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, 2006 |
|
|
[ ] |
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.) |
|
|
1411 Broadway
New York, New York
(Address of principal executive offices) |
10018
(Zip Code) |
Registrant's telephone number, including area code: (212)
642-3860
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 if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. [X] Yes [ ] No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. [ ] Yes [X] No
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.
[ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] |
Accelerated filer [ ] |
Non-accelerated filer [ ] |
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). [ ] Yes [X] 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 1, 2006, was approximately $3,530,470,908.
As of February 23,
2007, 108,490,339 shares of the registrant's common stock were outstanding.
TABLE OF CONTENTS
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 2007 Annual Meeting of Stockholders (the
"Proxy Statement") that are specifically identified herein as
incorporated by reference into this Form 10-K. |
III |
|
- 2 -
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., "l.e.i." means
R.S.V. Sport, Inc. and its related companies, "Kasper" means Kasper,
Ltd., "Maxwell" means Maxwell Shoe Company Inc. (acquired July 8,
2004), "Barneys" means Barneys New York, Inc. (acquired December 20,
2004), "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 lower levels of consumer confidence;
- the performance of our products within the prevailing retail environment;
- customer acceptance of both new designs and newly-introduced product lines;
- our reliance on a few department store groups for large portions of our
business;
- consolidation of our retail customers;
- financial difficulties encountered by our customers;
- the effects of vigorous competition in the markets in which we operate;
- our ability to identify acquisition candidates and, in an increasingly
competitive environment for such acquisitions, acquire such businesses on
reasonable financial and other terms;
- the integration of the organizations and operations of any acquired
businesses into our existing organization and operations;
- our reliance on independent foreign manufacturers;
- changes in the costs of raw materials, labor, advertising and
transportation;
- the general inability to obtain higher wholesale prices for our products
that we have experienced for many years;
- the uncertainties of sourcing associated with the new environment in which
general quota has expired on apparel products (while China has agreed to
safeguard quota on certain classes of apparel products through 2008, political
pressure will likely continue for restraint on importation of apparel);
- our ability to successfully implement new operational and financial
computer systems; 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. We do not undertake to publicly update or revise our
forward-looking statements as a result of new information, future events or
otherwise.
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., a
Fortune 500 company, is a leading designer, marketer and wholesaler of branded
apparel, footwear and accessories. We also market directly to consumers through
our chain of specialty retail and value-based stores, and we operate the Barneys
New York chain of luxury stores. Our nationally recognized brands include Jones
New York, Nine West, Anne Klein, Gloria Vanderbilt, Kasper, Bandolino, Easy
Spirit, Evan-Picone, Norton McNaughton, Erika, l.e.i., Energie, Enzo Angiolini,
Joan & David, Mootsies Tootsies, Sam & Libby, Napier, Judith Jack,
Albert Nipon, Le Suit and Barneys New York. We also market costume
jewelry under the Givenchy brand licensed from Givenchy Corporation and
footwear under the Dockers Women brand licensed from Levi Strauss &
Co. Each brand is differentiated by its own distinctive styling, pricing
strategy, distribution channel and target consumer. We 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. For more than 30 years, we have built a reputation for
excellence in product quality and value, and in operational execution.
Sale of Polo Jeans Company Business
On January 22, 2006, we entered
into a Stock Purchase Agreement with Polo Ralph Lauren Corporation
("Polo") and certain of its subsidiaries with respect to the sale to
Polo of all outstanding stock of Sun. We also entered into a settlement and
release agreement with Polo to settle litigation between the respective parties,
including our former President, upon closing. The transactions closed on
February 3, 2006. Sun's assets and liabilities on the closing date primarily
related to the Polo Jeans Company business, which Sun operated under
long-term license and design agreements entered into with Polo in 1995. We
retained distribution and product development facilities in El Paso, Texas,
along with certain working capital items, including accounts receivable and
accounts payable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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.
- 4 -
Wholesale Better Apparel
Our brands cover a broad array of
categories for the women's markets. Within those brands, various product
classifications include career and casual sportswear, jeanswear, dresses, suits,
and a combination of all components termed lifestyle collection. Career and
casual sportswear are marketed as 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 brands 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 both our brands and licensed brands:
Group
|
Products
|
Label
|
Product
Classification
|
Retail
Price
Points
|
Jones New York
|
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 Dress
Jones New York Suit
|
Collection Sportswear
Lifestyle
Casual Sportswear
Casual Sportswear
Dresses
Suits |
$29 -
$457
$24 - $399
$15 - $199
$34 - $125
$83 - $274
$60 - $340 |
Nine West
|
Skirts, blouses,
pants,
jackets, sweaters, dresses, outerwear, shorts, casual tops
|
Nine West |
Lifestyle |
$20 -
$325 |
Anne Klein
|
Skirts, blouses, pants,
jackets, sweaters,
vests,
dresses, casual tops |
Anne Klein New York
AK Anne Klein
AK Sport
Anne Klein Dress
Anne Klein Suit |
Collection Sportswear
Collection Sportswear
Casual Sportswear
Dresses
Suits |
$34
- - $1,995
$21
- - $329
$7 - $159
$79 - $344
$98 - $692 |
Other |
Skirts,
blouses, pants,
jackets, sweaters,
suits, dresses |
Kasper
Albert Nipon
Evan-Picone Dress
Le Suit |
Suits, Dresses, Sportswear
Suits
Dresses
Suits |
$36
- - $326
$259
- - $692
$38
- - $191
$30
- - $240 |
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
scheduled shipment dates to ensure a fresh flow of goods to the retail floor. In
addition, certain brands offer key item styles, which are less seasonal in
nature, on a replenishment basis (which ship generally within five days from
receipt of order).
- 5 -
The following table summarizes
selected aspects of the products sold under our brands:
Group
|
Products
|
Label
|
Product
Classification
|
Retail
Price
Points
|
Jones New York
|
Skirts, blouses,
jackets, sweaters,
casual tops |
Jones Wear
Jones Wear Jeans
Jones & Co. |
Collection Sportswear
Casual Sportswear
Casual Sportswear |
$17 -
$100 |
Nine West
|
Skirts, blouses,
jackets, sweaters,
casual tops |
Nine & Company
Bandolino |
Lifestyle
Casual Sportswear |
$15 -
$130 |
Gloria Vanderbilt
|
Skirts, blouses, shorts,
jackets, sweaters,
jeanswear, capris,
casual tops |
Gloria Vanderbilt |
Lifestyle
Casual Sportswear |
$13
- $18 |
McNaughton |
Skirts, blouses,
jackets, sweaters,
casual tops |
Norton McNaughton |
Collection Sportswear |
$29 -
$121 |
Other
|
Skirts, blouses, pants,
jackets, sweaters,
jeanswear, dresses,
casual tops and bottoms |
Evan-Picone
Energie
Erika
l.e.i.
Jeanstar
A|Line
A|Line Sport
Pappagallo
Rena Rowan
GLO/GLO Girls
W |
Lifestyle
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear
Casual Sportswear |
$6
- - $116 |
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 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 -
Footwear |
|
|
|
Retail
Price Points
|
|
Label
|
Product
Classification
|
Shoes
|
Boots
|
Bridge |
Joan & David
Anne Klein New York |
Contemporary
Contemporary |
$195 -
$295
$145 - $295 |
---
$295 - $395 |
Better |
Nine West
Nine West Kids
Enzo Angiolini
AK Anne Klein
Circa Joan & David
Botique 58 |
Contemporary
Children's
Sophisticated Classics
Modern Classics
Sophisticated Classics
Contemporary |
$59 -
$89
$25 -$49
$60 - $125
$69 - $85
$89 - $150
$87 - $125 |
$89 -
$340
$45 - $59
$130 - $225
$119 - $189
$139 - $250
$125 - $285 |
Upper
Moderate |
Bandolino
Easy Spirit |
Modern Classics
Comfort/Fit,
Active,
Sport/Casuals |
$59 - $75
$59 - $85 |
$79 - $149
$69 - $165 |
Moderate |
Nine & Company
Westies
Gloria Vanderbilt
Mootsies Tootsies
Mootsies Tootsies Kids
Sam & Libby
Sam
& Libby Kids
Dockers Women |
Contemporary
Contemporary
Lifestyle
Lifestyle
Children's
Contemporary
Children's
Lifestyle |
$49 -
$59
$30 - $55
$35
$30 - $45
$20 - $35
$40 - $55
$28 - $39
$30 - $60 |
$75 -
$105
---
---
$45 - $60
---
$49
$45
$50 - $99 |
Accessories
|
|
Label
|
Product Classification
|
Retail Price
Points
|
Bridge |
Judith Jack |
Marcasite and Sterling Silver Jewelry |
$48 - $1,950 |
Better |
Jones New York
Nine West
Givenchy |
Handbags
Handbags,
Small Leather Goods
and Costume Jewelry
Costume and Fashion
Jewelry |
$78 -
$168
$18 - $120
$22 - $295 |
Upper Moderate |
Bandolino |
Handbags |
$34
- $53 |
Moderate |
Nine & Company
Gloria Vanderbilt
Napier |
Handbags, Small
Leather Goods and
Costume Jewelry
Handbags and Small
Leather Goods
Costume Jewelry |
$12 -
$44
$45 - $49
$15 - $75 |
Retail
We market apparel, footwear and
accessories directly to consumers through our specialty retail stores operating
in malls and urban retail centers, our various value-based ("outlet")
stores and luxury stores located in major urban locations. 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, 2006, we operated a total of 411 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, 2006. Of these
stores, 408 are located within the United States and three are located in
Canada. In addition to the
- 7 -
stores listed in the table, we participate in a joint venture that operates
36 specialty stores in Australia under the Nine West and Enzo
Angiolini names.
|
|
|
Retail Price Range
|
|
Average
store
size (sq. ft.)
|
|
Number of
locations
|
Brands
offered
|
Shoes and
Boots
|
Accessories
|
Apparel
|
Type of
locations
|
Nine West |
227 |
Primarily
Nine West |
$39 -$230 |
$5 - $550 |
$24 - $249 |
Upscale and regional malls and urban retail centers |
1,616 |
Easy Spirit |
111 |
Primarily
Easy Spirit |
$16 -
$199 |
$3 -
$120 |
$59 -
$129 |
Upscale and regional malls and
urban retail centers |
1,385 |
Bandolino |
51 |
Primarily
Bandolino |
$39 -
$149 |
$6 -
$79 |
$50 -
$150 |
Urban retail
locations and regional malls |
1,400 |
Enzo Angiolini |
9 |
Primarily Enzo Angiolini |
$49 -
$220 |
$6 -
$190 |
$119 -
$249 |
Upscale malls and urban retail centers |
1,502 |
Anne
Klein New York Accessories |
8 |
Anne
Klein New York |
$50 -
$395 |
$8 -
$795 |
$550 -
$1,200 |
Urban retail
locations and regional malls |
1,496 |
Apparel |
5 |
Various |
$50
- $140 |
$3
- $148 |
$30 -
$750 |
Urban retail locations and
regional malls |
4,586 |
Luxury stores. At December
31, 2006, we operated five Barneys New York flagship stores in prime
retail locations in New York City, Beverly Hills, Chicago, Boston and Dallas.
The flagship stores, which average 107,583 square feet, establish and promote Barneys
New York as a leading specialty retailer of men's and women's fashion.
These stores offer customers a wide variety of merchandise, including apparel,
accessories, cosmetics and items for the home, catering to affluent,
fashion-conscious customers. We also seek to ensure that the ambience of our
flagship stores reflects the luxury and distinct style of the merchandise that
we sell. The flagship stores in New York and Beverly Hills also include
restaurants managed by third-party contractors.
At December 31, 2006, we operated
three Barneys New York regional stores in Manhasset, NY, Seattle, WA and
Chestnut Hill, MA. The regional stores, which average 12,133 square feet,
provide a limited selection of the merchandise offered in the flagship stores
and cater to similar customers as our flagship stores in more localized markets.
At December 31, 2006, we operated
12 Barneys New York CO-OP stores. These free-standing stores, which
average 8,202 square feet, are an extension of the CO-OP departments in our
flagship stores and focus on providing customers with a selection of high-end,
contemporary, urban casual apparel and accessories, often at price points that
are slightly lower than our non-CO-OP merchandise. CO-OP stores provide us with
the opportunity to develop one of Barneys' fastest growing merchandise
categories in a less capital intensive manner, relative to Barneys' other
luxury stores. These stores give us the opportunity to enter new markets and
expand in our existing markets, while broadening our client base by targeting
the younger designer customer. In addition, since we will be attracting our
Barneys customer earlier in their life cycle, we also believe this format can
serve as the initial entree for the shopper who will ultimately develop into our
regional and flagship store customer. Similar to our CO-OP departments, our
CO-OP stores offer merchandise from established and emerging designers, as well
as our Barneys brand.
Outlet Stores. At December
31, 2006, we operated a total of 701 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
- 8 -
produced by our licensees. The Barneys New York outlet stores leverage
the Barneys New York brand to reach a wider audience by providing a lower
priced version of the sophistication, style and quality of the retail experience
provided in the luxury stores and also provide a clearance vehicle for residual
merchandise from the luxury stores.
The following table summarizes
selected aspects of our outlet stores at December 31, 2006. Of these stores, 679
are located within the United States and its territories and 22 are located in
Canada. In addition to the stores listed in the table, we participate in a joint
venture that operates seven outlet stores in Australia under the Nine West
name.
|
Number of
locations
|
Brands
offered
|
Type of
locations
|
Average
store
size (sq. ft.)
|
Nine West |
177 |
Primarily Nine West |
Manufacturer
outlet centers |
2,851 |
Jones New York |
148 |
Primarily Jones New
York and
Jones New York Sport |
Manufacturer
outlet centers
|
3,821 |
Easy Spirit |
114 |
Primarily Easy Spirit |
Manufacturer
outlet centers |
3,651 |
Stein Mart (leased footwear departments)1 |
102 |
All Company footwear brands |
Strip centers |
2,657 |
Kasper |
84 |
Primarily Kasper |
Manufacturer
outlet centers |
2,621 |
Anne Klein |
45 |
Primarily Anne Klein |
Manufacturer
outlet centers |
2,690 |
Treza/Jones
New York Woman |
14 |
Various
Company apparel brands in plus sizes |
Manufacturer
outlet centers |
2,884 |
Barneys New York |
12 |
Various |
Manufacturer
outlet centers |
6,931 |
Hot
for Shoes |
4 |
All Company footwear brands |
Strip centers |
7,074 |
Joan & David |
1 |
Primarily Joan & David |
Manufacturer
outlet center |
2,202 |
(1) We closed our Stein Mart leased shoe departments in January 2007.
We also operate four Barneys
New York warehouse sale events annually, one each spring and fall season in
both New York and Santa Monica, California. The warehouse sale events provide
another vehicle for liquidation of end of season residual merchandise, as well
as a low cost extension of the Barneys New York brand to a wider
audience. The events attract a wide range of shoppers, mostly bargain hunters
who value quality and fashion.
Licensed Brands
As a result of the acquisition of
Victoria, we 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,
2008. 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.
As a result of the acquisition of
Maxwell, we obtained the exclusive license to produce and sell women's
footwear under the Dockers Women trademark in the United States
(including its territories and possessions) pursuant to an agreement with Levi
Strauss & Co. The agreement, which expires in December 2008, provides
- 9 -
for the payment by us of a percentage of net sales against guaranteed minimum
royalty and advertising payments as set forth in the agreement.
Design
Our apparel product lines have
design teams that are 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 reduce 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 and accessory markets.
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.
We complement the designer
merchandise in our luxury stores with a diverse selection of comparable quality Barneys
branded merchandise, including ready-to-wear apparel, handbags, shoes, dress
shirts, ties and sportswear. Barneys branded merchandise is manufactured
by independent third parties according to our specifications. We are intensively
involved in all aspects of the design and manufacture of this collection.
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, Givenchy and Levi Strauss & Co. also provide design services to
us for our licensed products and have the right to approve our designs for the Givenchy
and Dockers Women 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 United States territories,
Mexico, China and other locations throughout the world. Approximately 96% of our
apparel products were manufactured outside the United States and Mexico,
primarily in Asia, while approximately 4% were manufactured in the United
States, its territories and Mexico during 2006. We source a portion of our
products in Central and South 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 current free-trade agreements, which provide that
certain articles assembled abroad from United States components are exempt from
United States duties on the value of these components.
- 10 -
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. Fabrics for garments manufactured 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 a sampling of production
garments upon receipt at our warehouse facilities to ensure compliance with our
specifications.
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
occasionally supply the raw materials to our 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. Products have historically been purchased from foreign manufacturers
in pre-set United States dollar prices, and therefore, we generally have not
been adversely affected by fluctuations in exchange rates.
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 and
Maxwell with footwear manufacturers in Asia and Brazil, by Nine West with
accessories manufacturers in Asia and by Victoria with jewelry manufacturers in
Asia. We work through independent buying agents for footwear and our own offices
for accessories and jewelry. Allocation of production among our manufacturing
resources is determined based upon a number of factors, including manufacturing
capabilities, delivery requirements and pricing.
During 2006, approximately 96% of
our footwear products were manufactured by independent footwear manufacturers
located in Asia (primarily China), approximately 2% were manufactured by
independently
- 11 -
owned footwear manufacturers in Brazil and approximately 2% were manufactured
by independently owned footwear manufacturers in Italy. Our handbags and small
leather goods are sourced through our own buying office in China, which utilizes
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 agents. For footwear, 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. For accessories, quality control reviews are done
on-site in the factories by our own locally-based inspection technicians. 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 through independent third-party manufacturers in
China and Brazil 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
footwear 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.
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 has
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 pre-set United States
dollar prices, and therefore, we generally have not been adversely affected by
fluctuations in exchange rates.
During 2006, 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 from third-party manufacturers enables us to better
control costs and avoid significant capital expenditures, work in process
inventory, and costs of managing a larger production workforce. Victoria's
history as 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
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.
- 12 -
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 Manufacturer's Compliance Program
Agreement. Under that agreement, 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.
Our Factory Standards, which we
have posted on our website, 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. During 2006, 1,284 audits were conducted (including
880 by independent auditors), including domestic and foreign factories for
apparel, footwear, handbag and jewelry products. Our Compliance Auditing staff
consists of 24 auditors based in six countries. Twenty-two staff members claim
English as a second language, and almost 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.
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 those 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 believe that
progress and improvement, although incremental, is quite real.
Marketing
Our ten largest customer groups,
principally department stores, accounted for approximately 47% of gross revenues
in 2006. Federated Department Stores, Inc., our largest customer in 2006,
accounted for 18% of our 2006 gross revenues.
We believe that purchasing
decisions are generally made independently by individual department stores
within a commonly controlled group. There has been a trend, however, toward more
centralized purchasing decisions. As such decisions become more centralized, the
risk to us of such concentration increases. Furthermore, we believe a trend
exists among our major customers to concentrate purchasing among a narrowing
group of vendors. In the future, retailers may have financial problems or
continue to consolidate, undergo restructurings or reorganizations, or realign
their affiliations, any of which could increase the concentration of our
customers. 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.
We also believe there is an
increasing focus by the department stores to concentrate an increasing portion
of their product assortments within their own private label products. These
private label lines compete directly with our product lines and may receive
prominent positioning on the retail floor by department stores. While this
creates more competition, we believe that our brands are preferred by the
consumer.
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
- 13 -
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, 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
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 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 field merchandising
associates for footwear, handbags and small leather goods 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 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' fashion catalogs as well as in-store shop
displays.
- 14 -
We have national advertising
campaigns for the following brands:
- Jones New York Collection and Jones
New York Signature (in fashion and lifestyle magazines),
- Nine West (footwear, apparel, handbags, jewelry and licensed
products, primarily in fashion magazines),
- Bandolino (in fashion magazines),
- l.e.i. (in lifestyle and fashion magazines and radio),
- Anne Klein New York
(in fashion magazines),
- Grane (in fashion magazines), and
- Jeanstar
(in fashion 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. 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 2016, 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. We are also a party to licensing arrangements
pursuant to which three retail stores are operated in Japan and a single
in-store department is operated in Singapore under the name Barneys New York.
The following table sets forth
information with respect to select aspects of our licensing business:
Brand
|
Category
|
Jones New York |
Men's
Accessories and Jewelry (U.S., Canada)
Men's Dress Shirts (U.S.)
Men's Neckwear (Canada)
Men's Neckwear (U.S.)
Men's Sportswear, Sweaters, Knit Shirts, Woven Shirts, Finished Bottom
Slacks and Outerwear
(Canada)
Men's Tailored Clothing, Dress Shirts, Outerwear, Dress Slacks
(Canada)
Men's Tailored Clothing, Formal Wear (U.S.)
Men's Topcoats, Outerwear (U.S.)
Men's Umbrellas, Rain Accessories (U.S.)
Men's and Women's Optical Eyewear (U.S., Canada, Argentina, Aruba,
Australia, Bahamas,
Barbados, Belize, Benelux, Bolivia, Chile,
Colombia, Costa Rica, Cyprus, Denmark,
Dominican Republic, Ecuador, El Salvador,
Finland, French Guiana, Guatemala, Honduras,
Ireland, Israel, Jamaica, Kuwait, Lebanon,
Mexico, Netherlands Antilles, Nicaragua, Norway,
Panama, Paraguay, Peru, Philippines, South
Africa, Suriname, Sweden, Trinidad, Turkey,
Uruguay, Venezuela)
Women's Costume Jewelry (Canada)
Women's Hats (U.S., Canada)
Women's Leather Outerwear (U.S.)
Women's Outerwear, Rainwear (U.S.)
Women's Outerwear, Wool Coats, Rainwear (Canada)
Women's Scarves, Wraps and Cold Weather Accessories (U.S., Canada)
Women's Sleepwear, Loungewear (U.S., Canada)
Women's Sunglasses (U.S., Canada)
Women's Umbrellas, Rain Accessories (U.S.)
Women's Watches (Canada)
Women's Wool Coats (U.S.)
Retail and Wholesale Distribution Rights for Women's Apparel,
Handbags, Small Leather Goods,
Footwear, Belts, Sunglasses, Coats, Scarves, as
well as Sleepwear if such items are made
available in the Territory (China, Hong Kong,
Indonesia, Macau, Malaysia, Singapore,
Taiwan, Thailand) |
- 15 -
Brand
|
Category
|
Jones Wear |
Women's Costume Jewelry
(Canada)
Women's Outerwear (Canada)
Women's Watches (Canada) |
Anne Klein New York
and AK Anne Klein
|
Anne
Klein New York Footwear (Worldwide excluding Japan)
AK Anne Klein Costume Jewelry (U.S.)
Belts (U.S., Canada)
Home Sewing Patterns (Worldwide)
Hosiery, Casual Legwear (U.S., Canada)
Outerwear, Wool Coats, Leather Outerwear, Rainwear (U.S.)
Scarves, Cold Weather Accessories, Gloves (U.S., Canada)
Sunglasses, Optical Eyewear (Worldwide)
Swimwear (U.S.)
Watches (Worldwide)
Manufacturing and Wholesale and Retail Distribution Rights for Apparel
(Japan)
Retail and Wholesale Distribution Rights for Handbags (Japan)
Sublicensed Wholesale and Retail Distribution Rights for Scarves,
Towels, Jewelry (Japan)
Manufacturing and Wholesale and Retail Distribution Rights for Apparel,
Handbags, Accessories
(Korea)
Retail and Wholesale Distribution Rights for Apparel and Handbags
(Central America, South
America, Caribbean,
Dominican Republic)
Retail and Wholesale Distribution Rights for Apparel, Small Leather
Goods, Footwear, Handbags,
Belts, Sunglasses,
Watches, Jewelry, Coats, Socks, Scarves, Swimwear, as well as
Sleepwear,
Fragrances, and Cosmetics if such items are
made available in the Territory (China, Hong
Kong, Indonesia, Macau, Malaysia, Singapore,
Taiwan, Thailand, Italy, France, Spain, United
Kingdom, Portugal, Ireland, Belgium,
Luxembourg, the Netherlands, Saudi Arabia)
Retail Distribution Rights for Apparel, Handbags, Accessories, Belts,
Sleepwear, Casual Legwear
(Philippines) |
A|Line |
Costume Jewelry (U.S.)
Sunglasses, Optical Eyewear (U.S.) |
Albert Nipon |
Men's Tailored Clothing (U.S.)
Women's Outerwear (U.S.) |
Kasper |
Men's Tailored Clothing (U.S., Canada, Mexico) |
Evan-Picone |
Men's Tailored Clothing,
Formal Wear, Topcoats (U.S.)
Manufacturing and Wholesale Distribution Rights for Women's Sportswear (Japan) |
Nine West |
Belts (U.S., Canada)
Casual Legwear (U.S., Canada)
Gloves, Cold Weather Accessories (U.S., Canada)
Hats (U.S., Canada)
Leather, Wool, Casual Outerwear, Rainwear (U.S., Canada, Spain)
Luggage (U.S., Canada)
Optical Eyewear (U.S., Canada, China, Mexico)
Sunglasses (U.S., Canada, Spain)
Retail and Wholesale Distribution Rights for Apparel, Belts, Cold
Weather Accessories,
Hats, Luggage, Sunglasses, Watches, Jewelry, Coats,
Legwear, Scarves, as well as Sleepwear,
Swimwear, Fragrances and Cosmetics if such items
are made available in the Territory (China,
Hong Kong, Indonesia, Japan, Macau, Malaysia,
Philippines, Singapore, Taiwan, Thailand,
United Kingdom, Ireland) |
Nine & Company |
Bed and Bath
Products and Accessories (U.S.)
Belts (U.S.)
Casual Legwear (U.S.)
Gloves, Cold Weather Accessories (U.S.)
Hats (U.S.)
Luggage (U.S.)
Sleepwear, Loungewear (U.S.)
Slippers (U.S.)
Sunglasses (U.S.)
Watches (U.S.) |
Easy Spirit |
Slippers (U.S., Canada) |
Enzo Angiolini |
Sunglasses (U.S.) |
- 16 -
Brand
|
Category
|
Energie |
Men's Denim
and Sportswear (U.S.)
Boys' Denim and Sportswear (4-6x and 8-20) (U.S.) |
Gloria Vanderbilt |
Knit Tops, Bottoms, ActiveWear,
Performance ActiveWear (U.S.)
Sleepwear, Daywear, Loungewear (U.S., Canada)
Infants', Toddlers' and Children's (4-6x) Apparel (U.S., Canada)
Decorative Bedding and Bath Products, Accent Rugs (U.S.) |
GLO |
Infants', Toddlers' and
Children's (4-6x) Apparel (U.S.)
Swimwear (U.S.) |
GLO Girl |
Infants', Toddlers' and
Children's (4-6x) Apparel (Canada) |
l.e.i. |
Casual Legwear
(U.S.)
Children's Apparel (U.S.)
Footwear (U.S., Canada)
Belts (U.S., Canada)
Hats (U.S., Canada)
Juniors' and Girls' Intimate Apparel (U.S.)
Juniors' and Girls' Outerwear (U.S.)
Juniors' and Girls' Sunglasses (U.S., Canada)
Watches (U.S., Canada) |
Joan & David |
Manufacturing and Retail
Distribution Rights for Apparel, Footwear, Handbags (China, Hong
Kong, Indonesia, Japan, Korea, Macau, Malaysia,
Philippines, Singapore, Taiwan, Thailand) |
Sam & Libby |
Men's, Women's and Children's
Slippers and Sandals (U.S.) |
International
footwear and accessories retail/wholesale distribution |
Nine West
and Enzo Angiolini retail locations (Bahrain, Kuwait, Oman, Qatar,
The United Arab
Emirates, Jordan, India, Poland) and Anne
Klein New York retail locations and wholesale
distribution rights for Anne Klein New York
footwear and accessories (Bahrain, Kuwait,
Oman, Qatar, the United
Arab Emirates)
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 and AK
Anne Klein, Circa Joan & David,
Sam & Libby and
Mootsies Tootsies footwear (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, NW Nine West and Easy
Spirit retail locations and wholesale distribution
rights for Nine West,
Enzo Angiolini, NW Nine West and Easy Spirit 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, Enzo Angiolini and Westies
retail locations, wholesale distribution rights for Nine
West
footwear and
accessories and Enzo Angiolini, Westies and AK Anne Klein
footwear and
manufacturing rights for Westies
footwear (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, wholesale distribution rights for Nine West, Enzo
Angiolini, Easy
Spirit, Bandolino, Nine & Company and Westies
footwear and accessories and
AK Anne Klein, Circa
Joan & David, Sam & Libby and Mootsies
Tootsies footwear (Canada)
Nine West retail locations (the United Kingdom,
Ireland, the Channel Islands, Denmark) 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, Belgium, the
Netherlands, Luxembourg)
Nine West retail locations and wholesale
distribution rights for Nine West and Enzo
Angiolini
footwear and accessories
(Spain)
Nine West retail locations (Russia)
Wholesale distribution rights for Nine West and Napier
costume jewelry (Canada) |
- 17 -
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, Evan-Picone, Norton
McNaughton, Erika, Energie, Nine West, Easy Spirit, Enzo Angiolini, Bandolino,
Nine & Company, Westies, Pappagallo, Joan & David, Mootsies Tootsies,
Sam & Libby, Napier, Judith Jack, Gloria Vanderbilt, GLO, l.e.i., Albert
Nipon, Anne Klein, Anne Klein New York, AK Anne Klein, A|Line, Kasper, Le Suit,
Jeanstar and Barneys New York. 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 2022. 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 |
2007-2015 |
|
Napier |
2009 |
|
Anne Klein |
2007-2016 |
Jones New York Sport |
2013 |
|
Judith Jack |
2012 |
|
Kasper |
2012 |
Evan-Picone |
2013 |
|
Norton McNaughton |
2014 |
|
Le Suit |
2008 |
Nine West |
2008-2015 |
|
Erika |
2014 |
|
Joan & David |
2012-2015 |
Easy Spirit |
2007-2015 |
|
Energie |
2015 |
|
Mootsies Tootsies |
2009-2013 |
Enzo Angiolini |
2008-2016 |
|
Gloria Vanderbilt |
2012-2015 |
|
Sam & Libby |
2013 |
Bandolino |
2011-2016
|
|
l.e.i. |
2010-2016 |
|
Barneys New York |
2007-2015 |
Nine & Company |
2012-2015
|
|
Albert Nipon |
2007-2019 |
|
CO-OP Barneys New York |
2014-2016 |
We carefully monitor trademark
expiration dates to provide uninterrupted registration of our material
trademarks. We also license the Givenchy and Dockers Women
trademarks (see "Licensed Brands" above).
We also hold numerous patents
expiring at various dates through 2026 (subject to payment of annuities and/or
periodic maintenance fees) and have additional patent applications pending in
the United States Patent and Trademark Office. 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.
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. In certain cases, 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.
- 18 -
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 $1.1 billion and $1.2 billion at December 31, 2006 and December
31, 2005, respectively. 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, a comparison of
unfilled orders from period to period is not necessarily meaningful and may not
be indicative of eventual actual shipments.
Employees
At December 31, 2006, we had
approximately 10,880 full-time employees. This total includes approximately
3,555 in quality control, production, design and distribution positions,
approximately 2,535 in administrative, sales, clerical and office positions and
approximately 4,790 in our retail stores. We also employ approximately 5,605
part-time employees, of which approximately 5,520 work in our retail stores.
Approximately 40 of our employees
located in Bristol, Pennsylvania are members of the Teamsters Union, which has a
collective bargaining agreement with us expiring on September 10, 2007.
Approximately 75 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 on March 15, 2009. Approximately 40 of our
employees are members of the Union of Needletrades, Industrial and Textile
Employees, which has a labor agreement with Kasper that expires on May 31, 2007.
Approximately 965 of our employees are members of UNITE HERE, which has various
labor agreements with Barneys that expire between March 31, 2007 and April 30,
2011. We consider our relations with our employees to be satisfactory.
Jones New York in the Classroom
On May 3, 2005, we announced the
launch of a charitable cause initiative, including the establishment of Jones
New York In The Classroom, Inc., a not-for-profit corporation, with an initial
grant from us of $1 million and a commitment of our continued support. Jones New
York In The Classroom is dedicated to improving the quality of education in
America and inspiring others, both individuals and corporations, to do the same
through support of teachers and vital teacher-based programs in America's
schools. It is focused on four areas of support for teachers: recruitment,
retention, professional development and recognition and support. Our initial
donation was earmarked to support each of the four non-profit organizations
selected by Jones New York In The Classroom to benefit from its programs and
fundraising: TeachersCount, New Teacher Academy, Fund for Teachers and
Adopt-A-Classroom. Each of these organizations addresses one or more of Jones
New York In The Classroom's areas of focus. In 2006, our contributions helped
Jones New York In The Classroom donate additional funds to these four non-profit
organizations. Those funds were used by Adopt-A-Classroom to renew classroom
adoptions and to develop a strategic publicity campaign; by Teachers Count to
develop several "Behind Every Famous Person is A Fabulous Teacher"
public service announcements; by New Teacher Academy to develop a new online
curriculum for new teachers to help with
- 19 -
classroom management skills; and by Fund for Teachers to fund professional
development and learning sabbaticals for 50 teachers and a new Asian study
program and teacher study guides.
Our commitment since the launch in
2005 has also included support for events to raise public awareness of Jones New
York In The Classroom and its goals for teachers and education, as well as
initiatives to encourage our employees to participate in volunteer opportunities
and fundraising for Jones New York In The Classroom, and the other non-profit
organizations Jones New York In The Classroom is supporting. Our corporate
employees have the opportunity to volunteer up to three hours of paid time off
each month in educational facilities in their local communities, totaling more
than 250,000 hours annually in support of teachers and education. Each of our
business locations is encouraged to raise or budget funds to adopt a classroom
to help with daily classroom needs through Adopt-A-Classroom. Working with our
retail customers, we have supported Jones New York In The Classroom with
in-store marketing programs, including a limited edition t-shirt for 2006
featuring artwork by illustrator Sujean Rim, and a dedicated Jones New York
shopping week during which ten percent of our profits on sales of certain
merchandise (up to $500,000) were donated to Jones New York In The Classroom.
Additional activities we have participated in include assisting Jones New York
In The Classroom in forming a national advisory committee comprised of education
professionals; designing, developing and hosting a website for the charity and
developing car magnets for sale by the charity to raise funds; holding a charity
golf classic to benefit Jones New York In The Classroom; and joining with The
Home Depot and Hands On Network for Back to School, Back to Style teacher and
classroom makeovers to raise awareness of Jones New York In The Classroom and
the four non-profit organizations it has committed to support. We also hosted
Apple Day, which recognized five of our associates and one of our cause
committees for their outstanding leadership and volunteerism on behalf of the
cause initiative and Jones New York In The Classroom.
Strategic Review
We have completed a strategic
review of our operating infrastructure and general and administrative support
areas to improve profitability and to ensure we are properly positioned for the
long-term benefit of our shareholders. By proactively reviewing our
infrastructure, systems and operating processes at a time when the industry is
undergoing consolidation and change, we plan to eliminate redundancies and
improve our overall cost structure and margin performance.
Supply Chain Management
- We are in the process of implementing a product development management
system which will ultimately be integrated with our third-party
manufacturers.
- We are utilizing the capabilities of our third-party manufacturers to
increase pre-production collaboration efforts with them, thereby increasing
speed to market and improving margins. This has already been achieved in
some of the moderate and better apparel businesses, and will continue to be
expanded across most of our businesses.
- We have selected SAP Apparel and Footwear Solution as our enterprise
resource planning system, which will be implemented company-wide utilizing
one universal platform.
- The logistics network is being analyzed in an effort to reduce costs and
increase efficiency by following a tiered approach of (i) multiple product
usage of existing distribution centers, (ii) utilizing third party logistics
providers, and (iii) ultimately direct shipping from factory to customer.
- In response to the elimination of apparel quotas and other trade
safeguards, we are in the process of consolidating our third-party
manufacturing to a more concentrated vendor matrix.
General and Administrative Areas
- We are implementing best practices in connection with the migration of our
current systems to the SAP Apparel and Footwear Solution platform.
We estimate that the implementation and execution of the initiatives underway
will be substantially completed by the end of 2007. We are targeting annual
savings of approximately $100 million once all the initiatives have been
implemented. The costs associated with the review and the ultimate capital
expenditures and execution expenses (including severance and fees) related to
the initiatives that are derived
- 20 -
are expected to fall in a range of $115 million to $120 million. As of
December 31, 2006, we have spent a total of $74.6 million.
Restructuring
In late 2003, we began to evaluate
the need to broaden global sourcing capabilities to respond to the competitive
pricing and global sourcing capabilities of our denim competitors, as the
favorable production costs from non-duty/non-quota countries and the breadth of
fabric options from Asia began to outweigh the benefits of Mexico's quick turn
and superior laundry capabilities. The decision to expand global sourcing,
combined with lower projected shipping levels of denim products for 2005, led us
to begin a comprehensive review of our denim manufacturing during the fourth
quarter of 2004. The result of this review was the development of a plan of
reorganization of our Mexican operations to reduce costs associated with excess
capacity.
On July 11, 2005, we announced
that we had completed a comprehensive review of our denim manufacturing
operations located in Mexico. The primary action plan arising from this review
resulted in the closing of the laundry, assembly and distribution operations
located in San Luis, Mexico. All manufacturing was consolidated into existing
operations in Durango and Torreon, Mexico. A total of 3,170 employees were
terminated as a result of the closure. We undertook a number of measures to
assist affected employees, including severance and benefits packages. As a
result of this consolidation, we expect that our manufacturing operations will
perform more efficiently, thereby improving our operating performance.
In December 2005, we closed our
distribution center in Bristol, Pennsylvania. A total of 118 employees were
affected by the closure.
On May 15, 2006, we announced the
closing of our Secaucus, New Jersey warehouse to reduce excess capacity. A total
of 211 employees were affected by the closure. The restructuring was
substantially completed in September 2006.
On May 30, 2006, we announced the
closing of our Stein Mart leased shoe departments, effective January 2007. A
total of 520 employees were affected by the closure.
On September 12, 2006, we
announced the closing of certain El Paso, Texas and Mexican operations related
to the decision by Polo to discontinue the Polo Jeans Company product
line, which we produced for Polo subsequent to the sale of the Polo Jeans
Company business to Polo in February 2006. A total of 1,863 employees are
affected by the closure. The closings will be substantially completed by the end
of March 2007.
ITEM 1A. RISK FACTORS
There are certain risks and
uncertainties that could cause actual results and events to differ materially
from those anticipated. Risks and uncertainties that could adversely affect us
include, without limitation, the following factors.
The apparel, footwear and
accessories industries are highly competitive. Any increased competition could
result in reduced sales or prices, or both, which could have a material adverse
effect on us.
Apparel, footwear and accessories companies face competition on many fronts,
including the following:
- establishing and maintaining favorable brand recognition;
- developing products that appeal to consumers;
- pricing products appropriately; and
- obtaining access to retail outlets and sufficient floor space.
There is intense competition in
the sectors of the apparel, footwear and accessories industries in which we
participate. We compete with many other manufacturers and retailers, some of
which are larger and have greater resources than we do. Any increased
competition could result in reduced sales or prices, or both, which could have a
material adverse effect on us.
- 21 -
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.
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.
We also believe there is an
increasing focus by the department stores to concentrate an increasing portion
of their product assortments within their own private label products. These
private label lines compete directly with our product lines and may receive
prominent positioning on the retail floor by department stores. While this
creates more competition, our independent studies indicate that our brands are
preferred by the consumer.
We may not be able to respond to
changing fashion and retail trends in a timely manner, which could have a
material adverse effect on us.
The apparel, footwear and
accessories industries have historically been subject to rapidly changing
fashion trends and consumer preferences. We believe that our success is largely
dependent on our ability to anticipate and respond promptly to changing consumer
demands and fashion trends in the design, styling and production of our
products. If we cannot gauge consumer needs and fashion trends and respond
appropriately, then consumers may not purchase our products, and this could have
a material adverse effect on us.
We believe that consumers in the
United States 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 brands 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. Despite our efforts to respond
to these trends, there can be no assurance that these trends will not have a
material adverse effect on us.
The apparel, footwear and
accessories industries are heavily influenced by general economic cycles. A
prolonged period of depressed consumer spending would have a material adverse
effect on us.
Purchases of apparel, footwear and
related goods generally decline during recessionary periods when disposable
income is low. In such an environment, promotional selling would adversely
affect our profitability.
The loss of any of our largest
customers could have a material adverse effect on us.
Our ten largest customer groups,
principally department stores, accounted for approximately 47% of revenues in
2006. Federated Department Stores, Inc. accounted for approximately 18% of our
2006 gross revenues.
We believe that purchasing
decisions are generally made independently by department store units
within a customer group. There has been a trend, however, toward more
centralized purchasing decisions. As such decisions become more centralized, the
risk to us of such concentration increases. A decision by the controlling owner
of a customer group of department stores to modify those customers'
relationships with us (for example, decreasing the amount of product purchased
from us, modifying floor space allocated to apparel in general or our products
specifically, or focusing on promotion of private label products rather than our
products) could have a material adverse effect on us. Furthermore, we believe a
trend exists among our major customers to concentrate purchasing among a
narrowing group of vendors. To the extent any of our key customers reduces the
number of vendors and consequently does not purchase from us, this could have a
material adverse effect on us.
- 22 -
In the future, retailers
may have financial problems or consolidate, undergo restructurings or
reorganizations, or realign their affiliations, any of which could further
increase the concentration of our customers. The loss of any of our largest
customers, or the bankruptcy or material financial difficulty of any customer or
any of the companies listed above, could have a material adverse effect on us.
We do not have long-term contracts with any of our customers, and sales to
customers generally occur on an order-by-order basis. As a result, customers can
terminate their relationships with us at any time or under certain circumstances
cancel or delay orders.
The loss or infringement of our
trademarks and other proprietary rights could have a material adverse effect on
us.
We believe that our trademarks and
other proprietary rights are important to our success and competitive position.
Accordingly, we devote substantial resources to the establishment and protection
of our trademarks on a worldwide basis. There can be no assurances that such
actions taken to establish and protect our trademarks and other proprietary
rights will be adequate to prevent imitation of our products by others or to
prevent others from seeking to block sales of our products as violative of their
trademarks and proprietary rights. Moreover, there can be no assurances that
others will not assert rights in, or ownership of, our trademarks and other
proprietary rights or that we will be able to successfully resolve such
conflicts. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent as do the laws of the United States. The
loss of such trademarks and other proprietary rights, or the loss of the
exclusive use of such trademarks and other proprietary rights, could have a
material adverse effect on us. Any litigation regarding our trademarks could be
time-consuming and costly.
As of December 31, 2006, the book
value of our goodwill and other intangibles was $2.1 billion. We utilize
independent third-party appraisals to estimate the fair value of both our
goodwill and our intangible assets with indefinite lives. These appraisals are
based on projected cash flows and interest rates. If interest rates or future
cash flows were to differ significantly from the assumptions used in these
projections, material non-cash impairment losses could result where the
estimated fair values of these assets become less than their carrying amounts.
As a result of continuing
decreases in projected revenues and profitability with respect to our Norton
McNaughton, l.e.i. and certain other moderate apparel brands and
changes in business strategy for our Norton McNaughton brand, as well as
continuing decreases in projected revenues for our Albert Nipon better
apparel brand, our Westies and Sam & Libby footwear brands and
our Richelieu costume jewelry brand, we recorded goodwill and trademark
impairment charges of $441.2 million and $50.2 million, respectively, in 2006.
As a result of similar continuing decreases in projected accessory revenues in
one of our costume jewelry brands, we recorded a trademark impairment charge
$0.2 million in 2004.
The extent of our foreign
operations and manufacturing may adversely affect our domestic business.
In 2006, approximately 96% of our
apparel products were manufactured outside of the United States, its territories
and Mexico, primarily in Asia, while approximately 4% were manufactured in the
United States, its territories and Mexico. Nearly all of our footwear and
accessories products were manufactured outside of North America in 2006 as well.
The following may adversely affect foreign operations:
- political instability in countries where contractors and suppliers are
located;
- imposition of regulations and quotas relating to imports;
- imposition of duties, taxes and other charges on imports;
- significant fluctuation of the value of the dollar against foreign
currencies; and
- restrictions on the transfer of funds to or from foreign countries.
As a result of our substantial
foreign operations, our domestic business is subject to the following risks:
- uncertainties of sourcing associated with the new environment in which
quota has been eliminated on apparel products pursuant to the World Trade
Organization Agreement, effective January 1, 2005 (although China has agreed
to safeguard quota on certain classes of apparel products through 2008 as a
result of a surge in exports to the United States, political pressure will
likely continue for restraint on importation of apparel);
- 23 -
- reduced manufacturing flexibility because of geographic distance between
us and our foreign manufacturers, increasing the risk that we may have to
mark down unsold inventory as a result of misjudging the market for a
foreign-made product; and
- violations by foreign contractors of labor and wage standards and
resulting adverse publicity.
Fluctuations in the price,
availability and quality of raw materials could cause delay and increase costs.
Fluctuations in the price,
availability and quality of the fabrics or other raw materials used by us in our
manufactured apparel and in the price of materials used to manufacture our
footwear and accessories could have a material adverse effect on our cost of
sales or our ability to meet our customers' demands. The prices for such
fabrics depend largely on the market prices for the raw materials used to
produce them, particularly cotton. The price and availability of such raw
materials may fluctuate significantly, depending on many factors, including crop
yields and weather patterns. In the future, we may not be able to pass all or a
portion of such higher raw materials prices on to our customers.
Our reliance on independent manufacturers could cause delay and damage
our reputation and customer relationships.
We rely upon independent third
parties for the manufacture of most of our products. A manufacturer's failure
to ship products to us in a timely manner or to meet the required quality
standards could cause us to miss the delivery date requirements of our customers
for those items. The failure to make timely deliveries may drive customers to
cancel orders, refuse to accept deliveries or demand reduced prices, any of
which could have a material adverse effect on us. This could damage our
reputation. We do not have long-term written agreements with any of our third
party manufacturers. As a result, any of these manufacturers may unilaterally
terminate their relationships with us at any time.
We are also increasing
pre-production collaboration efforts with many of our third party manufacturers
to utilize their capabilities to increase speed to market and improve margins.
Difficulties in effectively achieving this collaboration could have an adverse
impact on our ability to achieve a substantial portion of the savings we
anticipate as a result of our strategic review.
Although we have an active program
to train our independent manufacturers in, and monitor their compliance with,
our labor and other factory standards, any failure by those manufacturers to
comply with our standards or any other divergence in their labor or other
practices from those generally considered ethical in the United States and the
potential negative publicity relating to any of these events could materially
harm us and our reputation.
Any inability to identify
acquisition candidates could have a material effect on our future growth.
A significant part of our growth
depends on our ability to identify acquisition candidates and, in an
increasingly competitive environment for such acquisitions, acquire such
businesses on reasonable financial and other terms. Difficulties in integrating
the organizations and operations of any acquired businesses into our existing
organization and operations could have a material adverse effect on us and could
damage our reputation.
Difficulties in implementing a
new enterprise system could impact our ability to design, produce and ship our
products on a timely basis.
We have announced the selection of
the SAP Apparel and Footwear Solution as our core operational and financial
system. The implementation of the SAP Apparel and Footwear Solution software,
which began in November 2006, is a key part of our ongoing efforts to eliminate
redundancies and enhance our overall cost structure and margin performance.
Difficulties migrating existing systems to this new software could impact our
ability to design, produce and ship our products on a timely basis.
- 24 -
ITEM 1B. UNRESOLVED STAFF
COMMENTS
Not Applicable.
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 (1)
|
Bristol, Pennsylvania
(2) |
leased |
Headquarters and distribution warehouse |
419,200 |
Bristol, Pennsylvania |
leased |
Administrative and computer services |
172,600 |
New York, New York |
leased |
Administrative, executive and sales offices |
793,850 |
Vaughan, Canada |
leased |
Administrative offices and distribution warehouse |
125,000 |
Lawrenceburg, Tennessee |
owned |
Distribution
warehouses |
1,223,800 |
South Hill, Virginia |
leased |
Distribution warehouses |
835,900 |
El Paso, Texas |
owned |
Administrative, warehouse and preproduction facility |
165,000 |
El Paso, Texas |
leased |
Distribution warehouses |
952,000 |
White Plains, New York |
leased |
Administrative offices |
132,200 |
West Deptford, New Jersey |
leased |
Distribution warehouses |
988,150 |
East Providence, Rhode Island |
leased |
Distribution warehouses, product development,
administrative and computer services |
241,400 |
Goose Creek, South Carolina |
leased |
Distribution warehouses |
715,250 |
Edison, New Jersey |
leased |
Distribution warehouse |
156,000 |
San Luis, Mexico |
leased |
Production and distribution warehouses |
186,000 |
Lyndhurst, New
Jersey |
leased |
Distribution
warehouse |
180,000 |
New York, New York |
leased |
Barneys New York flagship
retail store |
240,000 |
Beverly Hills,
California |
leased |
Barneys New
York flagship retail store |
120,000 |
_________________
(1) Including mezzanine where applicable.
(2) Approximately 381,800 square feet of this facility is currently not in
service.
We sublease a 234,000 square feet
office building in White Plains, New York 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 approximately 550,000
square feet of office and manufacturing facilities in Mexico which are not in
service. We intend to sell these facilities during 2007.
Our retail stores are leased
pursuant to long-term leases, typically five to seven years for apparel and
footwear outlet stores, ten years for footwear and accessories and apparel
specialty stores and ten to 20 years with multiple ten-year renewal options for
our luxury 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.
- 25 -
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name |
Age |
Office
|
Peter Boneparth |
47 |
President and Chief Executive Officer |
Sidney Kimmel |
79 |
Chairman |
Wesley R. Card |
59 |
Chief Operating
Officer |
Efthimios
P. Sotos |
39 |
Chief
Financial Officer |
Patrick M. Farrell |
57 |
Executive
Vice President and Corporate Controller |
Ira M. Dansky |
61 |
Executive Vice President, General Counsel
and Secretary |
Lynne
F. Cote' |
41 |
Chief
Executive Officer - Wholesale Sportswear, Suits and Dresses |
Mr. Boneparth was named President
in March 2002 and Chief Executive Officer in May 2002. 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.
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 was named our Chief
Operating Officer in March 2002. He also served as our Chief Financial Officer
from 1990 to March 2006.
Mr. Sotos was named Chief
Financial Officer in March 2006. He previously served as Executive Vice
President - Treasurer, Strategic and Financial Planning from September 2005 to
March 2006. He served as Corporate Vice President and Treasurer from 2001 to
April 2002 and Senior Vice President and Treasurer from May 2002 to August 2005.
Mr. Sotos joined Jones Apparel Group in 1999 as part of our acquisition of Nine
West Group, where he was the Assistant Treasurer.
Mr. Farrell was appointed Vice
President and Corporate Controller in November 1997, Senior Vice President in
September 1999 and Executive Vice President in March 2006.
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. Cote' was named Chief
Executive Officer - Wholesale Sportswear, Suits and Dresses in November 2005.
She served as Chief Executive Officer - Moderate Sportswear Division from July
2005 to November 2005 and as President - Moderate Sportswear from October 2001
to July 2005. Prior to that, she was Executive Vice President of Merchandising
for McNaughton from November 1998 to October 2001.
- 26 -
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: |
|
|
|
|
2006 |
|
|
|
|
High |
$36.10 |
$35.98 |
$33.07 |
$34.51 |
Low |
$28.58 |
$30.59 |
$27.30 |
$31.72 |
2005 |
|
|
|
|
High |
$37.48 |
$33.69 |
$33.45 |
$31.26 |
Low |
$31.61 |
$29.07 |
$26.85 |
$26.47 |
Dividends per share of common stock: |
|
|
|
|
2006 |
$0.12 |
$0.12 |
$0.12 |
$0.14 |
2005 |
$0.10 |
$0.10 |
$0.12 |
$0.12 |
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 February 23, 2007 was
$34.08, and on that date there were 533 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.
Annual CEO Certification
The Annual CEO Certification
required by Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual was submitted to the New York Stock Exchange on May 25, 2006.
Issuer Purchases of Equity Securities
The following table sets forth the
repurchases of our common stock for the fiscal quarter ended December 31, 2006.
Issuer Purchases of Equity Securities
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
1, 2006 to
October 28, 2006 |
225,000 |
$33.22 |
225,000 |
$86,824,607 |
October 29,
2006 to
November 25, 2006 |
2,595,454 |
$33.44 |
2,595,454 |
$21,441 |
November
26, 2006 to December 31, 2006 |
- |
- |
- |
$21,441 |
Total |
2,820,454 |
$33.43 |
2,820,454 |
$21,441 |
These repurchases
were made under a program announced on February 15, 2006 for $250.0 million.
This plan has no expiration date.
- 27 -
Comparative Performance
The SEC requires us to present a
chart comparing the cumulative total stockholder return on our common stock with
the cumulative total stockholder return of (i) a broad equity market index and
(ii) a published industry index or peer group. The following chart compares the
performance of our common stock with that of the S&P 500 Composite Index and
the S&P 500 Apparel, Accessories & Luxury Goods Index, assuming an
investment of $100 on December 31, 2001 in each of our common stock, the stocks
comprising the S&P 500 Composite Index and the stocks comprising the S&P
500 Apparel, Accessories & Luxury Goods Index and the reinvestment of
dividends.
- 28 -
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, 2006. We completed our acquisitions of Gloria Vanderbilt, l.e.i.,
Kasper, Maxwell and Barneys 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 per share data)
Year Ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
Income Statement Data
|
|
|
|
|
|
|
Net sales |
$ 4,669.9
|
$ 5,014.6
|
$ 4,592.6
|
$ 4,339.1
|
$ 4,312.2
|
|
Licensing income (net) |
51.8
|
59.6
|
57.1
|
36.2
|
28.7
|
|
Service and other revenues |
21.1
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Total revenues |
4,742.8 |
5,074.2 |
4,649.7 |
4,375.3 |
4,340.9 |
|
Cost of goods sold |
3,031.3
|
3,243.8
|
2,944.4
|
2,738.6
|
2,657.0
|
|
|
|
|
|
|
|
|
Gross profit |
1,711.5 |
1,830.4 |
1,705.3 |
1,636.7 |
1,683.9 |
|
Selling, general and administrative
expenses |
1,341.7
|
1,333.2
|
1,176.7
|
1,052.4
|
1,068.9
|
|
Loss on sale of Polo Jeans
Company business |
45.1
|
-
|
-
|
-
|
-
|
|
Trademark impairments |
50.2
|
-
|
0.2
|
4.5
|
24.4
|
|
Goodwill impairment |
441.2
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
Operating (loss) income |
(166.7)
|
497.2
|
528.4
|
579.8
|
590.6
|
|
Interest income |
3.5
|
1.1
|
1.9
|
3.5
|
4.6
|
|
Interest expense and financing costs |
58.2
|
76.2
|
51.2
|
58.8
|
62.7
|
|
Gain on sale of stock in Rubicon Retail
Limited |
17.4
|
-
|
-
|
-
|
-
|
|
Equity in earnings of unconsolidated affiliates |
4.5
|
3.2
|
3.8
|
2.5
|
1.0
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes |
(199.5)
|
425.3
|
482.9
|
527.0
|
533.5
|
|
(Benefit) provision for income taxes |
(53.5)
|
151.0
|
181.1
|
198.4
|
201.2
|
|
|
|
|
|
|
|
|
(Loss) income before cumulative effect of change in accounting principle |
(146.0)
|
274.3
|
301.8
|
328.6
|
332.3
|
|
Cumulative effect of change in accounting for
share-based payments, net of tax |
1.9
|
-
|
-
|
-
|
-
|
|
Cumulative effect of change in accounting for intangible assets, net of tax |
-
|
-
|
-
|
-
|
(13.8)
|
|
|
|
|
|
|
|
|
Net (loss) income |
$(144.1)
|
$
274.3
|
$ 301.8
|
$ 328.6
|
$ 318.5
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
(Loss) income per share before cumulative effect of change in accounting principle |
|
|
|
|
|
|
Basic |
$(1.32) |
$2.33 |
$2.44 |
$2.58 |
$2.59 |
|
Diluted |
$(1.32) |
$2.30 |
$2.39 |
$2.48 |
$2.46 |
|
Net (loss) income per share |
|
|
|
|
|
|
Basic |
$(1.30) |
$2.33 |
$2.44 |
$2.58 |
$2.48 |
|
Diluted |
$(1.30) |
$2.30 |
$2.39 |
$2.48 |
$2.36 |
|
Dividends paid per share |
$0.50 |
$0.44 |
$0.36 |
$0.16 |
- |
|
Weighted average common shares outstanding |
|
|
|
|
|
|
Basic |
110.6 |
118.0 |
123.6 |
127.3 |
128.2 |
|
Diluted |
110.6 |
119.2 |
126.5 |
136.5 |
139.0 |
December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
Balance Sheet Data
|
|
|
|
|
|
|
Working capital |
$ 663.2 |
$ 447.8 |
$ 612.3 |
$ 826.9 |
$ 890.9 |
|
Total assets |
3,787.0 |
4,577.8 |
4,550.8 |
4,187.7 |
3,852.6 |
|
Short-term debt and current portion of long-term debt and capital lease obligations |
104.1 |
357.3 |
203.2 |
180.8 |
6.3 |
|
Long-term debt, including capital lease obligations |
788.6 |
789.8 |
1,016.6 |
835.1 |
978.1 |
|
Stockholders' equity |
2,211.6 |
2,666.4 |
2,653.9 |
2,537.8 |
2,303.5 |
- 29 -
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 2004 through 2006,
and our liquidity and capital resources. The following discussion and analysis
should be read in conjunction with our Consolidated Financial Statements
included elsewhere herein.
Executive 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 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.
During 2006, the following
significant events took place:
- in February 2006, we settled litigation with Polo and sold the Polo
Jeans Company business to Polo;
- in March 2006, we opened a new Barneys New York flagship store in
Boston, Massachusetts;
- in May 2006, we announced the closing of our Stein Mart leased shoe
departments, effective mid-January 2007;
- in May 2006, we announced the closing of our Secaucus, New Jersey
warehouse;
- in September 2006, we opened a new Barneys New York flagship store
in Dallas, Texas;
- in September 2006, we announced the closing of certain El Paso and Mexican
production facilities due to Polo's discontinuance of the Polo Jeans
Company product line, which we produced for Polo subsequent to the sale
of the Polo Jeans Company business; and
- we recognized impairments during the fourth fiscal quarter of 2006 of $8.6
million for property, plant and equipment, $441.2 million of goodwill
related to the wholesale moderate apparel segment and $50.2 million of
trademark value.
Trends
We believe that several
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 and to differentiate their product offerings
through exclusivity of brands. We believe department stores are increasing the
focus of their product assortments on their own private label products. We also
believe that consumers in the United States and Canada are shopping in multiple
channels, including specialty shops and national chains where value is perceived
to be higher. We have responded to these trends by enhancing the brand equity of
our brands 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 Joan & David, Mootsies Tootsies and Sam & Libby brands
and the Barneys New York retail stores). Through this diversification, we
have evolved into a multidimensional resource in apparel, footwear and
accessories and retail. 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 and Bandolino
apparel brands and the Jones New York accessory brand, and to reposition
the Bandolino and Evan-Picone brands to the moderate market
segment. We have also leveraged our design, production and marketing
capabilities to develop and provide proprietary branded and private label
products such as Nine & Company to major wholesale customers.
- 30 -
On January 1, 2005, the World
Trade Organization's 148 member nations lifted all quotas on apparel and
textiles. As a result, all textiles and textile apparel manufactured in a member
nation and exported after January 1, 2005 are no longer subject to quota
restrictions. This allows retailers, apparel firms and others to import
unlimited quantities of apparel and textile items from China, India and other
low-cost countries. The effects of this action could lead to lower production
costs or allow us to improve the quality of our products for a given cost and
could also allow us to concentrate production in the most efficient markets.
China, however, has implemented an export tax on many of the items previously
subject to quota restriction. In addition, litigation and political activity has
been initiated by interested parties seeking to re-impose quotas. As a result,
we are unable to predict the long-term effects of the lifting of quota
restrictions and related events on our results of operations.
Sale of Polo Jeans Company Business
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 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. 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 trademark in the United
States, Canada and Mexico pursuant to license and design service agreements with
Polo (the "Ralph License"). The Ralph License was scheduled to end on
December 31, 2003.
During the course of the
discussions concerning the Ralph License, Polo asserted that the expiration of
the Ralph License would cause the Lauren License agreements to end on December
31, 2003, instead of December 31, 2006. We believed that this was 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 alleged that Polo breached the Lauren
License agreements by claiming that the license ends at the end of 2003. The
complaint also alleged that Ms. Nemerov breached the confidentiality and
non-compete provisions of her employment agreement with us. Additionally, Polo
was alleged to have induced Ms. Nemerov to breach her employment agreement and
Ms. Nemerov was 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.
These matters were resolved by
settlement dated January 22, 2006, which closed on February 3, 2006. In
connection with this settlement, we entered into a Stock Purchase Agreement with
Polo and certain of its subsidiaries with respect to the sale to Polo of all
outstanding stock of Sun. We received gross proceeds of $355.0 million in
connection with the sale and the settlement. Sun's assets and liabilities on
the closing date primarily related to the Polo Jeans Company business,
which Sun operated under long-term license and design agreements entered into
with Polo in 1995. We retained distribution and product development facilities
in El Paso, Texas, along with certain working capital items, including accounts
receivable and accounts payable. In addition, as part of the agreements, we
provided certain support services to Polo (including manufacturing, distribution
and information technology) until January 2007 and we will continue to provide
certain financial and administrative functions until March 2007.
We recorded a pre-tax loss of
approximately $145.1 million after allocating $356.7 million of goodwill to the
business sold and a pre-tax gain of $100.0 million related to the litigation
settlement. Approximately $3.7 million in state and local taxes have been
accrued related to the litigation settlement, resulting in a combined after tax
loss of approximately $48.8 million. The combined loss created federal and state
capital loss carryforwards that we do not expect to be realizable and, as a
result, we increased our deferred tax valuation allowance to offset the deferred
tax benefit recorded as a result of the combined loss.
- 31 -
Long-lived assets included in the
sale include $2.0 million of net property, plant and equipment and $5.5 million
of unamortized long-term prepaid marketing expenses. Net sales for the Polo
Jeans Company business, which are reported under the wholesale better
apparel segment, were $24.6 million, $303.5 million and $336.5 million for 2006,
2005 and 2004, respectively.
Acquisitions
We completed our acquisitions of
Maxwell on July 8, 2004 and Barneys on December 20, 2004. 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. Maxwell operates in the wholesale footwear and accessories
segment and Barneys operates in the retail segment.
Restructuring
In late 2003, we began to evaluate
the need to broaden global sourcing capabilities to respond to the competitive
pricing and global sourcing capabilities of our denim competitors, as the
favorable production costs from non-duty/non-quota countries and the breadth of
fabric options from Asia began to outweigh the benefits of Mexico's quick turn
and superior laundry capabilities. The decision to expand global sourcing,
combined with lower projected shipping levels of denim products for 2005, led us
to begin a comprehensive review of our denim manufacturing during the fourth
quarter of 2004. The result of this review was the development of a plan of
reorganization of our Mexican operations to reduce costs associated with excess
capacity.
On July 11, 2005, we announced
that we had completed a comprehensive review of our denim manufacturing
operations located in Mexico. The primary action plan arising from this review
resulted in the closing of the laundry, assembly and distribution operations
located in San Luis, Mexico (the "denim restructuring"). All
manufacturing was consolidated into existing operations in Durango and Torreon,
Mexico. A total of 3,170 employees were terminated as a result of the closure.
We undertook a number of measures to assist affected employees, including
severance and benefits packages. As a result of this consolidation, we expected
that our manufacturing operations would perform more efficiently, thereby
improving our operating performance.
In connection with the denim
restructuring, we recorded $11.4 million of net pre-tax costs (of which $12.1
million was recorded in 2005 and $0.7 million was reversed in 2006), which
includes $5.1 million of one-time termination benefits, $3.2 million of losses
on the sale of property, plant and equipment, $2.2 million of contract
termination costs and $0.9 million of legal and other associated costs. Of these
amounts, $10.1 million were reported as cost of sales and $1.3 million were
reported as a selling, general and administrative expense in the wholesale
moderate apparel segment. The restructuring was substantially completed during
the fiscal quarter ended April 1, 2006.
In December 2005, we closed our
distribution center in Bristol, Pennsylvania. A total of 118 employees were
affected by the closure. We recorded charges of $3.6 million and $0.4 million in
2005 and 2006, respectively, related to one-time termination benefits and other
employee-related matters. These expenses are reported as selling, general and
administrative expenses in the wholesale better apparel segment.
On May 15, 2006, we announced the
closing of our Secaucus, New Jersey warehouse to reduce excess capacity. In
connection with the closing, we incurred $2.7 million of one-time termination
benefits and associated employee costs for 211 employees and $1.6 million for
cleanup costs and remaining rent payments. These expenses are reported as
selling, general and administrative expenses in the wholesale better apparel
segment. The restructuring was substantially completed in September 2006.
On May 30, 2006, we announced the
closing of our Stein Mart leased shoe departments, effective January 2007. In
connection with the closing, we have accrued $1.2 million of one-time
termination benefits and associated employee costs for an estimated 520
employees, which is reported as a selling, general and administrative expense in
the retail segment.
- 32 -
On September 12, 2006, we
announced the closing of certain El Paso, Texas and Mexican operations related
to the decision by Polo to discontinue the Polo Jeans Company product
line (the "manufacturing restructuring") , which we produced for Polo
subsequent to the sale of the Polo Jeans Company business to Polo in
February 2006. In connection with the El Paso closing, we expect to incur $4.6
million of one-time termination benefits and associated employee costs for an
estimated 129 employees and $0.6 million of other costs. Of this amount, $2.3
million is reported as a selling, general and administrative expense and $1.8
million is reported as a cost of sales in the wholesale moderate apparel segment
during 2006, and the remaining $1.1 million will be accrued on a straight-line
basis over the remaining period each employee is required to render service to
receive the benefit. In connection with the Mexican closing, we expect to incur
$3.0 million of one-time termination benefits and associated employee costs for
an estimated 1,734 employees and $0.2 million of other costs. Of this amount,
$2.8 million is reported as cost of sales in the wholesale moderate apparel
segment, and the remaining $0.4 million will be recorded during the first fiscal
quarter of 2007. In addition, we determined the estimated fair value of the
property, plant and equipment employed in Mexico was less than its carrying
value. As a result, we recorded an impairment loss of $8.6 million, which is
also reported as cost of sales in the wholesale moderate apparel segment, with
the estimated fair value of $5.2 million reclassified as assets held for sale
and reported as part of prepaid expenses and other current assets. The closings
will be substantially completed by the end of March 2007.
Strategic Review
We have completed a strategic
review of our operating infrastructure and general and administrative support
areas to improve profitability and to ensure we are properly positioned for the
long-term benefit of our shareholders. By proactively reviewing our
infrastructure, systems and operating processes at a time when the industry is
undergoing consolidation and change, we plan to eliminate redundancies and
improve our overall cost structure and margin performance.
Supply Chain Management
- We are in the process of implementing a product development management
system which will ultimately be integrated with our third-party
manufacturers.
- We are utilizing the capabilities of our third-party manufacturers to
increase pre-production collaboration efforts with them, thereby increasing
speed to market and improving margins. This has already been achieved in
some of the moderate and better apparel businesses, and will continue to be
expanded across most of our businesses.
- We have selected SAP Apparel and Footwear Solution as our enterprise
resource planning system, which will be implemented company-wide utilizing
one universal platform.
- The logistics network is being analyzed in an effort to reduce costs and
increase efficiency by following a tiered approach of (i) multiple product
usage of existing distribution centers, (ii) utilizing third party logistics
providers, and (iii) ultimately direct shipping from factory to customer.
- In response to the elimination of apparel quotas and other trade
safeguards, we are in the process of consolidating our third-party
manufacturing to a more concentrated vendor matrix.
General and Administrative Areas
- We are implementing best practices in connection with the migration of our
current systems to the SAP Apparel and Footwear Solution platform.
We estimate that the
implementation and execution of the initiatives underway will be substantially
completed by the end of 2007. We are targeting annual savings of approximately
$100 million once all the initiatives have been implemented. The costs
associated with the review and the ultimate capital expenditures and execution
expenses (including severance and fees) related to the initiatives that are
derived are expected to fall in a range of $115 million to $120 million. As of
December 31, 2006, we have spent a total of $74.6 million.
Goodwill and Other Intangible Assets
Goodwill represents the excess of
the purchase price and related costs over the value assigned to net tangible and
identifiable intangible assets of businesses acquired and accounted for under
the purchase
- 33 -
method. Accounting rules require that we test at least annually for possible
goodwill impairment. We perform our test in the fourth fiscal quarter of each
year using a discounted cash flow analysis that requires that certain
assumptions and estimates be made regarding industry economic factors and future
profitability. As a result of the 2006 impairment analysis, we determined that
the goodwill balance existing in our wholesale moderate apparel segment was
impaired as a result of continuing decreases in projected revenues and
profitability with respect to our Norton McNaughton, l.e.i. and
certain other moderate apparel brands, as well as changes in business strategy
with respect to our Norton McNaughton brand. Accordingly, we recorded an
impairment charge of $441.2 million. No other indication of goodwill impairment
was identified.
We also perform our annual
impairment test for trademarks during the fourth fiscal quarter of the year. As
a result of continuing decreases in projected revenues for our Norton
McNaughton brand, our Albert Nipon better apparel brand, our Westies
and Sam & Libby footwear brands and our Richelieu costume
jewelry brand, we recorded trademark impairment charges of $50.2 million in
2006. As a result of similar continuing decreases in projected accessory
revenues in one of our costume jewelry brands, we recorded a trademark
impairment charge of $0.2 million in 2004. All trademark impairment charges are
reported as selling, general and administrative ("SG&A") expenses
in the licensing, other and eliminations segment.
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-Merton
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.
In December 2004, the FASB issued
a revision of SFAS No. 123, "Share-Based Payment" (hereinafter
referred to as "SFAS No. 123R"), which requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. This Statement establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees except for equity instruments
held by employee share ownership plans. We adopted SFAS No. 123R on January 1,
2006 using the modified prospective application option. As a result, the
compensation cost for the portion of awards we granted before January 1, 2006
for which the requisite service has not been rendered and that were outstanding
as of January 1, 2006 will be recognized as the remaining requisite service is
rendered. In addition, the adoption of SFAS No. 123R required us to change from
recognizing the effect of forfeitures as they occur to estimating the number of
outstanding instruments for which the requisite service is not expected to be
rendered. As a result, we recorded a pretax gain of $3.1 million on January 1,
2006, which is reported as a cumulative effect of a change in accounting
principle. We were also required to change the amortization period for employees
eligible to retire from the period over which the awards vest to the period from
the grant date to the date the employee is eligible to retire. The adoption of
SFAS No. 123R did not have a material effect on our results of operations or our
financial position. Concurrently with the adoption of SFAS No. 123R, we have
shifted the composition of our share-based compensation awards towards the use
of restricted shares and away from the use of employee stock options.
- 34 -
Critical Accounting Policies
Several of our accounting policies
involve significant or complex judgements and uncertainties and require us to
make certain critical accounting estimates. We consider an accounting estimate
to be critical if it requires us to make assumptions about matters that were
highly uncertain at the time the estimate was made. The estimates with the
greatest potential effect on our results of operations and financial position
include the collectibility of accounts receivable, the recovery value of
obsolete or overstocked inventory and the fair values of both our goodwill and
intangible assets with indefinite lives. Estimates related to accounts
receivable affect our wholesale better apparel, wholesale moderate apparel,
wholesale footwear and accessories and retail segments. Estimates related to
inventory and goodwill affect our wholesale better apparel, wholesale moderate
apparel, wholesale footwear and accessories and retail segments. Estimates
related to intangible assets with indefinite lives affect our licensing, other
and eliminations segment.
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 annually test both our goodwill
and our intangible assets with indefinite lives for impairment by utilizing
independent third-party appraisals to estimate their fair values. 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.
We have not made any material
changes to any of our critical accounting estimates in the last three years. Our
senior management has discussed the development and selection of our critical
accounting estimates with the Audit Committee of our Board of Directors. In
addition, there are other items within our financial statements that require
estimation, but are not deemed critical as defined above. Changes in estimates
used in these and other items could have a material impact on our financial
statements.
Results of Operations
Statements of Operations Stated in Dollars and as a Percentage of Total Revenues
(In millions)
|
2006
|
|
2005
|
|
2004
|
Net sales |
$
4,669.9
|
98.5%
|
|
$
5,014.6
|
98.8%
|
|
$
4,592.6
|
98.8%
|
Licensing income (net) |
51.8
|
1.1%
|
|
59.6
|
1.2%
|
|
57.1
|
1.2%
|
Service
and other revenues |
21.1
|
0.4%
|
|
-
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
4,742.8
|
100.0%
|
|
5,074.2
|
100.0%
|
|
4,649.7
|
100.0%
|
Cost of goods sold |
3,031.3
|
63.9%
|
|
3,243.8
|
63.9%
|
|
2,944.4
|
63.3%
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
1,711.5
|
36.1%
|
|
1,830.4
|
36.1%
|
|
1,705.3
|
36.7%
|
Selling, general and administrative expenses |
1,341.7
|
28.3%
|
|
1,333.2
|
26.3%
|
|
1,176.9
|
25.3%
|
Loss on sale of
Polo Jeans Company business |
45.1
|
1.0%
|
|
-
|
-
|
|
-
|
-
|
Trademark
impairments |
50.2
|
1.1%
|
|
-
|
-
|
|
-
|
-
|
Goodwill impairment |
441.2
|
9.3%
|
|
-
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
(166.7)
|
(3.5%)
|
|
497.2
|
9.8%
|
|
528.4
|
11.4%
|
Interest income |
3.5
|
0.1%
|
|
1.1
|
0.0%
|
|
1.9
|
0.0%
|
Interest expense and financing costs |
58.2
|
1.2%
|
|
76.2
|
1.5%
|
|
51.2
|
1.1%
|
Gain
on sale of stock in Rubicon Retail Limited |
17.4
|
0.4%
|
|
-
|
-
|
|
-
|
-
|
Equity of earnings of unconsolidated affiliates |
4.5
|
0.1%
|
|
3.2
|
0.1%
|
|
3.8
|
0.1%
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes |
(199.5)
|
(4.2%)
|
|
425.3
|
8.4%
|
|
482.9
|
10.4%
|
(Benefit)
provision for income taxes |
(53.5)
|
(1.1%)
|
|
151.0
|
3.0%
|
|
181.1
|
3.9%
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before
cumulative effect of change in accounting principle |
(146.0)
|
(3.1%)
|
|
274.3
|
5.4%
|
|
301.8
|
6.5%
|
Cumulative effect
of change in accounting for share-based payments, net of tax |
1.9
|
0.0%
|
|
-
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$(144.1)
|
(3.0%)
|
|
$ 274.3
|
5.4%
|
|
$ 301.8
|
6.5%
|
|
|
|
|
|
|
|
|
|
|
Percentage totals may not agree due to rounding.
- 35 -
2006 Compared to 2005
Revenues. Total
revenues for 2006 were $4.74 billion compared to $5.07 billion for 2005, a
decrease of 6.5%.
Revenues by segment were as
follows:
(In millions)
|
2006
|
2005
|
Increase
(Decrease)
|
Percent
Change
|
Wholesale better apparel |
$ 1,127.4
|
$ 1,438.2
|
$(310.8)
|
(21.6%)
|
Wholesale moderate apparel |
1,142.0
|
1,265.2
|
(123.2)
|
(9.7%)
|
Wholesale footwear and accessories |
941.1
|
978.6
|
(37.5)
|
(3.8%)
|
Retail |
1,477.9 |
1,332.6 |
145.3 |
10.9% |
Licensing and other |
54.4
|
59.6
|
(5.2)
|
(8.7%)
|
|
|
|
|
|
Total revenues |
$ 4,742.8
|
$ 5,074.2
|
$(331.4)
|
(6.5%)
|
|
|
|
|
|
Wholesale better apparel revenues
decreased primarily due to the sale of the Polo Jeans Company business
($278.9 million of the decrease) and the discontinuance of our Easy Spirit
and Jones New York Country apparel lines. Decreases in shipments of our Jones
New York Sport product line were partially offset by increased shipments of
our Nine West apparel product line.
Wholesale moderate apparel
revenues decreased primarily due to decreased shipments of our l.e.i.,
Joneswear, Nine & Co., Norton McNaughton and Bandolino product
lines (primarily to J.C. Penney Company, Inc., Sears Holding Corporation and
Kohl's Corporation) and the discontinuance of our A|Line, Joneswear
Jeans, C.L.O.T.H.E.S. and Latina product lines (primarily sold
at J.C. Penney Company, Inc. and Sears Holding Corporation locations). These
decreases were partially offset by increased shipments of our Gloria
Vanderbilt and GLO product lines and increased shipments of private
label products, including the new Duckhead product line.
Wholesale footwear and accessories
revenues decreased due to decreased shipments of our Nine West accessory
and costume jewelry product lines and our Enzo Angiolini, Sam & Libby
and Easy Spirit footwear product lines (primarily to Federated Department
Stores Inc. and Dillard's Inc.) as well as the discontinuance of the Bandolino,
l.e.i. and licensed Tommy Hilfiger costume jewelry product lines,
partially offset by increased shipments of our Anne Klein and Circa
Joan & David footwear product lines and an increase in our international
footwear business.
Retail revenues increased due to
both new store openings and a 4.7% increase in comparable store sales
(comparable stores are stores that have been open for a full year, are not
scheduled to close in the current period and are not scheduled for an expansion
or downsize by more than 25% or relocation to a different street or mall). We
began 2006 with 1,086 retail locations and had a net increase of 46 locations
during the period to end the period with 1,132 locations.
Revenues for 2006 also include
$17.4 million of service fees charged to Polo under a short-term transition
service agreement entered into with Polo at the time of the sale of the Polo
Jeans Company business. These revenues are based on contractual monthly and
per-unit fees as set forth in the agreement. Of this amount, $11.7 million was
recorded in the wholesale better apparel segment, $3.1 million was recorded in
the wholesale moderate apparel segment and $2.6 million was recorded in the
licensing and other segment.
Gross Profit. The
gross profit margin was 36.1% for both 2006 and 2005.
Wholesale better apparel gross
profit margins were 36.5% and 34.6% for 2006 and 2005, respectively. The
increase was due to lower levels of sales to off-price retailers, lower
production costs and lower levels of air freight, partially offset by reduced
sales of higher-margin Polo Jeans Company products as a result of the
sale of the Polo Jeans Company business.
- 36 -
Wholesale moderate apparel gross
profit margins were 21.2% and 23.0% for 2006 and 2005, respectively. Increased
margins in our Gloria Vanderbilt and GLO product lines were offset
by higher levels of sales to off-price retailers, higher levels of air freight
and excess capacity in our Mexican manufacturing operations.
Wholesale footwear and accessories
gross profit margins were 28.6% and 31.0% for 2006 and 2005, respectively. The
decrease was a result of lower net sales in the higher-margin wholesale jewelry
business, higher net sales in our lower-margin international business, higher
levels of air freight and sales to off-price retailers, markdowns related to the
discontinuance of the licensed Tommy Hilfiger jewelry line in the current
period and writedowns of excess inventory in our direct selling jewelry and
accessory business.
Retail gross profit margins were
48.8% and 50.1% for 2006 and 2005, respectively. The decrease was the result of
a higher level of promotional activity in our footwear and accessories stores,
the liquidation of excess inventory and increased sales in our lower-margin
Barneys stores in the current period.
SG&A Expenses.
SG&A expenses were $1.34 billion in 2006 and $1.33 billion in 2005.
Decreases due to the sale of the Polo Jeans Company business, headcount
reductions as a result of the strategic review and lower levels of advertising
in the current period were offset by increased expenses resulting from the
opening of new retail stores, $4.3 million recorded in the wholesale better
apparel segment in the current period related to the closing of the Secaucus
warehouse, $1.2 million recorded in the retail segment related to the closing of
our Stein Mart retail locations, $2.3 million recorded in the wholesale moderate
apparel segment related to the closing of our Mexican production facilities and
$10.0 million recorded in the wholesale footwear and accessories segment related
to the termination of a former executive officer and the settlement of
litigation concerning a license agreement. SG&A expenses for 2006 also
included $2.6 million in the retail segment and $0.9 million recorded in the
licensing, other and eliminations segment related to the termination of the
former executive officer. SG&A expenses for 2005 included approximately $3.1
million as a result of an arbitration award to a former employee, approximately
$3.6 million related to the closing of our Bristol warehouse facility and $1.7
million related to the denim restructuring in the wholesale moderate apparel
segment, offset by one-time gains of $5.1 million in the better wholesale
apparel segment as a result of a recovery of unauthorized markdown allowances
from Saks Incorporated (relating to sales made by Kasper prior to the date of
acquisition) and $5.2 million in the retail segment from a landlord repurchase
of a retail store operating lease.
Impairment Losses and Other
Items. As a result of our 2006 impairment analysis, we determined that
the goodwill balance existing in our wholesale moderate apparel segment was
impaired as a result of continuing decreases in projected revenues and
profitability for our Norton McNaughton, l.e.i. and certain other
moderate apparel brands as well as changes in business strategy with respect to
our Norton McNaughton brand. Accordingly, we recorded an impairment
charge of $441.2 million. As a result of continuing decreases in projected
revenues for our Norton McNaughton brand, our Albert Nipon better
apparel brand, our Westies and Sam & Libby footwear brands and
our Richelieu costume jewelry brand, we also recorded trademark
impairment charges of $50.2 million. During 2006, we also recorded a $17.4
million gain (net of associated costs) upon the sale of stock in Rubicon Retail
Limited (see "Gain on Sale of Stock in Rubicon Retail Limited" in
Notes to Consolidated Financial Statements).
Operating (Loss) Income.
The resulting operating loss for 2006 was $166.7 million compared to operating
income of $497.2 million for 2005, due to the factors described above and the
loss of the sale of the Polo Jeans Company business.
Net Interest Expense.
Net interest expense was $54.7 million in 2006 compared to $75.1 million in
2005. The decrease was primarily the result of lower average borrowings during
2006 and the redemption at maturity of our 7.875% Senior Notes in June 2006.
(Benefit) Provision for
Income Taxes. The effective income tax rate was 26.7% for 2006
and 35.5% for 2005. The difference was primarily driven by the net tax effects
associated with the sale of the Polo Jeans Company business, the goodwill
impairment, the litigation settlement and the gain on the sale of stock in
Rubicon Retail Limited. Without the effects of the Polo Jeans Company
sale, the goodwill impairment, the litigation settlement and the gain on the
sale of stock in Rubicon Retail Limited, the effective tax rate for 2006 was
34.4%. The change from 2005 to 2006 was primarily driven by favorable
resolutions of the 2001 to 2003
- 37 -
federal and various state income tax audits that resulted in the reversal of
$8.6 million of prior income tax accruals.
Cumulative Effect of Change
in Accounting for Share-Based Payment. The adoption of SFAS No. 123R
required us to change from recognizing the effect of forfeitures of unvested
employee stock options and restricted stock as they occur to estimating the
number of outstanding instruments for which the requisite service is not
expected to be rendered. As a result, we recorded a gain of $1.9 million (net of
$1.2 million in taxes) on January 1, 2006 as a cumulative effect of a change in
accounting principle.
Net (Loss) Income and (Loss)
Earnings Per Share. Net loss was $144.1 million in 2006 compared to net
income of $274.3 million earned in 2005. Diluted (loss) earnings per share for
2006 was $(1.30) compared to $2.30 for 2005, on 7.2% fewer shares outstanding.
2005 Compared to 2004
Revenues. Total
revenues for 2005 were $5.07 billion compared to $4.65 billion for 2004, an
increase of 9.1%.
Revenues by segment were as
follows:
(In millions)
|
2005
|
2004
|
Increase
(Decrease)
|
Percent
Change
|
Wholesale better apparel |
$ 1,438.2
|
$ 1,493.2
|
$(55.0)
|
(3.7%)
|
Wholesale moderate apparel |
1,265.2
|
1,315.3
|
(50.1)
|
(3.8%)
|
Wholesale footwear and accessories |
978.6
|
1,002.4
|
(23.8)
|
(2.4%)
|
Retail |
1,332.6 |
780.3 |
552.3 |
70.8% |
Licensing and other |
59.6
|
58.5
|
1.1
|
1.9%
|
|
|
|
|
|
Total revenues |
$ 5,074.2
|
$ 4,649.7
|
$ 424.5
|
9.1%
|
|
|
|
|
|
In the wholesale better apparel
segment, decreased shipments of the Polo Jeans Company, Kasper Suit, Jones
New York Signature, Jones New York Dress and Le Suit product lines
were partially offset by increased shipments of our Nine West, Jones New York
Collection and Anne Klein product lines.
Wholesale moderate apparel
revenues decreased primarily as a result of a reduction in shipments of our l.e.i.,
private label denim, Norton McNaughton, Erika and Evan-Picone
product lines. These reductions were partially offset by increases in our Gloria
Vanderbilt, Nine & Company and Bandolino product lines, as
well as initial shipments of several new product lines, including Pappagallo,
Rena Rowan, C.L.O.T.H.E.S., A|Line (which launched in the third
quarter of 2004) and the W and Latina private label product lines.
Wholesale footwear and accessories
revenues decreased primarily due to decreased shipments in our Nine West
accessories and our Nine West, Easy Spirit and Enzo Angiolini
footwear product lines, partially offset by the product lines added as a result
of the Maxwell acquisition ($98.6 million for the portion of 2005 for which
there were no corresponding shipments in 2004) as well as an increase in our
international footwear business.
Retail revenues increased
primarily as the result of approximately $522.0 million in incremental sales
from the locations added as a result of the Barneys acquisition as well as sales
from new footwear and apparel store openings, partially offset by a 0.2%
decrease in comparable store sales. We began 2005 with 1,037 retail locations
and had a net increase of 49 locations during the period to end the period with
1,086 locations.
Gross Profit. The
gross profit margin decreased to 36.1% in 2005 compared to 36.7% in 2004.
Wholesale better apparel gross
profit margins were 34.6% and 34.2% for 2005 and 2004, respectively. The
increase reflects the effect of a $4.1 million adjustment to cost of sales in
2004 to write up acquired Kasper inventories to market value as required under
purchase accounting.
- 38 -
Wholesale moderate apparel gross
profit margins were 23.0% and 26.1% for 2005 and 2004, respectively. The
decrease was a result of lower margins in our l.e.i. and private label
denim businesses primarily due to $10.6 million of costs related to the denim
restructuring, an estimated $12.5 million in costs due to excess capacity in our
denim manufacturing operations, higher levels of sales to off-price retailers
and additional product costs that were not passed through to the customer. The
decrease was partially offset by higher shipments of higher-margin Gloria
Vanderbilt products.
Wholesale footwear and accessories
gross profit margins were 31.0% and 33.5% for 2005 and 2004, respectively. The
decrease was primarily due to a higher level of sales to off-price retailers as
well as a higher percentage of international sales, which carry lower gross
margins than the segment average. These decreases were offset in the prior
period by an adjustment to cost of sales of $6.0 million to write up acquired
Maxwell inventories to market value as required under purchase accounting.
Retail gross profit margins were
50.1% and 53.3% for 2005 and 2004, respectively. The decrease was primarily the
result of the effects of the addition of the acquired Barneys retail locations,
which generate lower margins than the historical segment average.
SG&A Expenses.
SG&A expenses of $1.33 billion in 2005 represented an increase of $156.3
million from the $1.18 billion reported for 2004. In 2005, Barneys added an
incremental $197.4 million to the retail segment, which includes $0.8 million of
net amortization of acquired intangible assets and unfavorable leases, and $2.5
million to the licensing, other and eliminations segment. SG&A expenses for
2005 included approximately $3.1 million as a result of an arbitration award to
a former employee, approximately $3.6 million related to the closing of our
Bristol warehouse facility and $1.7 million related to the denim restructuring
in the wholesale moderate apparel segment, offset by one-time gains of $5.1
million in the better wholesale apparel segment as a result of a recovery of
unauthorized markdown allowances from Saks Incorporated (relating to sales made
by Kasper prior to the date of acquisition) and $5.2 million in the retail
segment from a landlord repurchase of a retail store operating lease. The prior
period included an $8.4 million writeoff of unamortized bond discounts and debt
issue costs in the wholesale better apparel segment resulting from the
redemption of all of our outstanding Zero Coupon Convertible Senior Notes due
2021 and $13.9 million and $8.0 million of amortization of Maxwell and Kasper
purchase prices, respectively, that were assigned to acquired customer orders.
Operating Income.
The resulting operating income for 2005 of $497.2 million decreased 5.9%, or
$31.2 million, from the $528.4 million for 2004, due to the factors described
above.
Net Interest Expense.
Net interest expense was $75.1 million in 2005 compared to $49.3 million in
2004. The increase was primarily the result of interest related to $750.0
million of Senior Notes that were issued in November 2004.
Provision for Income Taxes.
The effective income tax rate was 35.5% for 2005 and 37.5% for 2004. The
reduction was primarily driven by favorable resolutions of various foreign and
state income tax audits related to acquired companies that resulted in the
reversal of prior income tax accruals.
Net Income and Earnings Per
Share. Net income was $274.3 million in 2005, a decrease of $27.5
million from the net income of $301.8 million earned in 2004. Diluted earnings
per share for 2005 was $2.30 compared to $2.39 for 2004, on 5.8% fewer 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, 2006, total cash and cash equivalents were $71.5 million, an
increase of $36.6 million from the $34.9 million reported as of December 31,
2005.
Operating activities provided
$423.9 million, $427.4 million and $461.9 million in 2006, 2005 and 2004,
respectively.
- 39 -
The $3.5 million decrease from 2005 to 2006 was primarily the result of lower
operating income before non-cash impairment charges offset by changes in certain
components of working capital. Accounts receivable decreased in 2006 compared to
an increase in 2005, primarily as a result of lower wholesale moderate apparel
sales in the current period and the effects of the sale of the Polo Jeans
Company business. Accounts payable and accrued expenses and other current
liabilities experienced increases in 2006 compared to decreases in 2005,
primarily as a result of accruals for property, plant and equipment related to
new store openings and computer systems and changes in payment terms to certain
vendors. These effects were offset by a decrease in taxes payable in 2006
compared to an increase in 2005, primarily as a result of the payment of federal
and state audit settlements and the reversal of prior years' income tax audit
accruals in the current period and lower estimated federal tax payments in the
prior period resulting from tax deductions arising from the Barneys acquisition,
and an increase in inventories in 2006 compared to a decrease in 2005, primarily
the result of new store openings in 2006 and anticipated sales growth for early
2007.
The change from 2004 to 2005 was
primarily due to the lower net income recorded in 2005. There were no
significant changes to working capital, accounts receivable or inventory from
2004 to 2005.
Investing activities provided
$197.6 million in 2006 and used $88.6 million and $629.4 million in 2005 and
2004, respectively. The changes were primarily due to cash received from the
sale of the Polo Jeans Company business offset by higher capital expenditures
for Barneys store openings and computer systems in 2006 and the cash paid for
the acquisitions of Maxwell and Barneys in 2004. Capital expenditures, which
amounted to $170.5 million in 2006, are expected to be approximately $130
million for 2007, primarily for retail store construction and remodeling and the
implementation of new computer systems.
Financing activities used $584.8
million in 2006, primarily to redeem at maturity our outstanding 7.875% Senior
Notes due 2005 at par on June 15, 2006 (for a total payment of $225.0 million),
repurchase our common stock and pay dividends to our common shareholders and
repay $29.5 million of net borrowings under our Senior Credit Facilities.
Financing activities used $348.4
million in 2005, primarily to redeem at maturity our outstanding 8.375% Senior
Notes due 2005 at par on August 15, 2005 (for a total payment of $129.6 million)
and repurchase our common stock and pay dividends to our common shareholders,
offset by $60.3 million in net borrowings under our Senior Credit Facilities.
Financing activities used $138.1
million in 2004, primarily to redeem our outstanding Zero Coupon Notes and 7.50%
Senior Notes due 2004, repurchase our common stock and pay dividends to our
common shareholders. On February 2, 2004, we redeemed all of our outstanding
Zero Coupon 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 recorded an SG&A
expense of $8.4 million in 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. On
June 15, 2004, we redeemed at maturity all our outstanding 7.50% Senior Notes
due 2004 at par for a total payment of $175.0 million.
In November 2004, we issued $250.0
million of 4.250% Senior Notes due 2009, $250.0 million of 5.125% Senior Notes
due 2014 and $250.0 million of 6.125% Senior Notes due 2034. Net proceeds of the
offerings were $743.5 million, which were used to fund the acquisition of
Barneys, to redeem $102.3 million of Barneys' outstanding 9% Senior Secured
Notes due 2008 and to repay amounts then outstanding under our Senior Credit
Facilities. In connection with the 4.250% Senior Notes due 2009 and the 5.125%
Senior Notes due 2014, we had entered into two interest rate lock agreements
which were terminated upon the issuance of the notes. These terminations
resulted in a gain of $0.2 million, which is being amortized as a reduction of
interest expense over the term of the related notes.
We repurchased $306.2 million,
$235.2 million and $194.9 million of our common stock on the open market during
2006, 2005 and 2004, respectively. As of December 31, 2006, a total of $1.4
billion had been expended under announced programs to acquire such shares and
there were no amounts remaining under any uncompleted programs. On February 13,
2007, our Board of Directors authorized an additional $300 million
- 40 -
for future stock repurchases. 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 $32.4 million, $13.4 million and $35.5
million in 2006, 2005 and 2004, respectively.
At December 31, 2006, we had
credit agreements with several lending institutions to borrow an aggregate
principal amount of up to $1.75 billion under Senior Credit Facilities. These
facilities, of which the entire amount is available for letters of credit or
cash borrowings, provide for a $1.0 billion five-year revolving credit facility
that expires in June 2009 and a $750.0 million five-year revolving credit
facility that expires in June 2010. At December 31, 2006, $355.7 million was
outstanding under the credit facility that expires in June 2009 (comprised of
$100.0 million in cash borrowings and $255.7 million in outstanding letters of
credit) and no amounts were outstanding under the credit facility that expires
in June 2010. 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.
At December 31, 2006, we also had
a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million
of letters of credit were outstanding.
On July 19, 2006, Moody's
lowered our senior long term debt rating to Baa3 from Baa2. On July 28, 2006,
Standard & Poor's lowered our corporate credit rating to BBB- from BBB. At
the time of these respective downgrades, we remained under review by both rating
agencies. On October 16, 2006, Moody's completed its review, confirming their
Baa3 rating and assigning us a stable outlook. On November 2, 2006, Standard
& Poor's completed its review, confirming their BBB- rating and assigning
us a negative outlook. These downgrades will increase the margin over the
floating interest rate charged under our Senior Credit Facilities and could
impact our cost of accessing the capital markets in the future.
We recorded pension liability
adjustments of $2.0 million, $0.2 million and $2.6 million in 2006, 2005 and
2004, respectively, to other comprehensive income resulting primarily from the
amortization of actuarial losses during 2006, lower than expected returns on our
plan assets and the lowering of the discount rate from 6.1% to 5.8% in 2004. 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 20, 2004, we completed
the acquisition of Barneys. The aggregate cash purchase price was $295.6
million, which included $19.00 for each outstanding share of Barneys common
stock (for a total of $264.5 million) and $26.7 million related to Barneys'
employee stock options, preferred stock and stock warrants. We also assumed
approximately $106.0 million of Barneys funded debt, $102.2 million of which we
subsequently refinanced.
On July 8, 2004, we completed the
acquisition of Maxwell. The aggregate cash purchase price was $377.2 million,
which included $23.25 for each outstanding share of Maxwell common stock (for a
total of $345.8 million) and $24.1 million related to Maxwell's employee stock
options.
On February 14, 2007, we announced
that the Board of Directors had declared a quarterly cash dividend of $0.14 per
share to all common stockholders of record as of March 2, 2007 for payment on
March 16, 2007.
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).
- 41 -
Contractual Obligations and Contingent Liabilities and Commitments
The following is a summary of our
significant contractual obligations for the periods indicated that existed as of
December 31, 2006, 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 |
$ 753.8 |
$
- |
$ 253.8 |
$
- |
$ 500.0 |
Interest on long-term debt |
558.7 |
39.1 |
76.3 |
56.2 |
387.1 |
Short-term borrowings (1) |
100.0 |
100.0 |
- |
- |
- |
Capital lease
obligations |
59.5 |
6.6 |
12.0 |
9.8 |
31.1 |
Operating lease obligations
(2) |
1,100.8 |
155.0 |
272.5 |
226.6 |
446.7 |
Purchase obligations (3) |
917.9 |
910.6 |
7.3 |
- |
- |
Minimum royalty payments
(4) |
2.6 |
1.3 |
1.3 |
- |
- |
Capital expenditure
commitments (5) |
97.3
|
94.0
|
3.3
|
-
|
-
|
Deferred compensation |
11.9
|
11.9
|
-
|
-
|
-
|
Other long-term liabilities |
129.0
|
2.5
|
19.0
|
15.9
|
91.6
|
|
|
|
|
|
|
Total contractual obligations |
$ 3,731.5
|
$ 1,321.0
|
$ 645.5
|
$ 308.5
|
$ 1,456.5
|
|
|
|
|
|
|
(1)
|
Excludes interest payments.
|
(2) |
Future rental commitments for
leases have not been reduced by minimum non-cancelable sublease rentals
aggregating $31.8 million.
|
(3)
|
Includes outstanding letters
of credit of $255.9 million, which primarily represent inventory
purchase commitments which typically mature in two to six months.
|
(4) |
Under exclusive licenses to
manufacture certain items under trademarks not owned by us pursuant to
various license 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.
|
(5) |
Net of $19.0 million expected
to be recovered through landlord construction allowances in 2007. |
We have a joint venture with
Sutton Developments Pty. Ltd. ("Sutton") to operate retail locations
in Australia. We have unconditionally guaranteed up to $7.0 million of
borrowings under the joint venture's uncommitted credit facility and up to
$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, 2006, the outstanding balance subject to
these guarantees was approximately $0.8 million.
We believe that funds generated by
operations, proceeds from the issuance of notes, the Senior Credit Facilities
and the Canadian line 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 our contingent
liabilities and commitments.
New Accounting Standards
In February 2006, the FASB issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -an
amendment of FASB Statements No. 133 and 140," which simplifies accounting
for certain hybrid financial instruments by permitting fair value remeasurement
for any hybrid instrument that contains an embedded derivative that otherwise
would require bifurcation and eliminates a restriction on the passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is
effective for all financial instruments acquired, issued or subject to a
remeasurement (new basis) event occurring after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The adoption of SFAS No.
155 will have no impact on our results of operations or our financial position.
- 42 -
In March 2006, the FASB issued
SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment
of FASB Statement No. 140," which establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities by requiring that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. SFAS
No. 156 is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. The adoption of SFAS No. 156 will have no
impact on our results of operations or our financial position.
In June 2006, the FASB issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109," which
establishes that the financial statement effects of a tax position taken or
expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits, that
the position will be sustained upon examination. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of FIN 48 is not expected
to have a material impact on our results of operations or our financial
position.
In September 2006, the FASB issued
SFAS No. 157, "Fair Value Measurements," which establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The adoption of SFAS No. 157 is not expected to have a material
impact on our results of operations or our financial position.
In September 2006, the FASB issued
SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)," which requires a business entity to recognize the overfunded
or underfunded status of a single-employer defined benefit postretirement plan
as an asset or liability in its statement of financial position and to recognize
changes in that funded status in comprehensive income in the year in which the
changes occur. SFAS No. 158 also requires a business entity to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. An employer with publicly traded equity
securities is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. As our defined benefit
pension plans are currently underfunded and benefits are either frozen or
increase only though interest credits, the adoption of SFAS No. 158 did not have
a material 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 $63.1
million at December 31, 2006.
- 43 -
The primary interest rate
exposures on floating rate financing arrangements are with respect to United
States and Canadian short-term rates. We had approximately $1.8 billion in
variable rate financing arrangements at December 31, 2006. As of December 31,
2006, a hypothetical immediate 10% adverse change in interest rates, as they
relate to the cash borrowings then outstanding under our variable rate financial
instruments, would have a $0.6 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 and purchase products from
foreign suppliers who require payment in funds other than the U.S. Dollar. At
December 31, 2006, we had outstanding foreign exchange contracts to exchange
Canadian Dollars for a total of US $27.3 million at a weighted-average exchange
rate of 1.1109 through December 2007, US $40.0 million for Euros at a
weighted-average exchange rate of 1.2854 through January 2008 and US $0.75
million for British Pounds at a weighted-average exchange rate of 1.8520 through
September 2007. 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 a financial instrument fails to perform its obligation. However,
we do not expect the counterparties, which presently have high credit ratings,
to fail to meet their obligations.
For further information see
"Derivatives" and "Financial Instruments" in the Notes to
Consolidated Financial Statements.
- 44 -
MANAGEMENT'S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
February 20, 2007
To the Stockholders of Jones Apparel Group, Inc.
The management of Jones Apparel
Group, Inc. is responsible for the preparation, integrity, objectivity and fair
presentation of the financial statements and other financial information
presented in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and reflect the effects of certain judgments and estimates made by
management.
In order to ensure that our
internal control over financial reporting is effective, management regularly
assesses such controls and did so most recently for our financial reporting as
of December 31, 2006. This assessment was based on criteria for effective
internal control over financial reporting described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, referred to as COSO. Our assessment included the
documentation and understanding of our internal control over financial
reporting. We have evaluated the design effectiveness and tested the operating
effectiveness of internal controls to form our conclusion.
Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes
those policies and procedures that pertain to maintaining records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions
of assets, providing reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, assuring that receipts and
expenditures are being made in accordance with authorizations of our management
and directors and providing reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of assets that could
have a material effect on our financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Based on this assessment, the
undersigned officers concluded that our internal controls and procedures are
effective in timely alerting them to material 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.
The Audit Committee of our 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.
BDO Seidman, LLP, the independent
registered public accountants who audit our financial statements, has reported
on management's assertion with respect to the effectiveness of our internal
control over financial reporting as of December 31, 2006.
|
|
Peter Boneparth
President and Chief Executive Officer |
Efthimios P. Sotos
Chief Financial Officer |
- 45 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Jones Apparel Group, Inc.
Bristol, Pennsylvania
We have audited management's
assessment, included in the accompanying Management's Report on Internal
Control Over Financial Reporting, that Jones Apparel Group, Inc. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's
assessment that Jones Apparel Group, Inc. and Subsidiaries maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on the criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Jones Apparel Group, Inc.
and Subsidiaries as of December 31, 2006 and 2005 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2006 and our report dated February
20, 2007 expressed an unqualified opinion.
New York, New York
February 20, 2007
- 46 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Jones Apparel Group, Inc.
Bristol, Pennsylvania
We have audited the accompanying
consolidated balance sheets of Jones Apparel Group, Inc. and Subsidiaries as of
December 31, 2006 and 2005 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2006. 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 the standards of the Public Company Accounting Oversight Board
(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 at December
31, 2006 and 2005, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Jones Apparel Group, Inc. and Subsidiaries'
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated February 20, 2007 expressed an unqualified opinion thereon.
New York, New York
February 20, 2007
- 47 -
Jones Apparel Group, Inc.
Consolidated Balance Sheets
(All amounts in millions except per share data)
December 31,
|
2006
|
2005
|
ASSETS
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$ 71.5
|
$ 34.9
|
|
Accounts receivable
|
411.6
|
458.4
|
|
Inventories
|
636.3
|
650.0
|
|
Deferred taxes
|
70.0
|
52.5
|
|
Prepaid expenses and other current assets
|
89.2
|
88.5
|
|
|
|
|
|
TOTAL CURRENT
ASSETS |
1,278.6
|
1,284.3
|
PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and amortization |
384.8
|
312.1
|
GOODWILL |
1,299.3
|
2,097.3
|
OTHER
INTANGIBLES, at cost, less
accumulated amortization |
771.6
|
827.5
|
OTHER ASSETS |
52.7
|
56.6
|
|
|
|
|
|
|
$ 3,787.0
|
$ 4,577.8
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Short-term borrowings
|
$ 100.0
|
$ 129.5
|
|
Current portion of long-term debt and capital lease obligations
|
4.1
|
227.8
|
|
Accounts payable
|
315.5
|
256.5
|
|
Income taxes payable
|
12.7
|
54.2
|
|
Accrued employee compensation
and benefits
|
52.3
|
51.0
|
|
Accrued expenses and other current liabilities
|
130.8
|
117.5
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES |
615.4
|
836.5
|
|
|
|
NONCURRENT LIABILITIES:
|
|
|
|
Long-term debt
|
752.8
|
752.6
|
|
Obligations under capital leases
|
35.8
|
37.2
|
|
Deferred taxes
|
42.4
|
175.9
|
|
Other
|
129.0
|
109.2
|
|
|
|
|
|
TOTAL NONCURRENT LIABILITIES |
960.0
|
1,074.9
|
|
|
|
|
|
TOTAL LIABILITIES |
1,575.4
|
1,911.4
|
|
|
|
|
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
153.2 and 151.4 |
1.5
|
1.5
|
|
Additional paid-in capital |
1,320.0
|
1,269.4
|
|
Retained earnings |
2,226.4
|
2,426.2
|
|
Accumulated other comprehensive loss |
(5.9)
|
(6.5)
|
|
Less treasury stock, 45.3
and 35.5 shares, at cost |
(1,330.4)
|
(1,024.2)
|
|
|
|
|
|
TOTAL STOCKHOLDERS'
EQUITY |
2,211.6
|
2,666.4
|
|
|
|
|
|
|
$ 3,787.0
|
$ 4,577.8
|
|
|
|
|
See accompanying notes to consolidated financial statements |
|
|
- 48 -
Jones Apparel Group, Inc.
Consolidated Statements of Operations
(All amounts in millions except per share data)
Year Ended December 31,
|
2006
|
2005
|
2004
|
Net sales |
$ 4,669.9
|
$ 5,014.6
|
$ 4,592.6
|
Licensing income (net) |
51.8
|
59.6
|
57.1
|
Service and other revenue |
21.1
|
-
|
-
|
|
|
|
|
Total revenues |
4,742.8
|
5,074.2
|
4,649.7
|
Cost of goods sold |
3,031.3
|
3,243.8
|
2,944.4
|
|
|
|
|
Gross profit
|
1,711.5
|
1,830.4
|
1,705.3
|
Selling, general and administrative expenses
|
1,341.7
|
1,333.2
|
1,176.7
|
Loss on sale of Polo Jeans Company business |
45.1
|
-
|
-
|
Trademark impairments |
50.2
|
-
|
0.2
|
Goodwill impairment |
441.2
|
-
|
-
|
|
|
|
|
Operating (loss) income |
(166.7)
|
497.2
|
528.4
|
Interest income |
3.5
|
1.1
|
1.9
|
Interest expense and financing costs |
58.2
|
76.2
|
51.2
|
Gain on sale of stock in Rubicon Retail Limited |
17.4
|
-
|
-
|
Equity in earnings of unconsolidated affiliates |
4.5
|
3.2
|
3.8
|
|
|
|
|
(Loss) income before provision for income taxes |
(199.5)
|
425.3
|
482.9
|
(Benefit) provision for income taxes |
(53.5)
|
151.0
|
181.1
|
|
|
|
|
(Loss) income before
cumulative effect of change in accounting principle |
(146.0)
|
274.3
|
301.8
|
Cumulative effect of change in accounting
for share-based payments, net of tax |
1.9
|
-
|
-
|
|
|
|
|
Net (loss) income |
$(144.1)
|
$ 274.3
|
$ 301.8
|
|
|
|
|
(Loss)
earnings per share
|
|
|
|
|
Basic
|
|
|
|
|
|
(Loss) income before
cumulative effect of change in accounting principle |
$(1.32) |
$2.33 |
$2.44 |
|
|
Cumulative effect of change in accounting
for share-based payments, net of tax |
0.02 |
- |
- |
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
$(1.30) |
$2.33 |
$2.44 |
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
(Loss) income before
cumulative effect of change in accounting principle |
$(1.32) |
$2.30 |
$2.39 |
|
|
Cumulative effect of change in accounting
for share-based payments, net of tax |
0.02 |
- |
- |
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
$(1.30) |
$2.30 |
$2.39 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
Basic |
110.6 |
118.0 |
123.6 |
|
|
Diluted |
110.6 |
119.2 |
126.5 |
|
|
|
|
|
|
Dividends declared per share |
$0.50 |
$0.44 |
$0.36 |
See accompanying notes to consolidated financial statements
- 49 -
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, 2004 |
126.2
|
|
$
2,537.8
|
|
$
1.5
|
|
$
1,179.4
|
|
$
1,947.2
|
|
$
3.8
|
|
$
(594.1)
|
Year ended December 31,
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
- |
|
301.8
|
|
- |
|
- |
|
301.8
|
|
- |
|
- |
|
Minimum
pension liability adjustment,
net of $1.0 tax |
- |
|
(1.6)
|
|
- |
|
- |
|
-
|
|
(1.6) |
|
- |
|
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 $6.9 tax |
- |
|
(4.3)
|
|
- |
|
- |
|
-
|
|
(4.3) |
|
- |
|
Foreign currency
translation adjustments |
- |
|
3.0
|
|
- |
|
- |
|
-
|
|
3.0 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
298.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock to employees, net of forfeitures |
0.1 |
|
-
|
|
- |
|
- |
|
-
|
|
- |
|
- |
Amortization
expense in connection with employee stock options and restricted stock |
- |
|
16.5
|
|
- |
|
16.5 |
|
-
|
|
- |
|
- |
Exercise of
employee stock options |
1.4 |
|
35.5
|
|
- |
|
35.5 |
|
-
|
|
- |
|
- |
Excess
tax
benefit derived from exercise of employee stock options and vesting of
restricted stock |
- |
|
5.0
|
|
- |
|
5.0 |
|
-
|
|
- |
|
- |
Dividends on
common stock ($0.36 per share) |
-
|
|
(44.8)
|
|
-
|
|
-
|
|
(44.8)
|
|
-
|
|
-
|
Treasury stock
acquired |
(5.5)
|
|
(194.9)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(194.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004 |
122.2
|
|
2,653.9
|
|
1.5
|
|
1,236.4
|
|
2,204.2
|
|
0.8
|
|
(789.0)
|
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
- |
|
274.3
|
|
- |
|
- |
|
274.3
|
|
- |
|
- |
|
Minimum
pension liability adjustment |
- |
|
0.2
|
|
- |
|
- |
|
-
|
|
0.2 |
|
- |
|
Change in fair value of
cash flow hedges, net of $1.5 tax |
- |
|
(2.3)
|
|
- |
|
- |
|
-
|
|
(2.3) |
|
- |
|
Reclassification adjustment for hedge gains and losses included in net income,
net of $1.8 tax |
- |
|
(2.8)
|
|
- |
|
- |
|
-
|
|
(2.8) |
|
- |
|
Foreign currency
translation adjustments |
- |
|
(2.4)
|
|
- |
|
- |
|
-
|
|
(2.4) |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
267.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
restricted stock to employees, net of forfeitures |
0.7 |
|
-
|
|
- |
|
- |
|
-
|
|
- |
|
- |
Amortization
expense in connection with employee stock options and restricted stock |
- |
|
18.3
|
|
- |
|
18.3 |
|
-
|
|
- |
|
- |
Exercise of
employee stock options |
0.6 |
|
13.4
|
|
- |
|
13.4 |
|
-
|
|
- |
|
- |
Excess
tax
benefit derived from exercise of employee stock options and vesting of
restricted stock |
- |
|
1.3
|
|
- |
|
1.3 |
|
-
|
|
- |
|
- |
Dividends on
common stock ($0.44 per share) |
-
|
|
(52.3)
|
|
-
|
|
-
|
|
(52.3)
|
|
-
|
|
-
|
Treasury stock
acquired |
(7.6)
|
|
(235.2)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(235.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005 |
115.9
|
|
2,666.4
|
|
1.5
|
|
1,269.4
|
|
2,426.2
|
|
(6.5)
|
|
(1,024.2)
|
Year ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
- |
|
(144.1)
|
|
- |
|
- |
|
(144.1)
|
|
- |
|
- |
|
Pension
and postretirement liability adjustments, net of $0.7 tax |
- |
|
(1.1)
|
|
- |
|
- |
|
-
|
|
(1.1) |
|
- |
|
Change in fair value of
cash flow hedges, net of $1.5 tax |
- |
|
2.1
|
|
- |
|
- |
|
-
|
|
2.1 |
|
- |
|
Reclassification adjustment for hedge gains and losses included in net
loss,
net of $0.6 tax |
- |
|
(1.1)
|
|
- |
|
- |
|
-
|
|
(1.1) |
|
- |
|
Foreign currency
translation adjustments |
- |
|
0.7
|
|
- |
|
- |
|
-
|
|
0.7 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss |
|
|
(143.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting for share-based payments |
- |
|
(3.1)
|
|
- |
|
(3.1) |
|
-
|
|
- |
|
- |
Issuance of
restricted stock to employees, net of forfeitures |
0.5 |
|
-
|
|
- |
|
- |
|
-
|
|
- |
|
- |
Amortization
expense in connection with employee stock options and restricted stock |
- |
|
17.9
|
|
- |
|
17.9 |
|
-
|
|
- |
|
- |
Exercise of
employee stock options |
1.3 |
|
32.4
|
|
- |
|
32.4 |
|
-
|
|
- |
|
- |
Excess tax
benefit derived from exercise of employee stock options and vesting of
restricted stock |
- |
|
3.4
|
|
- |
|
3.4 |
|
-
|
|
- |
|
- |
Dividends on
common stock ($0.50 per share) |
-
|
|
(55.7)
|
|
-
|
|
-
|
|
(55.7)
|
|
-
|
|
-
|
Treasury stock
acquired |
(9.8)
|
|
(306.2)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(306.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006 |
107.9
|
|
$ 2,211.6
|
|
$
1.5
|
|
$ 1,320.0
|
|
$ 2,226.4
|
|
$ (5.9)
|
|
$ (1,330.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
- 50 -
Jones Apparel Group, Inc.
Consolidated Statements of Cash Flows
(All amounts in millions)
Year Ended December 31,
|
2006
|
2005
|
2004
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Net (loss) income |
$(144.1)
|
$ 274.3
|
$ 301.8
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities, net of
acquisitions and sale of Polo Jeans Company business:
|
|
|
|
|
|
Loss
on sale of Polo Jeans Company business
|
45.1 |
- |
- |
|
|
Gain on sale of
stock in Rubicon Retail Limited
|
(17.4) |
- |
- |
|
|
Cumulative
effect of change in accounting for share-based payments
|
(3.1) |
- |
- |
|
|
Impairment losses on
property, plant and equipment
|
8.6 |
- |
- |
|
|
Trademark impairments
|
50.2 |
- |
0.2 |
|
|
Goodwill Impairment
|
441.2 |
- |
- |
|
|
Amortization of original issue discount
|
- |
- |
1.3 |
|
|
Depreciation and other amortization
|
105.2 |
102.8 |
107.7 |
|
|
Equity in earnings
of unconsolidated affiliates
|
(4.5) |
(3.2) |
(3.8) |
|
|
Dividends
received from unconsolidated affiliates
|
- |
1.3 |
2.0 |
|
|
Provision for losses on accounts receivable
|
0.6 |
1.2 |
(0.8) |
|
|
Deferred taxes
|
(152.8) |
42.8 |
52.8 |
|
|
Loss on repurchase
of Zero Coupon Convertible Senior Notes
|
- |
- |
8.4 |
|
|
Losses on
sales of property, plant and equipment
|
1.8 |
5.0 |
3.8 |
|
|
Other
items, net
|
0.8 |
(2.2) |
- |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
46.3
|
(11.1)
|
7.0
|
|
|
|
Inventories |
(16.2)
|
14.5
|
34.8
|
|
|
|
Prepaid expenses and other current assets |
14.4
|
(1.4)
|
(10.5)
|
|
|
|
Other assets |
2.3
|
4.0
|
(2.6)
|
|
|
|
Accounts payable |
58.9
|
(3.1)
|
(14.7)
|
|
|
|
Income taxes payable |
(41.5)
|
24.3
|
22.9
|
|
|
|
Accrued expenses and other
current liabilities |
16.2
|
(26.6)
|
(40.2)
|
|
|
|
Other liabilities |
11.9
|
4.8
|
(8.2)
|
|
|
|
|
|
|
|
|
Total adjustments |
568.0
|
153.1
|
160.1
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
423.9
|
427.4
|
461.9
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Net
proceeds from sale of Polo Jeans Company business |
350.6
|
-
|
-
|
|
Acquisition of
Maxwell, net of cash acquired |
-
|
-
|
(273.5)
|
|
Acquisition
of Barneys, net of cash acquired |
-
|
(4.1)
|
(261.9)
|
|
Acquisition of
Kasper, net of cash acquired |
-
|
-
|
(37.9)
|
|
Capital expenditures |
(170.5)
|
(87.5)
|
(56.6)
|
|
Net cash received on
sale of stock in Rubicon Retail Limited |
17.4
|
-
|
-
|
|
Acquisition of intangibles |
-
|
(0.1)
|
(1.2)
|
|
Capital
contributions to unconsolidated affiliates |
-
|
(0.7)
|
-
|
|
Proceeds from sales of property, plant and equipment |
0.1
|
3.6
|
1.7
|
|
Other |
-
|
0.2
|
-
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) investing activities |
197.6
|
(88.6)
|
(629.4)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Issuance of 4.25% Senior Notes, net of discount and debt issuance costs |
-
|
-
|
248.1
|
|
Issuance of
5.125% Senior Notes, net of discount and debt issuance costs |
-
|
-
|
248.1
|
|
Issuance of 6.125% Senior Notes, net of discount and debt issuance costs |
-
|
-
|
247.3
|
|
Redemption
of Zero Coupon Convertible Senior Notes |
-
|
-
|
(446.6)
|
|
Redemption at
maturity of 7.50% Senior Notes |
-
|
-
|
(175.0)
|
|
Redemption at
maturity of 8.375% Senior Notes |
-
|
(129.6)
|
-
|
|
Redemption at
maturity of 7.875% Senior Notes |
(225.0)
|
-
|
-
|
|
Redemption
of Barneys 9% Senior Secured Notes, including premiums and fees |
-
|
-
|
(112.7)
|
|
Net
(repayment) borrowing under credit facilities |
(29.5)
|
60.3
|
69.2
|
|
Purchases of treasury stock |
(306.2)
|
(235.2)
|
(201.5)
|
|
Proceeds from exercise of employee stock options |
32.4
|
13.4
|
35.5
|
|
Dividends paid |
(55.7)
|
(52.3)
|
(44.8)
|
|
Proceeds from termination of interest rate
hedges |
-
|
-
|
0.2
|
|
Debt
issuance costs |
-
|
(0.6)
|
-
|
|
Principal payments on capital leases |
(4.2)
|
(4.4)
|
(5.9)
|
|
Excess tax benefits
from share-based payment arrangement |
3.4
|
-
|
-
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
(584.8)
|
(348.4)
|
(138.1)
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH |
(0.1)
|
(0.5)
|
0.6
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
36.6 |
(10.1) |
(305.0) |
CASH AND CASH EQUIVALENTS, BEGINNING |
34.9
|
45.0
|
350.0
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, ENDING |
$
71.5
|
$ 34.9
|
$
45.0
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
- 51 -
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 and market a broad range of women's collection sportswear,
suits and dresses, casual sportswear and jeanswear for 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 luxury, 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.
We also provide credit to certain
retail customers through an in-house Barneys New York credit card
program. We perform ongoing credit reviews of our credit card accounts. Accounts
are generally written off automatically after 180 days have passed without
receipt of a full scheduled monthly payment and are written off sooner in the
event of bankruptcy or other factors that make collection seem unlikely. We
estimate an allowance for uncollectibility using a model that considers the
current aging of the accounts, historical write-off and recovery rates and other
portfolio data. Concentration of credit risk is limited because of the large
number of credit card accounts.
Derivative Financial Instruments
Our primary objectives for
holding derivative financial instruments are to manage foreign currency and
interest rate risks. We do not use financial instruments for trading or other
speculative purposes. We have historically used derivative financial instruments
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). Our strategies related to
derivative financial instruments have been:
- the use of foreign currency forward contracts to hedge a portion of
anticipated future short-term inventory purchases to offset the effects of
changes in foreign currency exchange rates (primarily between the U.S.
Dollar and the Canadian Dollar, the Euro and the British Pound);
- the use of interest rate swaps to effectively convert a portion of our
outstanding fixed-rate debt to variable-rate debt to take advantage of lower
interest rates; and
- 52 -
- the use of treasury rate locks to fix forward the treasury rate component
of a portion of our November 2004 debt offering that was priced based on the
prevailing applicable treasury rate and credit spread at the time the debt
offering was finalized.
The derivatives we use in our risk
management strategies are highly effective hedges because all the critical terms
of the derivative instruments match those of the hedged item. 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 SG&A expenses for all other items. Any ineffective portion
of a hedging derivative's change in fair value will be immediately recognized
in SG&A 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. Gains or losses generated from the early termination of
interest rate contracts and treasury locks are amortized to earnings over the
remaining terms of the contracts as adjustments to interest expense. The fair
values of the derivatives, which are based on quoted market prices, are reported
as other current assets or accrued expenses and other current liabilities, as
appropriate.
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
credit card accounts, and an allowance for estimated sales returns.
Inventories and Cost of Sales
Inventories are valued at the
lower of cost or market. Approximately 55%, 28% and 17% of inventories were
determined by using the FIFO (first in, first out), weighted average cost and
retail methods of valuation, respectively, as of December 31, 2006 and
approximately 57%, 30% and 13% of inventories were determined by using the FIFO,
weighted average cost and retail methods of valuation, respectively, as of
December 31, 2005. We reduce the carrying cost of inventories for obsolete or
slow moving items as necessary to properly reflect inventory value. The cost
elements included in inventory consist of all direct costs of merchandise (net
of purchase discounts and vendor allowances), allocated overhead (primarily
design and indirect production costs), inbound freight and merchandise
acquisition costs such as commissions and import fees.
Cost of sales includes the
inventory cost elements listed above as well as warehouse outbound freight,
internally transferred merchandise freight and realized gains or losses on
foreign currency forward contracts associated with inventory purchases. Our cost
of sales may not be comparable to those of other entities, since some entities
include all of the costs associated with their distribution functions in cost of
sales while we include these costs in selling, general and administrative
expenses.
Property, Plant, Equipment and Depreciation and Amortization
Property, plant and equipment are
recorded at cost. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements recorded at the inception of a lease are amortized using the
straight-line method over the life of the lease or the useful life of the
improvement, whichever is shorter; for improvements made during the lease term,
the amortization period is the shorter of the useful life or the remaining lease
term (including any renewal periods that are deemed to be reasonably assured).
Property under capital leases is amortized over the lives of the respective
leases or the estimated useful lives of the assets, whichever is shorter.
Operating Leases
Total rent payments under
operating leases that include scheduled payment increases and rent holidays are
amortized on a straight-line basis over the term of the lease. Rent expense on
our buildings and retail stores is classified as an SG&A expense and, for
certain stores, includes contingent rents that are based on a percentage of
retail sales over stated levels. Landlord allowances are amortized by the
straight-line method over the original term of the lease as a reduction of rent
expense.
- 53 -
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. We annually
test goodwill and other intangibles without determinable lives (primarily
tradenames and trademarks) for impairment through the use of independent
third-party appraisals. Other intangibles with determinable lives, including
license agreements, are amortized on a straight-line basis over the estimated
useful lives of the assets (currently ranging from three to 31 years).
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 operations. Net foreign currency losses reflected in the
consolidated statements of operations were $0.4 million, $1.2 million and $1.9
million in 2006, 2005 and 2004, respectively.
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. Licensing income is recognized based on the higher of
contractual minimums or sales of licensed products reported by our licensees.
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, net of reimbursements for cooperative
advertising. Advertising costs associated with our cooperative advertising
programs are accrued as the related revenues are recognized. Net advertising
expense was $92.1 million, $80.6 million and $77.6 million in 2006, 2005 and
2004, 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.
- 54 -
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
2005 and 2004 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. For
2006, none of the options outstanding were included in the computation of
diluted earnings per share due to the net loss for the year.
|
2005
|
2004
|
Number of options (in millions) |
9.6 |
3.9 |
Weighted average exercise price |
$33.57 |
$37.44 |
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-Merton
option pricing model) is amortized to compensation expense over the option's
vesting period. 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.
In December 2004, the FASB issued
a revision of SFAS No. 123, "Share-Based Payment" (hereinafter
referred to as "SFAS No. 123R"), which requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. This Statement establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees except for equity instruments
held by employee share ownership plans. We adopted SFAS No. 123R on January 1,
2006 using the modified prospective application option. As a result, the
compensation cost for the portion of awards we granted before January 1, 2006
for which the requisite service had not been rendered and that were outstanding
as of January 1, 2006 will be recognized as the remaining requisite service is
rendered. In addition, the adoption of SFAS No. 123R required us to change from
recognizing the effect of forfeitures as they occur to estimating the number of
outstanding instruments for which the requisite service is not expected to be
rendered. As a result, we recorded a pretax gain of $3.1 million on January 1,
2006, which is reported as a cumulative effect of a change in accounting
principle. We were also required to change the amortization period for employees
eligible to retire from the period over which the awards vest to the period from
the grant date to the date the employee is eligible to retire. The adoption of
SFAS No. 123R did not have a material effect on our results of operations or our
financial position. Concurrently with the adoption of SFAS No. 123R, we have
shifted the composition of our share-based compensation awards towards the use
of restricted shares and away from the use of employee stock options.
Had we elected to adopt the fair
value approach of SFAS No. 123 upon its effective date, our net income for 2005
and 2004 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
- 55 -
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,
|
2005
|
2004
|
(In millions except per share data) |
|
|
|
|
|
Net income - as reported |
$
274.3 |
$
301.8 |
Add: stock-based employee compensation cost,
net of related tax effects, included in the determination of net income as reported |
11.9 |
10.3 |
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 |
(13.1)
|
(16.9)
|
|
|
|
Net income - pro forma |
$ 273.1
|
$ 295.2
|
|
|
|
Basic earnings per share |
|
|
As reported |
$2.33 |
$2.44 |
Pro forma |
$2.32 |
$2.39 |
Diluted earnings per share |
|
|
As reported |
$2.30 |
$2.39 |
Pro forma |
$2.29 |
$2.34 |
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, net of projected forfeitures, 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.
New Accounting Standards
In February 2006, the FASB issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -an
amendment of FASB Statements No. 133 and 140," which simplifies accounting
for certain hybrid financial instruments by permitting fair value remeasurement
for any hybrid instrument that contains an embedded derivative that otherwise
would require bifurcation and eliminates a restriction on the passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is
effective for all financial instruments acquired, issued or subject to a
remeasurement (new basis) event occurring after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The adoption of SFAS No.
155 will have no impact on our results of operations or our financial position.
In March 2006, the FASB issued
SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment
of FASB Statement No. 140," which establishes, among other things, the
accounting for all separately recognized servicing assets and servicing
liabilities by requiring that all separately recognized
- 56 -
servicing assets and servicing liabilities be initially measured at fair
value, if practicable. SFAS No. 156 is effective as of the beginning of an
entity's first fiscal year that begins after September 15, 2006. The adoption
of SFAS No. 156 will have no impact on our results of operations or our
financial position.
In June 2006, the FASB issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109," which
establishes that the financial statement effects of a tax position taken or
expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits, that
the position will be sustained upon examination. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of FIN 48 is not expected
to have a material impact on our results of operations or our financial
position.
In September 2006, the FASB issued
SFAS No. 157, "Fair Value Measurements," which establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The adoption of SFAS No. 157 is not expected to have a material
impact on our results of operations or our financial position.
In September 2006, the FASB issued
SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)," which requires a business entity to recognize the overfunded
or underfunded status of a single-employer defined benefit postretirement plan
as an asset or liability in its statement of financial position and to recognize
changes in that funded status in comprehensive income in the year in which the
changes occur. SFAS No. 158 also requires a business entity to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. An employer with publicly traded equity
securities is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. As our defined benefit
pension plans are currently underfunded and benefits are either frozen or
increase only though interest credits, the adoption of SFAS No. 158 did not have
a material impact on our results of operations or our financial position.
ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
Accounts receivable consist of the
following:
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Trade accounts
receivable |
$ 398.8
|
$ 459.1
|
Credit card receivable |
49.1
|
40.5
|
Allowances for doubtful
accounts, returns, discounts and co-op advertising |
(36.3)
|
(41.2)
|
|
|
|
|
$ 411.6
|
$ 458.4
|
|
|
|
A significant portion of our sales
are to retailers throughout the United States and Canada. We have one
significant customer in our wholesale apparel and wholesale footwear and
accessories operating segments. Federated Department Stores, Inc. accounted for
approximately 18%, 19% and 25% of consolidated gross revenues for 2006, 2005 and
2004, respectively, and accounted for approximately 20% of accounts receivable
at December 31, 2006.
ACQUISITIONS
On July 8, 2004, we acquired all
the outstanding shares of Maxwell. Maxwell designs and markets casual and dress
footwear for women and children under multiple brand names, each of which is
targeted to a distinct segment of the footwear market. Maxwell markets its
products nationwide to national chains,
- 57 -
department stores and specialty retailers. Maxwell offers footwear for women
in the moderately priced market segment under the Mootsies Tootsies, Sam
& Libby and Dockers Women brands, in the better market segment
under the AK Anne Klein and Circa Joan & David brands and in
the bridge segment under the Joan and David and Albert Nipon
brands. Maxwell also sells moderately priced children's footwear under both
the Mootsies Tootsies and Sam & Libby brands and licenses the J.
G. Hook trademark from J. G. Hook, Inc. to source and develop private label
products for retailers who require brand identification. Maxwell operates in the
wholesale footwear and accessories segment.
The acquisition of Maxwell was
intended to provide further diversification in our footwear business and
strengthen our positions in both the moderate and children's distribution
channels. We also expect to benefit from the cross-branding opportunities that
exist with our other lines of business.
The aggregate purchase price was
$377.2 million, which included $23.25 per share in cash for each outstanding
share of Maxwell (for a total of $345.8 million) and $24.1 million related to
Maxwell's employee stock options. The purchase price was allocated to Maxwell'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 $210.6 million being recorded as goodwill in
the wholesale footwear and accessories segment. The acquired goodwill relating
to Maxwell will not be deductible for tax purposes.
We assigned $40.3 million of the
Maxwell purchase price to intangible assets based on independent, third-party
appraisals. Of this amount, $24.7 million was assigned to registered trademarks
that are not subject to amortization, $1.1 million was assigned to third-party
license agreements, which had a useful life of approximately 18 months on the
acquisition date, and $14.5 million was assigned to existing customer orders,
which had a useful life of approximately eight months on the acquisition date.
On December 20, 2004, we acquired
100% of the common stock of Barneys. Barneys is a luxury retailer that provides
its customers with a wide variety of merchandise across a broad range of prices,
including a diverse selection of Barneys branded merchandise. Barneys'
preferred arrangements with established and emerging designers, combined with
creative merchandising, store designs and displays, advertising campaigns,
publicity events and emphasis on customer service, has positioned it as a
leading retailer of men's and women's fashion, cosmetics, jewelry and home
furnishings. Barneys complements its merchandise offerings from designers such
as Giorgio Armani, Manolo Blahnik, Marc Jacobs, Prada, Jil Sander and
Ermenegildo Zegna with a diverse selection of Barneys branded
merchandise, including ready-to-wear apparel, handbags, shoes, dress shirts,
ties and sportswear. Barneys branded merchandise is manufactured by
independent third parties according to Barneys' specifications and is of
comparable quality to the designer merchandise. Barneys operates in the retail
segment.
As our growth strategy has focused
on diversification to provide a well-balanced portfolio of businesses, the
acquisition of Barneys provided additional diversification by introducing a new
competency in luxury specialty retailing. With an inherent diversified portfolio
comprised of its own brand, as well as numerous other brands from new designers
and classic design houses, Barneys provides entry into the high-growth,
resilient luxury goods market.
The aggregate cash purchase price
was $295.6 million, which included $19.00 for each outstanding share of Barneys
common stock (for a total of $264.5 million) and $26.7 million related to
Barneys' employee stock options, preferred stock and stock warrants. We also
assumed approximately $106.0 million of Barneys funded debt, $102.2 million of
which we subsequently refinanced. The purchase price was allocated to Barneys'
assets and liabilities, with the excess of the purchase price over the fair
value of the net assets acquired of approximately $247.4 million being recorded
as goodwill in the retail segment. Of the acquired goodwill relating to Barneys,
approximately $83.1 million will be deductible for tax purposes.
We assigned $67.7 million of the
Barneys purchase price to intangible assets based on independent, third-party
appraisals. Of this amount, $42.0 million was assigned to registered trademarks
that are not subject to amortization, $4.0 million was assigned to a third-party
license agreement, which had a useful life of approximately 31 years on the
acquisition date, $1.2 million was assigned to credit cardholder relationships,
which had a useful life of approximately 181 months on the acquisition date,
$0.2 million was assigned to a customer database, which had a useful life of
approximately 145 months on the acquisition date, and $20.3
- 58 -
million was assigned to favorable leases, which had a useful life of
approximately 158 months on the acquisition date.
ACCRUED RESTRUCTURING COSTS
In connection with the
acquisitions of McNaughton, Kasper and Maxwell, we assessed and formulated plans
to restructure certain operations of each company. These plans involved the
closure of distribution facilities and certain offices. The objectives of the
plans were to eliminate unprofitable or marginally profitable lines of business
and reduce overhead expenses.
In late 2003, we began to evaluate
the need to broaden global sourcing capabilities to respond to the competitive
pricing and global sourcing capabilities of our denim competitors, as the
favorable production costs from non-duty/non-quota countries and the breadth of
fabric options from Asia began to outweigh the benefits of Mexico's quick turn
and superior laundry capabilities. The decision to expand global sourcing,
combined with lower projected shipping levels of denim products for 2005, led us
to begin a comprehensive review of our denim manufacturing during the fourth
quarter of 2004. The result of this review was the development of a plan of
reorganization of our Mexican operations to reduce costs associated with excess
capacity.
On July 11, 2005, we announced
that we had completed a comprehensive review of our denim manufacturing
operations located in Mexico. The primary action plan arising from this review
resulted in the closing of the laundry, assembly and distribution operations
located in San Luis, Mexico (the "denim restructuring"). All
manufacturing was consolidated into existing operations in Durango and Torreon,
Mexico. A total of 3,170 employees were terminated as a result of the closure.
We undertook a number of measures to assist affected employees, including
severance and benefits packages. As a result of this consolidation, we expected
that our manufacturing operations would perform more efficiently, thereby
improving our operating performance.
In connection with the denim
restructuring, we recorded $11.4 million of net pre-tax costs (of which $12.1
million was recorded in 2005 and $0.7 million was reversed in 2006), which
includes $5.1 million of one-time termination benefits, $3.2 million of losses
on the sale of property, plant and equipment, $2.2 million of contract
termination costs and $0.9 million of legal and other associated costs. Of these
amounts, $10.1 million were reported as cost of sales and $1.3 million were
reported as a selling, general and administrative expense in the wholesale
moderate apparel segment. The restructuring was substantially completed during
the fiscal quarter ended April 1, 2006.
In December 2005, we closed our
distribution center in Bristol, Pennsylvania. A total of 118 employees were
affected by the closure. We recorded charges of $3.6 million and $0.4 million in
2005 and 2006, respectively, related to one-time termination benefits and other
employee-related matters. These expenses are reported as selling, general and
administrative expenses in the wholesale better apparel segment.
On May 15, 2006, we announced the
closing of our Secaucus, New Jersey warehouse to reduce excess capacity. In
connection with the closing, we incurred $2.7 million of one-time termination
benefits and associated employee costs for 211 employees and $1.6 million for
cleanup costs and remaining rent payments. These expenses are reported as
selling, general and administrative expenses in the wholesale better apparel
segment. The restructuring was substantially completed in September 2006.
On May 30, 2006, we announced the
closing of our Stein Mart leased shoe departments, effective January 2007. In
connection with the closing, we have accrued $1.2 million of one-time
termination benefits and associated employee costs for an estimated 520
employees, which is reported as a selling, general and administrative expense in
the retail segment.
On September 12, 2006, we
announced the closing of certain El Paso, Texas and Mexican operations related
to the decision by Polo to discontinue the Polo Jeans Company product
line (the "manufacturing restructuring") , which we produced for Polo
subsequent to the sale of the Polo Jeans Company business to Polo in
February 2006. In connection with the El Paso closing, we expect to incur $4.6
million of one-time termination benefits and associated employee costs for an
estimated 129 employees and $0.6 million of other
- 59 -
costs. Of this amount, $2.3 million is reported as a selling, general and
administrative expense and $1.8 million is reported as a cost of sales in the
wholesale moderate apparel segment during 2006, and the remaining $1.1 million
will be accrued on a straight-line basis over the remaining period each employee
is required to render service to receive the benefit. In connection with the
Mexican closing, we expect to incur $3.0 million of one-time termination
benefits and associated employee costs for an estimated 1,734 employees and $0.2
million of other costs. Of this amount, $2.8 million is reported as cost of
sales in the wholesale moderate apparel segment, and the remaining $0.4 million
will be recorded during the first fiscal quarter of 2007. In addition, we
determined the estimated fair value of the property, plant and equipment
employed in Mexico was less than its carrying value. As a result, we recorded an
impairment loss of $8.6 million, which is also reported as cost of sales in the
wholesale moderate apparel segment, with the estimated fair value of $5.2
million reclassified as assets held for sale and reported as part of prepaid
expenses and other current assets. The closings will be substantially completed
by the end of March 2007.
The accrual of restructuring costs
and liabilities, of which $5.1 million is included in accrued expenses and other
current liabilities and $1.3 million is included in other noncurrent
liabilities, is as follows:
(In millions)
|
Severance
and other
employee
costs
|
Closing of
retail
stores and consolidation
of facilities
|
Denim
restructuring
|
Manufacturing restructuring
|
Total
|
Balance, January 1, 2004 |
$ 6.9
|
$ 3.7
|
$ -
|
$ -
|
$ 10.6
|
Net additions |
16.9
|
17.4
|
-
|
-
|
34.3
|
Payments and reductions |
(17.3)
|
(3.0)
|
-
|
-
|
(20.3)
|
|
|
|
|
|
|
Balance, December 31,
2004 |
6.5
|
18.1
|
-
|
-
|
24.6
|
Net additions (reversals) |
2.9
|
(6.5)
|
9.0
|
-
|
5.4
|
Payments and reductions |
(6.0)
|
(9.5)
|
(6.5)
|
-
|
(22.0)
|
|
|
|
|
|
|
Balance, December 31,
2005 |
3.4
|
2.1
|
2.5
|
-
|
8.0
|
Net additions (reversals) |
4.3
|
1.6
|
(0.7)
|
6.9
|
12.1
|
Payments and reductions |
(6.3)
|
(2.1)
|
(1.8)
|
(3.5)
|
(13.7)
|
|
|
|
|
|
|
Balance, December 31,
2006 |
$ 1.4
|
$ 1.6
|
$ -
|
$ 3.4
|
$ 6.4
|
|
|
|
|
|
|
Estimated severance payments and
other employee costs of $1.4 million accrued at December 31, 2006 relate to the
remaining estimated severance for an estimated 524 employees at locations to be
closed. Employee groups affected (totaling an estimated 988 employees) include
administrative, warehouse and management personnel at locations closed or to be
closed and retail personnel at the Stein Mart locations to be closed.
The $4.3 million net addition in
2006 represents $2.7 million related to the closing of the Secaucus distribution
center and $0.4 million of additional severance accruals related to the closing
of the Bristol distribution center, which were recorded as selling, general and
administrative expenses in the wholesale better apparel segment, and $1.2
million in severance accruals for the Stein Mart locations to be closed, which
was recorded as a selling, general and administrative expense in the retail
segment.
The $2.9 million net addition in
2005 represents $3.6 million related to the closing of the Bristol facility,
which was recorded as a selling, general and administrative expense in the
wholesale better apparel segment, offset by $0.6 million of adjustments related
to severance accruals for the Kasper and Maxwell acquisitions, which were
recorded as reductions of goodwill and $0.1 million related to the closing of
the Mexican and El Paso production facilities, which was recorded as a reduction
of selling, general and administrative expenses in the moderate wholesale
apparel segment.
The $16.9 million net addition
during 2004 represents severance accruals related to acquisitions, which was
recorded as an increase to goodwill.
During 2006, 2005 and 2004, $6.3
million, $6.0 million and $17.3 million, respectively, of the accrual were
utilized (relating to partial or full severance and related costs for 729, 165
and 231 employees, respectively).
- 60 -
The $1.6 million accrued at
December 31, 2006 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.
The $1.6 million addition in 2006
represents costs related to the closing of the Secaucus distribution center,
primarily to return the building to its original condition, which was recorded
as a selling, general and administrative expense in the wholesale better apparel
segment.
The $6.5 million reversal in 2005
includes a $1.2 million adjustment related to the closing of a Maxwell facility
and a $5.0 million adjustment related to the closing of a Kasper facility, both
of which were recorded as reductions of goodwill, and a $0.3 million reduction
related to the final settlement of the remaining lease for a previously-closed
North Carolina distribution facility, which was recorded as a reduction of
selling, general and administrative expenses in the wholesale better apparel
segment.
The $17.4 million addition for
2004 represents a $15.9 million accrual for the closing of certain Kasper and
Maxwell facilities, which was recorded as an increase to goodwill, and a $1.7
million lease termination payment related to the prior closing of a North
Carolina distribution facility offset by a $0.2 million reduction in accruals
related to the prior closing of a Canadian facility, both of which were recorded
as SG&A expenses in the wholesale better apparel segment.
The details of the denim
restructuring accruals are as follows:
(In millions)
|
One-time
termination
benefits
|
Contract
termination
costs
|
Other
associated
costs
|
Total
denim
restructuring
|
Balance, January 1, 2005 |
$ -
|
$ -
|
$ -
|
$ -
|
Additions |
5.3
|
2.6
|
1.1
|
9.0
|
Payments and reductions |
(4.9)
|
(1.0)
|
(0.6)
|
(6.5)
|
|
|
|
|
|
Balance, December 31, 2005 |
0.4
|
1.6
|
0.5
|
2.5
|
Reversals |
(0.2)
|
(0.3)
|
(0.2)
|
(0.7)
|
Payments and reductions |
(0.2)
|
(1.3)
|
(0.3)
|
(1.8)
|
|
|
|
|
|
Balance, December 31,
2006 |
$ -
|
$ -
|
$ -
|
$ -
|
|
|
|
|
|
During 2006 and 2005,
respectively, $0.2 million and $4.9 million of the termination benefits accrual
were utilized (relating to costs for 18 and 3,098 employees, respectively).
The details of the manufacturing
restructuring accruals are as follows:
(In millions)
|
|
One-time
termination
benefits
|
Other
associated
costs
|
Total
denim
restructuring
|
Balance, January 1, 2006 |
|
$ -
|
$ -
|
$ -
|
Additions |
|
6.1
|
0.8
|
6.9
|
Payments and reductions |
|
(3.3)
|
(0.2)
|
(3.5)
|
|
|
|
|
|
Balance, December 31,
2006 |
|
$ 2.8
|
$ 0.6
|
$ 3.4
|
|
|
|
|
|
The $3.4 million accrued at
December 31, 2006 represents $2.8 million of one-time termination benefits for
an estimated 99 employees and $0.6 million of legal fees and related costs.
During 2006, $3.3 million of the termination benefits reserve was utilized
(relating to partial or full severance for 1,703 employees).
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 will be charged to operations in the period in which they
occur.
- 61 -
SALE OF POLO JEANS COMPANY BUSINESS
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 trademark in the United States, Canada and Mexico
pursuant to license and design service agreements with Polo, which were to
expire on December 31, 2006. 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 trademark in the United States, Canada and Mexico pursuant to
license and design service agreements with Polo. The Ralph License was scheduled
to end on December 31, 2003.
During the course of the
discussions concerning the Ralph License, Polo asserted that the expiration of
the Ralph License would cause the Lauren License agreements to end on December
31, 2003, instead of December 31, 2006. We believed that this was 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 alleged that Polo breached the Lauren
License agreements by claiming that the license ends at the end of 2003. The
complaint also alleged that Ms. Nemerov breached the confidentiality and
non-compete provisions of her employment agreement with us. Additionally, Polo
was alleged to have induced Ms. Nemerov to breach her employment agreement and
Ms. Nemerov was 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.
These matters were resolved by
settlement dated January 22, 2006, which closed on February 3, 2006. In
connection with this settlement, we entered into a Stock Purchase Agreement with
Polo and certain of its subsidiaries with respect to the sale to Polo of all
outstanding stock of Sun. We received gross proceeds of $355.0 million in
connection with the sale and the settlement. Sun's assets and liabilities on
the closing date primarily related to the Polo Jeans Company business,
which Sun operated under long-term license and design agreements entered into
with Polo in 1995. We retained distribution and product development facilities
in El Paso, Texas, along with certain working capital items, including accounts
receivable and accounts payable. In addition, as part of the agreements, we
provided certain support services to Polo (including manufacturing, distribution
and information technology) until January 2007 and we will continue to provide
certain financial and administrative functions until March 2007. Service revenue
related to these agreements recognized in the statement of operations is based
on negotiated monthly amounts according to the terms of the agreements.
We recorded a pre-tax loss of
approximately $145.1 million after allocating $356.7 million of goodwill to the
business sold and a pre-tax gain of $100.0 million related to the litigation
settlement. Approximately $3.7 million in state and local taxes have been
accrued related to the litigation settlement, resulting in a combined after tax
loss of approximately $48.8 million. The combined loss created federal and state
capital loss carryforwards that we do not expect to be realizable and, as a
result, we increased our deferred tax valuation allowance to offset the deferred
tax benefit recorded as a result of the combined loss.
Long-lived assets included in the
sale include $2.0 million of net property, plant and equipment and $5.5 million
of unamortized long-term prepaid marketing expenses. Net sales for the Polo
Jeans Company business, which are reported under the wholesale better
apparel segment, were $24.6 million, $303.5 million and $336.5 million for 2006,
2005 and 2004, respectively.
- 62 -
PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as
follows:
December 31,
|
2006
|
2005
|
Useful
lives
(years)
|
(In millions) |
|
|
|
|
|
|
|
Land and
buildings |
$ 81.2
|
$ 95.0
|
5 - 40 |
Leasehold
improvements |
347.5
|
268.6
|
1 - 39 |
Machinery, equipment and software |
320.1
|
294.4
|
3 - 20 |
Furniture and
fixtures |
109.6
|
95.3
|
3 - 8 |
Construction in progress |
37.7
|
31.0
|
- |
|
|
|
|
|
896.1
|
784.3
|
|
Less: accumulated depreciation and amortization |
511.3
|
472.2
|
|
|
|
|
|
|
$ 384.8
|
$ 312.1
|
|
|
|
|
|
Depreciation and amortization
expense relating to property, plant and equipment (including capitalized leases)
was $83.8 million, $81.2 million and $64.0 million in 2006, 2005 and 2004,
respectively. At December 31, 2006, we had outstanding commitments of
approximately $97.3 million relating primarily to the construction or remodeling
of retail store locations (net of $19.0 million expected to be recovered through
landlord construction allowances) and the design and implementation of new
computer software systems. During 2006, we capitalized approximately $0.5
million of interest as part of the cost of major capital projects.
Included in property, plant and
equipment are the following capitalized leases:
December 31,
|
2006
|
2005
|
Useful
lives
(years)
|
(In millions) |
|
|
|
|
|
|
|
Buildings |
$ 45.9
|
$ 58.8
|
15 - 20 |
Machinery and equipment |
10.5
|
12.3
|
4 - 5 |
|
|
|
|
|
56.4
|
71.1
|
|
Less: accumulated amortization |
22.0
|
29.7
|
|
|
|
|
|
|
$ 34.4
|
$ 41.4
|
|
|
|
|
|
INVENTORIES
Inventories are summarized as follows:
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Raw materials |
$ 10.4
|
$ 16.6
|
Work in process |
10.1
|
17.7
|
Finished goods |
615.8
|
615.7
|
|
|
|
|
$ 636.3
|
$ 650.0
|
|
|
|
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of
the purchase price and related costs over the value assigned to net tangible and
identifiable intangible assets of businesses acquired and accounted for under
the purchase method. Accounting rules require that we test at least annually for
possible goodwill impairment. We perform our test in the fourth quarter of each
year using a discounted cash flow analysis that requires that certain
assumptions and estimates be made regarding industry economic factors and future
profitability. We
- 63 -
test for impairment at the operating segment level. As a result of the 2006
impairment analysis, we determined that the goodwill balance existing in our
wholesale moderate apparel segment was impaired as a result of continuing
decreases in projected revenues and profitability with respect to our Norton
McNaughton, l.e.i. and certain other moderate brands as well as
changes in business strategy with respect to our Norton McNaughton brand.
Accordingly, we recorded an impairment charge of $441.2 million. No other
indication of goodwill impairment was identified.
The changes in the carrying amount
of goodwill for 2005 and 2006, by segment and in total, are as follows:
(In millions)
|
Wholesale
Better
Apparel
|
Wholesale
Moderate
Apparel
|
Wholesale
Footwear &
Accessories
|
Retail
|
Total
|
Balance, January 1, 2005 |
$ 400.1
|
$ 519.2
|
$ 808.8
|
$ 396.9
|
$ 2,125.0
|
Reclassification of Barneys intangible assets and unfavorable leases,
net of tax |
-
|
-
|
-
|
(29.3)
|
(29.3)
|
Net adjustments to purchase price of prior acquisitions |
(3.3)
|
-
|
4.5
|
0.4
|
1.6
|
|
|
|
|
|
|
Balance, December 31, 2005 |
396.8
|
519.2
|
813.3
|
368.0
|
2,097.3
|
Sale of Polo Jeans Company business |
(356.7)
|
-
|
-
|
-
|
(356.7)
|
Impairment |
-
|
(441.2)
|
-
|
-
|
(441.2)
|
Net adjustments to purchase price of prior acquisitions |
-
|
-
|
(0.1)
|
-
|
(0.1)
|
|
|
|
|
|
|
Balance, December 31,
2006 |
$ 40.1
|
$ 78.0
|
$ 813.2
|
$ 368.0
|
$ 1,299.3
|
|
|
|
|
|
|
We also perform our annual
impairment test for trademarks during the fourth fiscal quarter of the year. As
a result of continuing decreases in projected revenues for our Norton
McNaughton brand, our Albert Nipon better apparel brand, our Westies
and Sam & Libby footwear brands and our Richelieu costume
jewelry brand, we recorded trademark impairment charges of $50.2 million in
2006. As a result of similar continuing decreases in projected accessory
revenues in one of our costume jewelry brands, we recorded a trademark
impairment charge of $0.2 million in 2004. All trademark impairment charges are
reported in the licensing, other and eliminations segment.
The components of other intangible
assets are as follows:
December 31,
|
|
2006
|
|
2005
|
(In millions)
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Amortized intangible assets |
|
|
|
|
|
|
License
agreements |
|
$ 64.4
|
$ 41.3
|
|
$ 64.4
|
$ 37.7
|
Acquired favorable
leases |
|
20.8
|
3.7
|
|
20.8
|
1.9
|
Acquired credit
cardholder relationships |
|
1.2
|
0.7
|
|
1.2
|
0.4
|
Acquired customer database |
|
0.2
|
0.1
|
|
0.2
|
0.1
|
|
|
|
|
|
|
|
|
|
86.6
|
45.8
|
|
86.6
|
40.1
|
Unamortized trademarks |
|
730.8
|
-
|
|
781.0
|
-
|
|
|
|
|
|
|
|
|
|
$
817.4
|
$ 45.8
|
|
$ 867.6
|
$ 40.1
|
|
|
|
|
|
|
|
Amortization expense for
intangible assets subject to amortization was $5.7 million, $8.0 million and
$32.6 million for 2006, 2005 and 2004, respectively. Amortization expense for
intangible assets subject to amortization for each of the years in the five-year
period ending December 31, 2011 is estimated to be $4.4 million in 2007, $4.3
million in 2008, $3.8 million in 2009, $3.4 million in 2010 and $3.3 million in
2011.
- 64 -
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, 2006 and 2005, 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,
|
2006
|
2005
|
(In millions) |
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
|
|
|
|
Long-term debt, including current portion |
$ 752.8
|
$ 694.3
|
$ 977.5
|
$ 913.2
|
Foreign currency exchange contracts, net
asset (liability) |
2.3
|
2.3
|
(1.9)
|
(1.9)
|
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.
We are exposed to market risk
related to changes in foreign currency exchange rates. We have assets and
liabilities denominated in certain foreign currencies and purchase products from
foreign suppliers who require payment in funds other than the U.S. Dollar. At
December 31, 2006, we had outstanding foreign exchange contracts to exchange
Canadian Dollars for a total of US $27.3 million at a weighted-average exchange
rate of 1.1109 through December 2007, US $40.0 million for Euros at a
weighted-average exchange rate of 1.2854 through January 2008 and US $0.75
million for British Pounds at a weighted-average exchange rate of 1.8520 through
September 2007.
We recorded amortization of net
gains resulting from the termination of interest rate swaps and locks of $2.3
million, $6.4 million and $7.8 million during 2006, 2005 and 2004, respectively,
as a reduction of interest expense. We reclassified $0.6 million, $1.8 million
and $0.9 million of net losses from foreign currency exchange contracts to cost
of sales in 2006, 2005 and 2004, respectively. There has been no material
ineffectiveness related to our foreign currency exchange contracts as the
instruments are designed to be highly effective in offsetting losses and gains
transactions being hedged. An estimated $2.3 million of existing pre-tax net
gains from currency exchange contracts reported in accumulated other
comprehensive income as of December 31, 2006 will be reclassified into cost of
sales in the next 12 months.
CREDIT FACILITIES
At December 31, 2006, we had
credit agreements with several lending institutions to borrow an aggregate
principal amount of up to $1.75 billion under Senior Credit Facilities. These
facilities, of which the entire amount is available for letters of credit or
cash borrowings, provide for a $1.0 billion five-year revolving credit facility
that expires in June 2009 and a $750.0 million five-year revolving credit
facility that expires in June 2010. At December 31, 2006, $355.7 million was
outstanding under the credit facility that expires in June 2009
- 65 -
(comprised of $100.0 million in cash borrowings and $255.7 million in
outstanding letters of credit) and no amounts were outstanding under the credit
facility that expires in June 2010. 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.
At December 31, 2006, we also had
a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million
of letters of credit were outstanding.
The weighted-average interest rate
for outstanding cash borrowings under our credit facilities was 6.0% and 6.33%
at December 31, 2006 and 2005, respectively.
LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
7.875% Senior Notes due 2006, net of unamortized discount of
$0.1 |
$ - |
$ 224.9 |
9% Senior Secured Notes due 2008, net of
unamortized discount of $0.2 and $0.4 |
3.5 |
3.4 |
4.250% Senior Notes due
2009, net of unamortized discount of $0.1 and $0.2 |
249.9 |
249.8 |
5.125% Senior Notes due 2014, net of
unamortized discount of $0.2 and $0.2 |
249.8 |
249.8 |
6.125% Senior Notes due
2034, net of
unamortized discount of $0.4 and $0.4 |
249.6 |
249.6 |
|
|
|
|
752.8
|
977.5
|
Less: current portion |
-
|
224.9
|
|
|
|
|
$ 752.8
|
$ 752.6
|
|
|
|
Long-term debt maturities for each
of the next five years are $3.8 million in 2008 and $250.0 million in 2009. All
of our notes contain certain covenants, including, among others, restrictions on
liens, sale-leaseback transactions and additional secured debt, and pay interest
semiannually. The weighted-average interest rate of our long-term debt was 5.2%
and 5.8% at December 31, 2006 and 2005, respectively.
On August 15, 2005, we redeemed at
maturity all our 8.375% Senior Notes due 2005 for a total payment of $129.6
million. On June 15, 2006, we redeemed at maturity all our outstanding 7.875%
Senior Notes due 2006 for a total payment of $225.0 million.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is comprised of the
following:
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Foreign currency
translation adjustments |
$
3.9 |
$
3.2 |
Minimum pension liability adjustments |
(11.2) |
(10.1) |
Unrealized gains on
hedge contracts |
1.4 |
0.4 |
|
|
|
|
$ (5.9)
|
$ (6.5)
|
|
|
|
- 66 -
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.
We use foreign currency forward
contracts for the specific purpose of hedging the exposure to variability in
forecasted cash flows associated primarily with inventory purchases. These
instruments are designated as cash flow hedges as the principal terms of the
forward exchange contracts are the same as the underlying forecasted foreign
currency cash flows. Therefore, changes in the fair value of the forward
contracts should be highly effective in offsetting changes in the expected
foreign currency cash flows, and accordingly, changes in the fair value of
forward exchange contracts are recorded in accumulated other comprehensive
income, net of related tax effects, with the corresponding asset or liability
recorded in the balance sheet. Amounts recorded in accumulated other
comprehensive income are reflected in current-period earnings when the hedged
transaction affects earnings.
The following summarizes, by major
currency, the U.S. Dollar equivalent amount of our foreign currency forward
exchange contracts.
December 31,
|
|
2006
|
|
2005
|
(In millions)
|
|
Notional
Amount
|
Fair Value -
Asset
|
|
Notional
Amount
|
Fair Value -
(Liability)
|
|
|
|
|
|
|
|
Canadian Dollar - U.S. Dollar |
|
$ 27.3
|
$ 1.2
|
|
$ 11.0
|
$ (0.2)
|
U.S. Dollar - Euro |
|
40.0
|
1.0
|
|
37.5
|
(1.6)
|
U.S. Dollar - British
Pound |
|
0.7
|
0.1
|
|
1.5
|
(0.1)
|
|
|
|
|
|
|
|
|
|
$ 68.0
|
$
2.3
|
|
$ 50.0
|
$ (1.9)
|
|
|
|
|
|
|
|
During 2006, no material amounts
were reclassified from other comprehensive income to earnings and there was no
material ineffectiveness related to our cash flow hedges. If foreign currency
exchange rates or interest rates do not change from their December 31, 2006
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.
OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Warehouses, office facilities and equipment |
$ 39.9
|
$ 40.1
|
Less: current portion |
4.1
|
2.9
|
|
|
|
Obligations under capital leases - noncurrent |
$ 35.8
|
$ 37.2
|
|
|
|
We 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.
- 67 -
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 two to six-year leases at an aggregate annualized rental of $2.0 million.
The equipment has been capitalized at its fair market value of $6.8 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, 2006:
Year Ending December 31, |
|
(In millions) |
|
|
|
2007 |
$ 6.6
|
2008 |
6.8
|
2009 |
5.2
|
2010 |
4.9
|
2011 |
4.9
|
Later years |
31.1
|
|
|
Total minimum lease payments |
59.5
|
Less: amount representing interest |
19.6
|
|
|
Present value of net minimum lease payments |
$ 39.9
|
|
|
COMMON STOCK
The Board of Directors has
authorized several programs to repurchase our common stock from time to time in
open market transactions totaling $1.4 billion. As of December 31, 2006, 49.8
million shares had been acquired at a cost of $1.4 billion and there were no
amounts remaining under any uncompleted programs. On February 13, 2007, our
Board of Directors authorized an additional $300 million for future stock
repurchases.
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.
(b) ROYALTIES. We have an
exclusive license to produce and sell women's footwear under the Dockers
Women trademark in the United States (including its territories and
possessions) pursuant to an agreement with Levi Strauss & Co. which expires
in December 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 $0.7
million in each of 2007 and 2008.
We have an 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, 2008. 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 $0.6 million in each of 2007 and 2008.
- 68 -
(c) LEASES. Total rent expense
charged to operations for 2006, 2005 and 2004 was as follows.
Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
Minimum rent |
$ 164.1
|
$ 155.1
|
$ 127.2
|
Contingent rent |
1.3
|
0.9
|
1.9
|
Less: sublease rent |
(6.2)
|
(5.8)
|
(6.8)
|
|
|
|
|
|
$ 159.2
|
$ 150.2
|
$ 122.3
|
|
|
|
|
The following is a schedule of future minimum rental payments required
under operating leases:
Year Ending December 31, |
|
(In millions) |
|
|
|
2007 |
$ 155.0
|
2008 |
141.1
|
2009 |
131.4
|
2010 |
119.8
|
2011 |
106.8
|
Later years |
446.7
|
|
|
|
$ 1,100.8
|
|
|
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 $31.8 million.
INCOME TAXES
The following summarizes the
(benefit) provision for income taxes:
Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
Current: |
|
|
|
Federal |
$ 71.6
|
$ 87.4
|
$ 103.0
|
State and local |
22.3
|
12.0
|
16.5
|
Foreign |
6.5
|
8.8
|
8.8
|
|
|
|
|
|
100.4
|
108.2
|
128.3
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
(128.7)
|
35.8
|
48.6
|
State and local
|
(22.9)
|
6.6
|
4.3
|
Foreign
|
(1.2)
|
0.4
|
(0.1)
|
|
|
|
|
|
(152.8)
|
42.8
|
52.8
|
|
|
|
|
(Benefit) provision for income taxes |
$ (52.4)
|
$ 151.0
|
$ 181.1
|
|
|
|
|
The total income tax
(benefit) provision was recorded as follows:
Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
Included in (loss) income before cumulative effect of change in
accounting principle |
$ (53.5)
|
$ 151.0
|
$ 181.1
|
Included in cumulative effect of change in
accounting for share-based payments |
1.1
|
-
|
-
|
|
|
|
|
|
$ (52.4)
|
$ 151.0
|
$ 181.1
|
|
|
|
|
- 69 -
The domestic and foreign
components of income (loss) before (benefit) provision for income taxes are as
follows:
Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
Included in income (loss) before
cumulative effect of change in accounting principle |
|
|
|
United States |
$(205.4)
|
$ 413.1
|
$ 457.1
|
Foreign |
5.9
|
12.2
|
25.8
|
|
|
|
|
|
(199.5)
|
425.3
|
482.9
|
|
|
|
|
Included in cumulative effect of change in
accounting for share-based payments |
|
|
|
United States |
3.1
|
-
|
-
|
Foreign |
-
|
-
|
-
|
|
|
|
|
|
3.1
|
-
|
-
|
|
|
|
|
Income (loss) before (benefit) provision
for income taxes |
|
|
|
United States |
(202.3)
|
413.1
|
457.1
|
Foreign |
5.9
|
12.2
|
25.8
|
|
|
|
|
|
$(196.4)
|
$ 425.3
|
$ 482.9
|
|
|
|
|
The (benefit) 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,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
(Benefit) provision for Federal income taxes at the statutory rate |
$(68.8)
|
$ 148.9
|
$ 169.0
|
State and local income taxes, net of federal benefit |
(4.9)
|
12.9
|
13.6
|
Foreign income tax
difference |
(3.7)
|
(5.8)
|
0.1
|
Goodwill impairment |
17.1
|
-
|
-
|
Capital loss on sale of
subsidiary |
(96.4)
|
-
|
-
|
Reversal of prior years federal, state and
foreign income tax
audit accruals |
(8.6)
|
(5.7)
|
-
|
Valuation allowances |
112.4
|
0.7
|
-
|
Other items, net |
0.5
|
-
|
(1.6)
|
|
|
|
|
(Benefit) provision for income taxes |
$(52.4)
|
$ 151.0
|
$ 181.1
|
|
|
|
|
We have not provided for U.S.
Federal and foreign withholding taxes on $34.2 million of foreign subsidiaries'
undistributed earnings as of December 31, 2006. Such earnings are intended to be
reinvested indefinitely.
- 70 -
The following is a
summary of the significant components of our deferred tax assets and
liabilities:
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Deferred tax assets (liabilities): |
|
|
Nondeductible accruals and allowances |
$ 84.3
|
$ 79.2
|
Depreciation |
27.3
|
15.9
|
Intangible asset valuation and amortization |
(115.0)
|
(253.6)
|
Loss and credit carryforwards |
118.3
|
23.6
|
Amortization of stock-based compensation |
15.4
|
12.5
|
Deferred compensation |
4.6
|
4.0
|
Inventory valuation |
(5.5)
|
(6.1)
|
Inventory overhead |
5.7
|
3.9
|
Pension |
6.8
|
6.1
|
Other (net) |
(1.9)
|
0.3
|
Valuation allowances |
(112.4)
|
(9.2)
|
|
|
|
Net deferred tax asset
(liability) |
$ 27.6
|
$ (123.4)
|
|
|
|
Included in:
|
|
|
Current assets
|
$ 70.0
|
$ 52.5
|
Noncurrent liabilities
|
(42.4)
|
(175.9)
|
|
|
|
Net deferred tax asset
(liability) |
$ 27.6
|
$ (123.4)
|
|
|
|
As of December 31, 2006, we had
state net operating loss carryforwards of $100.2 million which expire through
2026. We also had capital loss carryforwards of $303.1 million which expire in
2011, and state tax credit carryforwards of $8.0 million, which expire through
2026.
During the fourth fiscal quarter
of 2006, favorable resolutions to the 2001 to 2003 federal and various state
income tax audits resulted in the reversal of $8.6 million of tax accruals.
We have determined that the $303.1
million of capital loss carryforwards expiring in 2011, $12.8 million of state
net operating loss carryforwards expiring in 2007 and $6.2 million of state
credit carryforwards expiring through 2026 may not be utilized; therefore, we
established valuation allowances of $107.7 million, $0.7 million (net of federal
tax benefit) and $4.0 million (net of federal tax benefit) in 2006 related to
the capital loss, state net operating loss and credit carryforwards,
respectively.
During the fourth fiscal quarter
of 2003, we determined that the $22.6 million of capital loss carryforwards from
2001 may not be utilized; therefore, we established a valuation allowance of
$8.5 million as of December 31, 2003. In 2006, the valuation allowance was
reversed as the 2001 capital loss carryforward was unable to be utilized.
During the fourth fiscal quarter
of 2005, we determined that $12.3 million of state net operating loss
carryforwards from 2001 may not be utilized; therefore, we established a
valuation allowance of $0.7 million (net of federal tax benefit). In 2006, the
valuation allowance was reversed as the 2001 state net operating loss
carryforward was unable to be utilized.
- 71 -
EARNINGS (LOSS) PER SHARE
Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions except per share amounts) |
|
|
|
|
|
|
|
Basic |
|
|
|
Net (loss) income |
$(144.1)
|
$ 274.3
|
$ 301.8
|
Weighted average common shares outstanding |
110.6
|
118.0
|
123.6
|
|
|
|
|
Basic
(loss) earnings
per share |
$(1.30)
|
$ 2.33
|
$ 2.44
|
|
|
|
|
Diluted |
|
|
|
Net (loss) income |
$(144.1)
|
$ 274.3
|
$ 301.8
|
Add: interest expense associated with convertible
notes, net of tax benefit
|
-
|
-
|
0.8
|
|
|
|
|
(Loss) income available to common shareholders |
$(144.1)
|
$ 274.3
|
$ 302.6
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
110.6 |
118.0 |
123.6 |
Effect of dilutive securities:
|
|
|
|
Employee stock options |
-
|
1.2
|
2.2
|
Assumed conversion of
convertible notes
|
-
|
-
|
0.7
|
|
|
|
|
Weighted average common shares and
share equivalents outstanding
|
110.6
|
119.2
|
126.5
|
|
|
|
|
Diluted
(loss) earnings per share |
$(1.30)
|
$ 2.30
|
$ 2.39
|
|
|
|
|
STATEMENT OF CASH FLOWS
Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
|
Detail of acquisitions: |
|
|
|
|
Fair value of assets acquired |
$ -
|
$ 1.1
|
$ 985.7
|
|
Liabilities assumed |
-
|
3.0
|
(279.3)
|
|
|
|
|
|
|
Cash paid for acquisitions |
-
|
4.1
|
706.4
|
|
Cash acquired in acquisitions |
-
|
-
|
(133.1)
|
|
|
|
|
|
|
Net cash paid for acquisitions |
$ -
|
$ 4.1
|
$ 573.3
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
Interest
|
$ 61.2 |
$ 86.0 |
$ 50.3 |
|
Income taxes |
135.4 |
78.6 |
98.5 |
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
Equipment acquired through capital lease financing
|
3.9 |
0.5 |
0.3 |
|
Tax benefits related to stock-based
employee compensation
|
3.4 |
1.3 |
5.0 |
|
Restricted stock issued to employees |
20.1 |
24.9 |
4.5 |
GAIN ON SALE OF STOCK IN RUBICON RETAIL LIMITED
On October 12, 2006, Mosaic
Fashions hf ("Mosaic") completed its acquisition of United Kingdom
retailer Rubicon Retail Limited ("Rubicon"). As a result of our sale
of Nine West's United Kingdom operations in January 2001, we obtained warrants
to purchase stock in Rubicon. These warrants were exercisable only upon a change
of control of Rubicon (including a public offering of Rubicon's shares) and,
therefore, had no
- 72 -
ascertainable value prior to Mosaic's acquisition of Rubicon. Upon this
acquisition, we exercised these outstanding warrants and Mosaic purchased the
resulting shares. As a result, we recorded a gain of $17.4 million (net of
associated costs).
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
and restricted stock grants at December 31, 2006 and 2005 totaled 4.1 million
and 4.3 million, respectively. Our policy is to issue new shares upon the
exercise of options and to offset these new shares by repurchasing shares in the
open market. We expect to repurchase approximately nine to ten million shares in
2007.
Total compensation cost recorded
for stock-based employee compensation awards (including awards to non-employee
directors) was $17.9 million, $18.3 million and $16.5 million for 2006, 2005 and
2004, respectively. Total compensation cost related to unvested awards not yet
recognized at December 31, 2006 was $21.6 million, which is expected to be
amortized over a weighted-average period of approximately 19.5 months. Cash
received from option exercises for 2006, 2005 and 2004 was $32.4 million, $13.4
million and $35.5 million, respectively. The total tax benefit recognized for
the tax deductions from option exercises and the vesting of restricted stock for
2006, 2005 and 2004 totaled $20.5 million, $13.9 million and $22.2 million,
respectively.
The following tables summarize
information about stock option transactions and related information (options in
millions):
|
2006
|
|
2005
|
|
2004
|
|
Options
|
Weighted
Average
Exercise
Price
|
|
Options
|
Weighted
Average
Exercise
Price
|
|
Options
|
Weighted
Average
Exercise
Price
|
Outstanding, January 1 |
11.5 |
$30.91 |
|
11.5 |
$30.19 |
|
12.6 |
$29.64 |
Granted |
-
|
-
|
|
1.0
|
$35.95
|
|
0.8
|
$34.15
|
Exercised |
(1.4)
|
$24.01
|
|
(0.6)
|
$22.88
|
|
(1.4)
|
$25.54
|
Cancelled |
(0.5) |
$35.44 |
|
(0.4) |
$35.07 |
|
(0.5) |
$35.26 |
Expired |
(0.2) |
$39.75 |
|
- |
- |
|
- |
- |
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
9.4
|
$31.43
|
|
11.5
|
$30.91
|
|
11.5
|
$30.19
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31 |
8.5
|
$30.96
|
|
9.6
|
$30.07
|
|
8.7
|
$29.31
|
|
|
|
|
|
|
|
|
|
|
2006
|
2005
|
2004
|
Weighted-average
contractual term (in years) of:
|
|
|
|
Options outstanding at
end of year
|
4.2 |
5.0 |
5.8 |
Options exercisable at end of year
|
4.1 |
4.8 |
5.6 |
|
|
|
|
Intrinsic value (in
millions) of:
|
|
|
|
Options outstanding at
end of year
|
$32.1 |
$27.8 |
$77.4 |
Options exercisable at end of year
|
31.8 |
27.6 |
66.7 |
Options exercised
during the year
|
10.4 |
4.2 |
14.7 |
|
|
|
|
Fair value (in millions) of options vested during the year
|
9.2 |
22.0 |
28.5 |
- 73 -
The fair value of each option
award is estimated on the date of the grant using the Black-Scholes-Merton
option pricing model. Expected volatilities are based on historical volatility
of our stock price and implied volatilities from publicly traded options on our
stock. We use historical data to estimate an option's expected life; the
expected life for grants to senior management-level employees and other
employees are considered separately for valuation purposes. The risk-free
interest rate input is based on the U.S. Treasury yield curve in effect at the
time of the grant. Compensation cost, net of projected forfeitures, is
recognized on a straight-line basis over the period between the grant and
vesting dates, with compensation cost for grants with a graded vesting schedule
recognized on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in substance,
multiple awards.
The following table summarizes the
weighted average fair value of options granted and the related weighted average
assumptions used in the Black-Scholes-Merton option pricing model for grants
issued in 2005 and 2004. We did not grant any options in 2006.
Year Ended December 31,
|
2005
|
2004
|
Weighted-average fair value of options at grant date:
|
|
|
Exercise price less than market price
|
$8.00 |
$32.93 |
Exercise price equal to market price
|
$10.43 |
$10.77 |
|
|
|
Assumptions:
|
|
|
Dividends yield
|
1.02% |
1.00% |
Expected volatility
|
30.3% |
40.9% |
Risk-free interest rate
|
4.46% |
2.87% |
Expected life (years)
|
3.9 |
4.0 |
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 (which is generally zero). The compensation cost, net of
projected forfeitures, is recognized over the period between the issue date and
the date any restrictions lapse, with compensation cost for grants with a graded
vesting schedule recognized on a straight-line basis over the requisite service
period for each separately vesting portion of the award as if the award was, in
substance, multiple awards. The restrictions do not affect voting and dividend
rights.
The following tables summarize
information about unvested restricted stock transactions (shares in thousands):
|
2006
|
|
2005
|
|
2004
|
|
Shares
|
Weighted
Average
Fair
Value
|
|
Shares
|
Weighted
Average
Fair
Value
|
|
Shares
|
Weighted
Average
Fair
Value
|
Nonvested, January 1 |
1,092 |
$34.34 |
|
738 |
$32.67 |
|
871 |
$31.79 |
Granted |
635
|
$31.72
|
|
705
|
$35.35
|
|
126
|
$35.53
|
Vested |
(315)
|
$31.78
|
|
(297)
|
$31.92
|
|
(208)
|
$30.47
|
Forfeited |
(86) |
$35.69 |
|
(54) |
$34.80 |
|
(51) |
$35.23 |
|
|
|
|
|
|
|
|
|
Nonvested, December 31 |
1,326
|
$33.61
|
|
1,092
|
$34.34
|
|
738
|
$32.67
|
|
|
|
|
|
|
|
|
|
|
2006
|
2005
|
2004
|
Fair value (in millions)
of shares vested during the year
|
$
10.0 |
$
9.5 |
$
6.3 |
- 74 -
During 2006, 634,927 shares of
restricted common stock were issued to 131 employees under the 1999 Stock
Incentive Plan. The restrictions generally lapse on the third anniversary of
issue. The value of this stock based on quoted market values was $20.1 million.
During 2005, 705,250 shares of
restricted common stock were issued to 200 employees under the 1999 Stock
Incentive Plan. The restrictions generally lapse on the third anniversary of
issue. The value of this stock based on quoted market values was $24.9 million.
During 2004, 126,250 shares of
restricted common stock were issued to 91 employees 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. The
value of this stock based on quoted market values was $4.5 million.
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 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.
All employee contributions into the Jones Plan are 100% vested.
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.
In connection with the
acquisitions of Gloria Vanderbilt, Kasper and Barneys, we assumed additional
plans in which certain employees participate.
Gloria Vanderbilt and Kasper
maintained defined contribution 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 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.
All employee contributions into these plans were 100% vested. We matched a
portion of the participant's contributions subject to maximums set by the
Department of the Treasury. The Gloria Vanderbilt and Kasper plans were merged
into the Jones Plan on January 26, 2004 and September 1, 2004, respectively.
Barneys maintained the Barney's
Inc. Retirement Savings Plan under Section 401(a) of the Code. Barneys employees
meeting certain requirements were eligible to participate in the plan. Under the
plan, participants could elect to have up to 13% 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. The plan required Barneys to match 50% of employee
contributions up to 6% of a participant's eligible compensation and to make a
non-discretionary contribution of 1.5% of a participant's eligible
compensation. In addition, Barneys could make a discretionary contribution of up
to 4% of a participant's eligible compensation. The Barneys plan was merged
into the Jones Plan on December 31, 2005.
Pursuant to certain collective
bargaining agreements, Barneys is also required to make periodic pension
contributions to union-sponsored multi-employer plans which provide for defined
benefits for certain union members employed by Barneys.
- 75 -
We also maintain the Jones Apparel
Group, Inc. Deferred Compensation Plan, a non-qualified defined contribution
plan for certain management and other highly compensated employees (a
"Rabbi Trust"). Under the plan, participants may elect have up to 90%
of their salary and annual bonus deferred and deposited with a qualified
trustee, who in turn invests the money in a variety of investment vehicles as
selected by each participant. The assets of the Rabbi Trust, consisting of
primarily debt and equity securities, are recorded at current market prices. The
trust assets are available to satisfy claims of our general creditors in the
event of bankruptcy. The trust's assets, included in prepaid expenses and
other current assets, and the corresponding deferred compensation liability,
included in accrued employee compensation and benefits, were $11.9 million and
$10.4 million at December 31, 2006 and 2005, respectively. This plan has no
effect on our results of operations.
We contributed approximately $9.1
million, $10.3 million and $8.1 million to our defined contribution plans during
2006, 2005 and 2004, respectively.
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 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 $7.0 million to our defined benefit plans in
2007. The measurement date for all plans is December 31. During 2005, we
terminated a Canadian benefit plan, purchasing joint and survivor annuities for
the remaining participants.
Obligations and Funded Status
Year Ended December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Change in
benefit obligation |
|
|
Benefit
obligation, beginning of year |
$ 39.6
|
$ 40.4
|
Interest
cost |
2.5
|
2.3
|
Actuarial loss |
4.2
|
0.4
|
Termination of Canadian benefit plan |
-
|
(0.9)
|
Settlements |
1.0
|
1.2
|
Benefits paid |
(4.0)
|
(3.8)
|
|
|
|
Benefit obligation, end of year |
43.3
|
39.6
|
|
|
|
Change in
plan assets |
|
|
Fair value
of plan assets, beginning of year |
25.2
|
25.6
|
Actual return on plan assets |
1.9
|
1.0
|
Employer
contribution |
4.3
|
3.0
|
Annuity
purchases related to termination of Canadian benefit plan |
-
|
(0.6)
|
Benefits
paid |
(4.0)
|
(3.8)
|
|
|
|
Fair value
of plan assets, end of year |
27.4
|
25.2
|
|
|
|
Funded status at end of year |
$(15.9)
|
(14.4)
|
|
|
|
Unrecognized
net loss |
N/A
|
16.2
|
|
|
|
Net amount
recognized |
N/A
|
$ 1.8
|
|
|
|
- 76 -
Amounts Recognized on the Balance Sheet
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Noncurrent liabilities |
$
15.9
|
N/A
|
Accrued benefit liability |
N/A
|
$ (14.4)
|
Accumulated other comprehensive
loss |
N/A
|
16.2
|
|
|
|
Net amount recognized |
N/A
|
$ 1.8
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Net loss |
$
18.2
|
$
16.2
|
Information for Pension Plans with an Accumulated Benefit Obligation in
Excess of Plan Assets
December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Projected benefit
obligation |
$ 43.3
|
$ 39.6
|
Accumulated benefit obligation |
43.3
|
39.6
|
Fair value of plan
assets |
27.4
|
25.2
|
Components of Net Periodic Benefit Cost and Other Amounts Recognized in
Other Comprehensive Income or Loss:
Year Ended December 31,
|
2006
|
2005
|
(In millions) |
|
|
|
|
|
Net Periodic
Benefit Cost: |
|
|
Interest cost |
$
2.5
|
$
2.3
|
Expected
return on plan assets |
(1.9)
|
(2.0)
|
Settlement costs |
1.8
|
1.9
|
Amortization
of net loss |
1.3
|
1.1
|
|
|
|
Total net periodic benefit cost |
3.7
|
3.3
|
|
|
|
Other
Changes in Plan Assets and Benefit Obligations |
|
|
Recognized in
Other Comprehensive Income or Loss: |
|
|
Net loss |
2.0
|
-
|
|
|
|
Total
recognized in net periodic benefit cost and other comprehensive income |
$
5.7
|
$
3.3
|
|
|
|
The estimated net loss that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost in 2007 is $1.0 million.
- 77 -
Assumptions
|
2006
|
2005
|
Weighted-average
assumptions used to determine: |
|
|
Benefit
obligations at December 31 |
|
|
Discount rate |
6.1%
|
5.6%
|
Expected long-term return on plan assets |
7.9%
|
7.9%
|
Net periodic benefit cost for year ended December 31 |
|
|
Discount rate |
5.6%
|
5.8%
|
Expected long-term return on plan assets |
7.9%
|
7.9%
|
Estimated Future Benefit Payments
Year Ending December 31, |
|
(In millions) |
|
|
|
2007 |
$ 1.7
|
2008 |
1.7
|
2009 |
1.9
|
2010 |
1.8
|
2011 |
1.9
|
2012 through 2016 |
12.0
|
|
|
|
$ 21.0
|
|
|
Plan Assets
The weighted-average asset allocations at December 31,
2006 and 2005 by asset category are as follows:
December 31,
|
2006
|
2005
|
Equity
securities |
65%
|
63%
|
Debt securities |
27%
|
32%
|
Other |
8%
|
5%
|
|
|
|
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, 2006, the weighted-average target
allocation percentages for fund investments were 44% fixed income securities,
40% U. S. equity securities, 4% real estate and 12% 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.
- 78 -
Other Plans
We also maintain the Nine West
Group Inc. Supplemental Executive Retirement Plan, the Nine West Group Inc.
Postretirement Executive Life Plan and the Nine West Group, Inc. Postretirement
Medical Plan, none of which have a material effect on our results of operations
or on our financial position. These plans, which are unfunded, were underfunded
by $3.0 million at December 31, 2006. Of this amount, $0.3 million is reported
under accrued expenses and other current liabilities and $2.7 million is
reported under other noncurrent liabilities.
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. HCL has the option to acquire our remaining
ownership interest at the end of five years through the issuance of HCL equity
shares.
We also have a 50% ownership
interest in a joint venture with Sutton to operate retail locations in
Australia. We have unconditionally guaranteed up to $7.0 million of borrowings
under the joint venture's uncommitted credit facility and up to $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, 2006, the
outstanding balance subject to these guarantees was approximately $0.8 million.
The results of our joint ventures
are reported under the equity method of accounting. The amount of consolidated
retained earnings represented by the undistributed earnings of our joint
ventures as of December 31, 2006 was $14.0 million.
BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
We identify operating segments
based on, among other things, differences in products sold and the way our
management organizes the components of our business for purposes of allocating
resources and assessing performance. 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
"licensing, other and eliminations." We define segment profit as
operating income before net interest expense, goodwill impairment charges,
equity in earnings of unconsolidated affiliates and income taxes. Summarized
below are our revenues, income and total assets by reportable segments.
- 79 -
(In millions)
|
Wholesale
Better
Apparel
|
Wholesale
Moderate
Apparel
|
Wholesale
Footwear &
Accessories
|
Retail
|
Licensing,
Other &
Eliminations
|
Consolidated
|
For the year ended December 31, 2006 |
|
|
|
|
|
|
Revenues from external customers |
$ 1,127.4
|
$ 1,142.0
|
$ 941.1
|
$ 1,477.9
|
$ 54.4
|
$ 4,742.8
|
|
Intersegment revenues |
145.4
|
3.8
|
53.9
|
-
|
(203.1)
|
-
|
|
|
|
|
|
|
|
|
|
Total revenues |
1,272.8
|
1,145.8
|
995.0
|
1,477.9
|
(148.7)
|
4,742.8
|
|
|
|
|
|
|
|
|
|
Segment income |
$
143.1
|
$
71.8
|
$
96.8
|
$
95.0
|
$ (87.1)
|
319.6 |
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
|
|
|
(54.7)
|
|
Loss on sale of
Polo Jeans Company business |
|
|
|
(45.1)
|
|
Gain
on sale of stock in Rubicon Retail Limited |
|
|
|
17.4
|
|
Goodwill
impairment |
|
|
|
(441.2)
|
|
Equity in earnings of unconsolidated affiliates |
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
Loss
before benefit for income taxes |
|
|
|
$(199.5)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
$
17.0 |
$
11.2 |
$
12.7 |
$
32.2 |
$
32.1 |
$
105.2 |
For the year ended December 31, 2005 |
|
|
|
|
|
|
Revenues from external customers |
$ 1,438.2
|
$ 1,265.2
|
$ 978.6
|
$ 1,332.6
|
$ 59.6
|
$ 5,074.2
|
|
Intersegment revenues |
144.5
|
4.6
|
41.5
|
-
|
(190.6)
|
-
|
|
|
|
|
|
|
|
|
|
Total revenues |
1,582.7
|
1,269.8
|
1,020.1
|
1,332.6
|
(131.0)
|
5,074.2
|
|
|
|
|
|
|
|
|
|
Segment income |
$
166.5
|
$
89.1
|
$
141.8
|
$
122.6
|
$ (22.8)
|
497.2 |
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
|
|
|
(75.1)
|
|
Equity in earnings of unconsolidated affiliates |
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
$ 425.3
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
$ 14.9 |
$ 16.4 |
$ 10.3 |
$ 30.9 |
$ 30.3 |
$ 102.8 |
For the year ended December 31, 2004 |
|
|
|
|
|
|
Revenues from external customers |
$ 1,493.2
|
$ 1,315.3
|
$ 1,002.4
|
$ 780.3
|
$ 58.5
|
$ 4,649.7
|
|
Intersegment revenues |
146.9
|
13.0
|
58.3
|
-
|
(218.2)
|
-
|
|
|
|
|
|
|
|
|
|
Total revenues |
1,640.1
|
1,328.3
|
1,060.7
|
780.3
|
(159.7)
|
4,649.7
|
|
|
|
|
|
|
|
|
|
Segment income |
$
160.1
|
$
142.6
|
$
164.2
|
$
78.4
|
$ (16.9)
|
528.4 |
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
|
|
|
(49.3)
|
|
Equity in earnings of unconsolidated affiliates |
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
|
$ 482.9
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
$ 24.1 |
$ 18.0 |
$ 22.7 |
$ 11.8 |
$ 31.1 |
$ 107.7 |
Total assets |
|
|
|
|
|
|
|
December 31,
2006 |
$
1,307.1 |
$
877.3 |
$
1,133.6 |
$
822.5 |
$
(353.5) |
$
3,787.0 |
|
December 31, 2005 |
1,895.1 |
1,107.2 |
1,084.7 |
790.2 |
(299.4) |
4,577.8 |
|
December 31,
2004 |
1,891.0 |
1,071.4 |
1,210.8 |
742.2 |
(364.6) |
4,550.8 |
Revenues from external customers and long-lived assets
excluding deferred taxes related to operations in the United States and foreign
countries are as follows:
On
or for the Year Ended December 31,
|
2006
|
2005
|
2004
|
(In millions) |
|
|
|
|
|
|
|
Revenues from external customers: |
|
|
|
United States |
$ 4,456.8
|
$ 4,804.3
|
$ 4,448.8
|
Foreign countries |
286.0
|
269.9
|
200.9
|
|
|
|
|
|
$ 4,742.8
|
$ 5,074.2
|
$ 4,649.7
|
|
|
|
|
Long-lived assets: |
|
|
|
United States |
$ 2,504.4
|
$ 3,265.4
|
$ 3,217.6
|
Foreign countries |
4.0
|
28.1
|
37.0
|
|
|
|
|
|
$ 2,508.4
|
$ 3,293.5
|
$ 3,254.6
|
|
|
|
|
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").
- 80 -
Jones and Jones Holdings function
as either co-issuers or co-obligors with respect to the outstanding debt
securities of Jones USA and 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 operations 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.
Condensed Consolidating Balance Sheets
(In millions)
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
Issuers
|
Others
|
Eliminations
|
Cons-
olidated
|
|
Issuers
|
Others
|
Eliminations
|
Cons-
olidated
|
ASSETS |
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS: |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ 35.0 |
$ 36.5 |
$ - |
$ 71.5 |
|
$ 20.3 |
$ 14.6 |
$ - |
$ 34.9 |
|
Accounts
receivable - net |
157.2 |
254.4 |
- |
411.6 |
|
178.8 |
279.6 |
- |
458.4 |
|
Inventories |
313.6 |
329.5 |
(6.8) |
636.3 |
|
282.4 |
374.6 |
(7.0) |
650.0 |
|
Prepaid
and refundable income taxes |
0.5 |
6.7 |
(7.2) |
- |
|
1.5 |
6.5 |
(8.0) |
- |
|
Deferred taxes |
24.3 |
45.9 |
(0.2) |
70.0 |
|
17.7 |
35.6 |
(0.8) |
52.5 |
|
Prepaid
expenses and other current assets |
38.9 |
50.3 |
- |
89.2 |
|
45.7 |
42.8 |
- |
88.5 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS |
569.5 |
723.3 |
(14.2) |
1,278.6 |
|
546.4 |
753.7 |
(15.8) |
1,284.3 |
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment - net |
154.6 |
230.2 |
- |
384.8 |
|
133.6 |
178.5 |
- |
312.1 |
Due from
affiliates |
51.8 |
857.8 |
(909.6) |
- |
|
63.5 |
624.8 |
(688.3) |
- |
Goodwill |
1,456.2 |
442.6 |
(599.5) |
1,299.3 |
|
1,784.3 |
1,240.5 |
(927.5) |
2,097.3 |
Other
intangibles - net |
160.6 |
611.0 |
- |
771.6 |
|
166.8 |
660.7 |
- |
827.5 |
Investments
in subsidiaries |
2,275.5 |
- |
(2,275.5) |
- |
|
2,205.2 |
- |
(2,205.2) |
- |
Other assets |
28.9 |
25.8 |
(2.0) |
52.7 |
|
30.7 |
27.4 |
(1.5) |
56.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4,697.1 |
$ 2,890.7 |
$ (3,800.8) |
$ 3,787.0 |
|
$ 4,930.5 |
$ 3,485.6 |
$ (3,838.3) |
$ 4,577.8 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
$ 100.0 |
$ - |
$ - |
$ 100.0 |
|
$ 129.5 |
$ - |
$ - |
$ 129.5 |
|
Current
portion of long-term debt and capital lease obligations |
1.5 |
2.6 |
- |
4.1 |
|
226.6 |
1.2 |
- |
227.8 |
|
Accounts payable |
154.3 |
161.2 |
- |
315.5 |
|
118.4 |
138.1 |
- |
256.5 |
|
Income
taxes payable |
16.1 |
27.1 |
(30.5) |
12.7 |
|
54.9 |
17.8 |
(18.5) |
54.2 |
|
Deferred taxes |
- |
0.2 |
(0.2) |
- |
|
0.9 |
- |
(0.9) |
- |
|
Accrued
expenses and other current liabilities |
97.8 |
85.3 |
- |
183.1 |
|
78.5 |
90.0 |
- |
168.5 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES |
369.7 |
276.4 |
(30.7) |
615.4 |
|
608.8 |
247.1 |
(19.4) |
836.5 |
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
749.3 |
3.5 |
- |
752.8 |
|
749.2 |
3.4 |
- |
752.6 |
|
Obligations
under capital leases |
11.1 |
24.7 |
- |
35.8 |
|
12.5 |
24.7 |
- |
37.2 |
|
Deferred taxes |
11.0 |
20.0 |
11.4 |
42.4 |
|
10.7 |
158.0 |
7.2 |
175.9 |
|
Due to
affiliates |
857.8 |
51.8 |
(909.6) |
- |
|
624.8 |
63.5 |
(688.3) |
- |
|
Other |
51.1 |
77.9 |
- |
129.0 |
|
38.0 |
71.2 |
- |
109.2 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
NONCURRENT LIABILITIES |
1,680.3 |
177.9 |
(898.2) |
960.0 |
|
1,435.2 |
320.8 |
(681.1) |
1,074.9 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES |
2,050.0 |
454.3 |
(928.9) |
1,575.4 |
|
2,044.0 |
567.9 |
(700.5) |
1,911.4 |
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY: |
|
|
|
|
|
|
|
|
|
|
Common
stock and additional paid-in capital |
1,321.5 |
2,189.6 |
(2,189.6) |
1,321.5 |
|
1,270.9 |
2,558.6 |
(2,558.6) |
1,270.9 |
|
Retained earnings |
2,661.9 |
244.7 |
(680.2) |
2,226.4 |
|
2,646.3 |
360.0 |
(580.1) |
2,426.2 |
|
Accumulated
other comprehensive (loss) income |
(5.9) |
2.1 |
(2.1) |
(5.9) |
|
(6.5) |
(0.9) |
0.9 |
(6.5) |
|
Treasury stock |
(1,330.4) |
- |
- |
(1,330.4) |
|
(1,024.2) |
- |
- |
(1,024.2) |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY |
2,647.1 |
2,436.4 |
(2,871.9) |
2,211.6 |
|
2,886.5 |
2,917.7 |
(3,137.8) |
2,666.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 4,697.1 |
$ 2,890.7 |
$ (3,800.8) |
$ 3,787.0 |
|
$ 4,930.5 |
$ 3,485.6 |
$ (3,838.3) |
$ 4,577.8 |
|
|
|
|
|
|
|
|
|
|
|
- 81 -
Condensed Consolidating Statements of Operations
(In millions)
|
Year Ended
December 31, 2006
|
|
Issuers
|
Others
|
Elim-
inations
|
Cons-
olidated
|
Net sales |
$
2,357.2 |
$
2,381.4 |
$
(68.7) |
$
4,669.9 |
Licensing
income (net) |
0.1 |
51.7 |
- |
51.8 |
Service
and other revenue |
2.8 |
18.3 |
- |
21.1 |
|
|
|
|
|
Total
revenues |
2,360.1 |
2,451.4 |
(68.7) |
4,742.8 |
Cost of goods
sold |
1,461.7 |
1,622.6 |
(53.0) |
3,031.3 |
|
|
|
|
|
Gross profit |
898.4 |
828.8 |
(15.7) |
1,711.5 |
Selling,
general and administrative expenses |
865.4 |
489.4 |
(13.1) |
1,341.7 |
Loss on sale of
Polo Jeans Company business |
22.8 |
22.3 |
- |
45.1 |
Trademark
impairments |
6.2 |
44.0 |
- |
50.2 |
Goodwill
impairment |
- |
441.2 |
- |
441.2 |
|
|
|
|
|
Operating
income (loss) |
4.0 |
(168.1) |
(2.6) |
(166.7) |
Net interest
expense and financing costs |
64.9 |
(10.2) |
- |
54.7 |
Gain on sale of
stock in Rubicon Retail Limited |
17.4 |
- |
- |
17.4 |
Equity
in earnings of unconsolidated affiliates |
0.5 |
4.5 |
(0.5) |
4.5 |
|
|
|
|
|
Loss
before benefit for income taxes and equity in earnings of subsidiaries |
(43.0) |
(153.4) |
(3.1) |
(199.5) |
Benefit for
income taxes |
(5.2) |
(39.2) |
(9.1) |
(53.5) |
Equity
in earnings of subsidiaries |
107.2 |
- |
(107.2) |
- |
|
|
|
|
|
Income (loss)
before cumulative effect of change in accounting principle |
69.4 |
(114.2) |
(101.2) |
(146.0) |
Cumulative
effect of change in accounting for share-based payments, net of tax |
1.9 |
- |
- |
1.9 |
|
|
|
|
|
Net
income (loss) |
$
71.3 |
$(114.2) |
$
(101.2) |
$(144.1) |
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
Issuers
|
Others
|
Eliminations
|
Consolidated
|
Net sales |
$
2,380.9 |
$
2,708.5 |
$
(74.8) |
$
5,014.6 |
Licensing
income (net) |
0.1 |
59.5 |
- |
59.6 |
|
|
|
|
|
Total
revenues |
2,381.0 |
2,768.0 |
(74.8) |
5,074.2 |
Cost of goods
sold |
1,464.0 |
1,835.0 |
(55.2) |
3,243.8 |
|
|
|
|
|
Gross profit |
917.0 |
933.0 |
(19.6) |
1,830.4 |
Selling,
general and administrative expenses |
797.3 |
551.7 |
(15.8) |
1,333.2 |
|
|
|
|
|
Operating
income |
119.7 |
381.3 |
(3.8) |
497.2 |
Net interest
expense (income) and financing costs |
80.6 |
(5.5) |
- |
75.1 |
Equity
in earnings of unconsolidated affiliates |
0.5 |
1.8 |
0.9 |
3.2 |
|
|
|
|
|
Income
before provision for income taxes and equity in earnings of subsidiaries |
39.6 |
388.6 |
(2.9) |
425.3 |
Provision for
income taxes |
18.2 |
134.3 |
(1.5) |
151.0 |
Equity
in earnings of subsidiaries |
253.0 |
- |
(253.0) |
- |
|
|
|
|
|
Net
income |
$
274.4 |
$
254.3 |
$
(254.4) |
$
274.3 |
|
|
|
|
|
|
Year Ended
December 31, 2004
|
|
Issuers
|
Others
|
Elim-
inations
|
Cons-
olidated
|
Net sales |
$
2,302.2 |
$
2,379.8 |
$
(89.4) |
$
4,592.6 |
Licensing
income (net) |
0.1
|
57.0 |
- |
57.1 |
|
|
|
|
|
Total
revenues |
2,302.3 |
2,436.8 |
(89.4) |
4,649.7 |
Cost of goods
sold |
1,363.6 |
1,648.5 |
(67.7) |
2,944.4 |
|
|
|
|
|
Gross profit |
938.7 |
788.3 |
(21.7) |
1,705.3 |
Selling,
general and administrative expenses |
793.7 |
396.9 |
(13.9) |
1,176.7 |
Trademark
impairment |
- |
0.2 |
- |
0.2 |
|
|
|
|
|
Operating
income |
145.0 |
391.2 |
(7.8) |
528.4 |
Net interest
expense (income) and financing costs |
54.6 |
(5.3) |
- |
49.3 |
Equity
in earnings of unconsolidated affiliates |
1.8 |
3.0 |
(1.0) |
3.8 |
|
|
|
|
|
Income
before provision for income taxes and equity in earnings of subsidiaries |
92.2 |
399.5 |
(8.8) |
482.9 |
Provision for
income taxes |
44.3 |
137.7 |
(0.9) |
181.1 |
Equity
in earnings of subsidiaries |
246.3 |
- |
(246.3) |
- |
|
|
|
|
|
Net
income |
$
294.2 |
$
261.8 |
$
(254.2) |
$
301.8 |
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
(In millions)
|
|
Year
Ended December 31, 2006
|
|
|
Issuers
|
Others
|
Eliminations
|
Consolidated
|
Net cash
provided by operating activities |
$
297.5 |
$
127.4 |
$
(1.0) |
$
423.9 |
|
|
|
|
|
|
Cash flows from
investing activities |
|
|
|
|
|
Net
proceeds from sale of Polo Jeans Company business |
344.1 |
6.5 |
- |
350.6 |
|
Capital expenditures |
(62.1) |
(108.4) |
- |
(170.5) |
|
Net cash
received from sale of stock in Rubicon Retail Limited |
17.4 |
- |
- |
17.4 |
|
Proceeds from sales of
property, plant and equipment |
0.1 |
- |
- |
0.1 |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
299.5 |
(101.9) |
- |
197.6 |
|
|
|
|
|
|
Cash
flows from financing activities |
|
|
|
|
|
Repurchase of Senior Notes |
(225.0) |
- |
- |
(225.0) |
|
Net repayment under credit facilities |
(29.5) |
- |
- |
(29.5) |
|
Purchases of treasury stock |
(306.2) |
- |
- |
(306.2) |
|
Proceeds
from exercise of employee stock options |
32.4 |
- |
- |
32.4 |
|
Dividends paid |
(55.7) |
(1.0) |
1.0 |
(55.7) |
|
Excess tax benefits from
share-based payment arrangements |
3.4 |
- |
- |
3.4 |
|
Other
items |
(1.7) |
(2.5) |
- |
(4.2) |
|
|
|
|
|
|
|
Net cash
used in financing activities |
(582.3) |
(3.5) |
1.0 |
(584.8) |
|
|
|
|
|
|
Effect
of exchange rates on cash |
- |
(0.1) |
- |
(0.1) |
|
|
|
|
|
|
Net
increase cash and cash equivalents |
14.7 |
21.9 |
- |
36.6 |
Cash and cash
equivalents, beginning |
20.3 |
14.6 |
- |
34.9 |
|
|
|
|
|
Cash and cash
equivalents, ending |
$ 35.0 |
$ 36.5 |
$
- |
$ 71.5 |
|
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
|
Issuers
|
Others
|
Eliminations
|
Consolidated
|
Net cash
provided by operating activities |
$
394.3 |
$
43.8 |
$
(10.7) |
$
427.4 |
|
|
|
|
|
|
Cash flows from
investing activities |
|
|
|
|
|
Payments
for acquisitions, net of cash acquired |
(4.1) |
- |
- |
(4.1) |
|
Capital expenditures |
(35.7) |
(51.8) |
- |
(87.5) |
|
Acquisition
of intangibles |
- |
(0.1) |
- |
(0.1) |
|
Proceeds from sales of
property, plant and equipment |
0.3 |
3.3 |
- |
3.6 |
|
Other |
- |
(0.5) |
- |
(0.5) |
|
|
|
|
|
|
|
Net cash
used in investing activities |
(39.5) |
(49.1) |
- |
(88.6) |
|
|
|
|
|
|
Cash
flows from financing activities |
|
|
|
|
|
Repurchase of Senior Notes |
(129.6) |
- |
- |
(129.6) |
|
Net
borrowing under credit facilities |
60.3 |
- |
- |
60.3 |
|
Purchases of treasury stock |
(235.2) |
- |
- |
(235.2) |
|
Proceeds
from exercise of employee stock options |
13.4 |
- |
- |
13.4 |
|
Dividends paid |
(52.3) |
(10.7) |
10.7 |
(52.3) |
|
Other
items |
(3.4) |
(1.6) |
- |
(5.0) |
|
|
|
|
|
|
|
Net cash
used in financing activities |
(346.8) |
(12.3) |
10.7 |
(348.4) |
|
|
|
|
|
|
Effect
of exchange rates on cash |
- |
(0.5) |
- |
(0.5) |
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents |
8.0 |
(18.1) |
- |
(10.1) |
Cash and cash
equivalents, beginning |
12.3 |
32.7 |
- |
45.0 |
|
|
|
|
|
Cash and cash
equivalents, ending |
$
20.3 |
$
14.6 |
$
- |
$
34.9 |
|
|
|
|
|
|
|
Year
Ended December 31, 2004
|
|
|
Issuers
|
Others
|
Eliminations
|
Consolidated
|
Net cash
provided by operating activities |
$
336.8 |
$
125.1 |
$
- |
$
461.9 |
|
|
|
|
|
|
Cash flows from
investing activities |
|
|
|
|
|
Payments
for acquisitions, net of cash acquired |
(573.3) |
- |
- |
(573.3) |
|
Capital expenditures |
(28.8) |
(27.8) |
- |
(56.6) |
|
Acquisition
of intangibles |
(1.2) |
- |
- |
(1.2) |
|
Proceeds from sales of
property, plant and equipment |
0.1 |
1.6 |
- |
1.7 |
|
|
|
|
|
|
|
Net cash used in investing
activities |
(603.2) |
(26.2) |
- |
(629.4) |
|
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
|
|
Issuance
of Senior Notes, net |
743.5 |
- |
- |
743.5 |
|
Repurchase of Senior Notes |
(621.6) |
(112.7) |
- |
(734.3) |
|
Net
borrowing under credit facilities |
69.2 |
- |
- |
69.2 |
|
Purchases of treasury stock |
(201.5) |
- |
- |
(201.5) |
|
Proceeds
from exercise of employee stock options |
35.5 |
- |
- |
35.5 |
|
Dividends paid |
(44.8) |
- |
- |
(44.8) |
|
Other
items |
(3.6) |
(2.1) |
- |
(5.7) |
|
|
|
|
|
|
|
Net cash
used in financing activities |
(23.3) |
(114.8) |
- |
(138.1) |
|
|
|
|
|
|
Effect
of exchange rates on cash |
- |
0.6 |
- |
0.6 |
|
|
|
|
|
|
Net
decrease in cash and cash equivalents |
(289.7) |
(15.3) |
- |
(305.0) |
Cash and cash
equivalents, beginning |
302.0 |
48.0 |
- |
350.0 |
|
|
|
|
|
Cash and cash
equivalents, ending |
$
12.3 |
$
32.7 |
$
- |
$
45.0 |
|
|
|
|
|
- 82 -
UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Unaudited interim consolidated financial information for the
two years ended December 31, 2006 is summarized as follows:
|
(In millions except per share data)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
2006 |
|
|
|
|
|
Net sales |
$ 1,200.2
|
$ 1,059.7
|
$ 1,221.6
|
$ 1,188.4
|
|
Total revenues |
1,215.3
|
1,074.1
|
1,241.0
|
1,212.5
|
|
Gross profit |
450.3
|
406.4
|
446.0
|
408.9
|
|
Operating income (loss) |
85.6
|
69.8
|
111.9
|
(434.0)
|
|
Income (loss) before cumulative effect of
change in accounting principle |
23.9
|
36.6
|
63.0
|
(269.5)
|
|
Net income (loss) |
25.8
|
36.6
|
63.0
|
(269.5)
|
|
Basic earnings (loss) per share before
cumulative effect of change in accounting principle |
$0.21
|
$0.33
|
$0.57
|
$(2.51)
|
|
Diluted earnings (loss)
per share before cumulative effect of change in accounting principle |
$0.22
|
$0.32
|
$0.56
|
$(2.51)
|
|
Basic earnings (loss) per share |
$0.23
|
$0.33
|
$0.57
|
$(2.51)
|
|
Diluted earnings (loss) per share |
$0.22
|
$0.32
|
$0.56
|
$(2.51)
|
|
Dividends declared per share |
$0.12
|
$0.12
|
$0.12
|
$0.14
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
Net sales |
$ 1,335.1
|
$ 1,165.4
|
$ 1,312.6
|
$ 1,201.6
|
|
Total revenues |
1,349.3
|
1,176.4
|
1,327.5
|
1,221.0
|
|
Gross profit |
498.7
|
434.5
|
461.4
|
435.7
|
|
Operating income |
158.3
|
105.4
|
139.6
|
93.8
|
|
Net income |
87.0
|
54.8
|
76.8
|
55.7
|
|
Basic earnings per share |
$0.72
|
$0.46
|
$0.66
|
$0.48
|
|
Diluted earnings per share |
$0.71
|
$0.46
|
$0.65
|
$0.48
|
|
Dividends declared per share |
$0.10
|
$0.10
|
$0.12
|
$0.12
|
Quarterly figures may not add to full year
due to rounding.
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
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 President and Chief Executive
Officer and our Chief 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.
- 83 -
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 our Internal Audit department and co-sourcing
partner Deloitte & Touche, LLP, 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 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 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.
We have begun the process of
implementing SAP, an enterprise resource planning ("ERP") system,
throughout Jones Apparel Group, Inc. and our consolidated subsidiaries. SAP will
integrate our operational and financial systems and expand the functionality of
our financial reporting processes. During the fourth fiscal quarter of 2006, the
Gloria Vanderbilt, Norton McNaughton and Miss Erika businesses
were converted to this system. We have adequately controlled the transition to
the new processes and controls, with no negative impact to our internal control
environment. We expect to roll out the implementation of this system to all
locations over a multi-year period. As the phased roll out occurs, we will
experience changes in internal control over financial reporting each quarter. We
expect this ERP system to further advance our control environment by automating
manual processes, improving management visibility and standardizing processes as
its full capabilities are utilized.
Except as noted above, there have
been no other 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.
Management's Annual Report on Internal Control Over Financial Reporting
Management's report on Internal
Control Over Financial reporting appears on page 45. Our independent registered
public accounting firm, BDO Seidman, LLP, has issued a report on our assessment
of our internal
- 84 -
control over financial reporting. The report on the audit of internal control
over financial reporting appears on page 46.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information about our
directors appearing in the Proxy Statement under the caption "Election of
Directors" is incorporated herein by reference.
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 Financial Officer,
Controller and other personnel performing similar functions. Both codes are
posted on our website, www.jny.com under the "Our Company - Corporate
Governance" caption. We intend to make all required disclosures 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.
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 - Board
Structure and Committee Composition" and "Corporate Governance - Board
Structure and Committee Composition - 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.
The balance of the information
required by this item is contained in the discussion entitled "Executive
Officers of the Registrant" in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the
Proxy Statement under the captions "Executive Compensation,"
"Corporate Governance - Compensation Committee Interlocks and Insider
Participation" and the information appearing in the Proxy Statement
relating to the compensation of directors under the caption "Corporate
Governance - 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, 2006.
- 85 -
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 |
9,194,772 |
$31.83 |
4,101,603 |
Equity compensation plans not approved by security holders |
218,865 |
$14.75 |
-- |
Total |
9,413,637 |
$31.43 |
4,101,603 |
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, 25,000 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. These
options vest in equal installments on each of the first five anniversary dates
of grant and expire ten years from 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 captions "Corporate Governance - Independence of
Directors," "Corporate Governance - Board Structure and Committee
Composition" and "Corporate Governance - Policy with Respect to
Related Person Transactions" is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing
in the Proxy Statement under the caption "Fees Paid to Independent
Registered Public Accountants" is hereby incorporated by reference.
- 86 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(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
Registered Public Accounting Firm |
|
|
Consolidated Balance Sheets - December 31,
2006 and 2005 |
|
|
Consolidated Statements of
Operations - Years ended December 31, 2006, 2005 and 2004 |
|
|
Consolidated Statements of Stockholders'
Equity - Years ended December 31, 2006, 2005 and 2004 |
|
|
Consolidated Statements of Cash Flows - Years ended
December 31, 2006, 2005 and 2004 |
|
|
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
registered public accounting firm thereon, listed in the Index to Financial Statement
Schedules attached hereto. |
|
3. |
The exhibits listed in the Exhibit Index attached hereto. |
- 87 -
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.
February 26, 2007 |
|
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, 2006 (the "Form 10-K")
constitutes and appoints Peter Boneparth, Wesley R. Card and Efthimios P. Sotos
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) |
February 26, 2007 |
/s/ Sidney Kimmel
Sidney Kimmel |
Chairman and Director
|
February 26, 2007 |
/s/ Efthimios P. Sotos
Efthimios P. Sotos |
Chief Financial Officer
(Principal Financial Officer) |
February 26, 2007 |
/s/ Patrick M. Farrell
Patrick M. Farrell |
Executive Vice President and
Corporate Controller
(Principal Accounting Officer) |
February 26, 2007 |
/s/ Howard Gittis
Howard Gittis |
Director |
February 26, 2007 |
/s/ Anthony F. Scarpa
Anthony F. Scarpa |
Director |
February 26, 2007 |
/s/ Matthew H. Kamens
Matthew H. Kamens |
Director |
February 26, 2007 |
/s/ J. Robert Kerrey
J. Robert Kerrey |
Director |
February 26, 2007 |
/s/ Ann N. Reese
Ann N. Reese |
Director |
February 26, 2007 |
/s/ Gerald C. Crotty
Gerald C. Crotty |
Director |
February 26, 2007 |
/s/ Lowell W. Robinson
Lowell W. Robinson |
Director |
February 26, 2007 |
/s/ Allen I. Questrom
Allen I. Questrom |
Director |
February 26, 2007 |
/s/ Frits D. van Paasschen
Frits D. van Paasschen |
Director |
February 26, 2007 |
- 88 -
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm 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 Exhibit1
|
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). |
2.6 |
Agreement and Plan of Merger
dated as of June 18, 2004, among Jones Apparel Group, Inc., MSC
Acquisition Corp. and Maxwell Shoe Company Inc. (incorporated by reference
to Exhibit 99.D.3 of Amendment No. 16 to our Schedule TO dated June 21,
2004). |
2.7 |
Agreement and
Plan of Merger dated as of November 10, 2004 among Jones Apparel Group,
Inc., Flintstone Acquisition Corp. and Barneys New York, Inc.
(incorporated by reference to Exhibit 2 of our Schedule 13D dated November
10, 2004). |
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
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). |
- 89 -
Exhibit No.
|
Description of Exhibit
|
4.3 |
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). |
4.4 |
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 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). |
4.5 |
Indenture
dated as of November 22, 2004, among Jones Apparel Group, Inc., Jones
Apparel Group Holdings, Inc., Jones Apparel Group USA, Inc., Nine West
Footwear Corporation and Jones Retail Corporation, as Issuers and SunTrust
Bank, as Trustee, including Form of 4.250% Senior Notes due 2009, Form of
5.125% Senior Notes due 2014 and Form of 6.125% Senior Notes due 2034
(incorporated by reference to Exhibit 4.14 of our Annual Report on Form
10-K/A for the fiscal year ended December 31, 2004). |
4.6 |
Form of Exchange and Note
Registration Rights Agreement dated November 22, 2004 among Jones Apparel
Group, Inc., Jones Apparel Group Holdings, Inc., Jones Apparel Group USA,
Inc., Nine West Footwear Corporation and Jones Retail Corporation, and
Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as
Representatives of the Several Initial Purchasers listed in Schedule I
thereto, with respect to 4.250% Senior Notes due 2009, 5.125% Senior Notes
due 2014 and 6.125% Senior Notes due 2034 (incorporated by reference to
Exhibit 4.15 of our Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2004). |
4.7* |
First
Supplemental Indenture dated as of December 31, 2006, by and among Jones
Apparel Group, Inc., Jones Apparel Group Holdings, Inc., Jones Apparel
Group USA, Inc., Nine West Footwear Corporation, Jones Retail Corporation,
Kasper, Ltd., as Issuers, and U.S. Bank National Association (as successor
in interest to SunTrust Bank), as Trustee, relating to the 4.250% Senior
Notes Due 2009, 5.125% Senior Notes due 2014 and 6.125% Senior Notes due
2034. |
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 10.3 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2005).+ |
10.4 |
Form of
Agreement Evidencing Stock Option Awards Under the 1999 Stock Incentive
Plan (incorporated by reference to Exhibit 10.4 of our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2004).+ |
10.5 |
Form of Agreement Evidencing
Restricted Stock Awards Under the 1999 Stock Incentive Plan (incorporated
by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the
three months ended April 2, 2005).+ |
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/A for the nine months ended
September 27, 1998).# |
10.7 |
1Design 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 |
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).+
|
- 90 -
Exhibit No.
|
Description of Exhibit
|
10.9 |
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).+ |
10.10 |
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).+
|
10.11 |
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).+ |
10.12 |
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).+
|
10.13 |
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). |
10.14 |
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). |
10.15 |
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).+
|
10.16 |
Amendment dated February 28, 2003 to the Amended and Restated
Employment Agreement between Jones Apparel Group, Inc. and Wesley R. Card
(incorporated by reference to Exhibit 10.22 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2002).+
|
10.17 |
Amendment
dated February 28, 2003 to the Amended and Restated Employment Agreement
between Jones Apparel Group, Inc. and Peter Boneparth (incorporated by
reference to Exhibit 10.23 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002).+
|
10.18 |
Amendment dated February 28, 2003 to the Amended and Restated
Employment Agreement between Jones Apparel Group, Inc. and Ira M. Dansky
(incorporated by reference to Exhibit 10.24 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2002).+
|
10.19 |
Amendment
dated February 28, 2003 to the Employment Agreement between Jones Apparel
Group, Inc. and Rhonda Brown (incorporated by reference to Exhibit 10.25
of our Annual Report on Form 10-K for the fiscal year ended December 31,
2002).+ |
10.20 |
Amendment No. 2 dated March 8,
2006 to Amended and Restated Employment Agreement between Jones Apparel
Group, Inc. and Wesley R. Card (incorporated by reference to Exhibit 10.1
of our Current Report on Form 8-K dated March 8, 2006).+ |
10.21 |
Amended and
Restated Employment Agreement dated as of June 5, 2006 between Jones
Apparel Group, Inc. and Efthimios P. Sotos (incorporated by reference to
Exhibit 10.2 of our Current Report on Form 8-K dated May 31, 2006).+
|
10.22 |
Form of Deferred Compensation
Plan for Outside Directors (incorporated by reference to Exhibit 10.26 of
our Annual Report on Form 10-K for the fiscal year ended December 31,
2002).+ |
10.23 |
Form of
Agreement Evidencing Restricted Stock Awards for Outside Directors Under
the 1999 Stock Incentive Plan (incorporated by reference to Exhibit 10.1
of our Quarterly Report on Form 10-Q for the three months ended April 2,
2005).+
|
- 91 -
Exhibit No.
|
Description of Exhibit
|
10.24 |
Amended and
Restated Five-Year Credit Agreement dated as of June 15, 2004, by and
among Jones Apparel Group USA, Inc., the Additional Obligors referred to
therein, the Lenders referred to therein, Citigroup Global Markets 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., Barclays Bank PLC and Suntrust 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 3, 2004).
|
10.25 |
Amendment to the Amended and Restated Five-Year Credit
Agreement dated as of November 17, 2004 among Jones Apparel Group USA, Inc.,
the Additional Obligors referred to therein, the Lenders referred to therein
and Wachovia Bank, National Association as agent for the Lenders
(incorporated by reference to Exhibit 10.31 of our Annual Report on Form
10-K/A for the fiscal year ended December 31, 2004).
|
10.26 |
Amended and
Restated Five-Year Credit Agreement dated as of May 16, 2005, 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 Co-Lead Arrangers and Joint Bookrunners,
Wachovia Bank, National Association, as Administrative Agent, JPMorgan
Chase Bank and Citibank, N.A., as Syndication Agents, and Bank of America,
N.A., Barclays Bank PLC and Suntrust Bank as Documentation Agents
(incorporated by reference to Exhibit 10.26 of our Annual Report on Form
10-K for the fiscal year ended December 31, 2005).
|
10.27 |
Jones Apparel Group, Inc. Deferred Compensation Plan
(incorporated by reference to Exhibit 10.32 of our Annual Report on Form
10-K/A for the fiscal year ended December 31, 2004).+
|
10.28* |
Summary Sheet
of Compensation of Non-Management Directors of Jones Apparel Group, Inc.+
|
10.29 |
Jones Apparel Group, Inc. Severance Plan and Summary Plan
Description (incorporated by reference to Exhibit 10.1 of our Current Report
on Form 8-K dated May 31, 2006).+
|
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).
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____________________
1 Exhibits filed with Forms 10-K, 10-Q, 8-K or
Schedule 14A of Jones Apparel Group, Inc. were filed under SEC File No.
001-10746.
* 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.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Jones Apparel Group, Inc.
Bristol, Pennsylvania
The audits referred to in our report dated February 20, 2007 relating to the
consolidated financial statements of Jones Apparel Group, Inc. and Subsidiaries,
which is contained in Item 8 of this Form 10-K, included the audit of the
financial statement schedule listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 20, 2007
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SCHEDULE II
JONES APPAREL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(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:
2004 $10.9 $ (0.7) $ 2.1(1) $ 3.3(2) $ 9.0
2005 $ 9.0 $ 1.2 $ - $ 4.1(2) $ 6.1
2006 $ 6.1 $ 0.6 $ - $ 3.2(2) $ 3.5
Allowance for sales discounts
For the year ended December 31:
2004 $14.8 $125.2 $ - $123.9(3) $ 16.1
2005 $16.1 $114.4 $ - $115.9(3) $ 14.6
2006 $14.6 $107.6 $ - $110.9(3) $ 11.3
Allowance for sales returns
For the year ended December 31:
2004 $ 5.2 $ 27.2 $ 3.3 (4) $ 26.8(3) $ 8.9
2005 $ 8.9 $ 28.6 $ 0.2 (5) $ 28.0(3) $ 9.7
2006 $ 9.7 $ 30.3 $(0.5)(5) $ 28.0(3) $ 11.5
Allowance for co-op advertising
For the year ended December 31:
2004 $ 7.4 $ 48.1 $ 1.1 (6) $ 44.4(3) $ 12.2
2005 $12.2 $ 34.8 $ - $ 36.2(3) $ 10.8
2006 $10.8 $ 23.2 $(0.2)(5) $ 23.8(3) $ 10.0
Deferred tax valuation allowance
For the year ended December 31:
2004 $ 8.5 $ - $ - $ - $ 8.5
2005 $ 8.5 $ 0.7 $ - $ - $ 9.2
2006 $ 9.2 $112.4 $ - $ 9.2(7) $112.4
(1) Addition due to the acquisition of Maxwell on July 8, 2004 and Barneys on December 20, 2004.
(2) Doubtful accounts written off against accounts receivable.
(3) Deductions taken by customers written off against accounts receivable.
(4) Addition due to the acquisition of Maxwell on July 8, 2004 and Barneys on December 20, 2004
and effects of foreign currency translation.
(5) Represents effects of foreign currency translation.
(6) Addition due to the acquisition of Maxwell on July 8, 2004.
(7) Deferred tax asset written off against the deferred tax valuation allowance.
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