in
shipments in the Evan-Picone line, which is in the process of being repositioned
from the better to the moderate market for Fall 1999. Additionally, although
unit shipments were up, net sales for the Jones New York label decreased due to
lower unit selling prices in various product categories as well as a change in
product mix to a "softer" styling. The increase in Casual was due to increased
shipments of Jones New York Sport and the addition of Polo Jeans since the
acquisition of Sun in October 1998. The increase in Lifestyle collection was
primarily due to a large increase in shipments under the Lauren by Ralph Lauren
label. The increase in suits, dress, and other was mainly the result of the
addition of the Sun private label jeans business.
Licensing Income. Licensing income increased $0.7 million to $4.3 million in
the first quarter of 1999 compared to $3.6 million in the first quarter of 1998.
Income from licenses under the Jones New York and Evan-Picone labels increased
$0.6 million and $0.1 million, respectively.
Gross Profit. The gross profit margin increased to 37.0% in the first quarter
of 1999 compared to 34.2% in the first quarter of 1998. This improvement was
attributable to the increase in sales of the Lifestyle collection and the
addition of the Polo Jeans label, both of which carry higher margins than the
corporate average, as well as a shift in the business towards casual styling
(including the "softer" styling of the Jones New York label) which carry lower
overseas production costs, the favorable impact of currency devaluations in
Asia, and continued improvement in inventory management.
SG&A Expenses. Selling, general and administrative expenses ("SG&A" expenses)
of $115.8 million in the first quarter of 1999 represented an increase of $48.6
million over the first quarter of 1998. As a percentage of total revenues, SG&A
expenses increased to 20.0% in the first quarter of 1999 from 17.5% for the
comparable period in 1998. In addition to increased royalty and advertising
expenses, Sun accounted for $32.2 million of the first quarter 1999 total and
retail store operating expenses increased $2.5 million over the first quarter
of 1998.
Operating Income. The resulting first quarter of 1999 operating income of
$95.9 million increased 49.7%, or $31.9 million, over the $64.0 million achieved
during the first quarter of 1998. The operating margin decreased to 16.6% in
the first quarter of 1999 from 16.7% in the first quarter of 1998 as the gains
in gross profit margin were offset by a higher ratio of SG&A expenses to
revenues and the amortization of goodwill resulting from the Sun acquisition.
- 11 -
<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Expense. Net interest expense was $6.7 million in the first
quarter of 1999 compared to $1.2 million in the comparable period of 1998,
primarily as a result of the debt incurred to finance the Sun acquisition.
Provision for Income Taxes. The effective income tax rate was 39.0% for the
first quarter of 1999 compared to 38.5% for the first quarter of 1998. The
increase was primarily due to the nondeductibility of goodwill amortization in
the first quarter of 1999.
Net Income. Net income increased 40.9% to $54.4 million in the first quarter
of 1999, an increase of $15.8 million over the net income of $38.6 million
earned in the first quarter of 1998. Net income as a percentage of total
revenues was 9.4% in the first quarter of 1999 and 10.1% in the first quarter
of 1998.
Liquidity and Capital Resources
The Company's principal capital requirements have been to fund working capital
needs, capital expenditures and to repurchase the Company's common stock on the
open market. The Company has historically relied primarily on internally
generated funds, trade credit and bank borrowings to finance its operations
and expansion. As of April 4, 1999, total cash and cash equivalents were $96.5
million, an $81.1 million increase over the $15.4 million reported as of March
29, 1998 and a decrease of $32.5 million from the $129.0 million reported as of
December 31, 1998.
Cash Used in Operations. Net cash used in operations was $25.6 million in the
first quarter of 1999 compared to $18.0 million in the first quarter of 1998.
While net income before depreciation and amortization increased $22.9 million in
the first quarter of 1999, the effect was offset by a larger increase in trade
receivables in the first quarter of 1999 than in the first quarter of 1998.
This increase was largely due to the sales increase over the respective prior
period and the inclusion of Sun in the first quarter of 1999.
Cash Used in Investing Activities. Net cash used in investing activities
increased $1.6 million in the first quarter of 1999 over the first quarter of
1998, primarily as a result of the acquisition of certain trademarks.
Cash Used in Financing Activities. Net cash used in financing activities was
$0.4 million in the first quarter of 1999, which was $1.5 million less than for
the same period in 1998. The Company repurchased $41.2 million of its common
stock on the open market during the first quarter of 1998 and none during the
first quarter of 1999. A total of $232.1 million has been expended under
announced programs to acquire up to $300.0 million of such shares. The Company
may authorize additional share repurchases in the future depending on, among
other things, market conditions and the Company's financial condition. Proceeds
from the issuance of common stock to employees exercising stock options amounted
to $1.4 million and $4.3 million in the first quarters of 1999 and 1998,
respectively.
In connection with the Sun acquisition, the Company replaced its existing
credit agreements with $265.0 million of 6.25% three-year Senior Notes due 2001,
and entered into an agreement with First Union National Bank, as administrative
agent, and other lending institutions to borrow an aggregate principal amount of
up to $550.0 million under Senior Credit Facilities. The Senior Notes, all of
which were outstanding at April 4, 1999, pay interest semiannually on April 1
and October 1 of each year.
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<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
These notes contain certain covenants, including, among others, restrictions on
liens, sale-leaseback transactions, and additional secured debt. The Senior
Credit Facilities consist of (i) a $150 million Three-Year Revolving Credit
Facility, (ii) a $300 million 364-Day Revolving Credit Facility, the entire
amount of which is available for trade letters of credit or cash borrowings,
and (iii) a $100 million Three-Year Term Loan Facility.
At April 4, 1999, $219.3 million was outstanding under the 364-Day Revolving
Credit Facility (which was comprised of the Company's letters of credit
outstanding on that date) and $100.0 million was outstanding under the Company's
Three-Year Term Loan Facility. Borrowings under the Senior Credit Facilities
may also be used for working capital and other general corporate purposes,
including permitted acquisitions and stock repurchases. The Senior Credit
Facilities are unsecured and require the Company to satisfy an earnings before
interest, taxes, depreciation, amortization and rent to interest expense plus
rents coverage ratio, and a net worth maintenance covenant, as well as other
restrictions, including (subject to exceptions) limiting the Company's ability
to incur additional indebtedness, prepay subordinated indebtedness, make
acquisitions, enter into mergers, and pay dividends.
The Company also has unsecured lines of credit for $50 million with First
Union National Bank and C$5 million with the Bank of Montreal. No amounts
were outstanding under these lines at April 4, 1999.
The Company believes that funds generated by operations, the Senior Notes,
the Senior Credit Facilities and the other unsecured lines of credit mentioned
above will provide the financial resources sufficient to meet its foreseeable
working capital, letter of credit, capital expenditure and stock repurchase
requirements and any ongoing obligations to the former Sun shareholders.
In April 1999, the Company received a commitment from First Union National
Bank to amend and replace its existing credit facilities as a result of the
pending acquisition of Nine West Group Inc. (see Note 6 of Notes to Consolidated
Financial Statements). The amended facilities will provide a $550 million 364-
day Revolving Credit Facility, the entire amount of which will be available for
trade letters of credit or cash borrowings, and a $700 million Five-Year
Revolving Credit Facility. The Company also intends to borrow an additional
$300 million to finance a portion of the acquisition through either bond
financing or additional bank borrowings.
YEAR 2000
The Company uses various types of technology in the operations of its
business. Some of this technology incorporates date identification functions;
however, many of these date identification functions were developed to use only
two digits to identify a year. These date identification functions, if not
corrected, could cause their related technologies to fail or create erroneous
results on or before January 1, 2000.
The Company has assessed, with both internal and external resources, the
impact of Year 2000 issues on its information and non-information technology
systems. As part of this process, the Company retained the services of an
independent consultant that specializes in Year 2000 evaluation and remediation
work. In addition, the Company has developed a plan with respect to the Year
2000 readiness of its internal technology systems. This plan involves (i)
creating awareness inside the
- 13 -
<PAGE>
JONES APPAREL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Company of Year 2000 issues, (ii) analyzing the Company's Year 2000 state of
readiness, (iii) testing, correcting and updating systems and computer software
as needed, and (iv) incorporating the corrected or updated systems and software
into the Company's business. The Company has moved into the testing and
correcting phase with respect to those technology systems that have been
identified as having Year 2000 issues. The Company anticipates substantially
completing the implementation of this plan by the middle of 1999; however, it
may revise the estimated date of completion of this plan based upon any
unforeseen delays in implementing such plan.
In a continuing effort to become more productive and competitive, the Company
replaces portions of its software and hardware when warranted by significant
business and/or technology changes. While these replacements are not
specifically intended to resolve the Year 2000 issue, the new software and
hardware is designed to function properly with respect to dates related to
the Year 2000 and beyond. The Company also has initiated discussions with its
significant suppliers, customers and financial institutions to ensure that
those parties have appropriate plans to remediate Year 2000 issues when their
systems interface with the Company's systems or may otherwise impact operations.
The Company anticipates substantially completing the implementation of this plan
by the middle of 1999; however, there can be no assurances that such plan will
be completed by the estimated date or that the systems and products of other
companies on which the Company relies will not have an adverse effect on its
business, operations or financial condition.
As of April 4, 1999, the Company had incurred approximately $465,000 in direct
external costs related to the Year 2000 issue. The Company does not separately
track the internal costs incurred for Year 2000 projects as such costs are
principally the related payroll costs for the management information systems
service group. The Company believes that additional costs related to the Year
2000 issue will not be material to its business, operations or financial
condition. However, estimates of Year 2000 related costs are based on numerous
assumptions and there is no certainty that estimates will be achieved and actual
costs could be materially greater than anticipated. The Company anticipates
that it will fund its additional Year 2000 costs from current working capital.
- 14 -
<PAGE>
JONES APPAREL GROUP, INC.
OTHER INFORMATION
Item 1. Legal Proceedings
On or about January 13 or January 14, 1999, 23 unidentified Asian garment
workers filed a purported class-action lawsuit against 22 garment manufacturers
with factories located in Saipan (part of the U.S. Commonwealth of the Northern
Mariana Islands) . The lawsuit, filed in federal court in Saipan, alleges
violations of federal labor statutes, and other laws. Also on or about January
13, 1999, a similarly unidentified group of garment workers represented by some
of the same law firms which brought the Saipan case filed a similar class-action
lawsuit in federal court in Los Angeles against 11 Saipan garment manufacturers
(including ten named in the first suit) and 17 U.S. clothing retailers and
designers, including the Company, alleging violations of federal racketeering
statutes and other laws, based on allegedly unfair and illegal treatment of
foreign workers. Also on or about January 13, 1999, a third lawsuit was filed
in state court in San Francisco by a labor union and three nonprofit groups
asserting claims of unlawful and unfair business practices and misleading
advertising against all the retailers and designers named in the Los Angeles
action, including the Company, one additional retailer and other unnamed
defendants. The two suits against the Company seek unspecified compensatory
and punitive damages as well as injunctive relief. The Company has reviewed
the pleadings. On March 29, 1999, the company filed a demurrer (a motion to
dismiss) in state court in San Francisco with respect to the state suit. On
March 29, 1999, the customer defendants (including the Company) and the
manufacturer defendants filed motions requesting a transfer of the Los Angeles
federal case to the federal district court in Saipan. On April 12, 1999, the
customer defendants (including the Company) filed a motion to dismiss in
federal court in Los Angeles requesting that the court dismiss the federal
suit. Counsel for plaintiffs have attempted to initiate discovery of customer
defendants (including the Company) in the federal case which may delay
resolution of the transfer motion. At this early stage, the Company is not
in a position to evaluate the likelihood of an unfavorable outcome.
Item 5. Other information
Statement Regarding Forward-looking Disclosure
This Report includes, and incorporates by reference, "forward-looking
statements" within the meaning of the securities laws. All statements
regarding the Company's expected financial position, business and financing
plans are forward-looking statements. Forward-looking statements also
include representations of the Company's expectations or beliefs concerning
future events that involve risks and uncertainties, including those associated
with the effect of national and regional economic conditions, the overall level
of consumer spending, the performance of the Company's products within the
prevailing retail environment, customer acceptance of both new designs and
newly-introduced product lines, financial difficulties encountered by customers,
the Company's ability to complete the proposed acquisition of Nine West Group
Inc., the effects of vigorous competition in the markets in which the Company
operates, and the integration of Sun Apparel, Inc., Nine West Group, Inc., or
other acquired businesses into the Company's existing operations. 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," 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
- 15 -
<PAGE>
JONES APPAREL GROUP, INC.
OTHER INFORMATION (CONTINUED)
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
During the quarter ended April 4, 1999, three Current Reports on Form 8-K
were filed with the Commission by the Company as follows:
(1) A Current Report on Form 8-K, dated January 1, 1999, announcing the
consummation of a corporate reorganization of the Company.
(2) A Current Report on Form 8-K, dated January 13, 1999, announcing a
class-action lawsuit against Saipan garment manufacturers and U. S.
clothing retailers and manufacturers, including the Company.
(3) A Current Report on Form 8-K, dated March 2, 1999, announcing that
the Company had entered into an Agreement and Plan of Merger with
Nine West Group Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
JONES APPAREL GROUP, INC.
(Registrant)
Date: May 14, 1999 By /s/ Sidney Kimmel
----------------------------
SIDNEY KIMMEL
Chief Executive Officer
By /s/ Wesley R. Card
----------------------------
WESLEY R. CARD
Chief Financial Officer
- 16 -
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