Form 10-K
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, 2003 |
|
|
[ ] |
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]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of the voting and non-voting
common equity held by non-affiliates as of the last business day of the
registrant's most recently completed second fiscal quarter, based on the closing
price of the registrant's common stock as reported on the New York Stock
Exchange composite tape on July 3, 2003, was approximately $3,794,816,924.
As of March 11, 2004, 126,104,431 shares of the
registrant's common stock were outstanding.
TABLE OF CONTENTS
2
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 2004 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, "our," "us" and "we" means Jones
Apparel Group, Inc. and consolidated subsidiaries, "Sun" means Sun
Apparel, Inc., "Nine West Group" means Nine West Group Inc.,
"Nine West" means Nine West Footwear Corporation, "Victoria"
means Victoria + Co Ltd., "Judith Jack" means Judith Jack, LLC,
"McNaughton" means McNaughton Apparel Group Inc., "Gloria
Vanderbilt" means Gloria Vanderbilt Apparel Corp. (acquired April 8, 2002),
"l.e.i." means R.S.V. Sport, Inc. and its related companies (acquired
August 15, 2002), "Kasper" means Kasper, Ltd. (acquired December 1,
2003), "FASB" means the Financial Accounting Standards Board,
"SFAS" means Statement of Financial Accounting Standards and
"SEC" means the United States Securities and Exchange Commission.
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 our 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 our expectations or beliefs concerning future events that
involve risks and uncertainties, including those associated with the effect of
national and regional economic conditions, lowered levels of consumer spending
resulting from a general economic downturn or generally reduced shopping
activity caused by public safety concerns, the performance of our 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 we
operate, the integration of the organizations and operations of any acquired
businesses into our existing organization and operations, our foreign operations
and manufacturing, changes in the costs of raw materials, labor and advertising,
and our 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 we believe 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 our 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 us or persons acting on our behalf are expressly
qualified in their entirety by the Cautionary Statements.
WEBSITE ACCESS TO COMPANY REPORTS
Copies of our filings under the Securities Exchange Act of
1934 (including annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to these reports) are available
free of charge on our investor relations website at www.jny.com on the same day
they are electronically filed with the SEC.
3
PART I
ITEM 1. BUSINESS
General
Jones Apparel Group, Inc. is a leading designer and
marketer of branded apparel, footwear and accessories. Our nationally recognized
brands include Jones New York, Evan-Picone, Norton McNaughton, Gloria
Vanderbilt, Erika, l.e.i., Energie, Nine West, Easy Spirit, Enzo Angiolini,
Bandolino, Napier, Judith Jack, Kasper, Anne Klein, Albert Nipon and Le
Suit. We also market apparel under the Polo Jeans Company brand
licensed from Polo Ralph Lauren Corporation ("Polo"), costume jewelry
under the Tommy Hilfiger brand licensed from Tommy Hilfiger Licensing,
Inc. ("Hilfiger") and the Givenchy brand licensed from Givenchy
Corporation ("Givenchy"), and footwear and accessories under the ESPRIT
brand licensed from Esprit Europe, B.V. ("Esprit Europe"). Each
brand is differentiated by its own distinctive styling, pricing strategy,
distribution channel and target consumer. We primarily contract for the
manufacture of our products through a worldwide network of quality
manufacturers. We have capitalized on our nationally known brand names by
entering into various licenses for several of our trademarks, including Jones
New York, Evan-Picone, Anne Klein New York, Nine West, Gloria
Vanderbilt and l.e.i., with select manufacturers of women's and men's
products which we do not manufacture. Celebrating more than 30 years of service,
we have built a reputation for excellence in product quality and value and in
operational execution.
On December 1, 2003, we acquired 100% of the common stock
of Kasper, Ltd. Kasper designs, markets, sources, manufactures and distributes
women's suits, sportswear and dresses. Kasper's brands include such
well-recognized names as Albert Nipon, Anne Klein New York, AK Anne Klein,
Kasper and Le Suit. In addition, Kasper has granted licenses for the
manufacture and distribution of certain other products including, but not
limited to, women's watches, jewelry, handbags, small leather goods, footwear,
coats, eyewear and swimwear and men's apparel. Kasper also operates retail
outlet stores under the Kasper and Anne Klein names, which not
only sell company-produced apparel, but also showcase and sell licensed
products. The acquisition of Kasper increases our penetration into the better
market distribution channel. We also expect to benefit from the cross-branding
opportunities of Kasper's brands that exist with our other lines of business.
Operating Segments
Our operations are comprised of four reportable segments:
wholesale better apparel, wholesale moderate apparel, wholesale footwear and
accessories, and retail. We identify operating segments based on, among other
things, the way our management organizes the components of our 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 our own retail locations. See "Business Segment and Geographic
Area Information" in the Notes to Consolidated Financial Statements.
Wholesale Better Apparel
Our brands cover a broad array of categories for the women's markets; we also
provide Polo Jeans Company apparel to 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.
We also produce a collection of sportswear under the Anne Klein New York
brand and suits under the Albert Nipon brand which are priced for the
bridge market. Career and casual sportswear are marketed as individual items or
groups of skirts, pants, shorts, 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 the four principal selling seasons - Spring, Summer, Fall and
Holiday. Each season is comprised of a series of individual items or groups
which have systematically spaced shipment dates to ensure a fresh flow of goods
to the retail floor. In addition, certain labels offer key item styles, which
are less seasonal in nature, on a replenishment basis (which ship generally
within three to five days from receipt of order).
4
The following table summarizes selected aspects of the
products sold under both our brands and licensed brands:
|
Label
|
|
Product
Classification
|
|
Retail
Price
Points
|
Jones New York Labels
Skirts, blouses, pants,
jackets, sweaters,
jeanswear, suits,
dresses, casual tops,
outerwear, shorts
|
Jones New York
Jones New York Signature
Jones New York Sport
Jones Jeans
Jones New York Country
Jones New York Dress
Jones New York Evening
Jones New York Suit
|
|
Collection Sportswear
Lifestyle
Casual Sportswear
Casual Sportswear
Lifestyle
Dresses
Dresses
Suits |
|
$15 - $458 |
Nine West Labels
Skirts, blouses,
pants,
jackets, sweaters,
dresses,
outerwear, shorts,
casual tops
|
Nine West
Easy Spirit |
|
Lifestyle
Lifestyle |
|
$20 - $307 |
Anne Klein Labels
Skirts, blouses, pants,
jackets, sweaters,
vests,
dresses, casual tops |
Anne Klein New York
AK Anne Klein |
|
Collection Sportswear
Collection Sportswear |
|
$55
- - $1,895
$20
- - $325 |
Other Labels
Skirts, blouses, pants,
jackets, sweaters,
suits, dresses |
Kasper
Albert Nipon
Evan-Picone Dress
Le Suit |
|
Suits, Dresses, Sportswear
Suits
Dresses
Suits |
|
$19
- - $320
$320
- - $660
$69
- - $153
$100
- - $300 |
Labels Under License
Skirts, t-shirts,
pants, jackets,
dresses,
sweaters, jeanswear |
Polo Jeans Company |
|
Casual Sportswear |
|
$20 - $425 |
Wholesale Moderate Apparel
Our brands cover a broad array of
categories for the women's, juniors and girls 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 individual items or groups of
skirts, pants, shorts, 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
the four principal selling seasons - Spring, Summer, Fall and Holiday. Each
season is comprised of a series of individual items or groups which have
systematically spaced shipment dates to ensure a fresh flow of goods to the
retail floor. In addition, certain labels offer key item styles, which are less
seasonal in nature, on a replenishment basis (which ship generally within three
to five days from receipt of order).
The following table summarizes selected aspects of the products sold under
our brands:
5
|
Label
|
|
Product
Classification
|
|
Retail
Price
Points
|
Jones New York Labels
Skirts, blouses,
jackets, sweaters,
casual tops |
Jones Wear
Jones Wear Sport |
|
Collection Sportswear
Casual Sportswear |
|
$20 - $129 |
Nine West Labels
Skirts, blouses,
jackets, sweaters,
casual tops
|
Nine & Company
Bandolino |
|
Lifestyle
Casual Sportswear |
|
$19 - $112 |
McNaughton Labels
Skirts, blouses,
jackets, sweaters,
casual tops |
Norton McNaughton
Maggie McNaughton |
|
Collection Sportswear
Collection Sportswear |
|
$29 - $80 |
Gloria Vanderbilt Labels
Skirts, blouses, shorts,
jackets, sweaters,
jeanswear, capris,
casual tops |
Gloria Vanderbilt
GLO/GLO Girls
Gloria Vanderbilt Career |
|
Lifestyle
Casual Sportswear
Casual Sportswear |
|
$26 - $72 |
Other Labels
Skirts, blouses, pants,
jackets, sweaters,
jeanswear, dresses,
casual tops and bottoms |
Evan-Picone
Energie
Erika
l.e.i.
Jeanstar
A|Line |
|
Lifestyle
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear |
|
$5
- - $122 |
In addition to the products sold under these brands, we
provide design and manufacturing resources to certain retailers to develop
moderately-priced product lines to be sold under private labels.
Wholesale Footwear and Accessories
Our wholesale footwear and accessories operations include
the sale of both brand name and private label footwear, handbags, small leather
goods, luggage and costume, semi-precious, sterling silver, and marcasite
jewelry. The following table summarizes selected aspects of the products sold
under both our brands and licensed brands:
6
Label
|
|
Product
Classification
|
|
Market
Segments
|
|
Retail Price Points
|
|
Shoes
|
|
Boots
|
Footwear |
|
|
|
|
|
|
|
|
Nine West |
|
Contemporary |
|
Better |
|
$40 - $89 |
|
$89 - $169 |
Bandolino |
|
Modern Classics |
|
Upper Moderate |
|
$39 - $59 |
|
$69 - $139 |
Easy Spirit |
|
Comfort/Fit
Active
Sport/Casuals |
|
Upper Moderate |
|
$39 - $79 |
|
$69 - $139 |
Enzo Angiolini |
|
Sophisticated Classics |
|
Better |
|
$59 - $105 |
|
$99 - $199 |
ESPRIT |
|
Juniors |
|
Better |
|
$20 - $69 |
|
$49 - $109 |
Nine & Company |
|
Contemporary |
|
Moderate |
|
$39 - $49 |
|
$59 - $99 |
Westies |
|
Contemporary |
|
Moderate |
|
$39 - $49 |
|
$54 - $99 |
Gloria Vanderbilt |
|
Lifestyle |
|
Moderate |
|
$25 - $39 |
|
$40 - $48 |
Accessories
|
|
|
|
|
|
Accessories
|
Nine West |
|
Handbags, Luggage,
Small Leather Goods
and Costume Jewelry |
|
Better |
|
$8 - $118 |
Bandolino |
|
Handbags |
|
Upper Moderate |
|
$68 -
$138 |
Jones New York |
|
Handbags |
|
Better |
|
$29 - $128 |
Nine & Company |
|
Handbags, Small
Leather Goods and
Costume Jewelry |
|
Moderate |
|
$8 - $39 |
Anne
Klein New York |
|
Handbags |
|
Bridge |
|
$90
- $280 |
ESPRIT
|
|
Junior Handbags and
Small Leather Goods |
|
Better |
|
$24 -
$48 |
Gloria Vanderbilt |
|
Handbags, Small
Leather Goods and
Costume Jewelry |
|
Moderate |
|
$8 -
$39 |
Napier |
|
Costume Jewelry |
|
Moderate |
|
$9 - $125 |
Givenchy |
|
Costume and Fashion
Jewelry |
|
Better |
|
$22 -
$350 |
Tommy Hilfiger |
|
Juniors Costume Jewelry |
|
Better |
|
$12 -
$60 |
Richelieu |
|
Costume Jewelry |
|
Moderate |
|
$8 - $50 |
l.e.i. |
|
Juniors Costume Jewelry |
|
Moderate |
|
$6 -
$12 |
Judith Jack |
|
Marcasite and Sterling
Silver Jewelry |
|
Bridge |
|
$8 -
$452 |
7
Retail
We market apparel, footwear and accessories directly to
consumers through our specialty retail stores operating in malls and urban
retail centers, as well as our various value-based ("outlet") stores.
We constantly evaluate both the opportunities for new locations and the results
of underperforming locations for possible modification or closure.
Specialty Retail Stores. At December 31, 2003, we
operated a total of 413 specialty retail stores. These stores sell either
footwear and accessories or apparel (or a combination of these products)
primarily under their respective brand names. Our Nine West, Easy Spirit, Enzo Angiolini
and Bandolino retail stores offer selections of exclusive products
not marketed to our wholesale customers. Certain of our specialty retail stores
also sell products licensed by us, including belts, legwear, outerwear, watches
and sunglasses.
The following table summarizes selected aspects of our
specialty retail stores at December 31, 2003. Of these stores, 406 are located
within the United States, four are located in the United Kingdom and three are
located in Canada. In addition to the stores listed in the table, we participate
in a joint venture that operates 25 specialty stores in Australia under the
Nine West and Enzo Angiolini names.
|
|
|
Retail Price Range
|
|
Average
store size
(square feet)
|
|
Number of
locations
|
Brands
offered
|
Shoes and
Boots
|
Accessories
|
Apparel
|
Type of
locations
|
Nine West |
217 |
Primarily
Nine West |
$29 -$179 |
$3 - $189 |
$79 - $259 |
Upscale and regional malls and urban retail centers |
1,678 |
Easy Spirit |
145 |
Primarily
Easy Spirit |
$39 - $139 |
$4 - $90 |
$29 - $119 |
Upscale and regional malls and
urban retail centers |
1,384 |
Enzo Angiolini |
24 |
Primarily Enzo Angiolini |
$24 - $199 |
$6 - $212 |
$129 - $299 |
Upscale malls and urban retail centers |
1,454 |
Bandolino |
16 |
Primarily
Bandolino |
$24 - $139 |
$25 - $128 |
- |
Urban retail
locations and regional malls |
1,263 |
Apparel |
11 |
Various |
- |
- |
$3 - $458 |
Urban retail locations and
regional malls |
3,316 |
Outlet Stores. At December 31, 2003, we operated a
total of 577 outlet stores. Our shoe stores focus on breadth of product line, as
well as value pricing, and offer a distribution channel for our 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 our specialty retail
footwear stores and wholesale divisions. The apparel stores focus on breadth of
product line, customer service and value pricing. In addition to our brand name
merchandise, these stores also sell merchandise produced by our licensees.
The following table summarizes selected aspects of our
outlet stores at December 31, 2003. Of these stores, 561 are located within the
United States and its territories and 16 are located in Canada. In addition to
the stores listed in the table, we participate in a joint venture that operates
four outlet stores in Australia under the Nine West name.
8
|
Number of
locations
|
|
Brands
offered
|
|
Type of
locations
|
|
Average
store size
(square feet)
|
Nine West |
134 |
|
Primarily Nine West |
|
Manufacturer
outlet centers |
|
2,806 |
Easy Spirit |
101 |
|
Primarily Easy Spirit |
|
Manufacturer
outlet centers |
|
4,163 |
Stein Mart (leased footwear departments) |
106 |
|
All Company footwear brands |
|
Strip centers |
|
2,648 |
Jones New York |
127 |
|
Primarily Jones New York,
Jones New York Sport and Jones New York Country |
|
Manufacturer
outlet centers
|
|
3,687 |
Anne Klein |
12 |
|
Primarily Anne Klein |
|
Manufacturer
outlet centers |
|
2,780 |
Kasper |
70 |
|
Primarily Kasper |
|
Manufacturer
outlet centers |
|
2,636 |
Others |
27 |
|
Various |
|
Manufacturer
outlet centers |
|
3,653 |
Licensed Brands; Termination as of December 31, 2003 of License for Lauren
and Ralph Brands
As a result of the acquisition of Sun, we obtained the
right to sell Polo Jeans Company products under long-term license and
design agreements which Sun entered into with Polo in 1995 (collectively, the "Polo Jeans
License"). Under the Polo Jeans License, Polo has granted us 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, its territories and Mexico.
The agreements expire on December 31, 2005 and may be renewed by us in five-year
increments for up to 25 additional years, provided that we achieve certain
minimum sales levels. Renewal of the Polo Jeans License after 2010
requires a one-time payment by us of $25.0 million or, at our option, a transfer
of a 20% interest in our 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 our 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 us of
a percentage of net sales against guaranteed minimum royalty and design service
payments as set forth in the agreements.
In October 1995, we 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 ("Lauren") trademark in the United States, Canada
and Mexico pursuant to license and design service agreements with Polo
(collectively, the "Lauren License"), which were to expire on
December 31, 2006. The agreements provide for the payment by us of a percentage
of net sales against guaranteed minimum royalty and design service payments as
set forth in the agreements.
In May 1998, we 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 ("Ralph") trademark in the United States, Canada and
Mexico pursuant to license and design service agreements with Polo (the "Ralph
License"). The agreements were scheduled to end on December 31, 2003. The
agreements provide for the payment by us of a percentage of net sales against
guaranteed minimum royalty and design service payments as set forth in the
agreements.
In June 2000, we 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 (collectively, the "Canada
Licenses"). The agreements were scheduled to expire on December 31, 2005
and were renewable for an additional five years, provided that we achieved
certain
9
minimum sales levels. The agreements provide for the payment by us of a
percentage of net sales against guaranteed minimum royalty and design service
payments as set forth in the agreements.
During the course of discussions concerning the Ralph
License, Polo asserted that the expiration of the Ralph contract on
December 31, 2003 would cause the Lauren License to end on December 31,
2003, instead of December 31, 2006. We believe that this is an improper
interpretation and that the expiration of the Ralph License did not cause
the Lauren License to end.
On June 3, 2003, we announced that our discussions with
Polo regarding the interpretation of the Lauren License had reached an
impasse and that, as a result, we had filed a complaint in the New York State
Supreme Court against Polo and its affiliates (see "Legal
Proceedings"). The complaint alleges that Polo breached the Lauren
License by claiming that the license ends at the end of 2003. We asked the court
to enter a judgment for compensatory damages of $550 million as well as punitive
damages. On June 3, 2003, Polo also filed a complaint in the New York State
Supreme Court against us, seeking among other things a declaratory judgment that
the Lauren License terminated as of December 31, 2003. On July 25, 2003,
we served papers opposing Polo's motion and also served upon Polo a motion
seeking summary judgment in Polo's action for a declaratory judgment. On August
12, 2003, Polo filed a cross-motion for summary judgment in that action. These
motions were argued on September 30, 2003, and the parties are awaiting
decisions.
We assert within the complaint that Polo's actions fully
discharged our obligations under the Lauren License for lines to be sold
after December 31, 2003. Therefore, we ceased development of Lauren
products effective with the Spring 2004 season. Our Lauren business
represented a significant portion of our sales and profits. Net sales of Lauren
products were $476.4 million for the year ended December 31, 2003. The
termination of our exclusive right to manufacture and market clothing under this
trademark in the United States, Canada and elsewhere will have a material
adverse effect on our results of operations after 2003. While we are pursuing
other opportunities, including internal brands (including the new lifestyle
brand under the Jones New York Signature label), acquisitions (including
the Kasper acquisition) and licensing options, some of which we previously were
precluded from exploring under agreements with Polo, there is no guarantee that
we will be able to replace all of the net sales of the Lauren brand.
However, the loss of the Lauren License will not materially adversely
impact our liquidity, and we will continue to have a strong financial position.
The expiration of the Ralph License will not be
material to us in any respect. Net sales of Ralph products were $30.7
million for the year ended December 31, 2003.
We and Polo have agreed that, in connection with the
expiration of the Ralph License, the Canada Licenses terminated as of
December 31, 2003. The termination of the Canada Licenses will not be material
to us in any respect. Net sales of all products under the Canada Licenses were
$41.3 million for the year ended December 31, 2003. The dispute between us and
Polo does not relate to the Polo Jeans License in the United States, and
an end to the Canada Licenses does not end our longer term Polo Jeans
License in the United States or otherwise adversely affect the Polo Jeans
License in the United States.
As a result of the acquisition of Victoria, we obtained
the exclusive license to produce and sell costume jewelry in the United States
and Canada under the Tommy Hilfiger trademark pursuant to an agreement
with Hilfiger. This agreement, which was recently amended to include the H
Hilfiger trademark, expires on March 31, 2008. The agreement provides for
payment by us of a percentage of net sales against guaranteed minimum royalty
and advertising payments as set forth in the agreement. We also obtained the
exclusive license to produce, market and distribute costume jewelry in the
United States, Canada, Mexico and Japan under the Givenchy trademark
pursuant to an agreement with Givenchy, which expires on December 31, 2005. The
agreement provides for the payment by us of a percentage of net sales against
guaranteed minimum royalty and advertising payments as set forth in the
agreement.
In July 2002, we obtained the exclusive license to produce
and sell women's and young women's footwear, luggage, handbags and small leather
goods bearing a diversified complement of ESPRIT trademarks pursuant to
license and design service agreements with Esprit Europe, a subsidiary of
Esprit
10
Holdings Limited. These branded products are distributed exclusively by
Nine West to department stores, retail specialty stores and other direct to consumer venues throughout the
United States and Puerto Rico. The agreement expires on December 31, 2007 and is
renewable for an additional five years provided that we achieve certain minimum
sales levels.
Design
Each of our apparel product lines has a design team which
is responsible for the creation, development and coordination of the product
group offerings within each line. We believe our design staff is recognized for
its distinctive styling of garments and its ability to update fashion classics
with contemporary trends. Our apparel designers travel throughout the world for
fabrics and colors, and stay continuously abreast of the latest fashion trends.
In addition, we actively monitor the retail sales of our products to determine
and react to changes in consumer trends.
For most sportswear lines, we will develop several groups
in a season. A group typically consists of an assortment of skirts, pants,
jeans, shorts, jackets, blouses, sweaters, t-shirts and various accessories. We
believe that we are able to minimize design risks because we 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, we can
redistribute styles and, in some cases, colors, to fit current market demand. We
also have a key item replenishment program for certain lines which consists of
core products that reflect little variation from season to season.
Our footwear and accessories product lines are developed
by a combination of our own design teams and third-party designers, 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.
Our 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 by our contractors based on technical drawings that we supply.
These prototypes are reviewed by our product development team , who negotiate
costs with the contractors. After samples are evaluated and cost estimates are
received, the lines are modified as needed for presentation for each selling
season.
In accordance with standard industry practices for
licensed products, we have the right to approve the concepts and designs of all
products produced and distributed by our licensees. Similarly, Polo Ralph Lauren
provides design services to us for our licensed products and has the right to
approve our designs for the Polo Jeans Company product line. Esprit
Europe, Hilfiger and Givenchy also provide design services to us for our
licensed products and have the right to approve our designs for the ESPRIT,
Tommy Hilfiger and Givenchy product lines, respectively.
Manufacturing and Quality Control
Apparel
Apparel sold by us is produced in accordance with our
design, specification and production schedules through an extensive network of
independent factories located in the United States and its territories, Mexico,
China and other locations throughout the world. We also operate several
manufacturing facilities of our own in Mexico and China. Approximately 24% of
our apparel products were manufactured in the United States and Mexico and 76%
in other parts of the world (primarily Asia) during 2003. We source a portion of
our products in Central America, enabling us to take advantage of shorter lead
times than other offshore locations due to proximity. Sourcing in this region
enables us to utilize exemptions under "807" customs regulations,
11
which provide that certain articles assembled abroad from United States
components are exempt from United States duties on the value of these
components.
We believe that outsourcing a majority of our products
allows us to maximize production flexibility, while avoiding significant capital
expenditures, work-in-process inventory build-ups and costs of managing a larger
production work force. Our fashion designers, production staff and quality
control personnel closely examine garments manufactured by contractors to ensure
that they meet our high standards.
Our comprehensive quality control program is designed to
ensure that raw materials and finished goods meet our exacting standards.
Substantially all of the fabric purchases for garments manufactured
domestically, in Mexico and in Central America are inspected upon receipt in
either our 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 either independent inspection services or by our
contractors upon receipt in their warehouses. Our quality control program
includes inspection of both prototypes of each garment prior to cutting by the
contractors and, in certain instances, a sampling of production garments upon
receipt at our warehouse facilities to ensure compliance with our
specifications.
Domestic contractors are supervised by our quality control
staff based primarily in Pennsylvania. Our Mexican contractors are monitored by
an in-house contractor operations group located in Mexico and other foreign
manufacturers' operations are monitored by our Hong Kong-based personnel, buying
agents located in other countries and independent contractors and inspection
services. Finished goods are generally shipped to our warehouses for final
inspection and distribution.
For our sportswear business, we generally supply the raw
material to our domestic manufacturers and occasionally to foreign
manufacturers. Otherwise, the raw materials are purchased directly by the
manufacturer in accordance with our specifications. Raw materials, which are in
most instances made and/or colored especially for us, consist principally of
piece goods and yarn and are purchased by us from a number of domestic and
foreign textile mills and converters. Our foreign finished goods purchases are
generally purchased on a letter of credit basis, while our domestic purchases
are generally purchased on open account.
Our primary raw material in our jeanswear business is
denim, which is primarily purchased from leading mills located in the United
States, Mexico, the Pacific Rim and Pakistan. Denim purchase commitments and
prices are negotiated on a quarterly or semi-annual basis. We perform our own
extensive testing of denim, cotton twill and other fabrics to ensure consistency
and durability.
We do not have long-term arrangements with any of our
suppliers. We have experienced little difficulty in satisfying our raw material
requirements and consider our sources of supply adequate.
Our 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. We
generally order piece goods concurrently with concept development. The purchase
of piece goods is controlled and coordinated on a divisional basis. When
possible, we limit our 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.
We believe our extensive experience in logistics and
production management underlies our success in coordinating with contractors who
manufacture different garments included within the same product group. We also
contract for the production of a portion of our products through a network of
foreign agents. We have had long-term mutually satisfactory business
relationships with many of our contractors and agents but do not have long-term
written agreements with any of them.
Footwear and Accessories
To provide a steady source of inventory, we rely on
long-standing relationships developed by Nine West with footwear and accessories
manufacturers in Brazil and Asia and by Victoria with jewelry manufacturers in
Asia. We work through independent buying agents for footwear and our own offices
for accessories and
12
jewelry. Allocation of production among our manufacturing
resources is determined based upon a number of factors, including manufacturing
capabilities, delivery requirements and pricing.
During 2003, approximately 83% of our footwear products
were manufactured by independent footwear manufacturers located in Asia
(primarily China) and approximately 17% were manufactured by independently owned
footwear manufacturers in Brazil. Our handbags and small leather goods are
sourced through our own buying offices in Korea and Hong Kong, which utilize
independent third party manufacturers located primarily in China. Products have
historically been purchased from the Brazilian and Asian manufacturers in
pre-set United States dollar prices, and therefore, we generally have not been
adversely affected by fluctuations in exchange rates. We do not have contracts
with any of our footwear, handbag or small leather goods manufacturers but, with
respect to footwear imported from Brazil and China, we rely on established
relationships with our Brazilian and Chinese manufacturers directly and through
our independent buying agent. Quality control reviews are done on-site in the
factories by our third-party buying agents primarily to ensure that material and
component qualities and fit of the product are in accordance with our
specifications. Our quality control program includes approval of prototypes, as
well as approval of final production samples to ensure they meet our high
standards.
We believe that our relationships with our Brazilian and
Chinese manufacturers provide us with a responsive and adequate source of supply
of our products and, accordingly, give us a significant competitive advantage.
We also believe that purchasing a significant percentage of our products in
Brazil and China allows us to maximize production flexibility while limiting our
capital expenditures, work-in-process inventory and costs of managing a larger
production work force. Because of the sophisticated manufacturing techniques 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, periodic 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. We cannot predict, however, the
effect that future changes in economic or political conditions in Brazil could
have on the economics of doing business with our Brazilian manufacturers.
Although we believe that we could source in China a portion of those products
which we currently source in Brazil and find alternative manufacturing sources
for the remainder of those products, the establishment of new manufacturing
relationships would involve various uncertainties, and the loss of a substantial
portion of our Brazilian manufacturing capacity before the alternative sourcing
relationships were fully developed could have a material adverse effect on our
financial condition or results of operations.
We place our projected orders for each season's styles
with our manufacturers prior to the time we have received all of our customers'
orders. Because of our close working relationships with our third party
manufacturers (which allow for flexible production schedules and production of
large quantities of footwear within a short period of time), most of our orders
are finalized only after we have received orders from a majority of our
customers. As a result, we believe that, in comparison to our competitors, we
are 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.
We do not have contracts with any of our jewelry
manufacturers but rely on long-standing relationships, principally with
third-party Asian manufacturers. We also have our own manufacturing facility to
satisfy demand for products manufactured domestically (such as cosmetic
containers) and to provide product samples, prototypes, small quantities of test
merchandise and a small amount of production capacity in the event of a
disruption of certain outsourced manufacturing. Victoria and Judith Jack have
historically experienced little difficulty in satisfying finished goods
requirements, and we consider their 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 2003, our jewelry products were manufactured
primarily by independently-owned jewelry manufacturers in Asia. We believe that
the quality and cost of products manufactured by our suppliers provide us with
the ability to remain competitive. Sourcing the majority of our products enables
us to better
13
control costs and avoid significant capital expenditures, work in
process inventory, and costs of managing a larger production workforce. Victoria's
and Judith Jack's history as manufacturers gives them the requisite experience
and knowledge to manage their 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 either by private
firms in the country of manufacture or on-site by domestic employees or our own
locally-based inspection technicians. Quality assurance checks are also
performed upon receipt of finished goods at our distribution facilities.
Workplace Compliance Program
We have an active program in place to monitor compliance
by our contract manufacturers (in all product categories) with the Jones Apparel
Group Standards for Contractors and Suppliers ("Factory Standards").
In 1996, we became a participant in the United States Department of Labor's
Apparel Manufacturers Compliance Program. Under that program, and through
independent agreements with domestic and foreign manufacturers that produce
products for us, we regularly audit for compliance with our Factory Standards
and require corrective action when appropriate. In 2003, we also initiated a
more active training program for contractors.
Our Factory Standards, which we have posted on our website
(www.jny.com), apply to conditions of employment, such as child labor, wages and
benefits, working hours and days off, health and safety conditions in the
workplace and housing, forced labor, discrimination, disciplinary practices and
freedom of association.
We have a vigorous factory-auditing program. Our
Compliance Department staff consists of 15 auditors based in three countries.
Twelve auditors claim English as a second language, and virtually all are
multi-lingual and have at least a bachelor's degree from a four-year institution
in the United States or abroad. In addition to our own staff, we retain several
recognized, unaffiliated workplace compliance audit firms to conduct factory
audits on our behalf and to report on such findings, including recommendations
for remediation.
During 2003, 1,308 audits were conducted (including over
900 by independent auditors), including domestic and foreign factories for
apparel, footwear, handbag and jewelry products. Also, during 2003, we initiated
a more training-based approach with our contract manufacturers. In China, we
funded a mobile training van program run by an independent monitoring firm, in
which approximately 20 factories were visited several times during the year,
providing worker training in the following topics: nutrition, reproductive
health for female workers, psychology and interpersonal relationships, social
skills, our Factory Standards, prevention and cure of SARS, calculation of wage
and working hours entitlements, and occupational health and safety. These topics
were addressed through lectures, group discussions and group exhibits performed
by the independent monitor's staff or local experts with relationships to the
monitor.
At our expense, the monitor also delivered an
interpersonal relationship training program to workers at two facilities in
Vietnam on our behalf, and a general code of conduct informational session for
representatives of all footwear factories in China (some of the same factories
being visited by the mobile van), bringing in local government representatives
to provide detailed information on the local labor code requirements for working
hours and wages.
We are also funding on-going training for factories in
Lesotho through a local industrial relations expert from South Africa; this
training is addressing the creation of personnel policies and procedures,
grievance procedures and interpersonal relationship management at those
factories.
We are providing ongoing support (but not funding) for two
factories that have engaged a China-based labor compliance consulting
organization, which is assisting the factories in exploring ways to decrease
working hours in those factories by improving efficiencies in the factories,
using industrial engineering and
14
production planning. In February 2004, we commenced funding the same training
(which will take place over a period of six months) with ten footwear factories in
China. We have funded remediation training for approximately ten factories in
Guatemala to address previously unfavorable audit results, specifically verbal
harassment of workers.
In all cases, the organization that provided the training
was not the organization providing the compliance monitoring of the same
facility, to avoid any real or perceived conflicts of interest.
Obtaining compliance with our Factory Standards is, in
many instances, a very challenging process. We deal with many factories in many
countries, each with legal systems and cultures far different from that of the
United States. Our auditing program invariably reports problems of varying
degrees in almost all factories. Our approach, in virtually all cases, has been
to attempt to improve conditions through directions to remediate the cited
conditions and to conduct follow-up audits, rather than to cease using a given
factory, which would assuredly result in severe hardship for the employees
working at those factories. We do believe that progress and improvement,
although incremental, is quite real.
Marketing
During 2003, no single customer accounted for more than
10% of sales; however, certain of our customers are under common ownership. When
considered together as a group under common ownership, sales to eight department
store customers currently owned by Federated Department Stores, Inc.
("Federated") accounted for approximately 13% of 2003 sales, and sales
to six department store customers currently owned by The May Department Stores
Company ("May") accounted for approximately 12% of 2003 sales. Our ten
largest customer groups accounted for approximately 61% of sales in 2003. While
we believe that purchasing decisions are generally made independently by each
department store customer (including the stores in the Federated and May
groups), in some cases the trend is toward more centralized purchasing
decisions. We attempt to minimize our credit risk from our concentration of
customers by closely monitoring accounts receivable balances and shipping levels
and the ongoing financial performance and credit status of our 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 corresponding industry selling
seasons. While we 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.
We believe retail demand for our apparel products is
enhanced by our ability to provide our retail accounts and consumers with
knowledgeable sales support. In this regard, we have an established program to
place retail sales specialists in many major department stores for many of our
brands, including Jones New York, Jones New York Sport, Jones
New York Signature, Polo Jeans Company, Kasper and Anne Klein. These
individuals have been trained by us to support the sale of our products by
educating other store personnel and consumers about our products and by
coordinating our marketing activities with those of the stores. In addition, the
retail sales specialists provide us with firsthand information concerning
consumer reactions to our products. In addition, we have 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 our products in
return for certain benefits.
We introduce new collections of footwear at industry-wide
shoe shows, held semi-annually in both New York City and Las Vegas. We also
present an interim line to customers during the fall and spring of each year. We
introduce new handbag and small leather goods collections at market shows that
occur five 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 our showrooms at these
times to view various product lines and merchandise.
We market our footwear, handbag, luggage and small leather
goods businesses with certain department stores and specialty retail stores by
bringing our retail and sales planning expertise to those retailers. Under this program, members of branded division management who have extensive
retail backgrounds work with
15
the retailer to create a "focus area" or
"concept shop" within the store that displays the full collection of a
single 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 our
products. In addition, our sales force and, for handbags and small leather
goods, field merchandising associates, recommend how to display our products,
assist with merchandising displays and educate store personnel about us and our
products. The goal of this approach is to promote high retail sell-throughs of
our products. With this approach, customers are encouraged to devote greater
selling space to our products, and we are better able to assess consumer
preferences, the future ordering needs of our customers, and inventory
requirements.
We work closely with our wholesale jewelry customers to
create long-term sales programs, which include choosing among our 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. In addition, field
merchandising associates recommend how to display our products, assist with
merchandising displays and educate store personnel about us and our products.
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, we establish close relationships
with retailers, allowing us to maximize product sales and increase floor space
allocated to our product lines. We have also placed retail sales specialists in
major department stores to support the sale of our Napier, Nine West,
Givenchy, Tommy Hilfiger and Judith Jack jewelry products.
Advertising and Promotion
We employ a cooperative advertising program for our
branded products, whereby we share the cost of certain wholesale customers'
advertising and promotional expenses in newspapers, magazines and other media up
to either a preset maximum percentage of the customer's purchases or an
agreed-upon rate of contribution. An important part of the marketing program
includes prominent displays of our products in wholesale customers' sales
catalogs as well as in-store shop displays.
We have national advertising campaigns for Jones New
York Collection, Jones New York Sport and Jones New York Signature
(primarily in the print media encompassing both our products and products of our
licensees), Nine West (footwear, apparel, handbags, jewelry and licensed
products, primarily in fashion magazines), Easy Spirit (primarily in
fashion, lifestyle, health and fitness magazines), Norton McNaughton (in
fashion, lifestyle and ethnic magazines), Erika and Erika Sport (in
lifestyle magazines), Nine & Company (in fashion magazines through
co-op advertising efforts), Bandolino (in fashion magazines), Gloria
Vanderbilt (in fashion and trade magazines), GLO (in fashion
magazines), l.e.i. (in lifestyle and fashion magazines and radio),
Anne Klein New York and AK Anne Klein (in fashion magazines),
Kasper (in fashion magazines), Jeanstar (in fashion and trade
magazines) and the licensed Polo Jeans Company line (in fashion and
lifestyle magazines). Given the strong recognition and brand loyalty already
afforded our brands, we believe these campaigns will serve to further enhance
and broaden our customer base. Except for Norton McNaughton, Erika,
Erika Sport and l.e.i., our in-house creative services departments
oversee the conception, production and execution of virtually all aspects of
these activities. We also believe that our retail network promotes brand name
recognition and supports the merchandising of complete lines by, and the
marketing efforts of, our wholesale customers.
Licensing of Company Brands
We have entered into various license agreements under
which independent licensees either manufacture, market and sell certain products
under our trademarks in accordance with designs furnished or approved by us or
distribute our products in certain countries where we do not do business. These
licenses, the terms of which (not including renewals) expire at various dates
through 2015, typically provide for the payment to us 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.
16
The following table sets forth information with respect to
select aspects of our licensing business:
Brand
|
Category
|
Jones New York |
Men's Tailored Clothing,
Formal Wear (U.S.)
Men's Tailored Clothing, Dress Shirts, Outerwear, Dress Slacks (Canada)
Men's Topcoats, Outerwear (U.S.)
Men's Accessories (U.S., Canada)
Men's Neckwear (U.S.)
Men's Neckwear (Canada)
Men's Umbrellas, Rain Accessories (U.S.)
Women's Outerwear, Rainwear (U.S.)
Women's Leather Outerwear (U.S.)
Women's Wool Coats (U.S.)
Women's Outerwear, Wool Coats, Rainwear (Canada)
Women's Scarves, Wraps (U.S.)
Women's Sunglasses (U.S., Canada)
Women's Eyewear (U.S., Canada)
Women's Sleepwear, Loungewear (U.S., Canada)
Women's Costume Jewelry (Canada)
Women's Umbrellas, Rain Accessories (U.S.) |
Anne Klein New York
and AK Anne Klein |
Men's Tailored Clothing (U.S.,
Canada, Mexico)
Men's Outerwear (U.S., Canada, Mexico)
Women's Swimwear (U.S.)
Women's Watches (Worldwide)
AK Anne Klein Women's Footwear (U.S., Canada)
Anne Klein New York Women's Footwear (Worldwide excluding Japan)
Women's Outerwear (U.S.)
Women's Scarves, Cold Weather Accessories (U.S., Canada)
AK Anne Klein Women's Jewelry (U.S.)
Women's Sunglasses, Optical Eyewear (Worldwide)
Women's Hosiery, Casual Legwear (U.S., Canada)
Women's Umbrellas, Rain Accessories (U.S., Canada)
Women's Belts (U.S., Canada)
Women's Home Sewing Patterns (Worldwide)
Bed, Bath, Table Linens (U.S.) |
|
International:
Women's Apparel, Handbags, Accessories, Footwear (Japan)
Women's Apparel, Handbags, Accessories (Korea)
Women's Apparel, Handbags, Accessories (Mexico, Central America, South
America, Caribbean, Dominican Republic)
Women's Apparel, Handbags, Accessories, Belts (Hong Kong, China, Taiwan,
Singapore, Malaysia, Thailand, Indonesia, Macau)
Women's Apparel, Handbags, Accessories, Belts, Sleepwear, Casual Legwear
(Philippines)
Retail distribution rights for women's apparel, handbags and small
leather goods (Turkey)
Retail distribution rights for women's apparel, footwear, handbags,
belts, small leather goods, scarves, sleepwear, socks and swimwear
(Greece) |
Kasper |
Men's Leather Outerwear (U.S.)
Men's Footwear (U.S., Canada)
Men's Tailored Clothing (U.S., Canada, Mexico) |
Albert Nipon |
Men's Tailored Clothing (U.S.)
Women's Footwear (U.S., Canada)
Women's Outerwear (U.S.) |
Evan-Picone |
Men's Tailored Clothing,
Formal Wear, Topcoats (U.S.)
Women's Sheer Hosiery, Casual Legwear (U.S.)
Women's Sportswear (Japan) |
17
Brand
|
Category
|
Nine West |
Watches (U.S., Canada, Spain,
Mexico, U.K., Central America)
Gloves, Cold Weather Accessories (U.S., Canada)
Leather, Wool, Casual Outerwear, Rainwear (U.S., Canada, Spain)
Belts (U.S.)
Sunglasses (U.S., Canada, Spain)
Hats (U.S., Canada)
Eyewear (U.S., Canada, Mexico, Brazil, Central America, Bolivia, Chile,
Columbia,
Costa Rica, El Salvador, Honduras, Netherlands Antilles, Panama, Peru,
Venezuela)
Casual Legwear (U.S., Canada) |
Easy Spirit |
Slippers (U.S., Canada) |
Enzo Angiolini |
Sunglasses (U.S.) |
Nine & Company |
Swimwear (U.S.)
Sleepwear, Loungewear (U.S.)
Watches (U.S.)
Gloves, Cold Weather Accessories (U.S.)
Leather, Wool, Casual Outerwear, Rainwear (U.S.)
Belts (U.S.)
Slippers (U.S.)
Sunglasses (U.S.)
Hats (U.S.)
Casual Legwear (U.S.) |
Calico |
Footwear (U.S.) |
International
footwear and accessories retail/wholesale distribution |
Nine West retail locations (Bahrain, Kuwait, Oman, Qatar, The United
Arab Emirates, Jordan, India, Poland)
Nine West retail locations (Saudi Arabia, Lebanon)
Nine West retail locations and wholesale distribution rights for Nine
West, Enzo Angiolini, Bandolino and Easy Spirit footwear and
accessories (Belize, Colombia, Costa Rica, Ecuador, El Salvador,
Guatemala, Honduras, Nicaragua, Panama, Venezuela, the Dominican Republic,
French Guiana, Guyana, Suriname, the Caribbean Islands)
Nine West retail locations and wholesale distribution rights for Nine
West footwear and accessories (Greece, Cyprus)
Nine West retail locations and wholesale distribution rights for Nine
West footwear and accessories (Chile, Peru) and wholesale distribution
rights for Enzo Angiolini footwear and accessories (Chile)
Nine West, Enzo Angiolini and NW Nine West retail locations and
wholesale distribution rights for Nine West, Enzo Angiolini and NW
Nine West footwear and accessories (Hong Kong, Indonesia, Japan,
Korea, Macau, Malaysia, the People's Republic of China, the Philippines,
Singapore, Taiwan, Thailand)
Nine West retail locations and wholesale distribution rights for Nine
West footwear and accessories (South Africa)
Nine West retail locations and wholesale distribution rights for Nine
West, Enzo Angiolini and Westies (locally produced) (Mexico)
Nine West retail locations (Turkey)
Nine West and Easy Spirit retail locations and wholesale
distribution rights for Nine West and Easy Spirit footwear
and accessories (Israel)
Nine West and Easy Spirit retail locations and wholesale
distribution rights for Nine West, Enzo Angiolini, Easy Spirit,
Bandolino and Westies footwear and accessories (Canada)
Nine West retail locations (the United Kingdom, Ireland, the Channel
Islands) and wholesale distribution rights for Nine West and NW
Nine West footwear and accessories and Easy Spirit footwear
(the United Kingdom, Ireland, the Channel Islands, Norway, Denmark,
Sweden, Finland, Iceland)
Nine West retail locations and wholesale distribution rights for Nine
West and Enzo Angiolini footwear and accessories (Spain) |
Energie |
Men's Denim & Sportswear
(U.S.) |
18
Brand
|
Category
|
Gloria Vanderbilt |
Women's Wool, Leather, Casual
Outerwear, Rainwear (U.S.)
Women's Woven Shirts (U.S.)
Women's Sweaters (U.S.)
Women's Knit Tops, Bottoms, ActiveWear (U.S.)
Women's Scarves, Gloves, Cold Weather Accessories (U.S., Canada)
Women's Costume Jewelry (Canada)
Women's Watches (U.S.)
Women's Sleepwear, Daywear, Loungewear (U.S.)
Women's Swimwear (U.S.)
Vanderbilt Denim, Apparel and Accessories for Men, Boys, Infants and
Toddlers (Canada)
Gloria Vanderbilt Apparel and Accessories for Women, Girls, Infants
and Toddlers (Canada) |
l.e.i. |
Intimate Apparel (Daywear)
(U.S.)
Swimwear (U.S.)
Footwear (U.S., Canada)
Handbags, Belts, Accessories (U.S., Canada)
Watches (U.S., Canada)
Casual Legwear (U.S.)
Sunglasses (U.S., Canada)
Children's Apparel (U.S.)
Outerwear (U.S.)
Jewelry (U.S.) |
Trademarks
We utilize a variety of trademarks which we own, including
Jones New York, Jones New York Signature, Jones New York Sport, Jones Wear,
Jones New York Country, Jones Jeans, Jones Studio, Evan-Picone, Executive Suite,
Norton McNaughton, Maggie McNaughton, Norton Studio, Erika, Energie, Nine West,
Easy Spirit, Enzo Angiolini, Bandolino, Banister, Nine & Company, Westies,
Napier, Richelieu, Judith Jack, Gloria Vanderbilt, Glo, l.e.i., Albert
Nipon, Anne Klein, Anne Klein New York, AK Anne Klein, Kasper and Le
Suit. We have registered or applied for registration for these and other
trademarks for use on a variety of items of apparel, footwear, accessories
and/or 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 our material registered trademarks are as
follows, with our other registered foreign and domestic trademarks expiring at
various dates through 2018. Certain brands such as Jones New York are
sold under several related trademarks; in these instances, the range of
expiration dates is provided. All marks are subject to renewal in the ordinary
course of business if no third party successfully challenges such registrations
and, in the case of domestic and certain foreign registrations, applicable use
and related filing requirements for the goods and services covered by such
registrations have been met.
Trademark
|
Expiration
Dates |
|
Trademark
|
Expiration
Dates |
|
Trademark
|
Expiration
Dates |
Jones New York |
2006-2012 |
|
Nine & Company |
2012 |
|
l.e.i. |
2011 |
Jones New York Sport |
2004 |
|
Napier |
2009 |
|
Albert Nipon |
2006-2012 |
Evan-Picone |
2013 |
|
Judith Jack |
2012 |
|
Anne Klein |
2005-2012 |
Nine West |
2011-2013 |
|
Norton McNaughton |
2004 |
|
Kasper |
2010 |
Easy Spirit |
2007-2010 |
|
Erika |
2004 |
|
Le Suit |
2008 |
Enzo Angiolini |
2005-2010 |
|
Energie |
2008 |
|
|
|
Bandolino |
2011
|
|
Gloria Vanderbilt |
2005-2012 |
|
|
|
We carefully monitor trademark expiration dates to provide
uninterrupted registration of our material trademarks. We also license the Polo
Jeans Company by Ralph Lauren, Givenchy, Tommy Hilfiger, H Hilfiger and ESPRIT
trademarks (see "Licensed Brands" above).
We also hold numerous patents expiring at various dates
through 2021 (subject to payment of annuities and/or periodic maintenance fees)
and have additional patent applications pending in the United States Patent and
Trademark Office and in certain other countries. We regard our trademarks and
other proprietary rights as valuable assets which are critical in the marketing
of our products. We vigorously monitor and protect our trademarks and patents
against infringement and dilution where legally feasible and appropriate.
19
Imports and Import Restrictions
Our transactions with our 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 our products are 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 our
operations and our ability to import products at current or increased levels. We
cannot predict the likelihood or frequency of any such events occurring.
Our 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, the Philippines, Thailand,
Indonesia and South 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. Our imported products are also
subject to United States customs duties and, in the ordinary course of business,
we are from time to time subject to claims by the United States Customs Service
for duties and other charges.
We monitor duty, tariff and quota-related developments and
continually seek to minimize our potential exposure to quota-related risks
through, among other measures, geographical diversification of our 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 our foreign manufacturers are located at greater
geographic distances from us than our domestic manufacturers, we are generally
required to allow greater lead time for foreign orders, which reduces our
manufacturing flexibility. Foreign imports are also affected by the high cost of
transportation into the United States and the effects of fluctuations in the
value of the dollar against foreign currencies in certain countries.
In addition to the factors outlined above, our future
import operations may be adversely affected by political instability resulting
in the disruption of trade from exporting countries and restrictions on the
transfer of funds.
Backlog
We had unfilled customer orders of approximately $1.4
billion at both December 31, 2003 and December 31, 2002. These amounts include
both confirmed and unconfirmed orders which we believe, 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 Kasper during 2003, a
comparison 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 we participate. We compete with many
other manufacturers and retailers, some of which are larger and have greater
resources.
We compete primarily on the basis of fashion, price and
quality. We believe our competitive advantages include our ability to anticipate
and respond quickly to changing consumer demands, our brand names and range of
products and our ability to operate within the industries' production and
delivery constraints. Furthermore, our established brand names and relationships
with retailers have resulted in a loyal following of customers.
20
While new entrants come into markets we serve on a regular
basis, we consider the risk of formidable new competitors to be low due to
barriers to entry, such as significant startup costs, the long-term nature of
supplier and customer relations and the need to develop both adequate financial
resources and an efficient operational infrastructure.
We believe 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, 2003, we had approximately 17,095
full-time employees. This total includes approximately 10,885 in quality
control, production, design and distribution positions, approximately 3,210 in
administrative, sales, clerical and office positions and approximately 3,000 in
our retail stores. We also employ approximately 4,750 part-time employees, of
which approximately 4,635 work in our retail stores.
Approximately 215 of our employees located in Bristol,
Pennsylvania are members of the Teamsters Union, which has a collective
bargaining agreement with us expiring in March 2006. Approximately 80 of our
employees located in Vaughan, Ontario are members of the Laundry and Linen
Drivers and Industrial Workers Union, which has a collective bargaining
agreement with us expiring in March 2006. Approximately 1,185 of our 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, 2005. Approximately 225 of our employees are members of the Union of
Needletrades, Industrial and Textile Employees, which has a one-year labor
agreement with Kasper expiring on May 31, 2004. We consider our relations with
our employees to be satisfactory.
ITEM 2. PROPERTIES
The general location, use and approximate size of our
principal properties are set forth below:
Location
|
Owned/Leased
|
Use
|
Approximate Area
in Square Feet
|
Bristol, Pennsylvania |
leased |
Headquarters and distribution warehouse |
453,000 |
Bristol, Pennsylvania |
leased |
Administrative and computer services |
131,000 |
New York, New York |
leased |
Administrative, executive and sales offices |
1,049,000 |
Vaughan, Canada |
leased |
Administrative offices and distribution warehouse |
120,000 |
Lawrenceburg, Tennessee |
leased |
Distribution warehouses |
1,199,000 |
South Hill, Virginia |
leased |
Distribution warehouses |
534,000 |
Rural Hall, North Carolina |
leased |
Materials and distribution warehouse |
447,000 |
El Paso, Texas |
owned |
Administrative, warehouse and preproduction facility |
165,000 |
El Paso, Texas |
leased |
Distribution warehouses |
861,000 |
Durango, Mexico |
owned |
Finishing, assembly and warehouse facilities |
453,000 |
White Plains, New York |
leased |
Administrative and computer services |
366,000 |
West Deptford, New Jersey |
leased |
Distribution warehouses |
868,000 |
East Providence, Rhode Island |
leased |
Distribution warehouses, product development and administrative |
241,000 |
Goose Creek, South Carolina |
leased |
Distribution warehouses |
600,000 |
Edison, New Jersey |
leased |
Administrative offices and distribution warehouses |
256,000 |
Commerce, California |
leased |
Administrative offices and distribution warehouse |
86,000 |
San Luis, Mexico |
leased |
Production and distribution warehouses |
997,000 |
Secaucus, New Jersey |
leased |
Administrative offices, retail store and distribution warehouse |
400,000 |
Shenzhen, China |
leased |
Production facilities and dormitories |
115,000 |
21
We sublease approximately 200,000 square feet of our White
Plains facilities and a 220,000 square foot warehouse facility in Teterboro, New
Jersey to independent companies. Our Australian joint venture company leases
office and distribution facilities in Australia.
We also own two production facilities totaling 101,000
square feet in Torreon, Mexico, a 67,000 square foot production facility in
Juarez, Mexico and a 111,000 square foot distribution facility in El Paso, Texas
which are currently not in service.
Our retail stores are leased pursuant to long-term leases,
typically five to seven years for apparel and footwear outlet stores and ten
years for footwear and accessories and apparel specialty stores. Certain leases
allow us to terminate our obligations after a predetermined period (generally
one to three years) in the event that a particular location does not achieve
specified sales volume and some leases have options to renew. 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.
We believe that our existing facilities are well
maintained, in good operating condition and that our existing and planned
facilities will be adequate for our operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Ralph License with Polo was scheduled to end on
December 31, 2003. During the course of the discussions concerning Ralph,
Polo asserted that the expiration of the Ralph contract would cause the Lauren
License agreements to end on December 31, 2003, instead of December 31, 2006. We
believe that this is an improper interpretation and that the expiration of the Ralph
License did not cause the Lauren License to end.
On June 3, 2003, we announced that our discussions with
Polo regarding the interpretation of the Lauren License had reached an
impasse and that, as a result, we had filed a complaint in the New York State
Supreme Court against Polo and its affiliates and our former President, Jackwyn
Nemerov. The complaint alleges that Polo breached the Lauren License
agreements by claiming that the license ends at the end of 2003. The complaint
also alleges that Ms. Nemerov breached the confidentiality and non-compete
provisions of her employment agreement with us. Additionally, Polo is alleged to
have induced Ms. Nemerov to breach her employment agreement and Ms. Nemerov is
alleged to have induced Polo to breach the Lauren License agreements. We
asked the court to enter a judgment for compensatory damages of $550 million, as
well as punitive damages, and to enforce the confidentiality and non-compete
provisions of Ms. Nemerov's employment agreement. On June 3, 2003, Polo also
filed a complaint in the New York State Supreme Court against us, seeking among
other things a declaratory judgment that the Lauren License terminated as
of December 31, 2003. On June 25, 2003, we filed an amended complaint adding a
claim against Ms. Nemerov for conversion, which alleges that Ms. Nemerov
wrongfully took and possesses documents containing confidential information
regarding us.
On July 3, 2003, Ms. Nemerov filed a motion to stay our
claims against her and to compel arbitration of those claims. We have opposed
that motion. Additionally, on July 3, 2003, Polo served a motion on us to
dismiss our breach of contract claim, and to stay our claim regarding inducement
of Ms. Nemerov's breach of her employment agreement pending the outcome of
arbitration. On July 8, 2003, we served papers opposing Nemerov's motion. On
July 25, 2003, we served papers opposing Polo's motion and also served upon Polo
a motion seeking summary judgment in Polo's action for a declaratory judgment.
On August 12, 2003, Polo filed a cross-motion for summary judgment in that
action. The four motions were argued on September 30, 2003, and the parties are
awaiting decisions.
We have been named as a defendant in various actions and
proceedings arising from our ordinary business activities. Although the amount
of any liability that could arise with respect to these actions cannot be
accurately predicted, in our opinion, any such liability will not have a
material adverse financial effect on us.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
Price range of common stock: |
|
|
|
|
2003 |
|
|
|
|
High |
$37.44 |
$31.15 |
$33.18 |
$35.91 |
Low |
$25.61 |
$26.60 |
$27.98 |
$30.78 |
2002 |
|
|
|
|
High |
$37.63 |
$41.68 |
$38.25 |
$37.65 |
Low |
$31.46 |
$33.05 |
$27.55 |
$26.18 |
Dividends per share of common stock: |
|
|
|
|
2003 |
- |
- |
$0.08 |
$0.08 |
2002 |
- |
- |
- |
- |
Our 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 our common stock as
reported on the New York Stock Exchange Composite Tape. The last reported sale
price per share of our common stock on March 11, 2004 was $36.15, and on that date
there were 457 holders of record of our 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.
The following table sets forth the repurchases of our
common stock for the fiscal quarter ended December 31, 2003.
Period |
(a) Total
Number of Shares (or Units) Purchased |
(b) Average
Price Paid per Share (or Unit) |
(c) Total
Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs |
(d) Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May Yet
Be Purchased Under the Plans or Programs |
October 5,
2003 to November 1, 2003 |
- |
- |
- |
$152,857,851 |
November 2,
2003 to November 29, 2003 |
- |
- |
- |
$152,857,851 |
November 30,
2003 to December 31, 2003 |
490,000 |
$33.83 |
490,000 |
$136,280,873 |
Total |
490,000 |
$33.83 |
490,000 |
$136,280,873 |
These repurchases were made under programs
announced on October 8, 2002 and July 29, 2003 for $150.0 million each. While
neither plan has an expiration date, the $150.0 million limit under the October
8, 2002 program was reached during December 2003.
23
ITEM 6. SELECTED FINANCIAL DATA
The following financial information is
qualified by reference to, and should be read in conjunction with, our
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 our audited Consolidated Financial
Statements for each of the five years in the period ended December 31, 2003. We
completed our acquisitions of Nine West Group, Victoria, Judith Jack,
McNaughton, Gloria Vanderbilt, l.e.i. and Kasper at various dates within the
five-year period and, accordingly, the results of their operations are included
in our operating results from the respective dates of acquisition.
(All amounts in millions except net income per share data)
Year Ended December 31,
|
2003
|
2002
|
2001
|
2000
|
1999
|
Income Statement Data
|
|
|
|
|
|
|
Net sales |
$ 4,339.1
|
$ 4,312.2
|
$ 4,073.8
|
$ 4,147.4
|
$ 3,152.4
|
|
Licensing income (net) |
36.2
|
28.7
|
24.8
|
22.2
|
20.9
|
|
|
|
|
|
|
|
|
Total revenues |
4,375.3 |
4,340.9 |
4,098.6 |
4,169.6 |
3,173.3 |
|
Cost of goods sold |
2,738.6
|
2,657.0
|
2,570.4
|
2,436.5
|
1,961.5
|
|
|
|
|
|
|
|
|
Gross profit |
1,636.7 |
1,683.9 |
1,528.2 |
1,733.1 |
1,211.8 |
|
Selling, general and administrative
expenses |
1,056.9
|
1,093.3
|
1,004.1
|
1,091.6
|
811.3
|
|
Amortization of goodwill |
-
|
-
|
44.2
|
36.9
|
22.3
|
|
|
|
|
|
|
|
|
Operating income |
579.8
|
590.6
|
479.9
|
604.6
|
378.2
|
|
Interest income |
3.5
|
4.6
|
4.5
|
2.3
|
3.3
|
|
Interest expense and financing costs |
58.8
|
62.7
|
84.6
|
103.8
|
66.9
|
|
Equity in earnings of unconsolidated affiliates |
2.5
|
1.0
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
527.0
|
533.5
|
399.8
|
503.1
|
314.6
|
|
Provision for income taxes |
198.4
|
201.2
|
163.6
|
201.2
|
126.2
|
|
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle |
328.6
|
332.3
|
236.2
|
301.9
|
188.4
|
|
Cumulative effect of change in accounting for intangible assets, net of tax |
-
|
13.8
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Net income |
$ 328.6
|
$ 318.5
|
$ 236.2
|
$ 301.9
|
$ 188.4
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
Income per share before cumulative effect of change in accounting principle |
|
|
|
|
|
|
Basic |
$2.58 |
$2.59 |
$1.92 |
$2.54 |
$1.65 |
|
Diluted |
$2.48 |
$2.46 |
$1.82 |
$2.48 |
$1.60 |
|
Net income per share |
|
|
|
|
|
|
Basic |
$2.58 |
$2.48 |
$1.92 |
$2.54 |
$1.65 |
|
Diluted |
$2.48 |
$2.36 |
$1.82 |
$2.48 |
$1.60 |
|
Dividends paid per share |
$0.16 |
- |
- |
- |
- |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
Basic |
127.3 |
128.2 |
123.2 |
119.0 |
114.1 |
|
Diluted |
136.5 |
139.0 |
133.7 |
121.9 |
118.0 |
December 31,
|
2003
|
2002
|
2001
|
2000
|
1999
|
Balance Sheet Data
|
|
|
|
|
|
|
Working capital |
$ 826.9 |
$ 890.9 |
$ 762.8 |
$ 294.9 |
$ 469.2 |
|
Total assets |
4,187.7 |
3,852.6 |
3,373.5 |
2,979.2 |
2,792.0 |
|
Short-term debt and current portion of long-term debt and capital lease obligations |
180.8 |
6.3 |
7.7 |
499.8 |
266.9 |
|
Long-term debt, including capital lease obligations |
835.1 |
978.1 |
976.6 |
576.2 |
834.2 |
|
Stockholders' equity |
2,537.8 |
2,303.5 |
1,905.4 |
1,477.2 |
1,241.0 |
24
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information and analysis
of our results of operations from 2001 through 2003, and our liquidity and
capital resources. The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements included elsewhere
herein.
Overview
We design, contract for the manufacture of, manufacture
and market a broad range of women's collection sportswear, suits and dresses,
casual sportswear and jeanswear for men, women and children, and women's
footwear and accessories. We sell our products through a broad array of
distribution channels, including better specialty and department stores and mass
merchandisers, primarily in the United States and Canada. We also operate our
own network of retail and factory outlet stores. In addition, we license the use
of several of our brand names to select manufacturers and distributors of women's
and men's apparel and accessories worldwide.
Trends
We believe that two significant trends are occurring in
the women's apparel, footwear and accessories industry. We believe that a
trend exists among our major retail accounts to concentrate their women's
apparel, footwear and accessories buying among a narrowing group of vendors. We
also believe that consumers in the United States and Canada are shopping less in
department stores (our traditional distribution channel) and more in other
channels, such as specialty shops and mid-tier locations where value is
perceived to be higher. We have responded to these trends by enhancing the brand
equity of our labels through our focus on design, quality and value, and through
strategic acquisitions which provide significant diversification to the business
by successfully adding new distribution channels, labels and product lines (such
as the Judith Jack, Norton McNaughton, Energie, Erika, Gloria Vanderbilt,
l.e.i., Kasper, Albert Nipon, AK Anne Klein and Anne Klein New York
brands). Through this diversification, we have evolved into a multidimensional
resource in apparel, footwear and accessories. We have leveraged the strength of
our brands to increase both the number of locations and amount of selling space
in which our products are offered, to introduce product extensions such as the Jones
New York Signature, Nine West, Nine & Company, Easy
Spirit and Bandolino apparel labels and the Jones New York
accessory label, and to reposition the Bandolino and Evan-Picone
labels to the moderate market segment.
Acquisitions
We completed our acquisitions of Judith Jack on April 26,
2001, McNaughton on June 19, 2001, Gloria Vanderbilt on April 8, 2002, l.e.i. on
August 15, 2002 and Kasper on December 1, 2003. The results of operations of the
acquired companies are included in our 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. Judith Jack operates in the wholesale footwear and accessories segment,
Kasper operates in the wholesale better apparel and retail segments and
McNaughton, Gloria Vanderbilt and l.e.i. operate in the wholesale moderate
apparel segment.
Restructuring and Other Charges
During 2002 and 2003, we restructured several of our
existing operations to reduce both excess capacity and overhead costs, including
the closing of Canadian and Mexican production facilities, the closing of an
administrative, warehouse and preproduction facility in El Paso, Texas and the
closing of a warehouse facility in Rural Hall, North Carolina. As a result, we
recorded restructuring charges of $8.8 million in 2002, including $5.0 million
of employee severance and related costs, $3.3 million of asset impairments
(based on estimated market values of the affected properties) and $0.5 million
of other costs. Of these charges, $0.9 million is reported as a selling, general
and administrative expense in the wholesale better apparel segment, $6.9 million
is reported as a selling, general and administrative expense in the wholesale
moderate apparel segment and $1.0 million is reported as a selling, general and
administrative expense in the wholesale
25
footwear and accessories segment. In 2003, we recorded an additional
restructuring charge of $0.7 million related to employee severance and related
costs in the wholesale better segment and reversed $0.3 million of employee
severance costs in the wholesale footwear and accessories segment.
During 2002, we recorded a $31.9 million charge relating
to contractual obligations under employment contracts, primarily for former
President Jackwyn Nemerov and former Vice Chairman Irwin Samelman. The charges
under these contracts are comprised of pre-tax amounts totaling $11.8 million
for contractual salary and bonus obligations and $18.1 million for non-cash
compensation expense resulting from contractual vesting of outstanding stock
options and restricted stock. Also included is a pre-tax amount of $2.0 million
related to certain obligations under the employment agreement that we entered
into with Peter Boneparth when we acquired McNaughton in 2001. These obligations
were satisfied in March 2002 when Mr. Boneparth was elected President and
designated to become our Chief Executive Officer on May 22, 2002.
The terrorist attacks of September 11, 2001 and subsequent
increases in unemployment and reduced consumer spending clearly had a negative
impact on the United States economy during 2001 and 2002. Retailers in those
distribution channels to which we sell our products responded to the general
sense of economic uncertainty with order reductions and extremely aggressive
promotional activity. As a result, we had the challenge in late 2001 and early
2002 of liquidating inventory above our normal plan, as well as working with our
retail customers to flow inventories through the normal retail distribution
channels. Accordingly, we recorded a pre-tax charge of $86.8 million (the
"special charge") in the third fiscal quarter of 2001 to provide for
the writedown of inventories and receivables. Of the special charge, $61.7
million was to write down to net realizable value merchandise that we either
owned or were committed for and needed to dispose of through off-price channels.
The charge to receivables of $24.1 million was to record an incremental
provision for customer allowances, which we anticipated we needed to provide to
our retail customers in order to effectively flow goods through the retail
channels.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets," which changed the accounting for goodwill and
other intangible assets from an amortization method to an impairment-only
approach. Upon our adoption of SFAS No. 142 on January 1, 2002, we ceased
amortizing our trademarks without determinable lives and our goodwill. As
prescribed under SFAS No. 142, we had our goodwill and trademarks tested for
impairment during the first fiscal quarter of 2002.
Due to market conditions resulting from a sluggish economy
compounded by the aftereffects of the events of September 11, 2001, we revised
our earnings forecasts for future years for several of our trademarks and
licenses. As a result, the fair market value of these assets (as appraised by an
independent third party) was lower than their carrying value as of December 31,
2001. We accordingly recorded an after-tax impairment charge of $13.8 million,
which is reported as a cumulative effect of change in accounting principle
resulting from the adoption of SFAS No. 142.
In the second fiscal quarter of 2002, we recorded an
additional impairment charge of $5.8 million related to two trademarks due to a
decrease in projected accessory revenues resulting from a further evaluation of
our costume jewelry business. We have our annual impairment test for goodwill
and trademarks performed in the fourth fiscal quarter of the year. As a result
of continuing decreases in projected accessory revenues in our costume jewelry
lines, the conversion of a portion of our Enzo Angiolini retail stores to
the more moderately-priced Bandolino brand and the discontinuance of our Rena
Rowan line, we recorded additional trademark impairment charges of $18.6
million in 2002 and$4.5 million in 2003. These charges are reported as a
selling, general and administrative expense in the other and eliminations
segment.
Termination as of December 31, 2003 of Licenses with Polo Ralph Lauren
Corporation for Lauren and Ralph Brands
The Ralph License with Polo was scheduled to end on
December 31, 2003. During the course of discussions concerning Ralph,
Polo asserted that the expiration of the Ralph contract would cause the Lauren
26
License agreements to end on December 31, 2003, instead of December 31, 2006.
We believe that this is an improper interpretation and that the expiration of
the Ralph License did not cause the Lauren License to end.
On June 3, 2003, we announced that our discussions with
Polo regarding the interpretation of the Lauren License had reached an
impasse and that, as a result, we had filed a complaint in the New York State
Supreme Court against Polo and its affiliates (see "Legal
Proceedings"). The complaint alleges that Polo breached the Lauren
License agreements by claiming that the license ends at the end of 2003. We
asked the court to enter a judgment for compensatory damages of $550 million as
well as punitive damages. On June 3, 2003, Polo also filed a complaint in the
New York State Supreme Court against us, seeking among other things a
declaratory judgment that the Lauren License terminated as of December
31, 2003. On July 25, 2003, we served papers opposing Polo's motion and also
served upon Polo a motion seeking summary judgment in Polo's action for a
declaratory judgment. On August 12, 2003, Polo filed a cross-motion for summary
judgment in that action. These motions were argued on September 30, 2003, and
the parties are awaiting decisions.
We assert within the complaint that Polo's actions fully
discharged our obligations under the Lauren License agreements for lines
to be sold after December 31, 2003. Therefore, we ceased development of Lauren
products effective with the Spring 2004 season. Our Lauren business
represented a significant portion of our sales and profits. Net sales of Lauren
products were $476.4 million for the year ended December 31, 2003. The
termination of our exclusive right to manufacture and market clothing under this
trademark in the United States, Canada and elsewhere will have a material
adverse effect on our results of operations after 2003. While we are pursuing
other opportunities, including internal brands (including the new lifestyle
brand under the Jones New York Signature label), acquisitions (including
the Kasper acquisition) and licensing options, some of which we previously were
precluded from exploring under agreements with Polo, there is no guarantee that
we will be able to replace all of the net sales of the Lauren brand.
However, the loss of the Lauren License will not materially adversely
impact our liquidity, and we will continue to have a strong financial position.
The expiration of the Ralph License will not be
material to us in any respect. Net sales of Ralph products were $30.7
million for the year ended December 31, 2003.
We and Polo have agreed that, in connection with the
expiration of the Ralph License, the Canada Licenses terminated as of
December 31, 2003. The termination of the Canada Licenses will not be material
to us in any respect. Net sales of all products under the Canada Licenses were
$41.3 million for the year ended December 31, 2003. The dispute between us and
Polo does not relate to the Polo Jeans License in the United States, and
an end to the Canada Licenses does not end our longer term Polo Jeans
License in the United States or otherwise adversely affect the Polo Jeans
License in the United States.
Stock-Based Compensation
Effective January 1, 2003, we adopted the fair value
method of accounting for employee stock options for all options granted after
December 31, 2002 pursuant to the guidelines contained in SFAS No. 123,
"Accounting for Stock-Based Compensation" using the "prospective
method" set forth in SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." Under this approach, the fair
value of the option on the date of grant (as determined by the Black-Scholes
option pricing model) is amortized to compensation expense over the option's
vesting period. Since the expense to be recorded is dependent on both the timing
and the number of options to be granted, we cannot estimate the effect on future
results of operations at this time. Prior to January 1, 2003, pursuant to a
provision in SFAS No. 123 we had elected to continue using the intrinsic-value
method of accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options had been
measured as the excess, if any, of the quoted market price of our stock at the
date of the grant over the amount the employee must pay to acquire the stock.
Under this approach, we had only recognized compensation expense for stock-based
awards to employees for options granted at below-market prices. For more
information, see "Summary of Accounting Policies - Stock Options" in
Notes to Consolidated Financial Statements.
27
Critical Accounting Policies
Several of our accounting policies involve significant
judgements and uncertainties. The policies with the greatest potential effect on
our results of operations and financial position include the estimated
collectibility of accounts receivable, the recovery value of obsolete or
overstocked inventory and the estimated fair values of both our goodwill and
intangible assets with indefinite lives.
For accounts receivable, we estimate the net
collectibility, considering both historical and anticipated trends of trade
discounts and co-op advertising deductions taken by our customers, allowances we
provide to our retail customers to flow goods through the retail channels, and
the possibility of non-collection due to the financial position of our
customers. For inventory, we estimate the amount of goods that we will not be
able to sell in the normal course of business and write down the value of these
goods to the recovery value expected to be realized through off-price channels.
Historically, actual results in these areas have not been materially different
than our estimates, and we do not anticipate that our estimates and assumptions
are likely to materially change in the future. However, if we incorrectly
anticipate trends or unexpected events occur, our results of operations could be
materially affected.
We utilize independent third-party appraisals to estimate
the fair values of both our goodwill and our intangible assets with indefinite
lives. These appraisals are based on projected cash flows and interest rates;
should interest rates or our future cash flows differ significantly from the
assumptions used in these projections, material impairment losses could result
where the estimated fair values of these assets become less than their carrying
amounts.
Results of Operations
Statements of Income Stated in Dollars and as a Percentage of
Total Revenues
(In millions)
|
2003
|
|
2002
|
|
2001
|
Net sales |
$ 4,339.1
|
99.2%
|
|
$ 4,312.2
|
99.3%
|
|
$ 4,073.8
|
99.4%
|
Licensing income (net) |
36.2
|
0.8%
|
|
28.7
|
0.7%
|
|
24.8
|
0.6%
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
4,375.3
|
100.0%
|
|
4,340.9
|
100.0%
|
|
4,098.6
|
100.0%
|
Cost of goods sold |
2,738.6
|
62.6%
|
|
2,657.0
|
61.2%
|
|
2,570.4
|
62.7%
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
1,636.7
|
37.4%
|
|
1,683.9
|
38.8%
|
|
1,528.2
|
37.3%
|
Selling, general and administrative expenses |
1,056.9
|
24.2%
|
|
1,061.4
|
24.5%
|
|
1,004.1
|
24.5%
|
Executive compensation obligations |
-
|
-
|
|
31.9
|
0.7%
|
|
-
|
-
|
Amortization of goodwill |
-
|
-
|
|
-
|
-
|
|
44.2
|
1.1%
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
579.8
|
13.3%
|
|
590.6
|
13.6%
|
|
479.9
|
11.7%
|
Interest income |
3.5
|
0.1%
|
|
4.6
|
0.1%
|
|
4.5
|
0.1%
|
Interest expense and financing costs |
58.8
|
1.3%
|
|
62.7
|
1.4%
|
|
84.6
|
2.1%
|
Equity of earnings of unconsolidated affiliates |
2.5
|
0.1%
|
|
1.0
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
527.0
|
12.0%
|
|
533.5
|
12.3%
|
|
399.8
|
9.8%
|
Provision for income taxes |
198.4
|
4.5%
|
|
201.2
|
4.6%
|
|
163.6
|
4.0%
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before change in accounting principle
|
328.6
|
7.5%
|
|
332.3
|
7.7%
|
|
236.2
|
5.8%
|
Cumulative effect of change in accounting for intangible assets
|
-
|
-
|
|
13.8
|
0.3%
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$ 328.6
|
7.5%
|
|
$ 318.5
|
7.3%
|
|
$ 236.2
|
5.8%
|
|
|
|
|
|
|
|
|
|
|
Percentage totals may not agree due to rounding.
2003 Compared to 2002
Revenues. Total revenues for 2003 were $4.38
billion compared to $4.34 billion for 2002, an increase of 0.8%.
Revenues by segment were as follows:
28
(In millions)
|
2003
|
2002
|
Increase/ (Decrease)
|
Percent
Change
|
Wholesale better apparel |
$ 1,475.0
|
$ 1,636.4
|
$ (161.4)
|
(9.9%)
|
Wholesale moderate apparel |
1,310.2
|
1,093.5
|
216.7
|
19.8%
|
Wholesale footwear and accessories |
868.3
|
882.3
|
(14.0)
|
(1.6%)
|
Retail |
685.6 |
700.0 |
(14.4) |
(2.1%) |
Other |
36.2
|
28.7
|
7.5
|
26.1%
|
|
|
|
|
|
Total revenues |
$ 4,375.3
|
$ 4,340.9
|
$ 34.4
|
0.8%
|
|
|
|
|
|
Wholesale better apparel revenues declined primarily as
the result of a decrease in shipments and increased customer allowances of our Polo
Jeans, Lauren and Ralph businesses. Planned decreases in Jones
New York career and decreased shipments in our Jones New York Sport
and Rena Rowan products were partially offset by increases in our Nine
West, Jones New York Suit and Easy Spirit apparel product lines as
well as the product lines added as a result of the Kasper acquisition.
Wholesale moderate apparel revenues increased primarily as
a result of the product lines obtained as a result of the Gloria Vanderbilt and
l.e.i. acquisitions. Increases were also realized in the Nine & Company
business during 2003, which were offset by reduced shipments of our Jones
Wear, Energie, Evan-Picone and Erika products.
The wholesale footwear and accessories business was
planned conservatively in light of the uncertain retail climate. These planned
reductions significantly impacted shipments of our Nine West accessories
and Enzo Angiolini footwear product lines, which were somewhat offset by
new product lines, including ESPRIT and Gloria Vanderbilt in both
the footwear and accessories product categories, as well as the growth of our Bandolino
footwear line and our Nine West international business.
Retail revenues decreased primarily due to comparable
store sales decreasing approximately 2.3% for footwear and accessories stores
and 4.3% for ready-to-wear outlet stores as compared to 2002. The overall
decreases were a result of a lack of consumer traffic and the challenging retail
environment for most of 2003, although consumer traffic in our footwear stores
improved considerably during the fourth fiscal quarter of 2003, and a net
reduction of five footwear stores and a consolidation of 12 apparel stores from
2002.
Gross Profit. The gross profit margin
decreased to 37.4% in 2003 compared to 38.8% in 2002.
Wholesale better apparel gross profit margins were 38.0%
and 41.3% for 2003 and 2002, respectively. The decrease was a result of higher
levels of sales through the off-price channel and increased discounts and
customer allowances provided to our retail customers in relation to the
discontinuance of our Lauren business. This decrease was partially offset
by improved performance of the Jones New York career products at retail,
resulting in lower levels of customer allowances, as well as a higher percentage
of sales of our product lines to regular customers at full-price and a lower
percentage of sales through the off-price channel. Cost of sales for 2003
included $3.4 million related to adjustments required under purchase accounting
to write up acquired inventories to market value.
Wholesale moderate apparel gross profit margins were 26.0%
and 27.0% for 2003 and 2002, respectively. The margin for the current period was
impacted by a higher level of customer allowances as a result of higher
promotions at our retail customers, as well as a higher ratio of off-price to
full-price sales during the period. Cost of sales for 2002 included $23.1
million related to adjustments required under purchase accounting to write up
acquired inventories to market value.
Wholesale footwear and accessories gross profit margins
were 33.8% and 32.0% for 2003 and 2002, respectively. The margin increase, which
occurred principally in our costume jewelry business, was driven by our
inventory liquidation plan in 2002 and an emphasis on maintaining lower
inventory levels, which resulted in lower sales through the off-price channel.
This increase was partially offset by challenges in our Nine West
accessories business that resulted in a higher level of customer allowances to
maintain the flow of inventory through the retail channel. Margins also
decreased in the Nine West, Easy Spirit and Bandolino
29
footwear product lines due to a higher level of customer allowances and a
higher percentage of sales through the off-price channel.
Retail gross profit margins were 54.5% and 53.2% for 2003
and 2002, respectively. The increase was primarily the result of improved
inventory planning which resulted in a higher percentage of full-price sales and
lower promotional activity in our retail stores.
Selling, General and Administrative Expenses.
Selling, general and administrative ("SG&A") expenses of $1.06
billion in 2003 represented a decrease of $36.4 million from the $1.09 billion
reported for 2002. In 2003, Kasper added $6.7 million to the wholesale better
apparel segment, which includes $1.1 million in amortization of acquired
customer orders, and $2.7 million to the retail segment. Gloria Vanderbilt and
l.e.i. added a total of $28.2 million to the wholesale moderate apparel segment
to 2003, which was somewhat offset by a $26.1 million reduction in our private
label denim business (a result of restructuring and integrating its operations
into l.e.i.). The reorganization of our costume jewelry business also reduced
overhead costs by $17.6 million from the prior year. The remaining decline
represents tighter cost controls across the wholesale businesses and leveraging
the corporate infrastructure across the organization, eliminating duplicative
expenses in our new acquisitions. In 2003 we recorded trademark impairments of
$4.5 million in the other and eliminations segment related primarily to the
discontinuance of our Rena Rowan product line. The prior period reflected
$31.9 million of executive compensation costs and a $24.4 million writedown of Enzo
Angiolini footwear and costume jewelry trademarks in the other and
eliminations segment.
Operating Income. The resulting operating
income for 2003 of $579.8 million decreased 1.8%, or $10.8 million, from the
$590.6 million for 2002, due to the factors described above.
Net Interest Expense. Net interest expense
was $55.3 million in 2003 compared to $58.1 million in 2002. This was primarily
a result of both lower interest rates and lower average borrowings in 2003 as
compared to 2002.
Provision for Income Taxes. The
effective income tax rate was 37.65% for 2003 and 37.7% for 2002. The difference
is primarily the result of an $8.5 million deferred valuation allowance
established in 2003 for capital loss carryforwards that will likely expire
unused, offset by an $8.7 million reversal of prior year tax accruals as the
result of the completion of Internal Revenue Service audits of our federal tax
returns through 2000.
Net Income and Earnings Per Share. Net
income was $328.6 million in 2003, an increase of $10.1 million from the net
income of $318.5 million earned in 2002. Diluted earnings per share for 2003 was
$2.48 compared to $2.36 for 2002, on 1.8% fewer shares outstanding.
2002 Compared to 2001
Revenues. Total revenues for 2002 were $4.34
billion compared to $4.10 billion for 2001, an increase of 5.9%. Excluding the
effect of the special charge mentioned above, total revenues for 2002 increased
$218.2 million, or 5.3%, over 2001.
Revenues by segment were as follows:
|
Total Revenues
|
|
Excluding
Special Charge
|
(In millions)
|
2002
|
2001
|
Increase/
(Decrease)
|
Percent
Change
|
|
2002
|
2001
|
Increase/
(Decrease)
|
Percent
Change
|
Wholesale
better apparel |
$
1,636.4
|
$
1,834.1
|
$
(197.7)
|
(10.8%)
|
|
$
1,636.4
|
$
1,845.7
|
$
(209.3)
|
(11.3%)
|
Wholesale
moderate apparel |
1,093.5
|
547.3
|
546.2
|
99.8%
|
|
1,093.5
|
548.3
|
545.2
|
99.4%
|
Wholesale footwear
and accessories |
882.3
|
980.7
|
(98.4)
|
(10.0%)
|
|
882.3
|
992.2
|
(109.9)
|
(11.1%)
|
Retail |
700.0 |
711.7 |
(11.7) |
(1.6%) |
|
700.0 |
711.7 |
(11.7) |
(1.6%) |
Other |
28.7
|
24.8
|
3.9
|
15.7%
|
|
28.7
|
24.8
|
3.9
|
15.7%
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
$
4,340.9
|
$ 4,098.6
|
$
242.3
|
5.9%
|
|
$
4,340.9
|
$ 4,122.7
|
$
218.2
|
5.3%
|
|
|
|
|
|
|
|
|
|
|
30
As a result of the difficult economic environment
experienced in 2001 and uncertainty as to the extent and duration of any
continuing impact into 2002, we planned reductions across most of our wholesale
businesses in coordination with many of our wholesale customers. In our
wholesale better apparel segment, these planned reductions significantly
impacted shipments of our Jones New York and Rena Rowan career
collection businesses (which had experienced difficult performance at retail
during 2001) and, to a lesser extent, also affected our Lauren by Ralph
Lauren collection business. Wholesale better apparel revenues for 2001 were
negatively impacted by $11.6 million relating to the special charge.
Wholesale moderate apparel revenues increased primarily as
a result of the product lines obtained as a result of the McNaughton, Gloria
Vanderbilt and l.e.i. acquisitions, which accounted for $528.5 million of the
increase. Increases in our Evan-Picone and Nine & Company businesses
were offset by lower sales in the Jones Wear and private label jeans
businesses. Wholesale moderate apparel revenues for 2001 were negatively
impacted by $1.0 million relating to the special charge.
We also planned reductions in our wholesale footwear and
accessories business as a result of the uncertain retail environment. The most
significant decreases were experienced in Nine West accessories and in Enzo
Angiolini and Easy Spirit footwear. The decrease is also due to
markdowns recognized in the costume jewelry business to more aggressively
liquidate inventories in both the wholesale and retail channels. Shipments of
the Nine West footwear line increased as a result of the positive
business initiatives of focusing inventory on tested and proven footwear styles,
as well as shortened production lead times and a broadening of product
classifications to provide more options to the consumer. Wholesale footwear and
accessories revenues for 2001 were negatively impacted by $11.5 million relating
to the special charge.
Retail revenues decreased primarily as a result of a
reduction of 18 stores in 2002 compared to the prior period. Comparable store
sales were down approximately 0.5% for footwear and accessories stores and down
approximately 6.0% for apparel outlet stores as compared to 2001. The decrease
in the apparel stores was due to a concentration of career product locations
which experienced difficult selling throughout 2002.
Gross Profit. The gross profit margin
increased to 38.8% in 2002 compared to 37.3% in 2001. Cost of sales included
$23.1 million and $17.7 million in 2002 and 2001, respectively, related to
adjustments required under purchase accounting to write up acquired inventories
to market value upon acquisition and $61.7 million in 2001 related to the
special charge reflected in cost of sales.
Wholesale better apparel gross profit margins were 41.3%
and 36.0% for 2002 and 2001, respectively. Wholesale better apparel cost of
sales for 2001 included $23.0 million related to the special charge. The primary
reasons for the margin increase were more favorable production costs realized
from offshore production and a continued focus on inventory management, which
resulted in lower off-price sales to discounters, partially offset by higher
customer allowances granted to retailers to clear product.
Wholesale moderate apparel gross profit margins were 27.0%
and 23.0% for 2002 and 2001, respectively. Wholesale moderate apparel cost of
sales for 2002 included $23.1 million in purchase accounting adjustments. Cost
of sales for 2001 included $16.7 million in purchase accounting adjustments and
$8.2 million related to the special charge. The margin increase was primarily
the result of the addition of higher-margin businesses realized from the
inclusion of McNaughton for the full year in 2002 compared to only 28 weeks in
2001, as well as the addition of Gloria Vanderbilt.
Wholesale footwear and accessories gross profit margins
were 32.0% and 32.5% for 2002 and 2001, respectively. Wholesale footwear and
accessories cost of sales for 2001 included $1.0 million in purchase accounting
adjustments and $23.1 million related to the special charge. The decrease in the
margin was driven by significant markdowns in the costume jewelry business to
more aggressively liquidate inventories in both the wholesale and retail
channels, and higher off-price sales to discounters and higher customer
allowances in the Nine West accessories line. Our wholesale footwear
business realized a significant improvement in margins resulting primarily from
a continued focus on inventory management, which resulted in lower off-price
sales to discounters.
31
Retail gross profit margins were 53.2% and 51.7% for 2002
and 2001, respectively. Retail cost of sales for 2001 included $7.4 million
related to the special charge. Margins in our Nine West retail business
benefitted from better inventory planning and improved product assortments in
our stores. This improvement was offset by more promotional activity in our
apparel outlet stores, impacted by the difficulty experienced in our Jones
New York career business.
SG&A expenses. SG&A expenses of
$1.09 billion in 2002 represented an increase of $89.2 million from the $1.0
billion reported for 2001. During 2002, SG&A expenses included $24.4 million
of trademark impairment charges. During 2001, SG&A expenses included $16.3
million of trademark amortization and $1.0 million related to the special
charge. McNaughton, Gloria Vanderbilt and l.e.i. added a total of $71.0 million
to 2002. Also contributing to the increase in SG&A expenses were the $31.9
million of executive compensation costs in the other and eliminations segment,
$1.9 million of costs related to the closing of a Canadian production facility
in the wholesale better apparel segment and $6.9 million of costs related to the
closing of administrative and production facilities in Mexico and Texas in the
wholesale moderate apparel segment. These increases were somewhat offset by cost
savings resulting from the restructuring of our costume jewelry business and a
continued focus on cost controls and efficiencies that can be realized by
leveraging common functions across all divisions.
Operating Income. The resulting operating
income for 2002 of $590.6 million increased 23.1%, or $110.7 million, from the
$479.9 million for 2001 due to the factors described above.
Net Interest Expense. Net interest expense
was $58.1 million in 2002 compared to $80.1 million in 2001, resulting from
lower average borrowings, lower interest rates, the effects of interest rate
swaps and using the proceeds from zero coupon convertible senior debt securities
issued in February 2001 to repay higher-rate borrowings under our credit
facilities.
Provision for Income Taxes. The effective
income tax rate was 37.7% for 2002 compared to 40.9% for 2001. The decrease was
primarily due to the elimination of nondeductible goodwill amortization
resulting from the adoption of SFAS No. 142.
Net Income and Earnings Per Share. Net
income was $318.5 million in 2002, an increase of $82.3 million from the net
income of $236.2 million earned in 2001. Diluted earnings per share for 2002 was
$2.36 compared to $1.82 for 2001, on a 4.0% increase in shares outstanding.
Liquidity and Capital Resources
Our principal capital requirements have been to fund
acquisitions, pay dividends, working capital needs, capital expenditures and
repurchases of our common stock on the open market. We have historically relied
on internally generated funds, trade credit, bank borrowings and the issuance of
notes to finance our operations and expansion. As of December 31, 2003, total
cash and cash equivalents were $350.0 million, an increase of $66.7 million from
the $283.3 million reported as of December 31, 2002.
Operating
activities provided $455.0 million, $716.5 million and $562.4 million in 2003,
2002 and 2001, respectively. The change from 2002 to 2003 was primarily due to a
smaller decrease in accounts receivable in 2003 than in 2002 and a small
increase in inventory in 2003 compared to a decrease in 2002. While accounts
receivable turns improved in 2003 compared to 2002, the reduction in 2003 was
less than in 2002 due primarily to the collection of acquired l.e.i. receivables
in 2002. The change in inventory was due to increases required for new product
launches (including Jones New York Signature, Gloria Vanderbilt Career
and Bandolino apparel) and planned increases in certain wholesale
moderate and accessories businesses, which were offset by improved inventory
turns in our wholesale better apparel segment and by reductions resulting from
the discontinuance of Lauren and Ralph. The change in cash
provided by operating activities from 2001 to 2002 was primarily due to lower
accounts receivable and inventory levels, the result of a significant
improvement in both accounts receivable and inventory turns.
Investing activities used $274.5 million, $368.7 million
and $160.3 million in 2003, 2002 and 2001, respectively. The decrease for 2003
from 2002 was primarily due to lower acquisition-related payments in
32
2003 than in 2002. The increase for 2002 from 2001 was primarily due to the
acquisitions of Gloria Vanderbilt and l.e.i.
During 2003, we entered into a sale-leaseback agreement
for our Virginia warehouse facility. The gross sale price was $25.9 million,
which resulted in a net gain of $7.5 million that has been deferred and is being
amortized over the 20-year term of the lease agreement (which has been recorded
as a capital lease). In connection with this transaction, we repaid $7.4 million
of long-term debt related to the Virginia warehouse facility.
Financing activities used $114.7 million in 2003. The
primary uses of cash were to repurchase our common stock and pay dividends to
our common shareholders.
Financing activities used $141.1 million in 2002,
primarily to refinance $43.7 million and $83.2 million of debt assumed as part
of the acquisitions of Gloria Vanderbilt and l.e.i., respectively, and to
repurchase our common stock. In addition, we redeemed the remaining $0.1 million
of Nine West Group's 9% Senior Subordinated Notes Due 2007 in September 2002
at 104.5% of par. These uses of funds were partially offset by $118.4 million in
proceeds from the issuance of common stock to our employees exercising stock
options.
Financing activities used $387.2 million in 2001. The
principal uses of cash were to repay in full $234.7 million of our 6.25% Senior
Notes that matured on October 1, 2001. In addition, we redeemed all $0.5 million
of Nine West Group's 5-1/2% Convertible Subordinated Notes Due 2003 on December
1, 2001 at 100.92% of par. In connection with the McNaughton acquisition, we
repurchased all $125.0 million of McNaughton's outstanding 12-1/2% Senior Notes
due 2005, Series B. We also refinanced $146.9 million of assumed McNaughton debt
and accrued interest using cash on hand and borrowings under our Senior Credit
Facilities.
In February 2001, we issued Zero Coupon Convertible Senior
Notes due 2021. Net proceeds of the offering were $392.8 million, which were
used to repay amounts then outstanding under our Senior Credit Facilities,
repurchase $30.3 million of our outstanding 6.25% Senior Notes at par, and for
general corporate purposes. On February 2, 2004, we redeemed all of the
outstanding notes at a redemption price (inclusive of issue price plus accrued
original issue discount) of $554.41 per $1,000 of principal amount at maturity
for a total payment of $446.6 million, which was financed primarily through our
Senior Credit Facilities. As a result of this transaction, we will record a
charge of $8.2 million in the first fiscal quarter of 2004, representing the
writeoff of unamortized bond discounts and debt issuance costs. The securities
carried a 3.5% yield to maturity with a face value of $805.6 million ($1,000 per
note) and were convertible into common stock at a conversion rate of 9.8105
shares per note.
In January 2001, we realized $8.3 million in proceeds from
terminating interest rate swap agreements that we had entered into in June 1999,
and in October 2002, we realized $21.6 million in proceeds from terminating
interest rate swap agreements that we had entered into in April 2002 (see
"Derivatives" in the Notes to Consolidated Financial Statements).
We repurchased $108.7 million, $129.2 million and $68.9
million of our common stock on the open market during 2003, 2002 and 2001,
respectively. As of December 31, 2003, $6.6 million of stock repurchases had not
settled and is accrued under accounts payable. As of December 31, 2003, a total
of $663.7 million had been expended under announced programs to acquire up to
$800.0 million of such shares. We may make additional share repurchases in the
future depending on, among other things, market conditions and our financial
condition. Proceeds from the issuance of common stock to our employees
exercising stock options amounted to $20.5 million, $118.4 million and $85.8
million in 2003, 2002 and 2001, respectively.
At December 31, 2003, we had credit agreements with
several lending institutions to borrow an aggregate principal amount of up to
$1.4 billion under Senior Credit Facilities. These facilities, of which the
entire amount is available for letters of credit or cash borrowings, provide for
a $700.0 million three-year revolving credit facility (which expires in June
2006 and replaced a similar $850.0 million 364-day revolving credit facility in
June 2003) and a $700.0 million five-year revolving credit facility (which
expires in June 2004). At December 31, 2003, $212.9 million was outstanding
under the three-year revolving credit facility (comprised solely of outstanding
letters of credit) and no amounts were outstanding under our five-year revolving
credit
33
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 us 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 our ability to incur additional
indebtedness, prepay subordinated indebtedness, make acquisitions, enter into
mergers and pay dividends.
In addition to these committed facilities, we have
unsecured uncommitted lines of credit for the purpose of issuing letters of
credit and bankers' acceptances for McNaughton and Kasper. As of December 31,
2003, $72.0 million in letters of credit were outstanding under these lines of
credit.
At December 31, 2003, we also had a C$25.0 million
unsecured line of credit in Canada, under which no amounts were outstanding.
In July 2001, December 2001 and August 2002, we entered
into transactions relating to the short sale of $139.0 million, $157.9 million
and $190.5 million, respectively, of U. S. Treasury securities. These
transactions were intended to address interest rate exposure and generate
capital gains that could be used to offset previously incurred capital losses.
There are no present intentions to enter into any further transactions. See "Short Term Bond Transactions" in Notes to Consolidated Financial
Statements.
In 2003 and 2002, we recorded minimum pension liability
adjustments of $3.1 million and $10.8 million, respectively, to other
comprehensive income resulting from the lowering of the discount rate from 6.5%
to 6.1% in 2003 and both the negative returns on our investments and the
lowering of the anticipated rate of future returns from 9.0% to 8.0% in 2002.
Our plans are currently underfunded by a total of $15.9 million. As the benefits
under our defined benefit plans are frozen with respect to service credits, the
effects on future pension expense are not anticipated to be material to our
results of operations or to our liquidity.
On December 1, 2003, we completed the acquisition of
Kasper. The aggregate cash purchase price was $259.3 million, of which $37.6
million was paid in January 2004.
On August 16, 2002, we completed the acquisition of l.e.i.
The aggregate purchase price was approximately $309.7 million, which included
payments to the selling shareholders of $272.5 million in cash and the issuance
of approximately 1.0 million shares of our common stock. We also assumed
approximately $84.0 million of l.e.i.'s funded debt and accrued interest,
$83.2 million of which we subsequently refinanced. Pursuant to the Amended
Acquisition Agreement, the selling shareholders were entitled to a $2.2 million
payment as additional consideration, which was made in 2003.
On April 8, 2002, we completed the acquisition of Gloria
Vanderbilt. The aggregate purchase price was approximately $100.9 million, which
included payments to the selling shareholders of $80.9 million in cash and the
issuance of approximately 0.6 million shares of our common stock. We also
assumed approximately $43.7 million of Gloria Vanderbilt's funded debt and
accrued interest, which we subsequently refinanced. The terms of the acquisition
agreement for Gloria Vanderbilt required us to pay the former Gloria Vanderbilt
shareholders additional consideration of $4.50 for each $1.00 of Gloria
Vanderbilt's earnings before interest and taxes (as defined in the stock
purchase agreement) that exceeded certain targeted levels for the 12 months
following the completion of the acquisition, up to a maximum of $54.0 million.
The maximum additional consideration was paid in cash on July 7, 2003 and was
recorded first as a reduction of the liability resulting from the fair value of
assets acquired exceeding the purchase price, with the remaining balance being
recorded as goodwill.
On February 18, 2004, we announced that the Board of
Directors had declared a quarterly cash dividend of $0.08 per share to all
common stockholders of record as of March 1, 2004 for payment on March 12, 2004.
34
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within
the meaning of SEC Regulation S-K Item 303(a)(4).
Contractual Obligations and Contingent Liabilities and Commitments
The following is a summary of our significant contractual
cash obligations for the periods indicated that existed as of December 31, 2003,
and, except for purchase obligations and other long-term liabilities, is based
on information appearing in the Notes to Consolidated Financial Statements
(amounts in millions).
|
Total
|
Less than
1 year
|
1 - 3
years
|
3 - 5
years
|
More than
5 years
|
Long-term debt (1) |
$ 975.0 |
$ 175.0 |
$ 354.6 |
$
- |
$ 445.4 |
Capital lease
obligations |
77.9 |
8.9 |
12.5 |
10.3 |
46.2 |
Operating leases |
585.9 |
100.5 |
162.5 |
114.4 |
208.5 |
Purchase obligations (2) |
1,009.5 |
990.9 |
18.6 |
- |
- |
Minimum royalty payments
(3) |
35.3 |
9.7 |
17.4 |
8.2 |
- |
Other long-term liabilities |
55.7
|
3.9
|
10.0
|
3.8
|
38.0
|
|
|
|
|
|
|
Total contractual cash obligations |
$ 2,739.3
|
$ 1,288.9
|
$ 575.6
|
$ 136.7
|
$ 738.1
|
|
|
|
|
|
|
(1) Includes $445.4 million of Zero Coupon Convertible Senior Notes Due
2021 that were redeemed in February 2004.
|
(2) Includes outstanding letters of credit of $284.9 million, which
primarily represent inventory purchase commitments which typically
mature in two to six months.
|
(3) Under exclusive licenses to manufacture certain items under
trademarks not owned by us pursuant to various license and design
service agreements, we are obligated to pay the licensors a percentage
of our net sales of these licensed products, subject to minimum
scheduled royalty and advertising payments. |
We have two joint ventures with HCL Technologies Limited
to provide us with computer consulting, programming and associated support
services. On August 31, 2004, we are obligated to contribute approximately $1.0
million of additional capital to the joint ventures in the form of cash or
assets. As of December 31, 2003, we have committed to purchase $17.3 million in
services from these joint venture companies through June 30, 2007.
We also have a joint venture with Sutton Developments Pty.
Ltd. ("Sutton") to operate retail locations in Australia. We have
unconditionally guaranteed up to AU$7.0 million of borrowings under the joint
venture's uncommitted credit facility and up to AU$0.4 million of
presettlement risk associated with foreign exchange transactions. Sutton is
required to reimburse us for 50% of any payments made under these guarantees. At
December 31, 2003, the outstanding balance subject to these guarantees was
approximately AU$1.0 million.
We believe that funds generated by operations, proceeds
from the issuance of notes, the Senior Credit Facilities and the McNaughton,
Kasper and Canadian lines of credit will provide the financial resources
sufficient to meet our foreseeable working capital, dividend, capital
expenditure and stock repurchase requirements and fund our contractual
obligations and contingent liabilities and commitments.
New Accounting Standards
In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The adoption of SFAS No. 149 had no impact on our
results of operations or our financial position.
35
In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The adoption of SFAS No. 150 had no impact on our
results of operations or our financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market Risk Sensitive Instruments
The market risk inherent in our 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. We manage
this exposure through regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. Our
policy allows the use of derivative financial instruments for identifiable
market risk exposures, including interest rate and foreign currency
fluctuations. We do not enter into derivative financial contracts for trading or
other speculative purposes. The following quantitative disclosures were derived
using quoted market prices, yields and theoretical pricing models obtained
through independent pricing sources for the same or similar types of financial
instruments, taking into consideration the underlying terms, such as the coupon
rate, term to maturity and imbedded call options. Certain items such as lease
contracts, insurance contracts, and obligations for pension and other
post-retirement benefits were not included in the analysis.
Interest Rates
Our primary interest rate exposures relate to our fixed
and variable rate debt. The potential decrease in fair value of our fixed rate
long-term debt instruments resulting from a hypothetical 10% adverse change in
interest rates was approximately $92.6 million at December 31, 2003. We employ
an interest rate hedging strategy utilizing swaps to effectively float a portion
of our interest rate exposure on our fixed rate financing arrangements.
The primary interest rate exposures on floating rate
financing arrangements are with respect to United States and Canadian short-term
rates. We had approximately $1.4 billion in variable rate financing arrangements
at December 31, 2003. As of December 31, 2003, a hypothetical immediate 10%
adverse change in interest rates, as they relate to the maximum available
borrowings under our variable rate financial instruments, would have a $2.5
million unfavorable impact over a one-year period on our earnings and cash
flows.
Foreign Currency Exchange Rates
We are exposed to market risk related to changes in
foreign currency exchange rates. We have assets and liabilities denominated in
certain foreign currencies related to international subsidiaries. At December
31, 2003, we had outstanding foreign exchange contracts in Canada to purchase
US$11.0 million at a weighted-average settlement price of C$1.3489 through April
2004. We believe that these financial instruments should not subject us to undue
risk due to foreign exchange movements because gains and losses on these
contracts should offset losses and gains on the assets, liabilities, and
transactions being hedged. We are exposed to credit-related losses if the
counterparty to the financial instruments fails to perform its obligations.
However, we do not expect the counterparty, which presently has high credit
ratings, to fail to meet its obligations.
For further information see "Derivatives" in the
Notes to Consolidated Financial Statements.
36
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.
Our 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 Deloitte &
Touche, LLP, our internal auditors, who conduct an extensive program of audits.
Our 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.
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/ Peter Boneparth
Peter Boneparth
President and Chief Executive Officer
|
/s/ Wesley R. Card
Wesley R. Card
Chief Operating and Financial Officer
|
37
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, 2003 and
2002, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2003. 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 audit 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, 2003
and 2002, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in notes to the financial statements, the
Company changed its method of accounting for stock-based compensation in 2003
and its method of accounting for goodwill and intangible assets in 2002.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 2, 2004
38
Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in millions except per share data)
December 31,
|
2003
|
2002
|
ASSETS
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$ 350.0
|
$ 283.3
|
|
Accounts receivable, net of allowances of $37.3 and $38.6 for doubtful accounts, discounts, returns and co-op
advertising
|
385.8
|
389.3
|
|
Inventories
|
590.6
|
529.6
|
|
Deferred taxes
|
80.6
|
80.8
|
|
Prepaid expenses and other current assets
|
48.9
|
35.2
|
|
|
|
|
|
TOTAL CURRENT
ASSETS |
1,455.9
|
1,318.2
|
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization |
268.4
|
249.3
|
GOODWILL |
1,646.9
|
1,541.2
|
OTHER
INTANGIBLES, at cost, less
accumulated amortization |
767.5
|
677.3
|
OTHER ASSETS |
49.0
|
66.6
|
|
|
|
|
|
|
$ 4,187.7
|
$ 3,852.6
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
$ 180.8
|
$ 6.3
|
|
Accounts payable
|
244.6
|
230.2
|
|
Income taxes payable
|
14.7
|
26.0
|
|
Payments due relating to Kasper acquisition
|
37.6
|
-
|
|
Accrued employee compensation
|
36.8
|
40.2
|
|
Accrued expenses and other current liabilities
|
114.5
|
124.6
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES |
629.0
|
427.3
|
|
|
|
NONCURRENT LIABILITIES:
|
|
|
|
Long-term debt
|
791.4
|
955.7
|
|
Obligations under capital leases
|
43.7
|
22.4
|
|
Deferred taxes
|
130.1
|
98.6
|
|
Other
|
55.7
|
45.1
|
|
|
|
|
|
TOTAL NONCURRENT LIABILITIES |
1,020.9
|
1,121.8
|
|
|
|
|
|
TOTAL LIABILITIES |
1,649.9
|
1,549.1
|
|
|
|
|
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 148.6 and 147.1 |
1.5
|
1.5
|
|
Additional paid-in capital |
1,179.4
|
1,143.8
|
|
Retained earnings |
1,947.2
|
1,638.8
|
|
Accumulated other comprehensive income |
3.8
|
4.8
|
|
|
|
|
|
|
3,131.9
|
2,788.9
|
|
Less treasury stock, 22.4 and 18.7 shares, at cost |
(594.1)
|
(485.4)
|
|
|
|
|
|
TOTAL STOCKHOLDERS'
EQUITY |
2,537.8
|
2,303.5
|
|
|
|
|
|
|
$ 4,187.7
|
$ 3,852.6
|
|
|
|
|
See accompanying notes to consolidated financial statements |
|
|
39
Jones Apparel Group, Inc.
Consolidated Statements of Income
(All amounts in millions except per share data)
Year Ended December 31,
|
2003
|
2002
|
2001
|
Net sales |
$ 4,339.1
|
$ 4,312.2
|
$ 4,073.8
|
Licensing income (net) |
36.2
|
28.7
|
24.8
|
|
|
|
|
Total revenues |
4,375.3
|
4,340.9
|
4,098.6
|
Cost of goods sold |
2,738.6
|
2,657.0
|
2,570.4
|
|
|
|
|
Gross profit
|
1,636.7
|
1,683.9
|
1,528.2
|
Selling, general and administrative expenses
|
1,056.9
|
1,093.3
|
1,004.1
|
Amortization of goodwill
|
-
|
-
|
44.2
|
|
|
|
|
Operating income |
579.8
|
590.6
|
479.9
|
Interest income |
3.5
|
4.6
|
4.5
|
Interest expense and financing costs |
58.8
|
62.7
|
84.6
|
Equity in earnings of unconsolidated affiliates |
2.5
|
1.0
|
-
|
|
|
|
|
Income before provision for income taxes |
527.0
|
533.5
|
399.8
|
Provision for income taxes |
198.4
|
201.2
|
163.6
|
|
|
|
|
Income before cumulative effect of change in accounting principle |
328.6
|
332.3
|
236.2
|
Cumulative effect of change in accounting for intangible assets, net of tax |
-
|
13.8
|
-
|
|
|
|
|
Net income |
$ 328.6
|
$ 318.5
|
$ 236.2
|
|
|
|
|
Earnings per share
|
|
|
|
|
Basic
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
$2.58
|
$2.59
|
$1.92
|
|
|
Cumulative effect of change in accounting for intangible
assets
|
-
|
0.11
|
-
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$2.58
|
$2.48
|
$1.92
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
$2.48
|
$2.46
|
$1.82
|
|
|
Cumulative effect of change in accounting for intangible
assets
|
-
|
0.10
|
-
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
$2.48
|
$2.36
|
$1.82
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
Basic |
127.3 |
128.2 |
123.2 |
|
|
Diluted |
136.5 |
139.0 |
133.7 |
See accompanying notes to consolidated financial statements
40
Jones Apparel Group, Inc.
Consolidated Statements of Stockholders'
Equity
(All amounts in millions except per share data)
|
Number of
common
shares
outstanding
|
|
Total
stock-
holders'
equity
|
|
Common
stock
|
|
Additional
paid-in
capital
|
|
Retained
earnings
|
|
Accumu-
lated
other
compre-
hensive
income
(loss)
|
|
Treasury
stock
|
Balance,
January 1, 2001 |
120.1 |
|
$
1,477.2 |
|
$
1.4 |
|
$752.0 |
|
$
1,084.1 |
|
$
(2.4) |
|
$
(357.9) |
Year ended
December 31, 2001: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
- |
|
236.2
|
|
- |
|
- |
|
236.2
|
|
- |
|
- |
|
Gain on
termination of interest rate hedges, net of $3.3 tax |
- |
|
5.0
|
|
- |
|
- |
|
-
|
|
5.0 |
|
- |
|
Change in fair value of cash flow
hedges |
- |
|
0.1
|
|
- |
|
- |
|
-
|
|
0.1 |
|
- |
|
Reclassification adjustment for hedge gains and losses included in net income,
net of $0.7 tax |
- |
|
(1.1)
|
|
- |
|
- |
|
-
|
|
(1.1) |
|
- |
|
Foreign
currency translation adjustments |
- |
|
(1.1)
|
|
- |
|
- |
|
-
|
|
(1.1) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
239.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock to employees |
0.1 |
|
-
|
|
- |
|
- |
|
-
|
|
- |
|
- |
Amortization
expense in connection with employee stock options and restricted stock |
- |
|
1.4
|
|
- |
|
1.4 |
|
-
|
|
- |
|
- |
Treasury
stock reissued for acquisition of McNaughton |
3.0 |
|
109.3
|
|
- |
|
73.6 |
|
-
|
|
- |
|
35.7 |
Conversion
of McNaughton employee stock options |
- |
|
34.2
|
|
- |
|
34.2 |
|
-
|
|
- |
|
- |
Exercise
of employee stock options |
4.3 |
|
85.8
|
|
- |
|
85.8 |
|
-
|
|
- |
|
- |
Tax benefit
derived from exercise of employee stock options |
-
|
|
27.4
|
|
-
|
|
27.4
|
|
-
|
|
-
|
|
-
|
Treasury stock
acquired |
(1.8)
|
|
(68.9)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(68.9)
|
Other |
-
|
|
(0.1)
|
|
-
|
|
(0.1)
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2001 |
125.7 |
|
1,905.4 |
|
1.4 |
|
974.3 |
|
1,320.3 |
|
0.5 |
|
(391.1) |
Year ended December 31, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
- |
|
318.5
|
|
- |
|
- |
|
318.5
|
|
- |
|
- |
|
Minimum
pension liability adjustment,
net of $4.1 tax |
- |
|
(6.7)
|
|
- |
|
- |
|
-
|
|
(6.7) |
|
- |
|
Gain on termination of
interest rate hedges, net of $8.2 tax |
- |
|
13.4
|
|
- |
|
- |
|
-
|
|
13.4 |
|
- |
|
Change in fair value of cash flow hedges,
net of $0.4 tax |
- |
|
(0.5)
|
|
- |
|
- |
|
-
|
|
(0.5) |
|
- |
|
Reclassification adjustment for hedge gains and losses included in net income,
net of $1.4 tax |
- |
|
(2.1)
|
|
- |
|
- |
|
-
|
|
(2.1) |
|
- |
|
Foreign
currency translation adjustments |
- |
|
0.2
|
|
- |
|
- |
|
-
|
|
0.2 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
322.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock to employees |
0.3 |
|
-
|
|
- |
|
- |
|
-
|
|
- |
|
- |
Treasury
stock reissued for acquisition of Gloria Vanderbilt |
0.6 |
|
20.0
|
|
- |
|
10.1 |
|
-
|
|
- |
|
9.9 |
Treasury
stock reissued for acquisition of l.e.i. |
1.0 |
|
36.3
|
|
- |
|
11.3 |
|
-
|
|
- |
|
25.0 |
Amortization
expense in connection with employee stock options and restricted stock |
- |
|
12.9
|
|
- |
|
12.9 |
|
-
|
|
- |
|
- |
Exercise
of employee stock options |
4.8 |
|
118.4
|
|
0.1 |
|
118.3 |
|
-
|
|
- |
|
- |
Tax benefit
derived from exercise of employee stock options |
-
|
|
16.9
|
|
-
|
|
16.9
|
|
-
|
|
-
|
|
-
|
Treasury stock
acquired |
(4.0)
|
|
(129.2)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(129.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002 |
128.4
|
|
2,303.5
|
|
1.5
|
|
1,143.8
|
|
1,638.8
|
|
4.8
|
|
(485.4)
|
Year ended December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
- |
|
328.6
|
|
- |
|
- |
|
328.6
|
|
- |
|
- |
|
Minimum
pension liability adjustment,
net of $1.1 tax |
- |
|
(2.0)
|
|
- |
|
- |
|
-
|
|
(2.0) |
|
- |
|
Change in fair value of
cash flow hedges, net of $1.0 tax |
- |
|
(1.4)
|
|
- |
|
- |
|
-
|
|
(1.4) |
|
- |
|
Reclassification adjustment for hedge gains and losses included in net income,
net of $2.0 tax |
- |
|
(3.6)
|
|
- |
|
- |
|
-
|
|
(3.6) |
|
- |
|
Foreign currency
translation adjustments |
- |
|
6.0
|
|
- |
|
- |
|
-
|
|
6.0 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
327.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock to employees, net of forfeitures |
0.6 |
|
-
|
|
- |
|
- |
|
-
|
|
- |
|
- |
Amortization
expense in connection with employee stock options and restricted stock |
- |
|
12.2
|
|
- |
|
12.2 |
|
-
|
|
- |
|
- |
Exercise of
employee stock options |
0.9 |
|
20.5
|
|
- |
|
20.5 |
|
-
|
|
- |
|
- |
Tax
benefit derived from exercise of employee stock options |
- |
|
2.9
|
|
- |
|
2.9 |
|
-
|
|
- |
|
- |
Dividends on
common stock ($0.16 per share) |
-
|
|
(20.2)
|
|
-
|
|
-
|
|
(20.2)
|
|
-
|
|
-
|
Treasury stock
acquired |
(3.7)
|
|
(108.7)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(108.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003 |
126.2
|
|
$
2,537.8
|
|
$
1.5
|
|
$
1,179.4
|
|
$
1,947.2
|
|
$
3.8
|
|
$
(594.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
41
Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows
(All amounts in millions)
Year Ended December 31,
|
2003
|
2002
|
2001
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Net income |
$ 328.6
|
$ 318.5
|
$ 236.2
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
- |
13.8 |
- |
|
|
Amortization of goodwill
|
- |
- |
44.2 |
|
|
Amortization of original issue discount
|
15.2 |
14.7 |
13.0 |
|
|
Trademark impairment losses
|
4.5 |
24.4 |
- |
|
|
Depreciation and other amortization
|
84.3 |
74.1 |
74.7 |
|
|
Provision for losses on accounts receivable
|
(0.6) |
3.6 |
3.3 |
|
|
Deferred taxes
|
47.1 |
2.6 |
24.9 |
|
|
Gain on short sale of U. S. Treasury securities
|
(6.6) |
(14.8) |
(5.4) |
|
|
Other
|
(2.2) |
3.1 |
2.9 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
61.2
|
117.2
|
85.1
|
|
|
|
Inventories |
(7.0)
|
122.9
|
62.8
|
|
|
|
Prepaid expenses and other current assets |
(10.8)
|
20.7
|
32.9
|
|
|
|
Other assets |
21.4
|
21.4
|
15.3
|
|
|
|
Accounts payable |
(17.5)
|
(1.6)
|
(14.4)
|
|
|
|
Taxes payable |
(13.4)
|
37.4
|
37.2
|
|
|
|
Accrued expenses and other liabilities |
(49.2)
|
(41.5)
|
(50.3)
|
|
|
|
|
|
|
|
|
Total adjustments |
126.4
|
398.0
|
326.2
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
455.0
|
716.5
|
562.4
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Acquisitions, net of cash acquired |
(198.2)
|
(332.7)
|
(134.0)
|
|
Capital expenditures |
(53.3)
|
(52.6)
|
(56.4)
|
|
Net proceeds from sale of U.S. Treasury securities |
12.3
|
9.2
|
3.1
|
|
Additional
consideration paid for acquisition of Gloria Vanderbilt |
(54.0)
|
-
|
-
|
|
Additional consideration and
other payments relating to other acquisitions |
(2.4)
|
(2.0)
|
(19.4)
|
|
Acquisition of intangibles |
(6.0)
|
(2.9)
|
(1.0)
|
|
Proceeds from sale of Nine West United Kingdom operations |
-
|
-
|
28.0
|
|
Repayments of loans to officers |
-
|
2.0
|
18.0
|
|
Proceeds from sales of property, plant and equipment |
26.9
|
10.4
|
1.1
|
|
Other |
0.2
|
(0.1)
|
0.3
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
(274.5)
|
(368.7)
|
(160.3)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Issuance of Senior Notes, net of discount and debt issuance costs |
-
|
-
|
392.8
|
|
Repurchase of Nine West Senior Notes |
-
|
(0.1)
|
(0.5)
|
|
Repurchase/redemption at maturity of 6.25% Senior Notes |
-
|
-
|
(265.0)
|
|
Repurchase of McNaughton Senior Notes |
-
|
-
|
(125.0)
|
|
Premiums paid on repurchase of McNaughton Senior Notes |
-
|
-
|
(35.2)
|
|
Refinancing of acquired debt |
-
|
(126.9)
|
(146.9)
|
|
Net repayments under credit facilities |
-
|
(0.8)
|
(225.7)
|
|
Purchases of treasury stock |
(102.1)
|
(129.2)
|
(68.9)
|
|
Proceeds from exercise of employee stock options |
20.5
|
118.4
|
85.8
|
|
Dividends paid |
(20.2)
|
-
|
-
|
|
Proceeds from termination of interest rate swaps |
-
|
21.6
|
8.3
|
|
Repayment of
long-term debt |
(7.4)
|
(11.2)
|
(11.1)
|
|
Proceeds from long-term debt
borrowings |
-
|
-
|
9.8
|
|
Principal payments on capital leases |
(5.5)
|
(12.9)
|
(5.6)
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
(114.7)
|
(141.1)
|
(387.2)
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH |
0.9
|
0.1
|
1.1
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
66.7 |
206.8 |
16.0 |
CASH AND CASH EQUIVALENTS, BEGINNING |
283.3
|
76.5
|
60.5
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING |
$ 350.0
|
$ 283.3
|
$ 76.5
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
42
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 our wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated. The
results of operations of acquired companies are included in our operating
results from the respective dates of acquisition.
We design, contract for the manufacture of, manufacture
and market a broad range of women's collection sportswear, suits and dresses,
casual sportswear and jeanswear for men, women and children, and women's
footwear and accessories. We sell our products through a broad array of
distribution channels, including better specialty and department stores and mass
merchandisers, primarily in the United States and Canada. We also operate our
own network of retail and factory outlet stores. In addition, we license the use
of several of our brand names to select manufacturers and distributors of women's
and men's apparel and accessories worldwide.
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 us to
concentration of credit risk consist principally of temporary cash investments
and accounts receivable. We place our cash and cash equivalents in
investment-grade, short-term debt instruments with high quality financial
institutions and the U.S. Government and, by policy, limit the amount of credit
exposure in any one financial instrument. We perform ongoing credit evaluations
of our customers' financial condition and, generally, require no collateral
from our customers. The allowance for non-collection of accounts receivable is
based upon the expected collectibility of all accounts receivable.
Derivative Financial Instruments
Our primary objectives for holding derivative financial
instruments have historically been to manage foreign currency and interest rate
risks. We do not use financial instruments for trading or other speculative
purposes. We currently use foreign currency-based derivatives to hedge both the
fair value of recognized assets or liabilities (a "fair value" hedge)
and the variability of anticipated cash flows of a forecasted transaction (a
"cash flow" hedge). Fair value hedges are entered into in order to
hedge the fair value of recognized assets or liabilities denominated in
non-functional currencies. Cash flow hedges are entered into in order to hedge
forecasted inventory purchases and royalty payments that are denominated in
non-functional currencies. The terms of foreign currency-based derivative
instruments are generally less than 12 months; the terms of interest rate swaps
are matched to the maturity date of the underlying debt instrument.
On the date the derivative contract is entered into, we
designate the derivative as either a fair value hedge or a cash flow hedge.
Changes in derivative fair values that are designated as fair value hedges are
recognized in earnings as offsets to the changes in fair value of the related
hedged assets and liabilities. Changes in derivative fair values that are
designated as cash flow hedges are deferred and recorded as a component of
accumulated other comprehensive income until the associated hedged transactions
impact the income statement, at which time the deferred gains and losses are
reclassified to either cost of sales for inventory purchases or to selling,
general and administrative expenses for all other items. Any ineffective portion
of a hedging derivative's change in fair value will be immediately recognized
in selling, general and administrative expenses. 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.
43
Accounts Receivable
Accounts receivable are reported at amounts we expect to
be collected, net of trade discounts and deductions for co-op advertising
normally taken by our customers, allowances we provide to our retail customers
to effectively flow goods through the retail channels, an allowance for
non-collection due to the financial position of our customers, and an allowance
for estimated sales returns.
Inventories
Inventories are valued at the lower of cost or market.
Approximately 58% and 65% of inventories were determined by using the FIFO
(first in, first out) method of valuation as of December 31, 2003 and 2002,
respectively; the remainder were determined by the weighted average cost and
retail methods. We make 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
one to 40 years.
Leased Property Under Capital Leases
Property under capital leases is amortized over the lives
of the respective leases or the estimated useful lives of the assets.
Goodwill and Other Intangibles
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 had been amortized using the straight-line method over 30 years
prior to December 31, 2001. Other intangibles with determinable lives, including
license agreements, are amortized on a straight-line basis over the estimated
useful lives of the assets. Other intangible assets without determinable lives,
such as trademarks, had been amortized using the straight-line method over
periods primarily ranging from 15 to 30 years prior to December 31, 2001. SFAS
No. 142, "Goodwill and Other Intangible Assets," changed the
accounting for goodwill and other intangible assets without determinable lives
from an amortization method to an impairment-only approach and, accordingly, we
annually test goodwill and other intangibles without determinable lives for
impairment through the use of independent third-party appraisals.
Foreign Currency Translation
The financial statements of foreign subsidiaries are
translated into U.S. dollars in accordance with 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
Our 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
Wholesale apparel and footwear and accessories sales are
recognized either when products are shipped or, in certain situations, upon
acceptance by the customer. Retail sales are recorded at the time of register
receipt. Allowances for estimated returns are provided when sales are recorded.
44
Shipping and Handling Costs
Shipping and handling costs billed to customers are
recorded as revenue. Freight costs associated with shipping goods to customers
are recorded as a cost of sales.
Advertising Expense
We record national advertising campaign costs as an
expense when the advertising takes place and we expense advertising production
costs as incurred. Advertising costs associated with our cooperative advertising
programs are accrued as the related revenues are recognized. Net advertising
expense was $74.2 million, $75.4 million and $62.5 million in 2003, 2002 and
2001, respectively.
Income Taxes
We use 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. Valuation allowances
are recorded to reduce deferred tax assets when uncertainty regarding their
realizability exists.
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 and the conversion of any
convertible bonds. The difference between reported basic and diluted
weighted-average common shares results from the assumption that all dilutive
stock options outstanding were exercised and all convertible bonds have been
converted into common stock.
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.
|
2003
|
2002
|
2001
|
Number of options (in millions) |
10.4 |
3.2 |
2.4 |
Weighted average exercise price |
$32.88 |
$38.97 |
$39.35 |
Stock Options
Effective January 1, 2003, we adopted the fair value
method of accounting for employee stock options for all options granted after
December 31, 2002 pursuant to the guidelines contained in SFAS No. 123,
"Accounting for Stock-Based Compensation" using the "prospective
method" set forth in SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." Under this approach, the fair
value of the option on the date of grant (as determined by the Black-Scholes
option pricing model) is amortized to compensation expense over the option's
vesting period. Since the expense to be recorded is dependent on both the timing
and the number of options to be granted, we cannot estimate the effect on future
results of operations at this time. Prior to January 1, 2003, pursuant to a
provision in SFAS No. 123 we had elected to continue using the intrinsic-value
method of accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options had been
measured as the excess, if any, of the quoted market price of our stock at the
date of the grant over the amount the employee must pay to acquire the stock.
Under this approach, we had only recognized compensation expense for stock-based
awards to employees for options granted at below-market prices. The adoption of
the fair value method did not have a material effect on our results of
operations.
45
Had we elected to adopt the fair value approach of SFAS
No. 123 upon its effective date, our net income would have decreased
accordingly. Both the stock-based employee compensation cost included in the
determination of net income as reported and the stock-based employee
compensation cost that would have been included in the determination of net
income if the fair value based method had been applied to all awards, as well as
the resulting pro forma net income and earnings per share using the fair value
approach, are presented in the following table. 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. For further information, see "Stock Options
and Restricted Stock."
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions except per share data) |
|
|
|
|
|
|
|
Net income - as reported |
$
328.6 |
$ 318.5 |
$ 236.2 |
Add: stock-based employee compensation cost,
net of related tax effects, included in the determination of net income as reported |
7.5 |
8.0 |
0.8 |
Deduct: stock-based employee compensation cost,
net of related tax effects, that would have been included in the determination of net income
if the fair value-based method had been applied to all awards |
(19.5)
|
(37.7)
|
(27.3)
|
|
|
|
|
Net income - pro forma |
$ 316.6
|
$ 288.8
|
$ 209.7
|
|
|
|
|
Basic earnings per share |
|
|
|
As reported |
$2.58 |
$2.48 |
$1.92 |
Pro forma |
$2.49 |
$2.25 |
$1.70 |
Diluted earnings per share |
|
|
|
As reported |
$2.48 |
$2.36 |
$1.82 |
Pro forma |
$2.39 |
$2.14 |
$1.63 |
Restricted Stock
Compensation cost for restricted stock is measured as the
excess, if any, of the quoted market price of our stock at the date the common
stock is issued over the amount the employee must pay to acquire the stock. The
compensation cost is recognized over the period between the issue date and the
date any restrictions lapse.
Long-Lived Assets
We review certain long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. In that regard, we assess the recoverability of such
assets based upon estimated non-discounted cash flow forecasts. If an asset
impairment is identified, the asset is written down to fair value based on
discounted cash flow or other fair value measures.
Cash Equivalents
We consider all highly liquid short-term investments to
be cash equivalents.
Presentation of Prior Year Data
Certain reclassifications have been made to conform prior
year data with the current presentation.
46
New Accounting Standards
In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The adoption of SFAS No. 149 had no impact on our
results of operations or our financial position.
In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. The adoption of SFAS No. 150 had no impact on our
results of operations or our financial position.
SIGNIFICANT CUSTOMERS
A significant portion of our sales are to retailers
throughout the United States and Canada. We have two significant customers in
our wholesale apparel and wholesale footwear and accessories operating segments.
Sales to department stores owned by Federated Department Stores, Inc. accounted
for 13%, 14% and 15% of consolidated total revenues for the years ended December
31, 2003, 2002 and 2001, respectively. Sales to department stores owned by The
May Department Stores Company accounted for 12%, 14% and 16% of consolidated
total revenues for the years ended December 31, 2003, 2002 and 2001,
respectively. May and Federated accounted for approximately 27% of accounts
receivable at December 31, 2003.
ACQUISITIONS
On December 1, 2003, we acquired 100% of the common stock
of Kasper. Kasper designs, markets, sources, manufactures and distributes women's
suits, sportswear and dresses. Kasper's brands include such well-recognized
names as Albert Nipon, Anne Klein New York, AK Anne Klein, Kasper and Le
Suit. In addition, Kasper has granted licenses for the manufacture and
distribution of certain other products including, but not limited to, women's
watches, jewelry, handbags, small leather goods, footwear, coats, eyewear and
swimwear and men's apparel. Kasper also operates retail outlet stores under
the Kasper and Anne Klein names, which not only sell company
produced apparel, but also showcase and sell licensed products. The acquisition
of Kasper is intended to partially replace the business in the better market
lost by the termination of the Lauren and Ralph agreements and
increases our penetration into the better market distribution channel. We also
expect to benefit from the cross-branding opportunities of Kasper's brands
that exist with our other lines of business. Kasper operates in both the
wholesale better apparel and retail segments and the licensing of acquired
Kasper trademarks to independent third parties is reported in the other and
eliminations segment.
The aggregate purchase price was $259.3 million, which
included $221.7 million in cash payments made in 2003 and $37.6 million payable
in 2004. The purchase price was allocated to Kasper'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 $57.0 million being recorded as goodwill.
The following table summarizes the estimated fair values
of the assets acquired and liabilities assumed at the date of acquisition. The
allocation of the purchase price has not been finalized and is subject to
refinement. We do not expect any additional adjustments to be material. Any
additional adjustments will affect the amount assigned to goodwill.
47
(In millions)
|
|
|
Current assets |
|
$ 145.0
|
Property, plant and equipment |
|
12.9
|
Intangible assets |
|
107.6
|
Goodwill |
|
57.0
|
Other assets |
|
7.3
|
|
|
|
Total assets acquired |
|
329.8
|
|
|
|
Current liabilities |
|
64.5
|
Long-term debt |
|
6.0
|
|
|
|
Total liabilities assumed |
|
70.5
|
|
|
|
Net assets acquired |
|
$ 259.3
|
|
|
|
Of the $107.6 million of acquired Kasper intangible
assets, $79.5 million was assigned to registered trademarks that are not subject
to amortization, $18.5 million was assigned to third-party license agreements,
which had a weighted-average useful life of approximately 86 months on the
acquisition date, $9.1 million was assigned to existing customer orders, which
had a useful life of approximately eight months on the acquisition date, and
$0.5 million was assigned to a below-market lease, which had a useful life of
approximately 109 months on the acquisition date. The amortization of the
customer orders and the below-market lease is included in selling, general and
administrative expenses and the amortization of the license agreements is
included in net licensing income. Of the acquired goodwill, approximately $22.1
million is expected to be deductible for tax purposes.
On August 15, 2002, we acquired 100% of the common stock
of l.e.i., a leading designer, manufacturer and distributor of girls' and
young women's moderately-priced jeanswear. l.e.i.'s products are marketed
nationwide to national chains, department stores and specialty retailers. The
acquisition of l.e.i. is intended to enhance our competitive position in the
moderate market. We also expect to benefit from the cross-branding opportunities
that exist with our other lines of business, by leveraging l.e.i.'s strengths
in design, production, merchandising and logistics, and by achieving cost
synergies and economies of scale in the manufacturing process. l.e.i. is
reported under our wholesale moderate apparel segment.
The aggregate purchase price was $309.7 million, which
included payments to the selling shareholders of $272.5 million in cash and the
issuance of 1,035,854 shares of our common stock valued for financial reporting
purposes at $35.04 per share (the average closing price for the week containing
July 10, 2002, the date the acquisition was announced). The number of our common
shares delivered was based upon the average of the high and low sales price for
the ten consecutive trading days immediately preceding the signing date.
The purchase price was allocated to l.e.i.'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 $172.7 million being recorded as goodwill. We
also assumed approximately $84.0 million of l.e.i.'s funded debt and accrued
interest, $83.2 million of which we subsequently refinanced.
Of the $113.6 million of acquired l.e.i. intangible
assets, $106.0 million was assigned to registered trademarks that are not
subject to amortization and $7.6 million was assigned to third-party license
agreements, which had a weighted-average useful life of approximately 20 months
on the acquisition date. The amortization of these agreements is included in net
licensing income. The $172.7 million of goodwill from the l.e.i. acquisition was
assigned to the wholesale moderate apparel segment and is expected to be
deductible for tax purposes.
Pursuant to the Amended Acquisition Agreement, the selling
shareholders of l.e.i. were entitled to a $2.25 million payment as additional
consideration, which was made in 2003 and recorded as goodwill.
On April 8, 2002, we acquired 100% of the common stock of
Gloria Vanderbilt and also the Gloria Vanderbilt (and related) trademarks
and third-party licenses from Gloria Vanderbilt Trademark B.V. Gloria Vanderbilt
is a leading designer, marketer and distributor of women's moderately priced
stretch and twill
48
jeanswear. Gloria Vanderbilt markets its products nationwide to national
chains, department stores, mass merchants, and specialty retailers. Brands
include Gloria Vanderbilt and junior product marketed under the GLO
brand name. The acquisition of Gloria Vanderbilt increased our penetration into
the moderate market distribution channel. Gloria Vanderbilt is reported under
our wholesale moderate apparel segment.
The aggregate purchase price was $100.9 million, which
included $80.9 million in cash payments and 562,947 shares of our common stock
valued at $35.564 (the average closing price for the week containing March 19,
2002, the date the acquisition was announced). The purchase price was allocated
to Gloria Vanderbilt's assets and liabilities, tangible and intangible (as
determined by an independent appraiser).
Of the $83.9 million of acquired Gloria Vanderbilt
intangible assets, $75.3 million was assigned to registered trademarks that are
not subject to amortization and $8.6 million was assigned to third-party license
agreements, which had a weighted-average useful life of approximately 30 months
on the acquisition date. The amortization of these agreements is included in net
licensing income.
The terms of the acquisition agreement for Gloria
Vanderbilt required us to pay the former Gloria Vanderbilt shareholders
additional consideration of $4.50 for each $1.00 of Gloria Vanderbilt's
earnings before interest and taxes (as defined in the stock purchase agreement)
that exceeded certain targeted levels for the 12 months following the completion
of the acquisition, up to a maximum of $54.0 million. The maximum additional
consideration was paid in cash on July 7, 2003 and was recorded first as a
reduction of the liability resulting from the fair value of assets acquired
exceeding the purchase price, with the remaining balance of $45.1 million being
recorded as goodwill in the third fiscal quarter of 2003.
We also assumed approximately $43.7 million of Gloria
Vanderbilt's funded debt and accrued interest, which we subsequently
refinanced.
On June 19, 2001, we acquired 100% of the common stock of
McNaughton in a merger transaction. McNaughton designs, contracts for the
manufacture of and markets a broad line of branded moderately-priced women's
and juniors' career and casual clothing. We purchased all of the outstanding
shares of McNaughton for a total purchase price of $117.5 million in cash and
approximately 3.0 million shares of common stock, valued for financial reporting
purposes at $36.55 per share (the average closing price for the period from two
business days before to two business days after April 16, 2001, the date the
acquisition was announced). In addition, we assumed $271.8 million of McNaughton's
outstanding debt, all of which has been refinanced. McNaughton is reported under
our wholesale moderate apparel segment.
The acquisition has been accounted for under the purchase
method of accounting for business combinations. The purchase price was allocated
to McNaughton'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 $303.5 million being
recorded as goodwill.
On April 26, 2001, we acquired substantially all of the
assets of Judith Jack. Judith Jack is a manufacturer and distributor of women's
jewelry and accessories, including marcasite and sterling silver products. The
total purchase price was $22.0 million in cash. Judith Jack is reported under
our wholesale footwear and accessories segment.
The acquisition has been accounted for under the purchase
method of accounting for business combinations. The purchase price was allocated
to the acquired 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 $11.1 million being
recorded as goodwill.
Our consolidated financial statements include the results
of operations of the acquired companies from their respective acquisition dates.
The following unaudited pro forma information presents a summary of our
consolidated results of operations as if the Kasper, Gloria Vanderbilt and
l.e.i. acquisitions and their related financing had taken place on January 1,
2002. 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 acquisitions occurred on January 1, 2002, or which
may result in the future.
49
Year Ended December 31,
|
2003
|
2002
|
Total revenues
(in millions) |
$ 4,777.6 |
$ 4,690.1 |
Net income (in
millions) |
360.1 |
351.4 |
Basic earnings
per common share |
$2.83 |
$2.72 |
Diluted
earnings per common share |
$2.71 |
$2.57 |
INVENTORIES
Inventories are summarized as follows:
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Raw materials |
$ 31.1
|
$ 29.6
|
Work in process |
30.6
|
30.1
|
Finished goods |
528.9
|
469.9
|
|
|
|
|
$ 590.6
|
$ 529.6
|
|
|
|
ACCRUED RESTRUCTURING COSTS
In connection with the acquisitions of Sun, Nine West
Group, Judith Jack, McNaughton, Gloria Vanderbilt and Kasper, we 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. During
2002 and 2003, we also restructured several of our operations, including the
closing of Canadian and Mexican production facilities, the closing of an
administrative, warehouse and preproduction facility in El Paso, Texas and the
closing of a warehouse facility in Rural Hall, North Carolina. The accrual of
these costs and liabilities, which are included in accrued expenses and other
current liabilities, is as follows:
(In millions)
|
Severance
and other
employee
costs
|
Closing of
retail
stores and consolidation
of facilities
|
Other
|
Total
|
Balance, January 1, 2001 |
$ 7.6
|
$ 17.7
|
$ 4.2
|
$ 29.5
|
Net additions (reversals) |
9.1
|
(9.0)
|
0.9
|
1.0
|
Payments and reductions |
(5.5)
|
(4.5)
|
(5.1)
|
(15.1)
|
|
|
|
|
|
Balance, December 31, 2001 |
11.2
|
4.2
|
-
|
15.4
|
Net additions |
3.3
|
4.2
|
-
|
7.5
|
Payments and reductions |
(7.1)
|
(6.3)
|
-
|
(13.4)
|
|
|
|
|
|
Balance, December 31, 2002 |
7.4
|
2.1
|
-
|
9.5
|
Net additions |
6.4
|
2.1
|
-
|
8.5
|
Payments and reductions |
(6.9)
|
(0.5)
|
-
|
(7.4)
|
|
|
|
|
|
Balance, December 31, 2003 |
$ 6.9
|
$ 3.7
|
-
|
$ 10.6
|
|
|
|
|
|
Estimated severance payments and other employee costs of
$6.9 million accrued at December 31, 2003 relate to the remaining estimated
severance for an estimated 244 employees at locations to be closed. Employee
groups affected (totaling an estimated 1,000 employees) include accounting,
administrative, customer service, manufacturing, production, warehouse and
management personnel at locations closed or to be closed and duplicate corporate
headquarters management and administrative personnel.
50
The $6.4 million net addition during 2003 represents a
$5.9 million increase in severance accruals related to acquisitions, which was
recorded as goodwill, and a net $0.5 million accrual charged to operations
relating to severance costs related to the closing and consolidation of existing
facilities.
The $3.3 million net addition in 2002 represents a net
reversal of $1.7 million of the accrual related to acquisitions, which was
recorded as a reduction of goodwill, and a $5.0 million accrual of severance and
other employee costs charged to operations related to the closing and
consolidation of existing facilities, including $0.4 million for the closing of
the Canadian facility and $3.6 million for the closing of the Mexican and El
Paso facilities. The $9.1 million net addition in 2001 represents accruals
related to the closing of acquired administrative and plant locations, which was
recorded as goodwill.
During 2003, 2002 and 2001, $6.9 million, $7.1 million and
$5.5 million, respectively, of the reserve was utilized (relating to partial or
full severance and related costs for 575, 270 and 225 employees, respectively).
The $3.7 million accrued at December 31, 2003 for the
consolidation of facilities relates to expected costs to be incurred, including
lease obligations, for closing certain acquired facilities in connection with
consolidating their operations into our other existing facilities, as well as
the closing of the Canadian production facility.
The $2.1 million additional accrual for 2003 relates $2.2
million related to the closing of acquired facilities and retail stores, which
was recorded as an increase to goodwill, offset by a $0.1 reduction of prior
accruals, which was recognized in operations.
The $4.2 million additional accrual for 2002 consists of
$0.4 million related to the closing of acquired facilities, which was recorded
as an increase to goodwill, $0.5 million charged to operations related to the
closing of the Canadian facility and $3.3 million charged to operations related
to the closing of the Mexican and El Paso facilities. The net reversal of $9.0
million for 2001 represents a net reversal of accruals related to acquisitions,
which was recorded as a reduction of goodwill.
Other amounts reported include a net addition of $0.9
million in 2001 related to the closing of certain foreign operations. This
amount were recorded as an adjustment to goodwill.
Our plans have not been finalized in all areas, and
additional restructuring costs may result as we continue to evaluate and assess
the impact of duplicate responsibilities, warehouses and office locations. We do
not expect any final adjustments to be material. Any additional costs relating
to Kasper before December 1, 2004 will be recorded as goodwill; after that date,
additional costs will be charged to operations in the period in which they
occur. Any costs not related to Kasper will be charged to operations in the
period in which they occur.
PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as
follows:
December 31,
|
2003
|
2002
|
Useful
lives
(years)
|
(In millions) |
|
|
|
|
|
|
|
Land and
buildings |
$
96.4
|
$ 90.6
|
5 - 40 |
Leasehold
improvements |
169.7
|
148.8
|
1 - 39 |
Machinery and
equipment |
291.5
|
241.6
|
3 - 20 |
Furniture and
fixtures |
64.6
|
56.2
|
3 - 8 |
Construction in progress |
18.8
|
18.4
|
- |
|
|
|
|
|
641.0
|
555.6
|
|
Less: accumulated depreciation and amortization |
372.6
|
306.3
|
|
|
|
|
|
|
$ 268.4
|
$ 249.3
|
|
|
|
|
|
51
Depreciation and amortization expense relating to
property, plant and equipment was $56.9 million, $52.2 million and $48.5 million
in 2003, 2002 and 2001, respectively.
Included in property, plant and equipment are the
following capitalized leases:
December 31,
|
2003
|
2002
|
Useful
lives
(years)
|
(In millions) |
|
|
|
|
|
|
|
Buildings |
$74.2
|
$ 48.6
|
15 - 20 |
Machinery and equipment |
11.5
|
13.4
|
3 - 7 |
|
|
|
|
|
85.7
|
62.0
|
|
Less: accumulated amortization |
24.9
|
22.9
|
|
|
|
|
|
|
$ 60.8
|
$ 39.1
|
|
|
|
|
|
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill
and Other Intangible Assets," which changed the accounting for goodwill and
other intangible assets from an amortization method to an impairment-only
approach. Upon our adoption of SFAS No. 142 on January 1, 2002, we ceased
amortizing our trademarks without determinable lives and our goodwill. As
prescribed under SFAS No. 142, we had our goodwill and trademarks tested for
impairment during the first fiscal quarter of 2002.
Due to market conditions resulting from a sluggish economy
compounded by the aftereffects of the events of September 11, 2001, we revised
our earnings forecasts for future years for several of our trademarks and
licenses. As a result, the fair market value of these assets (as appraised by an
independent third party) was lower than their carrying value as of December 31,
2001. We accordingly recorded an after-tax impairment charge of $13.8 million,
which is reported as a cumulative effect of change in accounting principle
resulting from the adoption of SFAS No. 142.
In the second
fiscal quarter of 2002, we recorded an additional impairment charge of $5.8
million related to two trademarks due to a decrease in projected accessory
revenues resulting from a further evaluation of our costume jewelry business.
We perform our annual impairment test for goodwill and
trademarks during the fourth fiscal quarter of the year. As a result of
continuing decreases in projected accessory revenues in our costume jewelry
lines, the conversion of a portion of our Enzo Angiolini retail stores to
the more moderately-priced Bandolino brand, and the discontinuance of our
Rena Rowan line, we recorded additional trademark impairment charges of
$18.6 million in 2002 and $4.5 million in 2003. All trademark impairment charges
are reported as selling, general and administrative expenses in the other and
eliminations segment.
The components of other intangible assets are as
follows:
December 31,
|
|
2003
|
|
2002
|
(In millions)
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Amortized intangible assets |
|
|
|
|
|
|
License
agreements |
|
$68.9
|
$ 25.1
|
|
$
61.5
|
$ 20.1
|
Acquired order backlog |
|
9.1
|
1.1
|
|
-
|
-
|
Covenant not to compete |
|
2.9
|
2.2
|
|
2.9
|
1.6
|
Other |
|
0.6
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
81.5
|
28.4
|
|
64.4
|
21.7
|
Unamortized trademarks |
|
714.4
|
-
|
|
634.6
|
-
|
|
|
|
|
|
|
|
|
|
$ 795.9
|
$ 28.4
|
|
$ 699.0
|
$ 21.7
|
|
|
|
|
|
|
|
52
During 2003, we acquired $19.3 million of third-party
license agreements that have a weighted-average amortization period of
approximately 84 months, $9.1 million of existing customer orders that have an
amortization period of approximately eight months, and $0.5 million in
below-market leases that have an amortization period of approximately 109
months. Amortization expense for intangible assets subject to amortization was
$18.5 million, $9.8 million and $5.1 million for the years ended December 31,
2003, 2002 and 2001, respectively. Amortization expense for intangible assets
subject to amortization for each of the years in the five-year period ending
December 31, 2008 is estimated to be $18.3 million in 2004, $4.9 million in
2005, $4.6 million in 2006, $3.4 million in 2007 and $3.3 million in 2008.
The changes in the carrying amount of goodwill for the
years ended December 31, 2002 and 2003, by segment and in total, are as follows:
(In millions)
|
Wholesale
Better
Apparel
|
Wholesale
Moderate
Apparel
|
Wholesale
Footwear &
Accessories
|
Retail
|
Total
|
Balance, January 1,2002 |
$ 356.7
|
$ 298.0
|
$ 602.5
|
$ 111.2
|
$ 1,368.4
|
Net adjustments to purchase price of prior acquisitions |
-
|
(0.1)
|
0.2
|
-
|
0.1
|
Acquisition of l.e.i. |
-
|
172.7
|
-
|
-
|
172.7
|
|
|
|
|
|
|
Balance, December 31, 2002 |
356.7
|
470.6
|
602.7
|
111.2
|
1,541.2
|
Net adjustments to purchase price of prior acquisitions |
-
|
1.4
|
-
|
-
|
1.4
|
Additional
consideration paid for Gloria Vanderbilt |
-
|
45.1
|
-
|
-
|
45.1
|
Additional consideration paid for l.e.i. |
-
|
2.2
|
-
|
-
|
2.2
|
Acquisition of Kasper |
47.6
|
-
|
-
|
9.4
|
57.0
|
|
|
|
|
|
|
Balance, December 31,
2003 |
$ 404.3
|
$ 519.3
|
$ 602.7
|
$ 120.6
|
$
1,646.9
|
|
|
|
|
|
|
Goodwill was initially tested for impairment upon adoption
of SFAS No. 142 and is further tested for impairment during the fourth fiscal
quarter of each year. There have been no impairments to the carrying amount of
goodwill.
The following table presents a comparison of reported net
income and earnings per share for each of the years in the three-year period
ended December 31, 2003 to the respective adjusted amounts that would have been
reported had SFAS No. 142 been in effect during all periods presented.
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions except per share data) |
|
|
|
|
|
|
|
Reported net income |
$ 328.6
|
$ 318.5
|
$ 236.2
|
Add back goodwill amortization |
-
|
-
|
44.2
|
Add back trademark amortization, net of tax |
-
|
-
|
9.5
|
|
|
|
|
Adjusted net income |
$ 328.6
|
$ 318.5
|
$ 289.9
|
|
|
|
|
Earnings per share - basic |
|
|
|
Reported net income |
$2.58
|
$2.48
|
$1.92
|
Goodwill amortization |
-
|
-
|
0.36
|
Trademark amortization |
-
|
-
|
0.07
|
|
|
|
|
Adjusted net income |
$2.58
|
$2.48
|
$2.35
|
|
|
|
|
Earnings per share - diluted |
|
|
|
Reported net income |
$2.48
|
$2.36
|
$1.82
|
Goodwill amortization |
-
|
-
|
0.33
|
Trademark amortization |
-
|
-
|
0.07
|
|
|
|
|
Adjusted net income |
$2.48
|
$2.36
|
$2.22
|
|
|
|
|
53
FINANCIAL INSTRUMENTS
As a result of our global operating and financing
activities, we are 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, we manage exposure to changes in interest rates and foreign currency
exchange rates through our 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. We do not use financial instruments for trading or other speculative
purposes.
At December 31, 2003 and 2002, 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,
|
2003
|
2002
|
(In millions)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
|
|
|
|
Long-term debt, including current portion |
$ 966.3
|
$ 1,018.9
|
$ 957.2
|
$ 1,027.2
|
Foreign currency exchange contracts |
0.5
|
0.5
|
-
|
-
|
Interest rate swaps |
-
|
-
|
(0.7)
|
(0.7)
|
|
|
|
|
|
|
$ 966.8
|
$ 1,019.4
|
$ 956.5
|
$ 1,026.5
|
|
|
|
|
|
Financial instruments expose us to counterparty credit
risk for nonperformance and to market risk for changes in interest and currency
rates. We manage exposure to counterparty credit risk through specific minimum
credit standards, diversification of counterparties and procedures to monitor
the amount of credit exposure. Our financial instrument counterparties are
substantial investment or commercial banks with significant experience with such
instruments. We also have procedures to monitor the impact of market risk on the
fair value and costs of our financial instruments considering reasonably
possible changes in interest and currency rates.
CREDIT FACILITIES
At December 31, 2003, we had credit agreements with
several lending institutions to borrow an aggregate principal amount of up to
$1.4 billion under Senior Credit Facilities. These facilities, of which the
entire amount is available for letters of credit or cash borrowings, provide for
a $700.0 million three-year revolving credit facility (which expires in June
2006 and replaced a similar $850.0 million 364-day revolving credit facility in
June 2003) and a $700.0 million five-year revolving credit facility (which
expires in June 2004). At December 31, 2003, $212.9 million was outstanding
under the three-year revolving credit facility (comprised solely of outstanding
letters of credit) and no amounts were outstanding under our 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 us 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 our ability to incur additional
indebtedness, prepay subordinated indebtedness, make acquisitions, enter into
mergers and pay dividends.
In addition to these committed facilities, we have
unsecured uncommitted lines of credit for the purpose of issuing letters of
credit and bankers' acceptances for McNaughton and Kasper. As of December 31,
2003, $72.0 million in letters of credit were outstanding under these lines of
credit.
At December 31, 2003, we also had a C$25.0 million
unsecured line of credit in Canada, under which no amounts were outstanding.
54
The weighted-average interest rate for cash borrowings
under our credit facilities was 1.7% at December 31, 2003.
LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
3.50% Zero Coupon Convertible Senior
Notes due 2021, net of unamortized discount of $7.7 and $8.2 |
$ 437.7 |
$ 422.0 |
7.50% Senior Notes due 2004, net of unamortized discount of $0.1 and $0.4 |
174.9 |
174.6 |
8.375% Series B Senior Notes due 2005, net of unamortized discount of $0.1 and $0.2 |
129.5 |
129.4 |
7.875% Senior Notes due 2006, net of unamortized discount of $0.8 and $1.1 |
224.2 |
223.9 |
6.98% Industrial revenue bonds, final payment due 2007 |
- |
7.3 |
|
|
|
|
966.3
|
957.2
|
Less: current portion |
174.9
|
1.5
|
|
|
|
|
$ 791.4
|
$ 955.7
|
|
|
|
Long-term debt maturities for each of the next five years
are $175.0 million in 2004, $129.6 million in 2005 and $225.0 million in 2006.
All of our notes contain certain covenants, including, among others,
restrictions on liens, sale-leaseback transactions, and additional secured debt
and all except the zero coupon convertible senior debt securities pay interest
semiannually. The weighted-average interest rate of our long-term debt was 5.9%
at December 31, 2003.
On February 2, 2004, we redeemed all our outstanding Zero
Coupon Convertible Senior Notes due 2021 at a redemption price (inclusive of
issue price plus accrued original issue discount) of $554.41 per $1,000 of
principal amount at maturity for a total payment of $446.6 million.
DERIVATIVES
SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," subsequently amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (as amended, hereinafter referred to as "SFAS 133"),
establishes accounting and reporting standards for derivative instruments.
Specifically, SFAS 133 requires us to recognize all derivatives as either assets
or liabilities on the balance sheet and to measure those instruments at fair
value. Additionally, the fair value adjustments will affect either stockholders'
equity or net income, depending on whether the derivative instrument qualifies
as a hedge for accounting purposes and, if so, the nature of the hedging
activity.
During 2003, no material amounts were reclassified from
other comprehensive income to earnings relating to cash flow hedges. If foreign
currency exchange rates or interest rates do not change from their December 31,
2003 amounts, we estimate that any reclassifications from other comprehensive
income to earnings within the next 12 months also will not be material. The
actual amounts that will be reclassified to earnings over the next 12 months
could vary, however, as a result of changes in market conditions.
For the periods April 2002 through October 2002 and June
1999 through January 2001, we had employed an interest rate hedging strategy
utilizing swaps to effectively float a portion of our interest rate exposure on
our fixed rate financing arrangements. The termination of these interest rate
swaps generated pre-tax gains of $21.6 million and $8.3 million, respectively,
which is being amortized as a reduction of interest expense over the remaining
terms of the interest rate swap agreements, with approximately $7.8 million of
pre-tax income to be reclassified into earnings within the next 12 months.
55
OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Warehouses, office facilities and equipment |
$ 49.6
|
$ 27.2
|
Less: current portion |
5.9
|
4.8
|
|
|
|
Obligations under capital leases - noncurrent |
$ 43.7
|
$ 22.4
|
|
|
|
We occupy warehouse and office facilities leased from the
City of Lawrenceburg, Tennessee. Three ten-year net leases run until February
2004, July 2005 and May 2006, respectively, and require minimum annual rent
payments of $0.5 million each plus accrued interest. In connection with these
leases, we guaranteed $15.0 million of Industrial Development Bonds issued in
order to construct the facilities, $2.1 million of which remained unpaid as of
December 31, 2003. The financing agreement with the issuing authority requires
us to comply with the same financial covenants required by our Senior Credit
Facilities (see "Credit Facilities").
We also lease 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 $1.3 million and $0.9
million, respectively.
In 2003, we entered into a sale-leaseback agreement for
our Virginia warehouse facility. This transaction resulted in a net gain of $7.5
million that has been deferred and is being amortized over the lease term, which
runs until April 2023 and requires minimum annual rent payments of $2.4 million.
The building has been capitalized at $25.6 million, which approximates the
present value of the minimum lease payments.
We also lease various equipment under three to seven-year
leases at an aggregate annual rental of $2.8 million. The equipment has been
capitalized at its fair market value of $10.5 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, 2003:
Year Ending December 31, |
|
(In millions) |
|
|
|
2004 |
$ 8.9
|
2005 |
7.1
|
2006 |
5.4
|
2007 |
5.1
|
2008 |
5.2
|
Later years |
46.2
|
|
|
Total minimum lease payments |
77.9
|
Less: amount representing interest |
28.3
|
|
|
Present value of net minimum lease payments |
$ 49.6
|
|
|
COMMITMENTS AND CONTINGENCIES
(a) CONTINGENT LIABILITIES. We have been named as a
defendant in various actions and proceedings, including actions brought by
certain employees whose employment has been terminated arising from our ordinary
business activities. Although the amount of any liability that could arise with
respect to these actions cannot be accurately predicted, in our opinion, any
such liability will not have a material adverse effect on our financial position
or results of operations.
56
(b) ROYALTIES. Under an exclusive license to manufacture
certain items under the Polo Jeans Company trademark pursuant to license
and design service agreements with Polo, we are obligated to pay Polo a
percentage of net sales of Polo Jeans Company products. Minimum payments
of $5.6 million per year are due under these agreements. We are 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 us in five-year
increments for up to 25 additional years provided that we achieve certain
minimum sales levels. Renewal of the Polo Jeans Company license after
2010 requires a one-time payment by us of $25.0 million or, at our option, a
transfer of a 20% interest in our 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 our 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.
We also have an exclusive license to produce and sell
costume jewelry in the United States and Canada under the Tommy Hilfiger
and H Hilfiger trademarks, which expires on March 31, 2008. The agreement
provides for payment by us of a percentage of net sales against guaranteed
minimum royalty and advertising payments as set forth in the agreement. Minimum
payments under this agreement amount to $1.5 million in 2004, $1.4 million in
2005, $1.5 million in 2006, $1.7 million in 2007 and $0.4 million in 2008. We
also have an exclusive license to produce, market and distribute costume jewelry
in the United States, Canada, Mexico and Japan under the Givenchy
trademark, which expires on December 31, 2005. The agreement provides for the
payment by us of a percentage of net sales against guaranteed minimum royalty
and advertising payments as set forth in the agreement. Minimum payments under
this agreement amount to $0.5 million in both 2004 and 2005.
In July 2002, we obtained the exclusive license to produce
and sell women's and young women's footwear, luggage, handbags and small
leather goods throughout the United States and Puerto Rico bearing a diversified
complement of ESPRIT trademarks pursuant to license and design service
agreements with Esprit Europe. The agreement expires on December 31, 2007 and is
renewable for an additional five years, provided that we achieve certain minimum
sales levels. Minimum payments under these agreements amount to $2.1 million in
2004, $3.6 million in 2005, $4.8 million in 2006 and $6.1 million in 2007. We
are also obligated to spend on advertising a percentage of net sales of these
licensed products.
(c) LEASES. Total rent expense charged to operations for
the years ended December 31, 2003, 2002 and 2001 was as follows.
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
Minimum rent |
$ 107.6
|
$ 100.8
|
$ 82.1
|
Contingent rent |
1.1
|
1.1
|
1.1
|
Less: sublease rent |
(6.4)
|
(5.6)
|
(4.4)
|
|
|
|
|
|
$ 102.3
|
$ 96.3
|
$ 78.8
|
|
|
|
|
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) |
|
|
|
2004 |
$ 100.5
|
2005 |
85.8
|
2006 |
76.7
|
2007 |
65.2
|
2008 |
49.2
|
Later years |
208.5
|
|
|
|
$ 585.9
|
|
|
57
Certain of the leases provide for renewal options and the
payment of real estate taxes and other occupancy costs. Future rental
commitments for leases have not been reduced by minimum non-cancelable sublease
rentals aggregating $47.2 million.
COMMON STOCK
The Board of Directors has authorized several programs to
repurchase our common stock from time to time in open market transactions
totaling $800.0 million. As of December 31, 2003, 26.9 million shares had been
acquired at a cost of $663.7 million. There is no time limit for the utilization
of the amounts remaining under any uncompleted programs.
INCOME TAXES
The following summarizes the provision for income taxes:
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
Current: |
|
|
|
Federal |
$ 131.1
|
$ 173.8
|
$ 120.0
|
State and local |
15.0
|
19.9
|
13.0
|
Foreign |
5.2
|
5.4
|
5.7
|
|
|
|
|
|
151.3
|
199.1
|
138.7
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
43.7
|
3.7
|
23.9
|
State and local
|
3.8
|
(2.1)
|
0.7
|
Foreign
|
(0.4)
|
0.5
|
0.3
|
|
|
|
|
|
47.1
|
2.1
|
24.9
|
|
|
|
|
Provision for income taxes |
$ 198.4
|
$ 201.2
|
$ 163.6
|
|
|
|
|
The total income tax provision was recorded
as follows:
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
Included in income before cumulative effect of change in accounting principle |
$ 198.4
|
$ 201.2
|
$ 163.6
|
Included in cumulative effect of change in accounting for intangible assets |
-
|
(8.4)
|
-
|
|
|
|
|
|
$ 198.4
|
$ 192.8
|
$ 163.6
|
|
|
|
|
The domestic and foreign components of income before
provision for income taxes are as follows:
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
United States |
$ 519.4
|
$ 527.6
|
$ 389.6
|
Foreign |
7.6
|
5.9
|
10.2
|
|
|
|
|
Income before
provision for income taxes |
$ 527.0
|
$ 533.5
|
$ 399.8
|
|
|
|
|
58
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,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
Provision for Federal income taxes at the statutory rate |
$ 184.5
|
$ 186.7
|
$ 139.9
|
State and local income taxes, net of federal benefit |
11.6
|
11.7
|
7.1
|
Amortization of goodwill |
-
|
-
|
15.4
|
Reversal of prior years federal income tax
audit accruals |
(8.7)
|
-
|
-
|
Valuation allowance |
8.5
|
-
|
-
|
Other items, net |
2.5
|
2.8
|
1.2
|
|
|
|
|
Provision for income taxes |
$ 198.4
|
$ 201.2
|
$ 163.6
|
|
|
|
|
We have not provided for U.S. Federal and foreign
withholding taxes on $35.5 million of foreign subsidiaries' undistributed
earnings as of December 31, 2003. Such earnings are intended to be reinvested
indefinitely.
The following is a summary of the significant components of our deferred tax
assets and liabilities:
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Deferred tax assets (liabilities): |
|
|
Nondeductible accruals and allowances |
$ 82.4
|
$ 89.4
|
Depreciation |
9.5
|
7.4
|
Intangible asset valuation and amortization |
(176.6)
|
(141.6)
|
Loss and credit carryforwards |
29.9
|
25.8
|
Amortization of stock-based compensation |
6.1
|
0.9
|
Other (net) |
7.7
|
0.3
|
Valuation allowance |
(8.5)
|
-
|
|
|
|
Net deferred tax
liability |
$ (49.5)
|
$ (17.8)
|
|
|
|
Included in:
|
|
|
Current assets
|
$ 80.6
|
$ 80.8
|
Noncurrent liabilities
|
(130.1)
|
(98.6)
|
|
|
|
Net deferred tax liability |
$ (49.5)
|
$ (17.8)
|
|
|
|
As of December 31, 2003, we had federal and state net
operating loss carryforwards of $28.4 million and $178.9 million, respectively,
which expire through 2022. We also had capital loss carryforwards of $22.6
million, which expire in 2006, and state tax credit carryforwards of $2.9
million, which expire through 2019.
During the fourth fiscal quarter of 2003, the Internal
Revenue Service completed its audits of our returns through 2000. As a result,
we reversed $8.7 million of tax accruals established in years prior to 2001.
We have determined that the $22.6 million of capital loss
carryforwards expiring in 2006 may not be utilized; therefore, we established a
valuation allowance of $8.5 million as of December 31, 2003.
59
EARNINGS PER SHARE
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions except per share amounts) |
|
|
|
|
|
|
|
Basic |
|
|
|
Net income |
$ 328.6
|
$ 318.5
|
$ 236.2
|
Weighted average common shares outstanding |
127.3
|
128.2
|
123.2
|
|
|
|
|
Basic earnings
per share |
$ 2.58
|
$ 2.48
|
$ 1.92
|
|
|
|
|
Diluted |
|
|
|
Net income |
$ 328.6
|
$ 318.5
|
$ 236.2
|
Add: interest expense associated with convertible
notes, net of tax benefit
|
9.5
|
9.1
|
7.7
|
|
|
|
|
Income available to common shareholders |
$ 338.1
|
$ 327.6
|
$ 243.9
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
127.3 |
128.2 |
123.2 |
Effect of dilutive securities:
|
|
|
|
Employee stock options |
1.3
|
2.9
|
3.3
|
Assumed conversion of
convertible notes
|
7.9
|
7.9
|
7.2
|
|
|
|
|
Weighted average common shares and
share equivalents outstanding
|
136.5
|
139.0
|
133.7
|
|
|
|
|
Diluted
earnings per share |
$ 2.48
|
$ 2.36
|
$ 1.82
|
|
|
|
|
STATEMENT OF CASH FLOWS
Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
|
Detail of acquisitions: |
|
|
|
|
Fair value of assets acquired |
$ 329.8
|
$ 622.3
|
$ 662.2
|
|
Liabilities assumed |
(108.1)
|
(211.7)
|
(378.9)
|
|
Common stock and options issued |
-
|
(56.3)
|
(143.5)
|
|
|
|
|
|
|
Cash paid for acquisitions |
221.7
|
354.3
|
139.8
|
|
Cash acquired in acquisitions |
(23.5)
|
(21.6)
|
(5.8)
|
|
|
|
|
|
|
Net cash paid for acquisitions |
$ 198.2
|
$ 332.7
|
$ 134.0
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
Interest
|
$ 47.0 |
$ 48.7 |
$ 77.5 |
|
Income taxes |
163.2 |
158.6 |
100.9 |
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
Equipment acquired through capital lease financing
|
29.3 |
5.4 |
3.4 |
|
Tax benefits related to stock options
|
2.9 |
12.9 |
27.4 |
|
Restricted stock issued to employees |
18.8 |
10.8 |
3.7 |
60
STOCK OPTIONS AND RESTRICTED STOCK
Under two stock option plans, we may grant stock options
and other awards from time to time to key employees, officers, directors,
advisors and independent consultants to us or to any of our subsidiaries. In
general, options become exercisable over either a three-year or five-year period
from the grant date and expire 10 years after the date of grant for options
granted on or before May 28, 2003 and seven years after the date of grant
thereafter. In certain cases for non-employee directors, options become
exercisable six months after the grant date. Shares available for future option
grants at December 31, 2003 totaled 2.0 million. Total compensation cost
recorded for stock-based employee compensation awards (including awards to
non-employee directors) was $12.2 million, $12.9 million (of which $11.3 million
was related to executive compensation obligations) and $1.1 million for 2003,
2002 and 2001, respectively.
In connection with our acquisition of McNaughton, stock
options for McNaughton common stock held by McNaughton employees and
non-employee directors were converted into fully-vested options to purchase our
common stock. Under the terms of the Agreement and Plan of Merger, each option
to purchase one share of McNaughton's common stock was converted into an
option to purchase 0.282 shares of our common stock and a cash payment averaging
approximately $5.89. Options to purchase 5.1 million shares of McNaughton common
stock were converted into options to purchase 1.4 million shares of our common
stock at a weighted average value of $17.85 per share.
The following table summarizes information about stock
option transactions (options in millions):
|
2003
|
|
2002
|
|
2001
|
|
Options
|
Weighted
Average
Exercise
Price
|
|
Options
|
Weighted
Average
Exercise
Price
|
|
Options
|
Weighted
Average
Exercise
Price
|
Outstanding, January 1 |
14.2 |
$29.28 |
|
17.9 |
$27.26 |
|
15.7 |
$24.70 |
Option conversions relating to acquisitions |
- |
- |
|
- |
- |
|
1.4 |
$17.85 |
Granted |
0.3
|
$30.28
|
|
2.0
|
$36.28
|
|
5.6
|
$31.72
|
Exercised |
(0.9)
|
$22.29
|
|
(4.8) |
$24.54 |
|
(4.3) |
$19.70 |
Cancelled/forfeited |
(1.0) |
$31.35 |
|
(0.9) |
$30.56 |
|
(0.5) |
$36.13
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
12.6
|
$29.64
|
|
14.2
|
$29.28
|
|
17.9
|
$27.26
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock
options outstanding at December 31, 2003 (options in millions):
|
|
Outstanding
|
|
Exercisable
|
Range of
Exercise Prices
|
|
Number
of
Options
|
Weighted
Average
Remaining
Years of
Contractual
Life
|
Weighted
Average
Exercise
Price
|
|
Number
of
Options
|
Weighted
Average
Exercise
Price
|
$0 to $10 |
|
0.2
|
3.3
|
$5.07
|
|
0.2
|
$5.22
|
$10 to $20 |
|
1.0
|
4.1
|
$15.44
|
|
1.0
|
$15.44
|
$20 to $30 |
|
4.7
|
6.4
|
$26.54
|
|
3.5
|
$26.51
|
$30 to $40 |
|
6.0
|
7.5
|
$33.64
|
|
3.0
|
$33.35
|
$40 to $50 |
|
0.6
|
7.2
|
$40.81
|
|
0.3
|
$40.89
|
$50 to $70 |
|
0.1
|
2.6
|
$67.03
|
|
0.1
|
$67.03
|
|
|
|
|
|
|
|
|
In total |
|
12.6
|
6.7
|
$29.64
|
|
8.1
|
$28.29
|
|
|
|
|
|
|
|
|
61
The following table summarizes the
weighted average fair value of options granted and the related assumptions used
in the Black-Scholes option pricing model.
Year Ended December 31,
|
2003
|
2002
|
2001
|
Weighted-average fair value of options at grant date:
|
|
|
|
Exercise price less than market price
|
$34.38 |
$32.71 |
$32.22 |
Exercise price equal to market price
|
$12.11 |
$14.72 |
$12.35 |
Exercise price greater than market price
|
- |
- |
$8.81 |
Assumptions:
|
|
|
|
Dividends yield
|
0.77% |
- |
- |
Expected volatility
|
47.9% |
50.0% |
49.7% |
Risk-free interest rate
|
2.55% |
3.98% |
3.22% |
Expected life (years)
|
3.8 |
3.5 |
3.6 |
During 2003, 626,500 shares of restricted common stock
were issued to 31 employees and six executive officers under the 1999 Stock
Incentive Plan. The restrictions generally lapse on one-third of the number of
restricted shares on each of the first three anniversary dates of issue or, in
the case of our Chief Executive Officer and our Chief Operating and Financial
Officer, one-third of the number of restricted shares on the first day
immediately following the end of the trading restrictions imposed by us on the
grantee with respect to the public announcement of fourth quarter financial
results for each of 2003, 2004 and 2005, provided we meet certain target levels
of free cash flow (cash flow from operations less capital expenditures) for the
year immediately preceding the lapse date. The value of this stock based on
quoted market values was $18.8 million, which we are amortizing over the period
in which the restrictions lapse. The restrictions do not affect voting and
dividend rights.
During 2002, 293,000 shares of restricted common stock
were issued to 75 employees and two executive officers under the 1999 Stock
Incentive Plan. The restrictions lapse on one-third of the number of restricted
shares on each of the third, fourth and fifth anniversary dates of issue or, in
the case of the executive officers, one-third of the number of restricted shares
on the first day immediately following the end of the trading restrictions
imposed by us on the grantee with respect to the public announcement of fourth
quarter financial results for each of 2003, 2004 and 2005, provided we meet
certain target levels of free cash flow for the year immediately preceding the
lapse date. The value of this stock based on quoted market values was $10.8
million, which we are amortizing over the period in which the restrictions
lapse. The restrictions do not affect voting and dividend rights.
During 2001, 100,000 shares of restricted common stock
were issued to an executive officer under the 1999 Stock Incentive Plan. The
restrictions originally were to lapse on one-third of the number of restricted
shares on each of the first three anniversary dates of issue; however, all
restrictions were lifted upon the executive officer's retirement in 2002. The
value of this stock based on quoted market values was $3.7 million, of which
$1.1 million was recorded in 2001 and $2.6 million was recorded in 2002.
EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
We maintain the Jones Apparel Group, Inc. Retirement Plan
(the "Jones Plan") under Section 401(k) of the Internal Revenue Code
(the "Code"). 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 (subject to limitations imposed by the Code) 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.
62
We have elected to make the Jones Plan a "Safe Harbor
Plan" under Section 401(k)(12) of the Code. As a result of this election,
we make 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. We may, at our sole discretion, contribute
additional amounts to all employees on a pro rata basis. Matching contributions
made prior to 2000 continue to vest over their original five-year period.
In connection with the acquisitions of Nine West Group,
Victoria, McNaughton and Gloria Vanderbilt we assumed additional plans in which
certain employees participate.
Nine West Group and Victoria maintained defined
contribution plans and McNaughton maintained two such plans under Section 401(k)
of the Code. Certain employees not covered by a collective bargaining agreement
and meeting certain other requirements were eligible to participate in these
plans. Participants could elect to have a portion (typically up to 15%) of their
salary deferred and deposited with a qualified trustee, who in turn invested the
money in a variety of investment vehicles as selected by each participant. All
employee contributions into these plans were 100% vested. We matched a portion
of the participant's contributions subject to subject to maximums set by the
Department of the Treasury. The Nine West Group, Victoria and two McNaughton
plans were merged into the Jones Plan on December 16, 2002, April 2, 2002,
November 22, 2002 and December 20, 2002, respectively.
Gloria Vanderbilt maintained a defined contribution plan
under Section 401(k) of the Code. Gloria Vanderbilt employees meeting certain
requirements were eligible to participate in the plan. Under the plan,
participants could elect to have up to 15% of their salary (subject to
limitations imposed by the Code) deferred and deposited with a qualified
trustee, who in turn invested the money in a variety of investment vehicles as
selected by each participant. Gloria Vanderbilt's matching contribution
amounted to 25% of the first 6% of the participant's salary deferred, subject
to maximums set by the Department of the Treasury. All participant contributions
into the plan are 100% vested; employer contributions vested over a six-year
period. This plan was merged into the Jones Plan on January 26, 2004.
Kasper maintains a defined contribution plan under Section
401(k) of the Code. Kasper employees meeting certain requirements are eligible
to participate in the plan. Under the plan, participants can elect to have up to
50% of their salary (subject to limitations imposed by the Code) deferred and
deposited with a qualified trustee, who in turn invests the money in a variety
of investment vehicles as selected by each participant. Kasper's matching and
profit sharing contributions are discretionary, with recent matching
contributions amounting to 50% of the first 3% of the participant's salary
deferred, subject to maximums set by the Department of the Treasury. All
participant contributions into the plan are 100% vested; employer contributions
vest over a three-year period and profit sharing contributions vest over a
five-year period.
We contributed approximately $6.4 million, $6.9 million
and $5.1 million to our defined contribution plans during 2003, 2002 and 2001,
respectively.
Prior to June 30, 2002, McNaughton maintained a profit
sharing plan covering certain employees with more than one year of continuous
service. Vesting occurred at a rate of 25% per year and employees were fully
vested after four years. Profit sharing plan assets consisted primarily of
stocks, bonds and U.S. Government securities. The plan provided for an accrual
of up to 15% of each employee's gross compensation plus bonus, up to a maximum
contribution of approximately $25,500 per employee. Our cost related to this
plan was $0.3 million and $0.6 million in 2002 and 2001, respectively. On June
30, 2002, this plan was terminated, with the participants having the choice of
either receiving their balances in cash or having their balances transferred
into the Jones Plan.
Defined Benefit Plans
We maintain several defined benefit plans, including the
Pension Plan for Associates of Nine West Group Inc. (the "Cash Balance
Plan") and The Napier Company Retirement Plan for certain associates of
Victoria (the "Napier Plan"). The Cash Balance Plan expresses
retirement benefits as an account balance which
63
increases each year through interest credits. All benefits under the Napier
Plan are frozen at the amounts earned by the participants as of December 31,
1995. Our funding policy is to make the minimum annual contributions required by
applicable regulations. We plan to contribute $5.5 million to our defined
benefit plans in 2004. The measurement date for all plans is December 31.
Obligations and Funded Status
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Change in
benefit obligation |
|
|
Benefit
obligation, beginning of year |
$ 36.6
|
$ 31.9
|
Service cost |
0.1
|
0.1
|
Interest
cost |
2.4
|
2.3
|
Actuarial loss |
3.7
|
6.5
|
Effects of
changes in foreign currency exchange rates |
0.1
|
-
|
Benefits paid |
(3.8)
|
(4.2)
|
|
|
|
Benefit obligation, end of year |
39.1
|
36.6
|
|
|
|
Change in
plan assets |
|
|
Fair value
of plan assets, beginning of year |
23.6
|
31.1
|
Actuarial return on plan assets |
2.5
|
(3.3)
|
Employer
contribution |
0.8
|
-
|
Effects of changes in foreign currency exchange rates |
0.1
|
-
|
Benefits
paid |
(3.8)
|
(4.2)
|
|
|
|
Fair value
of plan assets, end of year |
23.2
|
23.6
|
|
|
|
Funded status |
(15.9)
|
(13.0)
|
Unrecognized
net actuarial loss |
13.9
|
10.8
|
|
|
|
Net amount
recognized |
$
(2.0)
|
$
(2.2)
|
|
|
|
Amounts Recognized on the Balance Sheet
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Accrued benefit cost |
$ (15.9)
|
$ (13.0)
|
Accumulated other comprehensive income |
13.9
|
10.8
|
|
|
|
Net amount recognized |
$ (2.0)
|
$ (2.2)
|
|
|
|
Information for Pension Plans with an Accumulated Benefit Obligation in
Excess of Plan Assets
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Projected benefit
obligation |
$
39.1
|
$
36.6
|
Accumulated benefit obligation |
39.1
|
36.6
|
Fair value of plan
assets |
23.2
|
23.6
|
Increase in minimum liability included in
other comprehensive income |
3.1
|
10.8
|
64
Components of Net Periodic Benefit Cost
December 31,
|
2003
|
2002
|
(In millions) |
|
|
|
|
|
Service cost |
$
0.1
|
$
0.1
|
Interest cost |
2.4
|
2.3
|
Expected
return on plan assets |
(1.8)
|
(2.4)
|
Amortization of prior service
costs |
-
|
0.2
|
Amortization
of net loss |
0.8
|
-
|
|
|
|
Net periodic
benefit cost |
$
1.5
|
$
0.2
|
|
|
|
Assumptions
|
2003
|
2002
|
Weighted-average
assumptions used to determine: |
|
|
Benefit
obligations at December 31 |
|
|
Discount rate |
6.1%
|
6.5%
|
Expected long-term return on plan assets |
7.9%
|
9.0%
|
Net periodic benefit cost for year ended December 31 |
|
|
Discount rate |
6.5%
|
7.1%
|
Expected long-term return on plan assets |
7.9%
|
9.0%
|
Plan Assets
The weighted-average asset allocations at December 31,
2003 and 2002 by asset category are as follows:
December 31,
|
2003
|
2002
|
Equity
securities |
53%
|
41%
|
Debt securities |
37%
|
49%
|
Other |
10%
|
10%
|
|
|
|
Total |
100%
|
100%
|
|
|
|
Our plans are designed to diversify investments across
types of investments and investment managers. Permitted investment vehicles
include investment-grade fixed income securities, domestic and foreign equity
securities, mutual funds, guaranteed insurance contracts and real estate, while
speculative and derivative investment vehicles are generally prohibited. The
investment managers have full discretion to manage their portion of the
investments subject to the objectives and policies of the respective plans. The
performance of the investment managers is reviewed on a regular basis. The
primary objectives are to achieve a rate of return sufficient to meet current
and future plan cash requirements and to emphasize long-term growth of principal
while avoiding excessive risk and maintaining fund liquidity. At December 31,
2003, the weighted-average target allocation percentages for fund investments
were 34% fixed income securities, 51% U. S. Equity securities, and 15%
international securities.
To determine the overall expected long-term
rate-of-return-on-assets assumption, we add an expected inflation rate to the
expected long-term real returns of our various asset classes, taking into
account expected volatility and correlation between the returns of the asset
classes as follows: for equities and real estate, a historical average
arithmetic real return; for government fixed-income securities, current yields
on inflation-indexed bonds; and for corporate fixed-income securities, the yield
on government fixed-income securities plus a blend of current and historical
credit spreads.
65
BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
We identify operating segments based on, among other
things, the way our management organizes the components of our business for
purposes of allocating resources and assessing performance. With the addition of
McNaughton in 2001 and the recent acquisitions of Gloria Vanderbilt and l.e.i.,
we redefined our reportable operating segments effective January 1, 2002. Our
operations are comprised of four reportable segments: wholesale better apparel,
wholesale moderate apparel, wholesale footwear and accessories, and retail.
Segment revenues are generated from the sale of apparel, footwear and
accessories through wholesale channels and our own retail locations. The
wholesale segments include wholesale operations with third party department and
other retail stores, the retail segment includes operations by our own stores,
and income and expenses related to trademarks, licenses and general corporate
functions are reported under "other and eliminations." We define
segment profit as operating income before net interest expense, equity in
earnings of unconsolidated affiliates, income taxes and (for periods prior to
January 1, 2002) amortization of goodwill. Summarized below are our revenues,
income and total assets by reportable segments.
(In millions)
|
Wholesale
Better
Apparel
|
Wholesale
Moderate
Apparel
|
Wholesale
Footwear &
Accessories
|
Retail
|
Other &
Eliminations
|
Consolidated
|
For the year ended December 31, 2003 |
|
|
|
|
|
|
Revenues from external customers |
$ 1,475.0
|
$ 1,310.2
|
$ 868.3
|
$ 685.6
|
$ 36.2
|
$ 4,375.3
|
|
Intersegment revenues |
88.7
|
12.3
|
62.6
|
-
|
(163.6)
|
-
|
|
|
|
|
|
|
|
|
|
Total revenues |
1,563.7
|
1,322.5
|
930.9
|
685.6
|
(127.4)
|
4,375.3
|
|
|
|
|
|
|
|
|
|
Segment income |
$ 212.8
|
$ 157.1
|
$ 157.9
|
$ 77.0
|
$ (25.0)
|
579.8 |
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
|
|
|
(55.3)
|
|
Equity in earnings of unconsolidated affiliates |
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
$ 527.0
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
$ 19.6 |
$ 18.6 |
$ 8.7 |
$ 11.0 |
$ 26.4 |
$ 84.3 |
For the year ended December 31, 2002 |
|
|
|
|
|
|
Revenues from external customers |
$ 1,636.4
|
$ 1,093.5
|
$ 882.3
|
$ 700.0
|
$ 28.7
|
$ 4,340.9
|
|
Intersegment revenues |
93.8
|
11.3
|
74.1
|
-
|
(179.2)
|
-
|
|
|
|
|
|
|
|
|
|
Total revenues |
1,730.2
|
1,104.8
|
956.4
|
700.0
|
(150.5)
|
4,340.9
|
|
|
|
|
|
|
|
|
|
Segment income |
$ 343.5
|
$ 133.5
|
$ 124.3
|
$ 69.9
|
$ (80.6)
|
590.6 |
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
|
|
|
(58.1)
|
|
Equity in earnings of unconsolidated affiliates |
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
$ 533.5
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
$ 21.7 |
$ 10.9 |
$ 8.6 |
$ 11.2 |
$ 21.7 |
$ 74.1 |
For the year ended December 31, 2001 |
|
|
|
|
|
|
Revenues from external customers |
$ 1,834.1
|
$ 547.3
|
$ 980.7
|
$ 711.7
|
$ 24.8
|
$ 4,098.6
|
|
Intersegment revenues |
84.4
|
16.4
|
76.8
|
0.1
|
(177.7)
|
-
|
|
|
|
|
|
|
|
|
|
Total revenues |
1,918.5
|
563.7
|
1,057.5
|
711.8
|
(152.9)
|
4,098.6
|
|
|
|
|
|
|
|
|
|
Segment income |
$ 313.8
|
$ 36.3
|
$ 159.1
|
$ 58.5
|
$ (43.6)
|
524.1 |
|
|
|
|
|
|
|
|
|
Amortization of goodwill |
|
|
|
|
|
(44.2)
|
|
Net interest expense |
|
|
|
|
|
(80.1)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
399.8
|
|
|
|
|
|
|
|
|
|
Depreciation and other amortization |
$ 26.9 |
$ 8.1 |
$ 3.9 |
$ 14.9 |
$ 20.9 |
$ 74.7 |
Total assets |
|
|
|
|
|
|
|
December 31, 2003 |
$ 1,842.1 |
$ 1,207.4 |
$ 1,081.2 |
$ 374.5 |
$ (317.5) |
$ 4,187.7 |
|
December 31, 2002 |
1,597.3 |
895.0 |
1,043.5 |
277.0 |
39.8 |
3,852.6 |
|
December 31, 2001 |
1,587.6 |
714.5 |
1,076.9 |
295.1 |
(300.6) |
3,373.5 |
Revenues from external customers and long-lived assets
excluding deferred taxes related to operations in the United States and foreign
countries are as follows:
66
On
or for the Year Ended December 31,
|
2003
|
2002
|
2001
|
(In millions) |
|
|
|
|
|
|
|
Revenues from external customers: |
|
|
|
United States |
$ 4,249.1
|
$ 4,158.6
|
$ 3,880.4
|
Foreign countries |
126.2
|
182.3
|
218.2
|
|
|
|
|
|
$ 4,375.3
|
$ 4,340.9
|
$ 4,098.6
|
|
|
|
|
Long-lived assets: |
|
|
|
United States |
$ 2,697.3
|
$ 2,493.6
|
$ 2,196.9
|
Foreign countries |
34.5
|
40.8
|
35.6
|
|
|
|
|
|
$ 2,731.8
|
$ 2,534.4
|
$ 2,232.5
|
|
|
|
|
RELATED PARTY TRANSACTIONS
During 2000, $20.0 million in loans were made to two of
our officers. A total of $18.0 million was loaned to our Chairman and former
Chief Executive Officer for his purchase of a residence in New York City. This
loan, repaid in full during 2001, replaced an arrangement under which he had
been provided the use of an apartment we owned and was secured by the residence
and bore interest at the applicable federal rate under IRS regulations. A total
of $2.0 million was loaned to our former President, which also bore interest at
the applicable federal rate under IRS regulations. This loan was repaid in full
during 2002.
SHORT-TERM BOND TRANSACTIONS
During 2001 and 2002, we entered into three transactions
relating to the short sale of $487.4 million of U.S. Treasury securities. The
transactions were intended to address interest rate exposure and generate
capital gains that could be used to offset previously incurred capital losses.
As a result of these transactions, we recorded short-term capital gains of $5.4
million, interest income of $1.4 million and interest expense and fees of $7.6
million during 2001, short-term capital gains of $14.8 million, interest income
of $1.8 million and interest expense and fees of $19.3 million during 2002, and
short-term capital gains of $6.6 million, interest income of $0.6 million and
interest expense and fees of $7.9 million during 2003. The net effects of $0.8
million, $2.7 million and $0.7 million, respectively, are included in the
statement of operations as interest expense. The first transaction, which
represented $139.0 million of the securities, closed in November 2001. The
second transaction, which represented $157.9 million of the securities, closed
in August 2002. The third transaction, which represented $190.5 million of the
securities, closed in May 2003. There are no present intentions to enter
into any further transactions.
EFFECTS OF SEPTEMBER 11, 2001
In September 2001, we recorded a pre-tax charge of $86.8
million to write down inventory and receivables resulting from the change in the
economic climate in the aftermath of the events of September 11, 2001. Of the
charge, $61.7 million was to write down to net realizable value goods that we
either owned or were committed for and needed to dispose of through off-price
channels. The charge to receivables of $24.1 million was to record an
incremental provision for customer allowances, which we anticipated we needed to
provide to our retail customers in order to effectively flow goods through the
retail channels.
SUPPLEMENTAL PRO FORMA CONDENSED FINANCIAL INFORMATION
Certain of our 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"),
Nine West and Jones Retail Corporation ("Jones Retail")(collectively,
including Jones, the "Issuers").
67
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 and Jones Retail function 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.
The following condensed consolidating balance sheets,
statements of income and statements of cash flows for the Issuers and our other
subsidiaries 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 are not presented as
Jones has no independent operations or assets. There are no contractual
restrictions on distributions from Jones USA, Jones Holdings, Nine West or Jones
Retail to Jones. On January 1, 2003, the retail operations of Nine West Group
were transferred to Jones Retail and the remaining Nine West Group wholesale
assets and liabilities were transferred to Nine West. As a result, the condensed
consolidating balance sheet for December 31, 2002 and the statements of income
and statements of cash flows for 2002 and 2001 have been restated for comparison
purposes.
Condensed Consolidating Balance Sheets
(In millions)
December 31, 2003 December 31, 2002
---------------------------------------- ----------------------------------------
Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated
---------------------------------------- ----------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $302.0 $ 48.0 $ - $350.0 $256.2 $ 27.1 $ - $283.3
Accounts receivable - net 173.2 212.6 - 385.8 184.8 204.5 - 389.3
Inventories 262.1 327.3 1.2 590.6 285.7 244.2 (0.3) 529.6
Prepaid and refundable income taxes 5.5 8.7 (14.2) - 0.7 1.4 (2.1) -
Deferred taxes 27.7 53.8 (0.9) 80.6 50.0 30.8 - 80.8
Prepaid expenses and other
current assets 28.3 20.6 - 48.9 25.2 10.0 - 35.2
---------------------------------------- ----------------------------------------
TOTAL CURRENT ASSETS 798.8 671.0 (13.9) 1,455.9 802.6 518.0 (2.4) 1,318.2
Property, plant and equipment - net 128.5 139.9 - 268.4 156.1 93.2 - 249.3
Due from affiliates 275.1 399.6 (674.7) - 557.5 420.5 (978.0) -
Goodwill 703.3 943.6 - 1,646.9 646.3 894.9 - 1,541.2
Other intangibles - net 167.3 600.2 - 767.5 173.5 503.8 - 677.3
Investments in subsidiaries 2,893.8 - (2,893.8) - 2,611.5 24.7 (2,636.2) -
Deferred taxes - - - - 6.5 - (6.5) -
Other assets 28.0 22.5 (1.5) 49.0 43.0 23.8 (0.2) 66.6
---------------------------------------- ----------------------------------------
$4,994.8 $2,776.8 $(3,583.9) $4,187.7 $4,997.0 $2,478.9 $(3,623.3) $3,852.6
======================================== ========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
and capital lease obligations $178.8 $ 2.0 $ - $180.8 $ 6.3 $ - $ - $ 6.3
Accounts payable 119.5 125.1 - 244.6 152.5 77.7 - 230.2
Income taxes payable 32.5 - (17.8) 14.7 20.2 7.8 (2.0) 26.0
Deferred taxes - 0.4 (0.4) - - - - -
Accrued expenses and other
current liabilities 119.6 69.3 - 188.9 100.5 64.3 - 164.8
---------------------------------------- ----------------------------------------
TOTAL CURRENT LIABILITIES 450.4 196.8 (18.2) 629.0 279.5 149.8 (2.0) 427.3
---------------------------------------- ----------------------------------------
NONCURRENT LIABILITIES:
Long-term debt 791.4 - - 791.4 955.7 - - 955.7
Obligations under capital leases 16.9 26.8 - 43.7 22.4 - - 22.4
Deferred taxes 27.3 103.6 (0.8) 130.1 26.3 78.8 (6.5) 98.6
Due to affiliates 317.1 357.6 (674.7) - 492.0 486.0 (978.0) -
Other 35.9 20.0 (0.2) 55.7 41.2 3.9 - 45.1
---------------------------------------- ----------------------------------------
TOTAL NONCURRENT LIABILITIES 1,188.6 508.0 (675.7) 1,020.9 1,537.6 568.7 (984.5) 1,121.8
---------------------------------------- ----------------------------------------
TOTAL LIABILITIES 1,639.0 704.8 (693.9) 1,649.9 1,817.1 718.5 (986.5) 1,549.1
---------------------------------------- ----------------------------------------
STOCKHOLDERS' EQUITY:
Common stock and additional
paid-in capital 1,790.9 1,405.2 (2,015.2) 1,180.9 1,969.4 1,178.3 (2,002.4) 1,145.3
Retained earnings 2,144.3 664.9 (862.1) 1,947.1 1,673.3 588.5 (623.0) 1,638.8
Accumulated other comprehensive
income (loss) 14.7 1.9 (12.7) 3.9 22.6 (6.4) (11.4) 4.8
Less treasury stock (594.1) - - (594.1) (485.4) - - (485.4)
---------------------------------------- ----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,355.8 2,072.0 (2,890.0) 2,537.8 3,179.9 1,760.4 (2,636.8) 2,303.5
---------------------------------------- ----------------------------------------
$4,994.8 $2,776.8 $(3,583.9) $4,187.7 $4,997.0 $2,478.9 $(3,623.3) $3,852.6
======================================== ========================================
68
Condensed Consolidating Statements of Income
(In millions) Year Ended December 31, 2003 Year Ended December 31, 2002 Year Ended December 31, 2001
-------------------------------------- -------------------------------------- --------------------------------------
Elim- Cons- Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated Issuers Others inations olidated
-------------------------------------- -------------------------------------- --------------------------------------
Net sales $2,466.8 $1,895.8 $(23.5) $4,339.1 $2,771.2 $1,558.0 $(17.0) $4,312.2 $3,009.8 $1,086.4 $(22.4) $4,073.8
Licensing income (net) 0.1 36.1 - 36.2 - 28.7 - 28.7 - 24.8 - 24.8
-------------------------------------- -------------------------------------- --------------------------------------
Total revenues 2,466.9 1,931.9 (23.5) 4,375.3 2,771.2 1,586.7 (17.0) 4,340.9 3,009.8 1,111.2 (22.4) 4,098.6
Cost of goods sold 1,426.2 1,328.9 (16.5) 2,738.6 1,579.5 1,087.7 (10.2) 2,657.0 1,860.7 726.1 (16.4) 2,570.4
-------------------------------------- -------------------------------------- --------------------------------------
Gross profit 1,040.7 603.0 (7.0) 1,636.7 1,191.7 499.0 (6.8) 1,683.9 1,149.1 385.1 (6.0) 1,528.2
Selling, general and
administrative expenses 781.2 281.9 (6.2) 1,056.9 890.6 209.4 (6.7) 1,093.3 880.7 163.0 (39.6) 1,004.1
Amortization of goodwill - - - - - - - - 23.6 20.6 - 44.2
-------------------------------------- -------------------------------------- --------------------------------------
Operating income 259.5 321.1 (0.8) 579.8 301.1 289.6 (0.1) 590.6 244.8 201.5 33.6 479.9
Net interest (income)
expense and financing
costs 53.2 2.1 - 55.3 53.6 4.5 - 58.1 97.6 (17.5) - 80.1
Equity in earnings of
unconsolidated affiliates 2.7 0.9 (1.1) 2.5 1.1 0.1 (0.2) 1.0 - - - -
-------------------------------------- -------------------------------------- --------------------------------------
Income before provision
for income taxes,
equity in earnings of
subsidiaries and
cumulative effect of
change in accounting
principle 209.0 319.9 (1.9) 527.0 248.6 285.2 (0.3) 533.5 147.2 219.0 33.6 399.8
Provision for income taxes 87.0 116.4 (5.0) 198.4 97.4 103.7 0.1 201.2 98.7 64.9 - 163.6
Equity in earnings of
subsidiaries 453.2 - (453.2) - 198.7 - (198.7) - 159.0 - (159.0) -
-------------------------------------- -------------------------------------- --------------------------------------
Income before cumulative
effect of change in
accounting principle 575.2 203.5 (450.1) 328.6 349.9 181.5 (199.1) 332.3 207.5 154.1 (125.4) 236.2
Cumulative effect of change
in accounting for
intangible assets,
net of tax - - - - - 13.8 - 13.8 - - - -
-------------------------------------- -------------------------------------- --------------------------------------
Net income $575.2 $203.5 $(450.1) $ 328.6 $349.9 $167.7 $(199.1) $318.5 $207.5 $154.1 $(125.4) $236.2
====================================== ====================================== ======================================
Condensed Consolidating Statements of Cash Flows
(In millions) Year Ended December 31, 2003 Year Ended December 31, 2002 Year Ended December 31, 2001
-------------------------------------- -------------------------------------- --------------------------------------
Elim- Cons- Elim- Cons- Elim- Cons-
Issuers Others inations olidated Issuers Others inations olidated Issuers Others inations olidated
-------------------------------------- -------------------------------------- --------------------------------------
Net cash provided by
operating activities $419.1 $162.9 $(127.0) $455.0 $694.9 $183.3 $(161.7) $ 716.5 $325.6 $615.7 $ (378.9) $ 562.4
-------------------------------------- -------------------------------------- --------------------------------------
Cash flows from investing activities:
Acquisitions, net of
cash acquired (198.2) - - (198.2) (332.7) - - (332.7) (112.8) (21.2) - (134.0)
Capital expenditures (27.3) (26.0) - (53.3) (24.7) (27.9) - (52.6) (34.9) (21.5) - (56.4)
Net cash related to sale
of U. S. Treasury bonds 12.3 - - 12.3 9.2 - - 9.2 3.1 - - 3.1
Additional consideration
and other payments
relating to acquisitions (56.4) - - (56.4) (2.0) - - (2.0) (19.4) - - (19.4)
Acquisition of intangibles - (6.0) - (6.0) (0.2) (2.7) - (2.9) - (1.0) - (1.0)
Proceeds from sale of Nine
West Group UK operations - - - - - - - - 28.0 - - 28.0
Proceeds from sales of
property, plant and
equipment 2.1 24.8 - 26.9 9.4 1.0 - 10.4 0.2 0.9 - 1.1
Repayments of loans to
officers - - - - 2.0 - - 2.0 18.0 - - 18.0
Other 0.2 - - 0.2 0.2 (0.3) - (0.1) 0.2 0.1 - 0.3
-------------------------------------- -------------------------------------- --------------------------------------
Net cash used in
investing activities (267.3) (7.2) - (274.5) (338.8) (29.9) - (368.7) (117.6) (42.7) - (160.3)
-------------------------------------- -------------------------------------- --------------------------------------
Cash flows from financing activities:
Issuance of Senior
Notes, net - - - - - - - - 392.8 - - 392.8
Repurchase of Senior Notes - - - - (0.1) - - (0.1) (265.5) (125.0) - (390.5)
Premiums paid on repurchase
of Senior Notes - - - - - - - - - (35.2) - (35.2)
Refinancing of
acquired debt - - - - (126.9) - - (126.9) (146.9) - - (146.9)
Net borrowings (payments)
under credit facilities - - - - - (0.8) - (0.8) (225.7) - - (225.7)
Purchases of treasury
stock (102.1) - - (102.1) (129.2) - - (129.2) (68.9) - - (68.9)
Proceeds from exercise of
employee stock options 20.5 - - 20.5 118.4 - - 118.4 85.8 - - 85.8
Dividends (20.2) (127.0) 127.0 (20.2) - (161.7) 161.7 - - (378.9) 378.9 -
Proceeds from termination
of interest rate swaps - - - - 21.6 - - 21.6 8.3 - - 8.3
Net proceeds from (repay-
ment of) long-term debt - (7.4) - (7.4) (1.5) (9.7) - (11.2) (1.5) 0.2 - (1.3)
Other items (4.2) (1.3) - (5.5) (10.0) (2.9) - (12.9) (4.9) (0.7) - (5.6)
-------------------------------------- -------------------------------------- --------------------------------------
Net cash used in
financing activities (106.0) (135.7) 127.0 (114.7) (127.7) (175.1) 161.7 (141.1) (226.5) (539.6) 378.9 (387.2)
-------------------------------------- -------------------------------------- --------------------------------------
Effect of exchange rates
on cash - 0.9 - 0.9 - 0.1 - 0.1 0.8 0.3 - 1.1
-------------------------------------- -------------------------------------- --------------------------------------
Net increase (decrease) in
cash and cash equivalents 45.8 20.9 - 66.7 228.4 (21.6) - 206.8 (17.7) 33.7 - 16.0
Cash and cash equivalents,
beginning 256.2 27.1 - 283.3 27.8 48.7 - 76.5 45.5 15.0 - 60.5
-------------------------------------- -------------------------------------- --------------------------------------
Cash and cash equivalents,
ending $302.0 $48.0 $ - $350.0 $256.2 $27.1 $ - $283.3 $27.8 $48.7 $ - $76.5
====================================== ====================================== ======================================
69
JOINT VENTURES
On July 1, 2002, we entered into two joint ventures with
HCL Technologies Limited ("HCL") to provide us with computer
consulting, programming and associated support services. HCL is a global
technology and software services company offering a suite of services targeted
at technology vendors, software product companies and organizations. We received
a 49% ownership interest in each joint venture, which operate under the names
HCL Jones Technologies, LLC and HCL Jones Technologies (Bermuda), Ltd., for a
cash contribution of $0.3 million and the transfer of certain software and
employees. HCL received a 51% ownership interest in each company for an initial
cash contribution of $1.0 million. On August 31, 2004, HCL is obligated to
contribute an additional $1.0 million in cash, and on that date we are also
obligated to contribute approximately $1.0 million in cash or assets. HCL has
the option to acquire our remaining ownership interest at the end of five years
through the issuance of HCL equity shares. As of December 31, 2003, we have
committed to purchase $17.3 million in services from these joint venture
companies through June 30, 2007.
We also have a joint venture with Sutton to operate retail
locations in Australia. We have unconditionally guaranteed up to AU$7.0 million
of borrowings under the joint venture's uncommitted credit facility and up to
AU$0.4 million of presettlement risk associated with foreign exchange
transactions. Performance under the guarantees is required if the joint venture
fails to make a required payment under these facilities when due. Sutton is
required to reimburse us for 50% of any payments made under these guarantees. At
December 31, 2003, the outstanding balance subject to these guarantees was
approximately AU$1.0 million.
The results of our joint ventures are reported under the
equity method of accounting.
UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the
two years ended December 31, 2003 is summarized as follows:
|
(In millions except per share data)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
2003 |
|
|
|
|
|
Net sales |
$ 1,226.7
|
$ 974.7
|
$ 1,171.1
|
$ 966.6
|
|
Total revenues |
1,234.2
|
980.4
|
1,180.5
|
980.2
|
|
Gross profit |
481.4
|
377.2
|
428.4
|
349.7
|
|
Operating income |
209.0
|
127.8
|
164.0
|
79.0
|
|
Net income |
121.8
|
71.1
|
93.9
|
41.8
|
|
Basic earnings per share |
$0.95
|
$0.56
|
$0.74
|
$0.33
|
|
Diluted earnings per share |
$0.90
|
$0.54
|
$0.71
|
$0.33
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
Net sales |
$ 1,120.3
|
$ 966.0
|
$ 1,271.0
|
$ 954.9
|
|
Total revenues |
1,126.9
|
972.0
|
1,277.5
|
964.5
|
|
Gross profit |
448.4
|
389.2
|
484.4
|
361.9
|
|
Operating income |
151.6
|
121.0
|
221.7
|
96.3
|
|
Income before cumulative effect
of change in accounting principle |
84.5
|
66.5
|
129.7
|
51.6
|
|
Net income |
70.7
|
66.5
|
129.7
|
51.6
|
|
Basic earnings per share before
cumulative effect of change in accounting principle |
$0.67
|
$0.52
|
$1.00
|
$0.40
|
|
Diluted earnings per share before cumulative effect of change in accounting principle |
$0.63
|
$0.49
|
$0.95
|
$0.39
|
|
Basic earnings per share |
$0.56
|
$0.52
|
$1.00
|
$0.40
|
|
Diluted earnings per share |
$0.53
|
$0.49
|
$0.95
|
$0.39
|
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Exchange Act Rule 13a-15(b), we carried out
an evaluation, under the supervision and with the participation of our President
and Chief Executive Officer and our Chief Operating and Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report.
The purpose of disclosure controls is to ensure that
information required to be disclosed in our reports filed with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls are also designed with the
objective of ensuring that such information is accumulated and communicated to
our management, including our Chief Executive Officer and our Chief Operating
and Financial Officer, to allow timely decisions regarding required disclosure.
The purpose of internal controls is to provide reasonable assurance that our
transactions are properly authorized, our assets are safeguarded against
unauthorized or improper use and our transactions are properly recorded and
reported to permit the preparation of our financial statements in conformity
with generally accepted accounting principles.
Our management does not expect that our disclosure
controls or our internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable rather than absolute assurance that the objectives of the control
system are met. The design of a control system must also reflect the fact that
there are resource constraints, with the benefits of controls considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud (if any) within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that simple errors or mistakes can occur.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Our internal controls are evaluated on an ongoing basis by
Deloitte & Touche, LLP, to whom we outsource our internal audit function, by
other personnel in our organization and by our independent auditors in
connection with their audit and review activities. The overall goals of these
various evaluation activities are to monitor our disclosure and internal
controls and to make modifications as necessary, as disclosure and internal
controls are intended to be dynamic systems that change (including improvements
and corrections) as conditions warrant. Part of this evaluation is to determine
whether there were any significant deficiencies or material weaknesses in our
internal controls, or whether we had identified any acts of fraud involving
personnel who have a significant role in the our internal controls. Significant
deficiencies are control issues that could have a significant adverse effect on
the ability to record, process, summarize and report financial data in the
financial statements; material weaknesses are particularly serious conditions
where the internal control does not reduce to a relatively low level the risk
that misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions.
Based upon this evaluation, our President and Chief
Executive Officer and our Chief Operating and Financial Officer concluded that,
subject to the limitations noted above, both our disclosure controls and
procedures and our internal controls and procedures are effective in timely
alerting them to material
71
information required to be included in our periodic SEC filings and that
information required to be disclosed by us in these periodic filings is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and that our internal controls are effective to
provide reasonable assurance that our financial statements are fairly presented
in conformity with generally accepted accounting principles.
There have been no changes in our internal controls over
financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are as follows:
Name |
Age |
Office
|
Peter Boneparth |
44 |
President and Chief Executive Officer and Director |
Sidney Kimmel |
76 |
Chairman and Director |
Wesley R. Card |
56 |
Chief Operating and Financial Officer |
Patrick M. Farrell |
54 |
Senior Vice President and Corporate Controller |
Rhonda J. Brown |
48 |
President and Chief Executive Officer of Footwear, Accessories and Retail Group and President and Chief Executive Officer of Nine West and Jones Retail |
Anita Britt |
40 |
Executive Vice President of Finance |
Ira M. Dansky |
58 |
Executive Vice President, General Counsel
and Secretary |
Geraldine Stutz |
75 |
Director |
Howard Gittis |
70 |
Director |
Anthony F. Scarpa |
60 |
Director |
Matthew H. Kamens |
52 |
Director |
Michael L. Tarnopol |
67 |
Director |
J. Robert Kerrey |
60 |
Director |
Ann N. Reese |
51 |
Director |
Mr. Boneparth was named President in March 2002 and Chief
Executive Officer in May 2002. He also serves as Chief Executive Officer of
McNaughton. He has been Chief Executive Officer of McNaughton since June 1999,
President of McNaughton from April 1997 until January 2002, and Chief Operating
Officer of McNaughton from 1997 until its acquisition by us. Prior to that time,
Mr. Boneparth was Executive Vice
72
President and Senior Managing Director of
Investment Banking for Rodman & Renshaw, Inc., an investment banking firm,
from March 1995 to April 1997.
Mr. Kimmel founded the Jones Apparel Division of W.R.
Grace & Co. in 1970. Mr. Kimmel has served as our Chairman since 1975 and as
Chief Executive Officer from 1975 to May 2002.
Mr. Card has been our Chief Financial Officer since 1990.
He was also named Chief Operating Officer in March 2002.
Mr. Farrell was appointed Vice President and Corporate
Controller in November 1997 and Senior Vice President in September 1999.
Ms. Brown joined us as President and Chief Executive
Officer of Nine West Group and President and Chief Executive Officer of
Footwear, Accessories and Retail Group in October 2001. Prior to joining us, Ms.
Brown served as President of Steve Madden, Ltd. from February 2000 to September
2001. Ms. Brown also served as Chief Operating Officer of Steve Madden, Ltd.
from July 1996 to January 2001 and as a director of that company from October
1996 to September 2001.
Ms. Britt was named Executive Vice President of Finance in
May 2002. She served as Director of Investor Relations and Financial Planning
from 1996 to August 2000, Vice President, Finance and Investor Relations from
September 2000 to February 2001 and Senior Vice President, Finance and Investor
Relations from March 2001 to April 2002.
Mr. Dansky has been our General Counsel since 1996 and our
Secretary since January 2001. He was elected an Executive Vice President in
March 2002.
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 has served on the Board of Directors of
Tiffany & Co., The Theatre Development Fund and The Actors' Fund.
Mr. Gittis has been Vice Chairman and Chief Administrative
Officer and a director of MacAndrews & Forbes Holdings Inc., a diversified
holding company, and various of its affiliates since July 1985. In addition, Mr.
Gittis is a director of Loral Space and Communications Ltd., M&F Worldwide
Corp., Panavision Inc., Revlon, Inc., Revlon Consumer Products Corporation and
Scientific Games Corporation.
Mr. Scarpa served as Senior Vice President and Division
Executive of J.P. Morgan Chase Bank from 1985 until his retirement in December
2000.
Mr. Tarnopol is a Senior Managing Director, Chairman of
the Investment Banking Division and Vice Chairman of the Board of Directors of
Bear, Stearns and Co. Inc. Mr. Tarnopol joined Bear Stearns in 1975, became a
Partner in 1975, and held executive positions in its Mergers and Acquisitions
and International departments prior to its conversion from a partnership to a
corporation in 1985. Thereafter, he became a Senior Managing Director of the
corporation.
Mr. Kamens is employed by Mr. Kimmel as a lawyer and
personal advisor. He is also Of Counsel to the law firm of Wolf, Block, Schorr
and Solis-Cohen LLP, where he served as its Chairman from 1995 to 2001.
Mr. Kerrey has served as the President of New School
University in New York City since January 2001. From 1988 to 2000, he served as
United States Senator from Nebraska. During that period, he was a member of
numerous congressionally-chartered commissions and Senate committees, including
the Senate Finance and Appropriations Committees and the Senate Select Committee
on Intelligence. Prior to that time, he served as Governor of Nebraska from
1982-1987. Mr. Kerrey also serves on the Board of Directors of Tenet
Healthcare Corporation.
73
Ms. Reese co-founded the Center for Adoption Policy
Studies in New York in 2001 and is currently the Executive Director. Prior to
co-founding the Center, Ms. Reese served as a Principal with Clayton, Dubilier
& Rice, a private equity investment firm, from 1999 to 2000 and as Executive
Vice President and Chief Financial Officer of ITT Corporation from 1995 to 1998.
Ms. Reese also serves on the Board of Directors of Xerox Corporation, Kmart
Holding Corporation and Jafra Cosmetics International Inc.
We have adopted a Code of Business Conduct and Ethics and
a Code of Ethics for Senior Executive and Financial Officers, which applies to
our Chief Executive Officer, Chief Operating and Financial Officer, Controller
and other personnel performing similar functions. Both codes are posted on our
website, www.jny.com, (under the "CORPORATE GOVERNANCE" caption) and
are also available in print to any stockholder who requests it by written
request addressed to Wesley R. Card, Chief Operating and Financial Officer,
Jones Apparel Group, Inc., 250 Rittenhouse Circle, Keystone Park, Bristol,
Pennsylvania 19007. We intend to satisfy the disclosure requirement regarding
any amendment to, or a waiver of, a provision of the Code of Ethics for Senior
Executive and Financial Officers by posting such information on our website.
We have also posted on our website, www.jny.com, our
Corporate Governance Guidelines and the charters of the Compensation, Audit and
Nominating/Corporate Governance Committees of our Board of Directors (under the
"CORPORATE GOVERNANCE" caption). That information is available in
print to any stockholder who requests it by written request addressed to Wesley
R. Card, Chief Operating and Financial Officer, Jones Apparel Group, Inc., 250
Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania 19007.
The information appearing in the Proxy Statement relating
to the members of the Audit Committee and the Audit Committee financial expert
under the captions "CORPORATE GOVERNANCE AND BOARD MATTERS - Board
Structure and Committee Composition" and "CORPORATE GOVERNANCE AND
BOARD MATTERS - Audit Committee" and the information appearing in the
Proxy Statement under the caption "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the
captions "EXECUTIVE COMPENSATION," "COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION," "EMPLOYMENT AND COMPENSATION
ARRANGEMENTS" and the information appearing in the Proxy Statement relating
to the compensation of directors under the caption "CORPORATE GOVERNANCE
AND BOARD MATTERS - Director Compensation and Stock Ownership Guidelines"
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information appearing in the Proxy Statement under the
caption "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS"
is incorporated herein by this reference.
Equity Compensation Plan Information
The following table gives information
about our common stock that may be issued upon the exercise of options, warrants
and rights under all of our existing equity compensation plans as of December
31, 2003.
74
Plan Category |
Number of securities to be issued upon exercise of
outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options,
warrants and rights |
Number of securities remaining available for future
issuance under equity compensation plans |
Equity compensation plans approved by security holders |
12,037,242 |
$29.73 |
2,045,449 |
Equity compensation plans not approved by security holders |
540,785 |
$27.75 |
-- |
Total |
12,578,027 |
$29.64 |
2,045,449 |
In connection with the acquisition of McNaughton, stock
options held by McNaughton employees on the acquisition date were converted to
fully-vested options to purchase our common stock under the same terms and
conditions as the original grants. A portion of these options were originally
granted pursuant to equity compensation plans not approved by McNaughton
shareholders. No additional options, warrants or other equity rights will be
granted under any McNaughton equity compensation plans.
During 2002, 325,000 options were granted pursuant to
equity compensation plans not approved by our shareholders. These options were
issued to persons not previously employed by us as material inducements to these
persons entering into employment contracts with us. Of these options, 225,000
became fully vested on December 30, 2003 and expire on December 30, 2006 (based
on terms of individual employment contracts) and 75,000 vest on the third
anniversary of the grant date and expire ten years after the grant date.
For further information, see "Stock Options and
Restricted Stock" in Notes to Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the
caption "CERTAIN TRANSACTIONS" is incorporated herein by this
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information appearing in the Proxy Statement under the
caption "FEES PAID TO INDEPENDENT AUDITORS" is hereby incorporated by
reference.
PART IV
ITEM 15. 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 are included in Item
8 of this report: |
|
|
Report of Independent Certified Public Accountants |
75
|
|
Consolidated Balance Sheets - December 31,
2003 and 2002 |
|
|
Consolidated Statements of Income - Years ended December 31,
2003, 2002 and 2001 |
|
|
Consolidated Statements of Stockholders'
Equity - Years ended December 31, 2003, 2002 and 2001 |
|
|
Consolidated Statements of Cash Flows - Years ended
December 31, 2003, 2002 and 2001 |
|
|
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 fiscal quarter ended December 31,
2003, we filed the following Current Reports on Form 8-K with the SEC.
|
|
(1) |
We filed a Current Report
of Form 8-K, dated October 28, 2003, referencing and furnishing as an
exhibit our press release announcing our results of operations for the
fiscal quarter ended October 4, 2003, as well as the following:
- announcing that the Spring 2004 launch of the Jones New York
Signature product line was on track;
- providing updated guidance for 2003;
- affirming prior guidance for 2004;
- announcing the repurchase of $33 million in Common Stock during
the fiscal quarter, and
- announcing a regular quarterly cash dividend of $.08 per share.
|
|
(2) |
We filed a Current Report of Form 8-K, dated
November 12, 2003, announcing that we had agreed to increase our
purchase price for Kasper by $17.0 million in order to facilitate a
timely closing of the transaction. |
|
(3) |
We filed a Current Report
of Form 8-K, dated November 13, 2003, announcing that we had received
the required agreement of certain Kasper stakeholders to support
Kasper's Plan of Reorganization, which included our amended purchase
agreement for Kasper. |
|
(4) |
We filed a Current Report of Form 8-K, dated
December 1, 2003, announcing that we had completed our acquisition of
100% of the common stock of Kasper. |
|
(5) |
We filed a Current Report
of Form 8-K, dated December 2, 2003, announcing that we had completed
our acquisition of 100% of the common stock of Kasper and that the
purchase price consisted of $221.0 million in cash and was subject to
certain post-closing adjustments, including an adjustment based on
closing working capital. |
|
(6) |
We filed a Current Report of Form 8-K, dated
December 17, 2003, announcing that we would redeem for cash all
currently outstanding Zero Coupon Convertible Senior Notes due 2021. |
76
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 12, 2004 |
|
JONES APPAREL GROUP, INC.
(Registrant)
|
|
By:
|
/s/ Peter Boneparth
Peter Boneparth, President and
Chief Executive Officer |
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, 2003 (the "Form 10-K") constitutes and appoints
Peter Boneparth, 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/ Peter Boneparth
Peter Boneparth |
President, Chief Executive Officer and Director
(Principal Executive Officer) |
March 12, 2004 |
/s/
Sidney Kimmel
Sidney Kimmel |
Chairman and Director
|
March 12, 2004 |
/s/
Wesley R. Card
Wesley R. Card |
Chief Operating and Financial Officer
(Principal Financial Officer) |
March 12, 2004 |
/s/
Patrick M. Farrell
Patrick M. Farrell |
Senior Vice President and
Corporate Controller
(Principal Accounting Officer) |
March 12, 2004 |
/s/
Geraldine Stutz
Geraldine Stutz |
Director |
March 12, 2004 |
/s/
Howard Gittis
Howard Gittis |
Director |
March 12, 2004 |
/s/
Anthony F. Scarpa
Anthony F. Scarpa |
Director |
March 12, 2004 |
/s/
Michael L. Tarnopol
Michael L. Tarnopol |
Director |
March 12, 2004 |
/s/
Matthew H. Kamens
Matthew H. Kamens |
Director |
March 12, 2004 |
/s/
J. Robert Kerrey
J. Robert Kerrey |
Director |
March 12, 2004 |
/s/ Ann N. Reese
Ann N. Reese |
Director |
March 12, 2004 |
77
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
Exhibit No.
|
Description of Exhibit
|
2.1 |
Agreement and Plan of Merger
dated September 10, 1998, among Jones Apparel Group, Inc., SAI Acquisition
Corp., Sun Apparel, Inc. and the selling shareholders (incorporated by
reference to Exhibit 2.1 of our Current Report on Form 8-K dated September
24, 1998). |
2.2 |
Agreement and
Plan of Merger dated as of March 1, 1999, among Jones Apparel Group, Inc.,
Jill Acquisition Sub Inc. and Nine West Group Inc. (incorporated by
reference to Exhibit 2.1 of our Current Report on Form 8-K dated March 2,
1999). |
2.3 |
Securities Purchase and Sale
Agreement dated as of July 31, 2000, among Jones Apparel Group, Inc.,
Jones Apparel Group Holdings, Inc., Victoria + Co Ltd. and the
Shareholders and Warrantholders of Victoria + Co Ltd (incorporated by
reference to Exhibit 2.1 of our Quarterly Report on Form 10-Q for the
three months ended April 2, 2000). |
2.4 |
Agreement and
Plan of Merger dated as of April 13, 2001, among Jones Apparel Group,
Inc., MCN Acquisition Corp. and McNaughton Apparel Group Inc.
(incorporated by reference to Exhibit 2.1 of our Current Report on Form
8-K dated April 13, 2001). |
2.5 |
Purchase Agreement dated as of
August 7, 2003 between Kasper A.S.L., Ltd. and Jones Apparel Group, Inc.
(incorporated by reference to Exhibit 2.1 of our Quarterly Report on Form
10-Q for the nine months ended October 4, 2003). |
3.1 |
Articles of
Incorporation, as amended (incorporated by reference to Exhibit 3.1 of our
Annual Report on Form 10-K for the fiscal year ended December 31, 1998). |
3.2 |
Amended and Restated By-Laws
(incorporated by reference to Exhibit 3.2 of our Quarterly Report on Form
10-Q for the six months ended July 6, 2002). |
4.1 |
Form of
Certificate evidencing shares of common stock of Jones Apparel Group, Inc.
(incorporated by reference to Exhibit 4.1 of our Shelf Registration
Statement on Form S-3, filed on October 28, 1998 (Registration No.
333-66223)). |
4.2 |
Exchange and Registration Rights
Agreement dated October 2, 1998, among Jones Apparel Group, Inc. and Chase
Securities Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated and
Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 4.1 of
our Form S-4, filed on December 9, 1998 (Registration No. 333-68587)). |
4.3 |
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 (incorporated by reference to Exhibit 4.1 of
our Quarterly Report on Form 10-Q for the six months ended July 4, 1999). |
4.4 |
Exchange and Note Registration
Rights Agreement dated June 15, 1999, among Jones Apparel Group, Inc.,
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 (incorporated by reference to Exhibit 4.5 of our Quarterly
Report on Form 10-Q for the six months ended July 4, 1999). |
78
Exhibit No.
|
Description of Exhibit
|
4.5 |
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 (incorporated by reference
to Exhibit 4.6 of our Quarterly Report on Form 10-Q for the six months
ended July 4, 1999). |
4.6 |
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 (incorporated by
reference to Exhibit 4.1 of the Nine West Group Inc. Registration
Statement on Form S-4, filed on August 21, 1997 (Registration No.
333-34085)). |
4.7 |
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, as Guarantors, and The Bank of New York, as
Trustee under the Senior Note Indenture dated as of July 9, 1997
(incorporated by reference to Exhibit 4.7.1 of the Nine West Group Inc.
Quarterly Report on Form 10-Q for the nine months ended October 31, 1998). |
4.8 |
Form of Nine
West Group Inc. 8-3/8% Series B Senior Notes due 2005 (incorporated by
reference to Exhibit 4.6 of the Nine West Group Inc. Registration
Statement on Form S-4, filed on August 21, 1997 (Registration No.
333-34085)). |
4.9 |
Indenture dated as of February
1, 2001, among Jones Apparel Group, Inc., Jones Apparel Group Holdings,
Inc., Jones Apparel Group USA, Inc. and Nine West Group Inc., as Issuers
and The Bank of New York, as Trustee, including Form of Zero Coupon
Convertible Senior Notes due 2021 (incorporated by reference to Exhibit
4.22 of our Annual Report on Form 10-K for the fiscal year ended December
31, 2000). |
4.10 |
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. (incorporated by reference to Exhibit 4.23 of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2000). |
4.11 |
Supplemental Indenture, dated as
of December 23, 2002, by and among Jones Apparel Group, Inc., Jones
Apparel Group Holdings, Inc., Jones Apparel Group USA, Inc., Nine West
Group Inc., Nine West Footwear Corporation, Jones Retail Corporation, as
issuers, and the Bank of New York, as Trustee, relating to the Zero Coupon
Senior Notes Due 2021 (incorporated by reference to Exhibit 4.11 of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2002). |
4.12 |
Supplemental
Indenture, dates as of December 23, 2002, by and among Jones Apparel
Group, Inc., Jones Apparel Group Holdings, Inc., Jones Apparel Group USA,
Inc., Nine West Group Inc., Nine West Footwear Corporation, Jones Retail
Corporation, as issuers, and the Bank of New York, as Trustee, relating to
the 7.50% Senior Notes Due 2004 and 7.875% Senior Notes Due 2006
(incorporated by reference to Exhibit 4.12 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2002). |
4.13 |
Supplemental Indenture, dates as
of December 23, 2002, by and among Jones Apparel Group, Inc., Jones
Apparel Group Holdings, Inc., Jones Apparel Group USA, Inc., Nine West
Group Inc., Nine West Footwear Corporation, Jones Retail Corporation, as
issuers, and the Bank of New York, as Trustee, relating to the 8-3/8%
Series B Senior Notes due 2005 (incorporated by reference to Exhibit 4.13
of our Annual Report on Form 10-K for the fiscal year ended December 31,
2002). |
10.1 |
1991 Stock
Option Plan (incorporated by reference to Exhibit 10.5 of our Registration
Statement on Form S-1 filed on April 3, 1991 (Registration No. 33-39742)).+ |
10.2 |
1996 Stock Option Plan
(incorporated by reference to Exhibit 10.33 of our Annual Report on Form
10-K for the fiscal year ended December 31, 1996).+ |
10.3 |
1999 Stock
Incentive Plan (incorporated by reference to Exhibit 4.3 of our
Registration Statement on Form S-8, filed on June 12, 2003 (Registration
No. 333-106052)).+ |
79
Exhibit No.
|
Description of Exhibit
|
10.4 |
License Agreement dated October
18, 1995, between Jones Apparel Group, Inc. and Polo Ralph Lauren, L.P.
(incorporated by reference to Exhibit 10.40 of our Annual Report on Form
10-K for the fiscal year ended December 31, 1996).# |
10.5 |
Design
Services Agreement dated October 18, 1995, between Jones Apparel Group,
Inc. and Polo Ralph Lauren, L.P. (incorporated by reference to Exhibit
10.41 of our Annual Report on Form 10-K for the fiscal year ended December
31, 1996).# |
10.6 |
License Agreement dated as of
August 1, 1995, between PRL USA, Inc., as assignee of Polo Ralph Lauren
Corporation, successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc.,
as amended (incorporated by reference to Exhibit 10.53 of our Quarterly
Report on Form 10-Q for the nine months ended September 27, 1998).# |
10.7 |
Design
Services Agreement dated as of August 1, 1995, between Polo Ralph Lauren
Corporation, successor to Polo Ralph Lauren, L.P., and Sun Apparel, Inc.,
as amended (incorporated by reference to Exhibit 10.54 of our Quarterly
Report on Form 10-Q for the nine months ended September 27, 1998).# |
10.8 |
Cross-Default and Term Extension
Agreement dated May 11, 1998 among PRL USA, Inc., The Polo/Lauren Company,
L.P., Polo Ralph Lauren Corporation, Jones Apparel Group, Inc. and Jones
Investment Co. Inc. (incorporated by reference to Exhibit 10.1 of our
Current Report on Form 8-K dated February 4, 2003).
|
10.9 |
License
Agreement dated May 11, 1998, between Jones Apparel Group, Inc. and Polo
Ralph Lauren, L.P. (incorporated by reference to Exhibit 10.53 of our
Quarterly Report on Form 10-Q for the fiscal nine months ended September
27, 1998).# |
10.10 |
Design Services Agreement dated
May 11, 1998, between Jones Apparel Group, Inc. and Polo Ralph Lauren,
L.P. (incorporated by reference to Exhibit 10.54 of our Quarterly Report
on Form 10-Q for the fiscal nine months ended September 27, 1998).#
|
10.11 |
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
(incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form
10-Q for the six months ended July 4, 1999). |
10.12 |
Jones Apparel Group, Inc.
Executive Annual Incentive Plan (incorporated by reference to Annex B of
our Proxy Statement for our 1999 Annual Meeting of Stockholders).+ |
10.13 |
Amended and
Restated Employment Agreement dated March 11, 2002, between Jones Apparel
Group, Inc. and Peter Boneparth (incorporated by reference to Exhibit
10.20 of our Annual Report on Form 10-K for the fiscal year ended December
31, 2001).+
|
10.14 |
Employment Agreement dated as of
July 1, 2000, between Jones Apparel Group, Inc. and Sidney Kimmel
(incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form
10-Q for the nine months ended October 1, 2000).+
|
10.15 |
Fourth Amended
and Restated 364-Day Credit Agreement dated as of June 12, 2001, among
Jones Apparel Group USA, Inc., the Additional Obligors referred to
therein, the Lenders referred to therein, J.P. Morgan Securities Inc. and
Salomon Smith Barney Inc., as Co-Lead Arrangers and Joint Bookrunners,
First Union National Bank, as Administrative Agent, The Chase Manhattan
Bank and Citibank, N.A., as Syndication Agents and Fleet National Bank and
Bank of America, N.A., as Documentation Agents (incorporated by reference
to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the six months
ended July 7, 2001).
|
10.16 |
Amended and Restated Employment
Agreement dated March 11, 2002, between Jones Apparel Group, Inc. and
Wesley R. Card (incorporated by reference to Exhibit 10.1 of our Quarterly
Report on Form 10-Q for the three months ended April 6, 2002).+
|
10.17 |
Amended and
Restated Employment Agreement dated April 4, 2002, between Jones Apparel
Group, Inc. and Ira M. Dansky (incorporated by reference to Exhibit 10.2
of our Quarterly Report on Form 10-Q for the three months ended April 6,
2002).+ |
10.18 |
Buying Agency Agreement dated
August 31, 2001, between Nine West Group Inc. and Bentley HSTE Far East
Services Limited (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q for the nine months ended October 6, 2001). |
10.19 |
Buying Agency
Agreement dated November 30, 2001, between Nine West Group Inc. and
Bentley HSTE Far East Services, Limited (incorporated by reference to
Exhibit 10.22 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
|
80
Exhibit No.
|
Description of Exhibit
|
10.20 |
Employment Agreement dated as of
October 1, 2001, between Jones Apparel Group, Inc. and Rhonda Brown
(incorporated by reference to Exhibit 10.23 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2001).+
|
10.21 |
Fifth Amended
and Restated 364-Day Credit Agreement dated as of June 11, 2002, among
Jones Apparel Group USA, Inc., the Additional Obligors referred to
therein, the Lenders referred to therein, Salomon Smith Barney Inc. and
J.P. Morgan Securities Inc., as Joint-Lead Arrangers and Joint Bookrunners,
Wachovia Bank, National Association, as Administrative Agent, Citibank,
N.A. and JPMorgan Chase Bank, as Syndication Agents and Bank of America,
N.A. and Fleet National Bank, as Documentation Agents (incorporated by
reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the six
months ended July 6, 2002).
|
10.22 |
Amendment dated February 28,
2003 to the Amended and Restated Employment Agreement between Jones
Apparel Group, Inc. and Wesley R. Card.+
|
10.23 |
Amendment
dated February 28, 2003 to the Amended and Restated Employment Agreement
between Jones Apparel Group, Inc. and Peter Boneparth.+
|
10.24 |
Amendment dated February 28,
2003 to the Amended and Restated Employment Agreement between Jones
Apparel Group, Inc. and Ira M. Dansky.+
|
10.25 |
Amendment
dated February 28, 2003 to the Employment Agreement between Jones Apparel
Group, Inc. and Rhonda Brown.+
|
10.26 |
Form of Deferred Compensation
Plan for Outside Directors.+
|
10.27 |
Waiver and
Amendment No. 2 to the Five-Year Credit Agreement dated as of June 10,
2003, among Jones Apparel Group USA, Inc., the Additional Obligors
referred to therein, the banks, financial institutions and other
institutional lenders parties to the Five-Year Credit Agreement referred
to therein and Wachovia Bank, National Association, as agent (incorporated
by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the
six months ended July 5, 2003).
|
10.28 |
Three Year Credit Agreement
dated as of June 10, 2003, by and among Jones Apparel Group USA, Inc., the
Additional Obligors referred to therein, the Lenders referred to therein,
J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as Joint
Lead Arrangers and Joint Bookrunners, Wachovia Bank, National Association,
as Administrative Agent, JPMorgan Chase Bank and Citibank, N.A., as
Syndication Agents and Fleet National Bank and Bank of America, N.A., as
Documentation Agents (incorporated by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q for the six months ended July 5, 2003).
|
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.
|
31* |
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32o |
Certifications of Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
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 (incorporated by reference
to Exhibit 99.1 of our Quarterly Report on Form 10-Q for the three months
ended April 2, 2000).
|
____________________
* Filed herewith.
o Furnished 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.
81
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Jones Apparel Group, Inc.
New York, New York
The audits referred to in our report dated February 2, 2004 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, 2003. 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, 2004
82
JONES APPAREL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(In Millions)
Column A Column B Column C Column D Column E
- ------------------------------- ---------- ------------------------- ---------- ---------
Additions
-------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end of
Description of period expenses accounts Deductions period
- ------------ ---------- ---------- ----------- ---------- ---------
Accounts receivable allowances
- ------------------------------
Allowance for doubtful accounts
For the year ended December 31:
2001 $13.8 $ 3.3 $0.9(1) $ 4.9(2) $13.1
2002 $13.1 $ 3.8 - $ 5.3(2) $11.6
2003 $11.6 $ (0.6) $1.2(3) $ 1.3(2) $10.9
Allowance for sales discounts
For the year ended December 31:
2001 $10.9 $122.3 $0.3(1) $121.9(4) $11.6
2002 $11.6 $135.4 - $132.3(4) $14.7
2003 $14.7 $127.5 $5.1(3) $132.6(4) $14.7
Allowance for sales returns
For the year ended December 31:
2001 $ 6.9 $ 27.2 - $ 30.9(4) $ 3.2
2002 $ 3.2 $ 28.1 $0.8(5) $ 25.0(4) $ 7.1
2003 $ 7.1 $ 29.0 $0.2(3) $ 31.7(4) $ 4.6
Allowance for co-op advertising
For the year ended December 31:
2001 $ 8.1 $ 22.9 - $ 27.0(4) $ 4.0
2002 $ 4.0 $ 28.3 $1.0(5) $ 28.1(4) $ 5.2
2003 $ 5.2 $ 28.4 - $ 26.5(4) $ 7.1
Deferred tax valuation allowance
For the year ended December 31:
2003 - $ 8.5 - - $ 8.5
(1) Addition due to the acquisition of McNaughton on June 19, 2001.
(2) Doubtful accounts written off against accounts receivable.
(3) Addition due to the acquisition of Kasper on December 1, 2003.
(4) Deductions taken by customers written off against accounts receivable.
(5) Addition due to the acquisition of Gloria Vanderbilt on April 8, 2002 and l.e.i. on August 15, 2002
83