SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
----------------------------
[ ] 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: 1-10689
--------
LIZ CLAIBORNE, INC.
-------------------------------------------------
(Exact name of registrant as specified in its
charter)
Delaware 13-2842791
- ----------------------------- ------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1441 Broadway, New York, New York 10018
- ------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(212) 354-4900
-------------------------------------------------
(Registrant's telephone number, including area
code)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The number of shares of Registrant's Common Stock, par value $1.00 per
share, outstanding at August 9, 2002 was 106,672,395.
2
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 29, 2002
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 29, 2002,
December 29, 2001 and June 30, 2001.............................................. 3
Condensed Consolidated Statements of Income for the Six and
Three Month Periods Ended June 29, 2002 and June 30, 2001........................ 4
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 29, 2002 and June 30, 2001.............................. 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 28
Item 4. Submission of Matters to Vote of Security Holders...................................... 29
Item 5. Other Information...................................................................... 30
Item 6. Exhibits and Reports on Form 8-K....................................................... 30
SIGNATURES ....................................................................................... 31
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
June 29, December 29, June 30,
2002 2001 2001
--------------- --------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 214,953 $ 127,635 $ 56,998
Marketable securities 48,338 32,993 7,095
Accounts receivable - trade, net 330,629 362,189 417,767
Inventories, net 436,101 487,923 529,688
Deferred income taxes 33,141 37,386 52,448
Other current assets 62,321 57,900 76,273
--------------- --------------- ---------------
Total current assets 1,125,483 1,106,026 1,140,269
--------------- --------------- ---------------
Property and Equipment - Net 365,011 352,001 340,100
Goodwill and Intangibles - Net 462,116 455,113 432,866
Other Assets 28,714 38,115 29,524
--------------- --------------- ---------------
Total Assets $ 1,981,324 $ 1,951,255 $ 1,942,759
=============== =============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt $ 4,953 $ -- $ 286,113
Accounts payable 200,090 236,906 229,916
Accrued expenses 218,061 199,772 166,718
Income taxes payable 1,039 10,636 9,085
--------------- --------------- ---------------
Total current liabilities 424,143 447,314 691,832
--------------- --------------- ---------------
Long-Term Debt 346,402 387,345 233,498
Other Non-Current Liabilities -- 15,000 20,292
Deferred Income Taxes 45,070 37,314 40,975
Commitments and Contingencies
Minority Interest 9,712 8,121 6,508
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- -- --
Common stock, $1 par value, authorized shares -
250,000,000, issued shares - 176,437,234 176,437 176,437 176,437
Capital in excess of par value 97,517 89,266 89,260
Retained earnings 2,155,398 2,077,540 1,973,455
Unearned compensation expense (14,827) (16,507) (15,923)
Accumulated other comprehensive loss (17,359) (5,346) (7,991)
--------------- --------------- ---------------
2,397,166 2,321,390 2,215,238
Common stock in treasury, at cost, 69,786,416,
71,212,310 and 71,318,008 shares (1,241,169) (1,265,229) (1,265,584)
--------------- --------------- ---------------
Total stockholders' equity 1,155,997 1,056,161 949,654
--------------- --------------- ---------------
Total Liabilities and Stockholders' Equity $ 1,981,324 $ 1,951,255 $ 1,942,759
=============== =============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Six Months Ended Three Months Ended
------------------------------ ------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net Sales $ 1,682,410 $ 1,553,685 $ 789,517 $ 727,035
Cost of goods sold 963,681 922,584 436,886 418,796
-------------- -------------- -------------- --------------
Gross Profit 718,729 631,101 352,631 308,239
Selling, general & administrative expenses 566,019 495,180 285,367 250,019
-------------- -------------- -------------- --------------
Operating Income 152,710 135,921 67,264 58,220
Other income (expense) - net (914) (2,286) (1,085) (1,335)
Interest expense - net (11,613) (11,812) (5,547) (6,156)
-------------- -------------- -------------- --------------
Income Before Provision for Income Taxes 140,183 121,823 60,632 50,729
Provision for income taxes 50,466 43,856 21,828 18,262
-------------- -------------- -------------- --------------
Net Income $ 89,717 $ 77,967 $ 38,804 $ 32,467
============== ============== ============== ==============
Net Income per Weighted Average Share, Basic $0.85 $0.75 $0.37 $0.31
Net Income per Weighted Average Share, Diluted $0.84 $0.74 $0.36 $0.31
Weighted Average Shares, Basic 105,248 103,737 105,648 104,232
Weighted Average Shares, Diluted 106,897 104,871 107,490 105,252
Dividends Paid per Common Share $0.11 $0.11 $0.06 $0.06
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Six Months Ended
----------------------------------
June 29, June 30,
2002 2001
--------------- ---------------
Cash Flows from Operating Activities:
Net income $ 89,717 $ 77,967
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 44,978 45,252
Deferred income taxes - net 6,493 6,652
Other - net 6,829 10,966
Change in current assets and liabilities:
Decrease (increase) in accounts receivable - trade 31,560 (88,264)
Decrease (increase) in inventories 51,822 (1,769)
(Increase) decrease in other current assets (4,084) 6,274
(Decrease) increase in accounts payable (36,817) 6,258
(Decrease) in accrued expenses (3,984) (41,666)
(Decrease) in income taxes payable (9,597) (828)
--------------- ---------------
Net cash provided by operating activities 176,917 20,842
--------------- ---------------
Cash Flows from Investing Activities:
Purchases of investment instruments (39) (37)
Purchases of property and equipment (44,158) (33,023)
Payments for acquisitions, net of cash acquired -- (245,294)
Payments for in-store merchandise shops (3,943) (12,708)
Other - net 31 4,138
--------------- ---------------
Net cash used in investing activities (48,109) (286,924)
--------------- ---------------
Cash Flows from Financing Activities:
Proceeds from short-term debt 4,953 286,113
Commercial paper - net (77,726) (36,674)
Proceeds from exercise of common stock options 27,162 38,151
Dividends paid (11,859) (11,548)
--------------- ---------------
Net cash (used in) provided by financing activities (57,470) 276,042
--------------- ---------------
Effect of Exchange Rate Changes on Cash 15,980 18
--------------- ---------------
Net Change in Cash and Cash Equivalents 87,318 9,978
Cash and Cash Equivalents at Beginning of Period 127,635 47,020
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 214,953 $ 56,998
=============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Liz Claiborne, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company") included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted from this report, as is permitted by such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K and the Company's Current Report on Form 8-K dated May 23, 2001, as
filed with the SEC on May 25, 2001 and amended on July 20, 2001. Results of
acquired companies are included in our operating results from the date of
acquisition, and, therefore, operating results on a period-to-period basis are
not comparable. Information presented as of December 29, 2001 is derived from
audited statements. Certain items previously reported in specific captions in
the accompanying financial statements have been reclassified to conform with the
current period's classifications.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
2. SUBSEQUENT EVENT
On July 9, 2002 the Company completed the purchase of 100 percent of the equity
interest of Mexx Canada, Inc., a privately held fashion apparel and accessories
company ("Mexx Canada"). Based in Montreal, Mexx Canada operates as a third
party distributor in Canada for the Company's Mexx business and, in 2001, had
sales of 83 million Canadian dollars (or approximately $54 million based on the
exchange rate in effect during that period). The total purchase price consisted
of an initial cash payment made at the closing date of $15.2 million, a second
payment at the end of the first quarter 2003 based on performance in 2002
(which, when combined with the initial cash payment, is intended to approximate
72% of the total valuation), currently expected to be an additional amount of
approximately $14 million, and a final payment payable at either party's option,
with respect to the year ended either 2004 or 2005 in the form of an earnout
designed to equal 28% of future implied equity value, which will be based on the
business's earnings and cash flow performance. Unaudited pro forma information
related to this acquisition is not included, as the impact of this transaction
is not material to the consolidated results of the Company.
3. ACQUISITIONS AND LICENSING COMMITMENTS
In June 2002, the Company consummated an exclusive license agreement with
Kellwood Company under which Kellwood was granted the license to design,
manufacture, market, sell and distribute men's dress shirts under the CLAIBORNE
label. The line will be produced by Kellwood's subsidiary, Smart Shirts Ltd., a
global manufacturer of men's shirts. Under the agreement, Kellwood is obligated
to pay a royalty equal to a percentage of net sales of the CLAIBORNE products.
The initial term of the license runs through December 31, 2005; the licensee has
an option to renew for two additional 3-year periods if certain sales thresholds
are met.
On May 23, 2001, the Company completed the purchase of 100 percent of the equity
interest of Mexx Group B.V. ("Mexx"), a privately held fashion apparel company
incorporated and existing under the laws of The Netherlands, for a purchase
price of approximately 295 million Euros (or $255.1 million based on the
exchange rate in effect on such date), in cash at closing (including the
assumption of debt), plus an earnout designed to equal 28% of future implied
equity value, payable at either party's option with respect to the year ended
2003, 2004 or 2005. Mexx designs and markets a wide range of merchandise for
women, men and children under the Mexx brand name. Mexx products are sold via
wholesale and retail formats in more than 40 countries in Europe, the Asia
Pacific region, Canada and the Middle East. The acquisition of Mexx, included in
operating results from the acquisition date, was accounted for using the
purchase method of accounting and, accordingly, the excess purchase price over
fair market value of the underlying net assets acquired of $199.7 million was
allocated to goodwill. The purchase price included
7
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
an adjustment for transaction fees associated with the acquisition and the
estimated costs associated with the closure of certain under-performing Mexx
retail stores as well as the elimination of certain other duplicate support
functions within the Mexx enterprise, which were decided prior to the
consummation of the transaction. The aggregate of the above items amounts to
$32.6 million. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer
being amortized as of December 30, 2001. The fair market value of assets
acquired was $179.2 million and liabilities assumed were $91.2 million.
The following unaudited pro forma information for 2001 assumes the Mexx
acquisition had occurred on December 31, 2000. The pro forma information, as
presented below, is not indicative of the results that would have been obtained
had the transaction occurred on December 31, 2000, nor is it indicative of the
Company's future results.
Six Months Ended Three Months Ended
------------------------------ ------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
(Dollars in thousands except per share data) Actual Pro forma Actual Pro forma
- -------------------------------------------- -------------- -------------- -------------- --------------
Net sales $ 1,682,410 $ 1,696,436 $ 789,517 $ 767,610
Net income 89,717 66,207 38,804 23,961
Basic earnings per share $0.85 $0.64 $0.37 $0.23
Diluted earnings per share $0.84 $0.63 $0.36 $0.23
The above amounts reflect adjustments for interest expense from additional
borrowings necessary to finance the acquisition, amortization of goodwill, and
income tax effect based upon a pro forma effective tax rate of 36%. The
unaudited pro forma information gives effect only to adjustments described above
and does not reflect management's estimate of any anticipated cost savings or
other benefits as a result of the acquisition.
In August 1999, March 2000 and April 2000, the Company consummated exclusive
license agreements (with certain territorial limitations) with Kenneth Cole
Productions, Inc. under which the Company acts as a licensee for women's
sportswear, women's socks and women's belts, respectively, bearing certain
Kenneth Cole trademarks. In addition, in August 1999, the Company consummated
the purchase of 1.0 million shares of Kenneth Cole Productions, Inc. Class A
stock at a price of $29 per share. As the result of a three-for-two stock split
in March 2001, the number of shares owned by the Company increased to 1.5
million shares. As of June 30, 2001, the $29 million acquisition cost was
recorded as a component of Other current assets. Certain restrictions applicable
to the Company's stock ownership expired on August 24, 2001. In accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of June 29, 2002, this investment was reclassified as an
available-for-sale marketable security at fair market value with unrealized
gains and losses net of taxes reported as a component of Accumulated other
comprehensive loss.
8
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign currency
translation, changes in the spot value of Eurobonds designated as a net
investment hedge, changes in unrealized gains and losses on securities and
changes in the fair value of cash flow hedges. Total comprehensive income for
interim periods was as follows:
Six Months Ended Three Months Ended
----------------------------- ------------------------------
June 29, June 30, June 29, June 30,
(Dollars in thousands) 2002 2001 2002 2001
- ---------------------- -------------- -------------- -------------- --------------
Net income $ 89,717 $ 77,967 $ 38,804 $ 32,467
Other comprehensive income (loss), net of tax:
Foreign currency translation 15,980 18 19,172 (482)
Foreign currency translation of Eurobond (36,781) -- (41,716) --
Changes in unrealized gains or losses on
securities 9,796 (353) 7,359 134
Changes in fair value of cash flow hedges (1,008) -- (1,008) --
-------------- -------------- -------------- --------------
Total comprehensive income, net of tax: $ 77,704 $ 77,632 $ 22,611 $ 32,119
============== ============== ============== ==============
5. MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at June
29, 2002, December 29, 2001 and June 30, 2001:
June 29, 2002
--------------------------------------------------------------
Gross Unrealized Estimated
------------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- -------------- -------------- -------------- --------------
Equity securities $ 29,000 $ 13,525 $ -- $ 42,525
Other holdings 8,637 -- (2,824) 5,813
-------------- -------------- -------------- --------------
Total $ 37,637 $ 13,525 $ (2,824) $ 48,338
============== ============== ============== ==============
December 29, 2001
--------------------------------------------------------------
Gross Unrealized Estimated
------------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- -------------- -------------- -------------- --------------
Equity securities $ 29,000 $ -- $ (2,705) $ 26,295
Other holdings 8,599 -- (1,901) 6,698
-------------- -------------- -------------- --------------
Total $ 37,599 $ -- $ (4,606) $ 32,993
============== ============== ============== ==============
June 30, 2001
--------------------------------------------------------------
Gross Unrealized Estimated
------------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- -------------- -------------- -------------- --------------
Other holdings $ 8,552 $ -- $ (1,457) $ 7,095
============== ============== ============== ==============
For the six months ended June 29, 2002 and June 30, 2001, there were no gross
realized gains on sales of available-for-sale securities. The net adjustments to
unrealized holding gains and losses on available-for-sale securities for the six
months ended June 29, 2002 and June 30, 2001 were a gain of $9,796,000 (net of
$5,510,000 in taxes) and a loss of $353,000 (net of $199,000 in taxes),
respectively, which were included in Accumulated other comprehensive loss.
9
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
June 29, December 30, June 30,
(Dollars in thousands) 2002 2001 2001
- ---------------------- -------------- -------------- --------------
Raw materials $ 30,073 $ 29,649 $ 36,622
Work in process 9,121 7,061 5,689
Finished goods 396,907 451,213 487,377
-------------- -------------- --------------
$ 436,101 $ 487,923 $ 529,688
============== ============== ==============
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
June 29, December 30, June 30,
(Dollars in thousands) 2002 2001 2001
- ---------------------- -------------- -------------- --------------
Land and buildings $ 144,300 $ 144,299 $ 142,140
Machinery and equipment 310,898 303,388 288,847
Furniture and fixtures 107,584 98,100 85,863
Leasehold improvements 222,497 198,446 189,879
-------------- -------------- --------------
785,279 744,233 706,729
Less: Accumulated depreciation
and amortization 420,268 392,232 366,629
-------------- -------------- --------------
$ 365,011 $ 352,001 $ 340,100
============== ============== ==============
8. GOODWILL AND INTANGIBLES, NET
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets," which requires that goodwill and
intangible assets with indefinite useful lives are no longer to be amortized,
but will rather be tested at least annually for impairment. SFAS No. 142 also
requires that intangible assets with finite useful lives will continue to be
amortized over their respective useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions
of SFAS No. 142 effective December 30, 2001. As of June 29, 2001, the Company
has completed the transitional impairment tests required under SFAS No. 142 and
no impairment was recognized.
The following tables disclose the carrying value of all the intangible assets:
June 29, 2002 December 29, 2001
---------------------------------------- -------------------------------------
Gross Gross
Carrying Accum. Carrying Accum.
(Dollars in thousands) Amount Amort. Net Amount Amort. Net
- ---------------------- -------------- ----------- ----------- ----------- ----------- -----------
Amortized intangible assets:
- ----------------------------
Licenses $ 42,849 $ (7,391) $ 35,458 $ 42,849 $ (5,530) $ 37,319
-------------- ----------- ----------- ----------- ----------- -----------
Total $ 42,849 $ (7,391) $ 35,458 $ 42,849 $ (5,530) $ 37,319
============== =========== =========== =========== =========== ===========
Unamortized intangible assets:
- ------------------------------
Trademarks $ 101,756 $ 13,140
----------- -----------
Total $ 101,756 $ 13,140
=========== ===========
10
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible amortization expense for the six months ending June 29, 2002 and June
30, 2001 was $1.861 million and $1.952 million, respectively.
The estimated intangible amortization expense for the next five years is as
follows:
(In thousands)
Fiscal Year Amortization Expense
- -------------------------------------------------
2002 $3,722
2003 3,882
2004 4,057
2005 3,450
2006 2,382
The changes in carrying amount of goodwill for the six months ended June 29,
2002 are as follows:
Wholesale Wholesale
(Dollars in thousands) Apparel Non-Apparel Total
- ---------------------- ------------- ------------- -------------
Balance December 29, 2001 $ 366,797 $ 37,857 $ 404,654
Reversal of unused provision (1,136) -- (1,136)
Earnout provision 10,000 -- 10,000
Reclassification to Trademarks (60,578) (28,038) (88,616)
------------- ------------- -------------
Balance June 29, 2002 $ 315,083 $ 9,819 $ 324,902
============= ============= =============
There is no goodwill recorded in our retail segment.
The following pro forma information presents the impact on net income and
earnings per share had SFAS No. 142 been effective for the six and three month
periods ended June 30, 2001.
Six Months Ended Three Months Ended
------------------------------ ------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
(Dollars in thousands except per share data) Actual Pro forma Actual Pro forma
- -------------------------------------------- -------------- -------------- -------------- --------------
Net income, as reported $ 89,717 $ 77,967 $ 38,804 $ 32,467
Discontinued amortization of goodwill and
intangibles, net of tax -- 4,121 -- 2,363
-------------- -------------- -------------- --------------
Net income, adjusted $ 89,717 $ 82,088 $ 38,804 $ 34,830
============== ============== ============== ==============
Basic earnings per share, as reported $0.85 $0.75 $0.37 $0.31
Discontinued amortization of goodwill and
intangibles, net of tax -- 0.04 -- 0.02
-------------- -------------- -------------- --------------
Basic earnings per share, adjusted $0.85 $0.79 $0.37 $0.33
============== ============== ============== ==============
Diluted earnings per share, as reported $0.84 $0.74 $0.36 $0.31
Discontinued amortization of goodwill and
intangibles, net of tax -- 0.04 -- 0.02
-------------- -------------- -------------- --------------
Diluted earnings per share, adjusted $0.84 $0.78 $0.36 $0.33
============== ============== ============== ==============
11
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. OTHER MATTERS
On May 22, 2001, the Company entered into an off-balance sheet arrangement
(synthetic lease) to acquire various land and equipment and construct buildings
and real property improvements associated with warehouse and distribution
facilities in Ohio and Rhode Island. Each facility has a lease term of five
years, with renewal subject to the consent of the lessor. The operating lease
arrangements are with a lessor, a limited partnership, who has contributed
equity in excess of 3.5% of the total value of the estimated aggregate cost to
complete these facilities, which is expected to be approximately $65 million.
The leases include guarantees by the Company for a substantial portion of the
financing and options to purchase the facilities at original cost. The Company
selected this financing arrangement to take advantage of the favorable financing
rates that it offered. The lessor financed the acquisition of the facilities
through equity funded by third-party financial institutions. The third-party
financial institutions hold a limited partnership interest in the lessor. The
Company's transactions with the lessor are limited to the operating lease
agreements and the associated rent expense that will be included in Selling,
general & administrative expense in the Condensed Consolidated Statements of
Income.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that will begin in January 2003
and terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The
effective change in fair value on the interest rate swap is recorded as a
component of Accumulated other comprehensive loss since these swaps are
designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the six months ended
June 29, 2002.
The Company has not entered into any other off-balance sheet arrangements other
than normal operating leases.
10. DEBT
On May 22, 2001, the Company entered into a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day unsecured credit
facility (the "Bridge Loan") from Citicorp North America, Inc. and Chase
Manhattan Bank. The Bridge Loan had two borrowing options, an "Alternative Base
Rate" option and a Eurodollar rate option, each as defined in the Bridge Loan.
The proceeds of the Bridge Loan were primarily used to finance the Company's
acquisition of Mexx on May 23, 2001 (see Note 3 of Notes to Condensed
Consolidated Financial Statements).
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date), of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to repay
the outstanding balance of the Bridge Loan, which expired on November 16, 2001.
Interest on the Eurobonds is being paid on an annual basis until maturity. These
bonds are designated as a hedge of our net investment in Mexx (see Note 3 of
Notes to Condensed Consolidated Financial Statements).
On November 15, 2001, the Company received a $500 million 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
expiring $500 million 364-day unsecured credit facility. This bank facility
includes a $50 million multicurrency revolving credit line. This facility and
the Company's $250 million bank facility (collectively, the "Agreement"), which
mature in November 2002 and November 2003, respectively, have received a credit
rating of BBB from Standard & Poor's and Baa2 from Moody's Investor Services,
and may be either drawn upon or used as a liquidity facility to support the
issuance of A2/P2 rated commercial paper. Repayment of outstanding balances of
the 364-day facility can be extended for one year after the maturity date. The
Agreement has two borrowing options, an "Alternative Base Rate" option, as
defined in the Agreement, and a Eurodollar rate option with a spread based on
the Company's long-term credit rating. The Agreement contains certain customary
covenants, including financial covenants requiring the Company to maintain
specified debt leverage and fixed charge coverage ratios, and covenants
restricting the Company's ability to, among other things, incur indebtedness,
grant liens, make investments and acquisitions, and sell assets. The Company
believes it is in
12
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
compliance with such covenants. The Agreement may be directly drawn upon, or
used, to support the Company's $750 million commercial paper program, which is
used from time to time to fund working capital and other general corporate
requirements. At June 29, 2002, there were no borrowings outstanding under the
commercial paper program. The Company's ability to obtain funding through its
commercial paper program is subject to, among other things, the Company
maintaining an investment-grade credit rating.
As of June 29, 2002, the Company had lines of credit aggregating $447 million,
which were primarily available to cover trade letters of credit. At June 29,
2002, December 29, 2001 and June 30, 2001, the Company had outstanding trade
letters of credit of $269 million, $228 million and $278 million, respectively.
These letters of credit, which have terms ranging from one to ten months,
primarily collateralize the Company's obligations to third parties for the
purchase of inventory. The fair value of these letters of credit approximates
contract values.
11. CONTINGENCIES AND COMMITMENTS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position.
12. RESTRUCTURING CHARGE
In December 2001, the Company recorded a net restructuring charge of $15.1
million (pretax), representing a charge of $19.0 million, which consisted of
approximately $4.6 million for the closure of seven Specialty Retail stores, due
to a shift to a vertical format for one of our brands which requires positioning
in different locations and the elimination of our large "world" store concept,
and five Outlet stores, due to the elimination of two of our branded store
formats; $3.5 million for the closure of four of our division offices; $3.3
million associated with the strategic closure of two specific facilities; and
$7.6 million in severance-related costs associated with the elimination of
approximately 600 jobs, offset by the $3.9 million deemed no longer necessary of
the Company's previous restructuring liability originally recorded in December
2000. The remaining balance of the restructuring liability as of June 29, 2002
was $9.3 million, of which approximately $8.2 million will require the outlay of
cash. The Company expects that these activities will be substantially completed
by December 2002.
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating and Occupancy
Store Closure Administrative Costs and Asset
(Dollars in millions) Costs Exit Costs Write Downs Total
- --------------------- --------------- --------------- --------------- ---------------
Balance at December 29, 2001 $ 5.6 $ 7.8 $ 2.3 $ 15.7
Spending for six months ended
June 29, 2002 (1.1) (3.3) (2.0) (6.4)
--------------- --------------- --------------- ---------------
Balance at June 29, 2002 $ 4.5 $ 4.5 $ 0.3 $ 9.3
=============== =============== =============== ===============
13. CASH DIVIDENDS AND COMMON STOCK REPURCHASE
On July 25, 2002, the Company's Board of Directors declared a quarterly cash
dividend on the Company's common stock at the rate of $0.05625 per share, to be
paid on September 9, 2002 to stockholders of record at the close of business on
August 19, 2002. As of August 9, 2001, the Company has $218.3 million remaining
in buyback authorization under its share repurchase program.
13
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. EARNINGS PER COMMON SHARE
The following is a reconciliation of the shares outstanding used in the
calculation of basic and diluted earnings per share:
Six Months Ended Three Months Ended
------------------------------ ------------------------------
June 29, June 30, June 29, June 30,
(Amounts in thousands) 2002 2001 2002 2001
- ---------------------- -------------- -------------- -------------- --------------
Weighted average common shares outstanding 105,248 103,737 105,648 104,232
Effect of dilutive securities:
Stock options and restricted stock grants 1,649 1,134 1,842 1,020
-------------- -------------- -------------- --------------
Weighted average common shares outstanding and
common share equivalents 106,897 104,871 107,490 105,252
============== ============== ============== ==============
15. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the six months ended June 29, 2002, the Company made income tax payments
of $43,411,000 and interest payments of $1,087,000. During the six months ended
June 30, 2001, the Company made income tax payments of $24,260,000 and interest
payments of $12,006,000. Other non-cash activities in the six months ended June
29, 2002 include the tax benefit from the exercise of stock options of $5.2
million, the reclassification of $15.0 million from Other Non-Current
Liabilities to Accrued Expenses and an additional accrual of $10.0 million
associated with a future payment related to the Lucky Brand Dungarees, Inc.
acquisition. Other non-cash activities in the six months ended June 30, 2001
include the tax benefit from the exercise of stock options of $4.2 million.
16. SEGMENT REPORTING
The Company operates the following business segments: Wholesale Apparel,
Wholesale Non-Apparel and Retail. The Wholesale Apparel segment consists of
women's and men's apparel designed and marketed worldwide under various
trademarks owned or licensed by the Company. The Wholesale Apparel segment also
includes wholesale sales of women's, men's and children's apparel designed and
marketed in Europe, Canada, the Asia-Pacific Region and the Middle East under
the Mexx brand names. The Wholesale Non-Apparel segment consists of accessories,
jewelry and cosmetics designed and marketed worldwide under certain owned or
licensed trademarks. The Retail segment consists of specialty retail, outlet and
concession stores worldwide that sell most of these apparel and non-apparel
products to the public through our specialty retail stores, outlet stores, and
concession stores. As a result of the Company's 2001 acquisition of Mexx, the
Company is also presenting its results on a geographic basis between Domestic
(wholesale customers and Company retail operations comprised of specialty retail
and outlet stores based in the United States) and International (wholesale
customers and Company retail operations comprised of specialty retail and outlet
stores and concession stores based outside of the United States).
The Company evaluates performance and allocates resources based on operating
profits or losses. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies in our
2001 Annual Report on Form 10-K. Intersegment sales are recorded at cost. There
is no intercompany profit or loss on intersegment sales, however, the wholesale
segments are credited with their proportionate share of the operating profit
generated by the Retail segment. The profit credited to the wholesale segments
from the Retail segment is eliminated in consolidation.
The Company's segments are business units that offer either different products
or distribute similar products through different distribution channels. The
segments are each managed separately because they either manufacture and
distribute distinct products with different production processes or distribute
similar products through different distribution channels.
14
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 29, 2002
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------ ------------- -------------
NET SALES:
Sales from external customers $ 1,149,891 $ 202,326 $ 323,400 $ 6,793 $ 1,682,410
Intercompany sales 87,825 9,135 -- (96,960) --
------------- ------------- ------------ ------------- -------------
Total net sales $ 1,237,716 $ 211,461 $ 323,400 $ (90,167) $ 1,682,410
============= ============= ============ ============= =============
OPERATING INCOME:
Segment operating income from
external customers $ 120,691 $ 6,990 $ 22,703 $ 2,326 $ 152,710
Intercompany segment operating
income (loss) 16,723 4,578 -- (21,301) --
------------- ------------- ------------ ------------- -------------
Total operating income (loss) $ 137,414 $ 11,568 $ 22,703 $ (18,975) $ 152,710
============= ============= ============ ============= =============
For the Six Months Ended June 30, 2001
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------ ------------- -------------
NET SALES:
Sales from external customers $ 1,090,886 $ 200,992 $ 254,667 $ 7,140 $ 1,553,685
Intercompany sales 92,454 9,135 -- (101,589) --
------------- ------------- ------------ ------------- -------------
Total net sales $ 1,183,340 $ 210,127 $ 254,667 $ (94,449) $ 1,553,685
============= ============= ============ ============= =============
OPERATING INCOME:
Segment operating income from
external customers $ 107,484 $ 3,860 $ 22,169 $ 2,408 $ 135,921
Intercompany segment operating
income (loss) 19,676 4,036 -- (23,712) --
------------- ------------- ------------ ------------- -------------
Total operating income (loss) $ 127,160 $ 7,896 $ 22,169 $ (21,304) $ 135,921
============= ============= ============ ============= =============
For the Three Months Ended June 29, 2002
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------ ------------- -------------
NET SALES:
Sales from external customers $ 513,369 $ 96,101 $ 176,968 $ 3,079 $ 789,517
Intercompany sales 44,028 5,122 -- (49,150) --
------------- ------------- ------------ ------------- -------------
Total net sales $ 557,397 $ 101,223 $ 176,968 $ (46,071) $ 789,517
============= ============= ============ ============= =============
OPERATING INCOME:
Segment operating income (loss) from
external customers $ 45,141 $ (23) $ 20,980 $ 1,166 $ 67,264
Intercompany segment operating
income (loss) 15,289 3,011 -- (18,300) --
------------- ------------- ------------ ------------- -------------
Total operating income (loss) $ 60,430 $ 2,988 $ 20,980 $ (17,134) $ 67,264
============= ============= ============ ============= =============
15
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended June 30, 2001
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- ------------- ------------- ------------ ------------- -------------
NET SALES:
Sales from external customers $ 489,048 $ 85,610 $ 149,129 $ 3,248 $ 727,035
Intercompany sales 43,515 4,577 -- (48,092) --
------------- ------------- ------------ ------------- -------------
Total net sales $ 532,563 $ 90,187 $ 149,129 $ (44,844) $ 727,035
============= ============= ============ ============= =============
OPERATING INCOME:
Segment operating income (loss) from
external customers $ 39,307 $ (2,610) $ 20,395 $ 1,128 $ 58,220
Intercompany segment operating
income (loss) 19,719 2,847 -- (22,566) --
------------- ------------- ------------ ------------- -------------
Total operating income (loss) $ 59,026 $ 237 $ 20,395 $ (21,438) $ 58,220
============= ============= ============ ============= =============
June 29, June 30,
(Dollars in thousands) 2002 2001
- ---------------------- -------------- --------------
SEGMENT ASSETS:
Wholesale Apparel $ 1,514,820 $ 1,524,177
Wholesale Non-Apparel 181,633 189,508
Retail 372,357 348,011
Corporate 201,895 181,295
Eliminations (289,906) (300,232)
-------------- --------------
Total assets $ 1,980,799 $ 1,942,759
============== ==============
GEOGRAPHIC DATA:
Six Months Ended Three Months Ended
------------------------------ ------------------------------
June 29, June 30, June 29, June 30,
(Dollars in thousands) 2002 2001 2002 2001
- ---------------------- -------------- -------------- -------------- --------------
NET SALES:
Domestic sales $ 1,399,330 $ 1,444,929 $ 657,490 $ 650,390
International sales 283,080 108,756 132,027 76,645
-------------- -------------- -------------- --------------
Total net sales $ 1,682,410 $ 1,553,685 $ 789,517 $ 727,035
============== ============== ============== ==============
OPERATING INCOME:
Domestic operating income $ 135,026 $ 128,891 $ 61,084 $ 53,371
International operating income 17,684 7,030 6,180 4,849
-------------- -------------- -------------- --------------
Total operating income $ 152,710 $ 135,921 $ 67,264 $ 58,220
============== ============== ============== ==============
June 29, June 30,
(Dollars in thousands) 2002 2001
- ---------------------- -------------- --------------
TOTAL ASSETS:
Domestic assets $ 1,455,201 $ 1,516,674
International assets 525,598 426,085
-------------- --------------
Total assets $ 1,980,799 $ 1,942,759
============== ==============
16
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
which requires that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized currently in
earnings in either income (loss) from continuing operations or Accumulated other
comprehensive income (loss), depending on the timing and designated purpose of
the derivative. The impact on the Company's financial condition, results of
operations and cash flows, upon the adoption of these pronouncements, was
immaterial.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in probable future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with our European and Canadian entities and other specific
activities and the swapping of variable interest rate debt for fixed rate debt
in connection with the synthetic lease. These instruments are designated as cash
flow hedges and, in accordance with SFAS No. 133, effective changes in fair
value are included in Accumulated other comprehensive income (loss), net of
related tax effects, with the corresponding asset or liability recorded in the
balance sheet. The ineffective portion of the cash flow hedge, if any, is
recognized in current-period earnings. Amounts in Accumulated other
comprehensive income (loss) are reclassified to current-period earnings when the
hedged transaction affects earnings.
At June 29, 2002, the Company had entered into average rate foreign currency
options with a net notional amount of $66.0 million with maturity dates from
July 2002 through December 2003 with downside protection in 2002 at 0.8815 U.S.
dollar per Euro and in 2003 of 0.9180 and 0.9450 U.S. dollar per Euro. As of
June 29, 2002, the Company had forward contracts maturing through October 2002
to sell 10.0 million Canadian dollars, forward contracts maturing through
November 2002 to sell 1.3 million British pounds and forward contracts maturing
through May 2003 to sell 61.8 million Euros. The aggregate U.S. dollar value of
the foreign exchange forward contracts was approximately $65.8 million at June
29, 2002, as compared with approximately $34.6 million at December 29, 2001 and
$15.5 million at June 30, 2001. Unrealized gains and losses for outstanding
foreign exchange forward contracts were not material at June 29, 2002, December
29, 2001 and June 30, 2001. As of June 29, 2002, the Company had options to buy
23.4 million Canadian dollars in connection with the acquisition of Mexx Canada
(see Note 2 of Notes to Condensed Consolidated Financial Statements for
information regarding this acquisition).
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that will begin in January 2003
and terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The
effective change in fair value on the interest rate swap is recorded as a
component of Accumulated other comprehensive loss since these swaps are
designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the six months ended
June 29, 2002.
The Company hedges its net investment position in Euros and generates foreign
currency interest payments that offset other transactional exposures in this
currency. To accomplish this, the Company borrows directly in foreign currency
and designates a portion of foreign currency debt as a hedge of net investments.
Under SFAS No. 133, changes in the fair value of these instruments are
immediately recognized in foreign currency translation adjustment, a component
of Accumulated other comprehensive income (loss), to offset the change in the
value of the net investment being hedged.
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize month-end balance
sheet and other expected exposures. These derivative instruments do not qualify
as cash flow hedges under SFAS No. 133 and are recorded at fair value with all
gains or losses, which have not been significant, recognized in current period
earnings immediately.
17
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
18. NEW ACCOUNTING PRONOUNCEMENTS
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 01-9 (formerly EITF Issue 00-25), "Accounting for
Consideration Given to a Customer or a Reseller of the Vendor's Products." This
issue addresses the recognition, measurement and income statement classification
of consideration from a vendor to a customer in connection with the customer's
purchase or promotion of the vendor's products. This consensus only impacted
revenue and expense classifications and did not change reported net income. In
accordance with the consensus reached, the Company adopted the required
accounting beginning December 30, 2001, the first day of fiscal year 2002, and
the impact of this required accounting does not have a material impact on the
revenue and expense classifications in the Company's Condensed Consolidated
Statements of Income.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 also
extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company adopted the provisions of SFAS No. 144
effective December 30, 2001, and the adoption did not have a significant effect
on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The Company will adopt the provisions of SFAS No. 145
upon its effective date and does not expect it to have a material effect on
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact of SFAS No. 146 on its results of operations and financial
position.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail. The Wholesale Apparel segment consists of women's and
men's apparel designed and marketed worldwide under various trademarks owned or
licensed by the Company; this segment includes our career (COLLECTION), casual
(LIZSPORT, LIZWEAR and LIZ & CO.), bridge (DANA BUCHMAN), large size (LIZ
CLAIBORNE WOMAN), men's (CLAIBORNE), moderate priced special markets (AXCESS,
CRAZY HORSE, EMMA JAMES, FIRST ISSUE, RUSS and VILLAGER), specialty apparel
(SIGRID OLSEN), premium denim (LUCKY BRAND DUNGAREES) and contemporary
sportswear and dress (LAUNDRY) businesses, as well as our licensed DKNY(R)
JEANS, DKNY(R) ACTIVE, and CITY DKNY(R) businesses and our licensed KENNETH COLE
NEW YORK and REACTION KENNETH COLE businesses. The Wholesale Apparel segment
also includes wholesale sales of women's, men's and children's apparel designed
and marketed in Europe, Canada, the Asia-Pacific Region and the Middle East
under the MEXX brand names. The Wholesale Non-Apparel segment consists of
accessories, jewelry and cosmetics designed and marketed worldwide under certain
of the above listed and other owned or licensed trademarks, including our MONET
and TRIFARI labels. The Retail segment consists of specialty retail, outlet and
concession stores worldwide that sell most of these apparel and non-apparel
products to the public through our 205 specialty retail stores, 221 outlet
stores, and 457 international concession stores (where the space is owned and
operated by the department store in which the space is located or leased and
operated by a third party, while the Company, in each case, owns the inventory).
This segment includes stores operating under the following formats: MEXX, LUCKY
BRAND DUNGAREES, LIZ CLAIBORNE, ELISABETH, DKNY(R) JEANS, DANA BUCHMAN and
MONET. As a result of our May 2001 acquisition of Mexx Group B.V. ("MEXX"), we
are also presenting our results on a geographic basis between Domestic
(wholesale customers and Company retail operations comprised of specialty retail
and outlet stores based in the United States) and International (wholesale
customers and Company retail operations comprised of specialty retail and outlet
stores and concession stores based outside of the United States). All data and
discussion with respect to our specific segments included within this
"Management's Discussion and Analysis" is presented before applicable
intercompany eliminations. Please refer to Note 16 of Notes to Condensed
Consolidated Financial Statements.
On May 23, 2001, the Company completed its acquisition of all the outstanding
capital stock of MEXX, a privately held fashion apparel company, incorporated
and existing under the laws of The Netherlands. MEXX designs and markets a wide
range of merchandise for women, men and children under the MEXX brand name.
MEXX's products are sold via wholesale and retail formats in more than 40
countries in Europe, the Asia-Pacific region, Canada and the Middle East, with
MEXX's core markets being the Benelux and Germanic regions. MEXX products, which
are in the mid-price range, are targeted at the 20-40 year old modern, urban
consumer.
MEXX's wholesale business, which accounted for approximately 71% of MEXX's total
net sales for each of fiscal years 2001 and 2000, consists of sales to
approximately 6,000 independent retail stores, 1,100 department store doors and
75 free standing MEXX franchise stores. MEXX's retail business, which accounted
for approximately 29% of MEXX's total net sales in fiscal years 2001 and 2000,
consists of 73 company owned and operated retail stores, 109 shop-in-shop and 36
"high street" concession stores and 23 outlet stores. MEXX also has licensed a
variety of its trademarks for use on a number of non-apparel items, including
fragrances, shoes, handbags, costume jewelry and watches.
On July 9, 2002, the Company completed the purchase of 100 percent of the equity
interest of Mexx Canada, Inc., a privately held fashion apparel and accessories
company ("Mexx Canada"). Based in Montreal, Mexx Canada operates as a third
party distributor in Canada for our MEXX business and, in 2001, had sales of 83
million Canadian dollars (or approximately $54 million based on the exchange
rate in effect during that period). The total purchase price consisted of an
initial cash payment made at the closing date of $15.2 million, a second payment
at the end of the first quarter 2003 based on performance in 2002 (which, when
combined with the initial cash payment, is intended to approximate 72% of the
total valuation), currently expected to be an additional amount of approximately
$14 million, and a final payment payable at either party's option, with respect
to the year ended either 2004 or 2005 in the form of an earnout designed to
equal 28% of future implied equity value, which will be based on the business's
earnings and cash flow performance. Unaudited pro forma information related to
this acquisition is not included, as the impact of this transaction is not
material to the consolidated results of the Company.
19
Three months ended June 29, 2002 compared to three months ended June 30, 2001
- -----------------------------------------------------------------------------
Net sales for the second quarter of 2002 were $789.5 million, an increase of
$62.5 million, or 8.6% over net sales for the second quarter of 2001. This
result reflected net sales increases of 4.7% in Wholesale Apparel (to $557.4
million), 18.7% in Retail (to $177.0 million), and 12.2% in Wholesale
Non-Apparel (to $101.2 million). The increase in our International net sales was
72.3% (to $132.0 million), due principally to the inclusion of sales of a full
quarter of our MEXX business (acquired in May 2001), and net sales in our
Domestic business increased by 1.1% (to $657.5 million), due principally to
increases in the domestic portion of our Wholesale Non-Apparel and Retail
segments, while sales in the domestic portion of our Wholesale Apparel segment
were nearly flat.
The increase in Wholesale Apparel net sales principally reflected the inclusion
of a full quarter of sales of MEXX. The sales increase also reflected sales
increases in our Special Markets business, due to higher unit volume partially
offset by lower average unit selling prices due to product mix, and in our LUCKY
BRAND DUNGAREES and SIGRID OLSEN businesses, due to higher unit volume and
higher average unit selling prices reflecting stronger demand. Sales in our core
Casual business declined, reflecting planned unit decreases in light of retailer
conservatism with respect to buying patterns. The Company also experienced sales
declines in our LIZ CLAIBORNE WOMAN and KENNETH COLE NEW YORK Women's
businesses, due to lower average unit selling prices, as well as in declines in
our Career and DANA BUCHMAN businesses, due to lower average unit selling prices
and lower unit volume.
The increase in Wholesale Non-Apparel net sales principally reflected unit
volume increases in our Jewelry business, due to increases in our SPECIAL
MARKETS JEWELRY and MONET department store businesses, in our Handbags business,
resulting from unit volume increases in both better and moderate product lines,
and in our Cosmetics businesses, due to the inclusion of our MAMBO fragrance
launched in August 2001. These increases were partially offset by a decrease in
our Fashion Accessories business, resulting from lower average unit selling
prices due to product mix.
The increase in Retail net sales reflected the inclusion of a full quarter of
sales from our MEXX stores acquired in May 2001, the addition of 25 new LUCKY
BRAND DUNGAREES Specialty Retail stores on a period-to-period basis, and, to a
lesser extent, a net of five additional Outlet stores on a period-to-period
basis. We ended the quarter with a total of 221 Outlet stores, 205 Specialty
Retail stores and 457 international concession stores. Comparable store sales
(inclusive of our international stores) were down approximately 4% in our Outlet
stores and down approximately 10% in our Specialty Retail stores, due in part to
the adverse effect of the shift of Easter from the second quarter last year to
the first quarter this year, a decline in traffic reflecting the challenging
retail environment, and conservative inventory planning intended to optimize
both merchandise flow and offerings while minimizing inventory risks.
Gross profit dollars increased $44.4 million, or 14.4%, in 2002 over 2001. Gross
profit as a percent of net sales increased to 44.7% in 2002 from 42.4% in 2001.
Approximately half of the gross profit rate increase was due to the inclusion of
MEXX, which runs at a higher gross margin rate than the Company average. The
increase in gross profit rate also reflected the increased proportion of sales
derived from our relatively higher-margin Wholesale Non-Apparel segment,
improved Company-wide inventory management (including continued improvement in
the matching of our production orders with our customer orders through the use
of new systems and revamped business processes) and continued lower unit
sourcing costs, as a result of the continued consolidation and optimization of
our worldwide supplier base, in combination with current favorable market
conditions as a result of ongoing excess offshore sourcing capacity. The Company
also benefited from higher margins realized in our Special Markets, LUCKY BRAND
DUNGAREES Specialty Retail stores, Jewelry, Casual, SIGRID OLSEN, LAUNDRY and
DKNY(R) JEANS Women's businesses. These increases were partially offset by lower
gross margins in our Specialty Retail stores, Fashion Accessories and DANA
BUCHMAN businesses, due to reasons discussed above, and in our DKNY(R) Juniors
business due to increased price/cost competitiveness in the junior sector.
Selling, general and administrative expenses ("SG&A") increased $35.3 million,
or 14.1%, in the second quarter of 2002 over the second quarter of 2001. These
expenses as a percent of net sales increased to 36.1% in 2002 from 34.4% in
2001. Approximately 75% of the SG&A rate increase reflected the inclusion of a
full quarter's expenses of MEXX. Also contributing to the SG&A rate increase
were the increased proportion of sales derived from our Wholesale Non-Apparel
segment, which has a relatively higher SG&A rate than the Company average, the
opening of new Outlet and LUCKY BRAND DUNGAREES Specialty Retail stores, higher
marketing costs in our Cosmetics business associated with our MAMBO brand
(launched in August 2001), and the lower proportion of sales derived from our
relatively lower-cost Casual, Career and LIZ CLAIBORNE WOMAN businesses. We also
incurred higher SG&A costs and rates in our Handbags, DKNY(R) Women's and DANA
BUCHMAN businesses. The increase in
20
our SG&A expense was partially mitigated by ongoing Company-wide expense
management and cost reduction initiatives and reduced goodwill amortization as a
result of the implementation of Statement of Financial Accounting Standards
("SFAS") No. 142, "Accounting for Goodwill and Other Intangibles," as well as
lower SG&A costs and rates in our Special Markets, CLAIBORNE Men's, Fashion
Accessories and LIZ CLAIBORNE WOMAN businesses.
As a result of the factors described above, we ended the second quarter of 2002
with operating income of $67.3 million, an increase of $9.0 million, or 15.5%,
over last year. Operating income as a percent of net sales increased to 8.5% in
2002 compared to 8.0% in 2001. Wholesale Apparel operating profit increased $1.4
million to $60.4 million (10.8% of net sales) in 2002 compared to $59.0 million
(11.1% of net sales) in 2001, principally reflecting increased profits in our
Special Markets, Casual, LUCKY BRAND DUNGAREES, SIGRID OLSEN, LAUNDRY and
CLAIBORNE Men's businesses, and the inclusion of the profits from MEXX,
partially offset by reduced profits in our DKNY(R) JEANS Women's and DANA
BUCHMAN businesses. Wholesale Non-Apparel operating profit increased $2.8 to
$3.0 million (3.0% of net sales) in 2002 compared to $0.2 million (0.3% of net
sales) in 2001, principally due to increases in our MONET and LIZ CLAIBORNE
JEWELRY businesses, partially offset by reduced profits in our Cosmetics
(reflecting reduced sales of our LIZ SPORT, LUCKY YOU and CURVE fragrances),
Fashion Accessories, and Handbags businesses. Retail operating profit increased
$0.6 million to $21.0 million (11.9% of net sales) in 2002 compared to $20.4
million (13.7% of net sales) in 2001, principally reflecting the inclusion of
the profits from the MEXX Retail stores, partially offset by higher operating
expenses in our Outlet stores and LUCKY BRAND DUNGAREES Specialty Retail stores
due to the additional store base, and reduced sales in our Specialty Retail
stores.
Net other expense in the second quarter of 2002 was $1.1 million, comprised of
other non-operating income, partially offset by minority interest expense,
compared to $1.3 million in 2001, comprised of minority interest and other
non-operating expenses.
Net interest expense in the second quarter of 2002 was $5.5 million, due
principally to interest expense on the Eurobond offering incurred to finance our
May 2001 acquisition of MEXX, compared to $6.2 million in 2001, which represents
the interest cost on the debt incurred to finance our strategic initiatives
including costs associated with our acquisitions and capital expenditures.
For the second quarter our income tax rate remained unchanged at 36.0%.
Net income increased in the second quarter of 2002 to $38.8 million, or 4.9% of
net sales, from $32.5 million in the second quarter of 2001, or 4.5% of net
sales, due to the factors described above. Diluted earnings per common share
increased 16.1% to $0.36 in 2002, up from $0.31 in 2001. Our average diluted
shares outstanding increased by 2.2 million shares in the second quarter of 2002
on a period-to-period basis, to 107.5 million, as a result of the exercise of
stock options and the effect of dilutive securities. Since the end of 2001, we
have not purchased any additional shares under our buyback program. As of August
9, 2002, we have $218.3 million remaining in buyback authorization under our
share repurchase program.
Six months ended June 29, 2002 compared to six months ended June 30, 2001
- -------------------------------------------------------------------------
Net sales for the first half of 2002 were $1,682.4 million, an increase of
$128.7 million, or 8.3%, over net sales for the first half of 2001. This result
reflected net sales increases of 4.6% in our Wholesale Apparel segment (to
$1,237.7 million), 0.6% in Wholesale Non-Apparel (to $211.5 million) and 27.0%
in Retail (to $323.4 million). The increase in our International net sales was
160.3%, (to $283.1 million), due principally to the inclusion of sales of MEXX.
Net sales in our Domestic business declined by 3.2% (to $1,399.3 million), due
principally to a decrease in the domestic portion of our Wholesale Apparel
segment, partially offset by an increase in the domestic portion of our Retail
segment.
The increase in Wholesale Apparel net sales principally reflected the inclusion
of a full six months of sales of MEXX. The sales increase also reflected
increases in our Special Markets business, due to higher unit volume partially
offset by lower average unit selling prices due to product mix, and in our
SIGRID OLSEN and LUCKY BRAND DUNGAREES businesses, due to higher unit volume and
higher average unit selling prices reflecting stronger demand. These increases
were partially offset by sales declines in our core Casual business, reflecting
planned unit decreases in light of retailer conservatism with respect to buying
patterns. The Company also experienced sales declines in our LIZ CLAIBORNE WOMAN
and Career businesses, due to lower unit volume and lower average unit selling
prices, in our DANA BUCHMAN and CRAZY HORSE Men's businesses, due to lower
21
unit volume, and in our CLAIBORNE Men's business due to conservative planning as
well as lower average unit selling prices resulting from the liquidation of
excess inventories.
The increase in Wholesale Non-Apparel net sales principally reflected increases
in our Jewelry business generated from favorable volume increases and in our
Handbags businesses, due to higher unit volume and increased margin support to
our retail customers. These increases were partially offset by a decrease in our
Fashion Accessories business, resulting from lower unit volume and lower average
unit selling prices due to product mix.
The increase in Retail net sales reflected the inclusion of a full six months of
sales from our MEXX stores acquired in May 2001, the addition of 25 new LUCKY
BRAND DUNGAREES Specialty Retail stores on a period-to-period basis and, to a
lesser extent, a net of five additional Outlet stores on a period-to-period
basis. Comparable store sales in our Outlet stores experienced low single-digit
decreases while our Specialty Retail stores experienced high single-digit
decreases, reflecting the challenging retail environment.
Gross profit dollars increased $87.6 million, or 13.9%, in the first half of
2002 over the first half of 2001. Gross profit as a percent of net sales
increased to 42.7% in 2002 from 40.6% in 2001 principally due to the inclusion
of a full six months of results of MEXX, which runs at a higher gross margin
rate than the Company average. The increase in gross profit rate also reflected
the increased proportion of sales derived from our relatively higher-margin
Retail segment, driven by the additional store base, improved company-wide
inventory management (including continued improvement in the matching of our
production orders with our customer orders through the use of new systems and
revamped business processes), improved product performance at retail and
continued lower unit sourcing costs as a result of the continued consolidation
and optimization of our worldwide supplier base, in combination with current
favorable market conditions as a result of ongoing excess offshore sourcing
capacity. The Company also benefited from higher margins realized in our Special
Markets, SIGRID OLSEN, and Jewelry businesses. These increases were partially
offset by lower gross margins in our Specialty Retail stores, CLAIBORNE Men's,
and Fashion Accessories businesses, due to the reasons discussed above.
Selling, general and administrative expenses ("SG&A") increased $70.8 million,
or 14.3%, in 2002 over 2001. These expenses as a percent of net sales increased
to 33.6% in 2002 from 31.9% in 2001, principally due to the inclusion of a full
six months of MEXX and the increased proportion of sales derived from our Retail
segment, each of which has a relatively higher SG&A rate than the Company
average. The increase also reflected the lower proportion of sales derived from
our relatively lower-cost Casual, Career and LIZ CLAIBORNE WOMAN businesses, as
well as increased marketing costs in our Cosmetics business associated with our
August 2001 launch of our MAMBO brand fragrance. We also incurred higher SG&A
costs and rates in our Handbags, DKNY(R) Juniors and DKNY(R) Men's businesses.
The increase in the dollar level of our SG&A was partially mitigated by ongoing
Company-wide expense management and cost reduction initiatives and reduced
goodwill amortization as a result of the implementation of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and
Other Intangibles," as well as lower SG&A costs and rates in our CLAIBORNE
Men's, MONET, Special Markets, LAUNDRY and KENNETH COLE NEW YORK Women's
businesses.
As a result of the factors described above, operating income increased $16.8
million, or 12.4%, to $152.7 million in the first six months of 2002 over the
first six months of 2001. Operating income as a percent of net sales increased
to 9.1% in 2002 compared to 8.7% in 2001. Wholesale Apparel operating profit
increased $10.3 million to $137.4 million (11.1% of net sales) in 2002 compared
to $127.2 million (10.7% of net sales) in 2001, principally reflecting the
inclusion of a full six month's profits from MEXX and increased profits in our
Special Markets, SIGRID OLSEN, LAUNDRY, Casual and LUCKY BRAND DUNGAREES
businesses, partially offset by reduced profits in our DANA BUCHMAN, DKNY(R)
Women's and CLAIBORNE Men's businesses. Wholesale Non-Apparel operating profit
increased $3.7 million to $11.6 million (5.5% of net sales) in 2002 compared to
$7.9 million (3.8% of net sales) in 2001, principally due to increases in our
MONET and LIZ CLAIBORNE JEWELRY businesses, partially offset by reduced profit
dollars in our Fashion Accessories, Cosmetics (reflecting reduced sales of our
LIZ SPORT, LUCKY YOU and CURVE fragrances) and Handbags businesses. Retail
operating profit increased $0.5 million to $22.7 million (7.0% of net sales) in
2002 compared to $22.2 million (8.7% of net sales) in 2001, principally
reflecting the inclusion of the profits from the MEXX Retail stores, partially
offset by increased operating expenses in our Outlet stores and LUCKY BRAND
DUNGAREES Specialty Stores stores due to the additional store base, and reduced
sales in our other Specialty Retail stores.
Net other expense in the first half of 2002 was $0.9 million, comprised of
minority interest expense, partially offset by other non-operating income,
compared to $2.3 million in 2001, comprised of minority interest and other
non-operating expenses.
22
Net interest expense in the first half of 2002 was $11.6 million, due
principally to interest expense on the Eurobond offering incurred to finance our
May 2001 acquisition of MEXX, compared to $11.8 million in 2001, which
represents the interest cost on the debt incurred to finance our strategic
initiatives including costs associated with our acquisitions, capital
expenditures and the repurchase of common stock in prior years.
For the six months our income tax rate remained unchanged at 36.0%.
Net income increased in 2002 to $89.7 million from $78.0 million in 2001 and
increased as a percent of net sales to 5.3% in 2002 from 5.0% in 2001, due to
the factors described above. Diluted earnings per common share increased 13.5%
to $0.84 in 2002 from $0.74 in 2001. Our average diluted shares outstanding
increased by 2.0 million shares in the second quarter of 2002 on a
period-to-period basis, to 106.9 million, as a result of the exercise of stock
options and the effect of dilutive securities.
FORWARD OUTLOOK
- ---------------
The economic and retail environments continue to be uncertain and challenging.
Accordingly, we are proceeding prudently and conservatively in planning our
business going forward. For fiscal 2002, we are optimistic that we can achieve a
sales increase of 5 - 7% and diluted EPS in the range of $2.17 - $2.20, which
reflects the July 2002 acquisition of Mexx Canada. For the third quarter of
2002, we are optimistic that we can achieve a sales increase of 3 - 4% and EPS
in the range of $0.76 - $0.78. Refer to "STATEMENT REGARDING FORWARD-LOOKING
DISCLOSURE" for a discussion of the risks and uncertainties relating to the
foregoing forward-looking statements.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
We ended the first half of 2002 with $263.3 million in cash and marketable
securities, compared to $160.6 million and $64.1 million at December 29, 2001
and June 30, 2001, respectively, and with $351.4 million of debt outstanding
compared to $387.3 million and $519.6 million at December 29, 2001 and June 30,
2001, respectively. This $138.6 million and $367.4 million improvement in our
debt net of cash position over the last six and twelve months, respectively, is
primarily attributable to the difference in working capital due to the factors
discussed below and, for the change between June 29, 2002 and June 30, 2001, the
reclassification of $42.5 million of the Company's ownership of Kenneth Cole
Productions, Inc. Class A stock (see Note 3 of Notes to Condensed Consolidated
Financial Statements for information regarding this investment). Working capital
increased $252.9 million, or 56.4%, to $701.3 at June 29, 2002 compared to
$448.4 million at June 30, 2001, and increased $42.6 million, or 6.2%, compared
to $658.7 million at December 29, 2001.
Accounts receivable decreased $87.1 million, or 20.9%, at the end of second
quarter 2002 compared to the end of second quarter 2001, due to the timing of
shipments made during the quarter as well as improvements made in our days'
sales outstanding. Accounts receivable decreased $31.6 million, or 8.7%, at June
29, 2002 compared to December 29, 2001 due to the timing of shipments.
Inventories decreased $93.6 million, or 17.7%, at the end of second quarter 2002
compared to the end of second quarter 2001, and decreased $51.8 million, or
10.6% at June 29, 2002 compared to December 29, 2001. These decreases are a
result of conservative planning and improved processes and procedures
implemented during the second half of 2001 to help adjust the flow of
replenishment product and seasonal essential programs into our warehouses. Our
average inventory turnover rate increased to 4.4 times for the 12-month period
ended June 29, 2002 from 4.0 times for both 12-month periods ended December 29,
2001 and June 30, 2001. The Company continues to take a conservative approach to
inventory management through 2002.
Borrowings under our commercial paper program peaked at $114.9 million during
the first six months of 2002; at June 29, 2002, there were no borrowings under
the program.
Net cash provided by operating activities was $176.9 million in the first half
of 2002, compared to $20.8 million in 2001. This $156.1 million change in cash
flow was primarily due to $28.9 million of cash provided by working capital in
2002 compared to a $120.0 million use of cash in 2001, driven primarily by
year-over-year changes in the accounts receivable, inventory, accounts payable
and accrued expense balances, as well as the increase in net income of $11.7
million in the six months of 2002 from the six months of 2001.
Net cash used in investing activities was $48.1 million in the first half of
2002, compared to $286.9 million in 2001. The 2002 net cash used primarily
reflected capital and in-store merchandise shop expenditures of $48.1 million;
23
2001 net cash used primarily reflected $245.3 million for the purchase of MEXX,
along with capital and in-store merchandise shop expenditures of $45.7 million.
Net cash used in financing activities was $57.5 million in the first half of
2002, compared to $276.0 million of net cash provided by financing activities in
2001. The $333.5 million year over year decrease primarily reflected the
assumption of $286.1 million of debt in 2001 to finance the May 2001 acquisition
of MEXX, net repayments of our commercial paper program of $77.7 million during
2002 compared to $36.7 million in 2001 and a decrease of $11.0 million in net
proceeds from the exercise of stock options.
Our anticipated capital expenditures for 2002 approximate $80 - $85 million, of
which $48.1 million has been expended through June 29, 2002. These expenditures
consisted primarily of in-store merchandise shops, the continued technological
upgrading and expansion of our management information systems and distribution
facilities (including certain building and equipment expenditures) and the
opening of stores. Capital expenditures and working capital cash needs will be
financed with net cash provided by operating activities and our revolving
credit, trade letter of credit and other credit facilities.
On May 22, 2001, the Company entered into a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day unsecured credit
facility (the "Bridge Loan") from Citicorp North America, Inc. and Chase
Manhattan Bank. The Bridge Loan had two borrowing options, an "Alternative Base
Rate" option and a Eurodollar rate option, each as defined in the Bridge Loan.
The proceeds of the Bridge Loan were primarily used to finance the Company's
acquisition of MEXX on May 23, 2001 (see Note 3 of Notes to Condensed
Consolidated Financial Statements).
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date) of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to repay
the outstanding balance of the Bridge Loan, which expired on November 16, 2001.
Interest on the Eurobonds is being paid on an annual basis until maturity. These
bonds are designated as a hedge of our net investment in Mexx (see Note 3 of
Notes to Condensed Consolidated Financial Statements).
On November 15, 2001, the Company received a $500 million 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
expiring $500 million 364-day unsecured credit facility. This bank facility
includes a $50 million multicurrency revolving credit line. This facility and
the Company's $250 million bank facility (collectively, the "Agreement"), which
mature in November 2002 and November 2003, respectively, have received a credit
rating of BBB from Standard & Poor's and Baa2 from Moody's Investor Services,
and may be either drawn upon or used as a liquidity facility to support the
issuance of A2/P2 rated commercial paper. Repayment of outstanding balances of
the 364-day facility can be extended for one year after the maturity date. The
Agreement has two borrowing options, an "Alternative Base Rate" option, as
defined in the Agreement, and a Eurodollar rate option with a spread based on
the Company's long-term credit rating. The Agreement contains certain customary
covenants, including financial covenants requiring the Company to maintain
specified debt leverage and fixed charge coverage ratios, and covenants
restricting the Company's ability to, among other things, incur indebtedness,
grant liens, make investments and acquisitions, and sell assets. The Company
believes it is in compliance with such covenants. The Agreement may be directly
drawn upon, or used, to support the Company's $750 million commercial paper
program, which is used from time to time to fund working capital and other
general corporate requirements. At June 29, 2002, there were no borrowings
outstanding under the commercial paper program. The Company's ability to obtain
funding through its commercial paper program is subject to, among other things,
the Company maintaining an investment-grade credit rating.
On May 22, 2001, the Company entered into an off-balance sheet arrangement
(synthetic lease) to acquire various land and equipment and construct buildings
and real property improvements associated with warehouse and distribution
facilities in Ohio and Rhode Island. Each facility has a lease term of five
years, with renewal subject to the consent of the lessor. The operating lease
arrangements are with a lessor, a limited partnership, who has contributed
equity in excess of 3.5% of the total value of the estimated aggregate cost to
complete these facilities, which is expected to be approximately $65 million.
The leases include guarantees by the Company for a substantial portion of the
financing and options to purchase the facilities at original cost. The Company
selected this financing arrangement to take advantage of the favorable financing
rates that it offered. The lessor financed the acquisition of the facilities
through equity funded by third-party financial institutions. The third-party
financial institutions hold a limited partnership interest in the lessor. The
Company's
24
transactions with the lessor are limited to the operating lease agreements and
the associated rent expense that will be included in SG&A in the Condensed
Consolidated Statements of Income.
As of June 29, 2002, the Company had lines of credit aggregating $447 million,
which were primarily available to cover trade letters of credit. At June 29,
2002, December 29, 2001 and June 30, 2001, the Company had outstanding trade
letters of credit of $269 million, $228 million and $278 million, respectively.
These letters of credit, which have terms ranging from one to ten months,
primarily collateralize the Company's obligations to third parties for the
purchase of inventory. The fair value of these letters of credit approximates
contract values.
We anticipate that cash flows from our operations, commercial paper program and
bank and letter of credit facilities will be sufficient to fund our future
liquidity requirements and that we will be able to adjust the amounts available
under these facilities if necessary. Such sufficiency and availability may be
adversely affected by a variety of factors, including, without limitation,
retailer and consumer acceptance of the Company's products, which may impact the
Company's financial performance, maintenance of the Company's investment grade
credit rating, as well as interest rate and exchange rate fluctuations.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------
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 at
the date of the financial statements and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, are presented in the Notes to Consolidated Financial
Statements in our 2001 Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, accounts receivable - trade, net, inventories,
accrued expenses and derivative instruments. In applying such policies
management must use some amounts that are based upon its informed judgments and
best estimates. Because of the uncertainty inherent in these estimates, actual
results could differ from estimates used in applying the critical accounting
policies. The Company is not aware of any reasonably likely events or
circumstances, which would result in different amounts being reported that would
materially affect its financial condition or results of operations.
Revenue Recognition
- -------------------
Revenue within our wholesale operations is recognized at the time when
merchandise is shipped from the Company's distribution centers, or if shipped
direct from contractor to customer, when title passes. Wholesale revenue is net
of returns, discounts and allowances. Discounts and allowances are recognized
when the related revenues are recognized. Retail store revenues are recognized
at the time of sale. Retail revenues are net of returns.
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, the Company extends credit to customers, which
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Consolidated Balance Sheets, is net of allowances and anticipated
discounts. An allowance for doubtful accounts is determined through analysis of
the aging of accounts receivable at the date of the financial statements,
assessments of collectibility based on historic trends and an evaluation of the
impact of economic conditions. An allowance for discounts is based on those
discounts relating to open invoices where trade discounts have been extended to
customers. Costs associated with potential returns of unsaleable products as
well as allowable customer markdowns and operational charge backs, net of
historical recoveries, are included as a reduction to net sales and are part of
the provision for allowances included in Accounts Receivable - Trade, Net. These
provisions result from divisional seasonal negotiations as well as historic
deduction trends net of historic recoveries and the evaluation of current market
conditions.
Inventories
- -----------
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons fashion
product. Market value of distressed inventory is valued based on historical
sales trends for this category of
25
inventory of our individual product lines, the impact of market trends and
economic conditions, and the value of current orders in house relating to the
future sales of this type of inventory.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on statistical trends, open contractual
obligations, and estimates based on projections and current requirements.
Derivative Instruments and Foreign Currency Risk Management Programs
- --------------------------------------------------------------------
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
which requires that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized currently in
earnings in either income (loss) from continuing operations or Accumulated other
comprehensive income (loss), depending on the timing and designated purpose of
the derivative. The impact on the Company's financial condition, results of
operations and cash flows, upon the adoption of these pronouncements, was
immaterial.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in probable future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with our European and Canadian entities and other specific
activities and the swapping of variable interest rate debt for fixed rate debt
in connection with the synthetic lease. These instruments are designated as cash
flow hedges and, in accordance with SFAS No. 133, effective changes in fair
value are included in Accumulated other comprehensive income (loss), net of
related tax effects, with the corresponding asset or liability recorded in the
balance sheet. The ineffective portion of the cash flow hedge, if any, is
recognized in current-period earnings. Amounts in Accumulated other
comprehensive income (loss) are reclassified to current-period earnings when the
hedged transaction affects earnings.
At June 29, 2002, the Company had entered into average rate foreign currency
options with a net notional amount of $66.0 million with maturity dates from
July 2002 through December 2003 with downside protection in 2002 at 0.8815 U.S.
dollar per Euro and in 2003 of 0.9180 and 0.9450 U.S. dollar per Euro. As of
June 29, 2002, the Company had forward contracts maturing through October 2002
to sell 10.0 million Canadian dollars, forward contracts maturing through
November 2002 to sell 1.3 million British pounds and forward contracts maturing
through May 2003 to sell 61.8 million Euros. The aggregate U.S. dollar value of
the foreign exchange forward contracts was approximately $65.8 million at June
29, 2002, as compared with approximately $34.6 million at December 29, 2001 and
$15.5 million at June 30, 2001. Unrealized gains and losses for outstanding
foreign exchange forward contracts were not material at June 29, 2002, December
29, 2001 and June 30, 2001. As of June 29, 2002, the Company had options to buy
23.4 million Canadian dollars in connection with the acquisition of Mexx Canada
(see Note 2 of Notes to Condensed Consolidated Financial Statements for
information regarding this acquisition).
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that will begin in January 2003
and terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The
effective change in fair value on the interest rate swap is recorded as a
component of Accumulated other comprehensive loss since these swaps are
designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the six months ended
June 29, 2002.
The Company hedges its net investment position in Euros and generates foreign
currency interest payments that offset other transactional exposures in this
currency. To accomplish this, the Company borrows directly in foreign currency
and designates a portion of foreign currency debt as a hedge of net investments.
Under SFAS No. 133, changes in the fair value of these instruments are
immediately recognized in foreign currency translation adjustment, a component
of Accumulated other comprehensive income (loss), to offset the change in the
value of the net investment being hedged.
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize month-end balance
sheet and other expected exposures. These derivative instruments
26
do not qualify as cash flow hedges under SFAS No. 133 and are recorded at fair
value with all gains or losses, which have not been significant, recognized in
current period earnings immediately.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases,
and in oral statements made by, or with the approval of, authorized personnel
that relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations or
level of business for 2002, or any other future period, are forward-looking
statements within the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements, which are indicated by words or
phrases such as "intend," "anticipate," "plan," "anticipate," "estimate,"
"project," "management expects," "the Company believes," "we are optimistic that
we can" or "currently envisions" and similar phrases are based on current
expectations only, and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected.
Among the factors that could cause actual results to materially differ include
changes in regional, national, and global microeconomic and macroeconomic
conditions, including the levels of consumer confidence and discretionary
spending, consumer income growth, higher personal debt levels, rising energy
costs, fluctuations in foreign currency exchange rates, increasing interest
rates and increased stock market volatility; risks related to retailer and
consumer acceptance of the Company's products; risks associated with competition
and the marketplace, including the financial condition of, and consolidations,
restructurings and other ownership changes in, the apparel (and related
products) industry and the retail industry, the introduction of new products or
pricing changes by the Company's competitors, and the Company's ability to
effectively remain competitive with respect to product, value and service; risks
associated with the Company's dependence on sales to a limited number of large
department store customers, including risks related to customer requirements for
vendor margin support, and those related to extending credit to customers; risks
relating to retailers' buying patterns and purchase commitments for apparel
products in general and the Company's products specifically; the Company's
ability to correctly balance the level of its fabric and/or merchandise
commitments with actual customer orders; the Company's ability to effectively
distribute its product within its targeted markets; risks related to the
Company's ability to establish, defend and protect its trademarks and other
proprietary rights and other risks relating to managing intellectual property
issues; uncertainties relating to the Company's ability to successfully
implement its growth strategies, integrate recent or future acquisitions,
maintain product licenses, or successfully launch new products and lines; risks
associated with the entry into new markets, either through internal development
activities or acquisitions; risks associated with the possible failure of the
Company's unaffiliated manufacturers to manufacture and deliver products in a
timely manner, to meet quality standards or to comply with the Company's
policies regarding labor practices or applicable laws or regulations; risks of
increased sourcing costs, including costs for materials and labor; risks
associated with changes in social, political, economic and other conditions
affecting foreign operations and sourcing, including currency rate fluctuations;
risks associated with terrorist activities, including reduced shopping activity
as a result of public safety concerns and disruption in the receipt and delivery
of merchandise; and any significant disruption in the Company's relationships
with its suppliers, manufacturers and employees.
The apparel and related product markets are highly competitive, both within the
United States and abroad. The Company's ability to successfully compete depends
on a number of factors, including the Company's ability to effectively
anticipate, gauge and respond to changing consumer demands and tastes, to
translate market trends into appropriate, saleable product offerings relatively
far in advance, and to operate within substantial production and delivery
constraints. In addition, consumer and customer acceptance and support
(especially by the Company's largest customers) depend upon, among other things,
product, value and service.
With respect to foreign sourcing, the Company notes that U.S. legislation which
would further restrict the importation into the U.S. and/or increase the cost of
textiles and apparel produced abroad has been periodically introduced in
Congress. Although it is unclear whether any new legislation will be enacted
into law, it appears likely that various new legislative or executive
initiatives will be proposed. These initiatives may include a reevaluation of
the trading status of certain countries, and/or retaliatory duties, quotas or
other trade sanctions, which, if enacted, would increase the cost of products
purchased from suppliers in such countries. In light of the very substantial
portion of the Company's products, which are manufactured by foreign suppliers,
the enactment of new legislation or the administration of current international
trade regulations, or executive action affecting international textile
agreements could adversely affect the Company's operations.
27
The Company from time to time reviews its possible entry into new markets,
either through internal development activities, acquisitions or licensing. The
entry into new markets (including the development and launch of new product
categories and product lines), such as the Company's entry into the moderate
market, the acquisition of businesses, such as the Company's acquisitions of
MEXX, SIGRID OLSEN, LUCKY BRAND DUNGAREES, LAUNDRY and MONET, and the licensing
of brands such as CANDIES(R), DKNY(R) JEANS and DKNY(R) ACTIVE, CITY DKNY(R),
KENNETH COLE NEW YORK, REACTION KENNETH COLE and UNLISTED.COM, are accompanied
by risks inherent in any such new business venture and may require methods of
operations and marketing and financial strategies different from those employed
in the Company's other businesses. Moreover, certain new businesses may be lower
margin businesses and may require the Company to achieve significant cost
efficiencies. In addition, new markets, product categories, product lines and
businesses may involve buyers, store customers and/or competitors different from
the Company's historical buyers, customers and competitors. Furthermore, the
Company's acquisition of other businesses entails the normal risks inherent in
such transactions, including, without limitation, possible difficulties, delays
and/or unanticipated costs in integrating the business, operations, personnel,
and/or systems of the acquired entity; risks that projected or satisfactory
level of sales, profits and/or return on investment will not be generated; risks
that expenditures required for capital items or working capital will be higher
than anticipated; risks involving the Company's ability to retain and
appropriately motivate key personnel of the acquired business; and risks
associated with unanticipated events and unknown or uncertain liabilities. In
addition, businesses licensed by the Company are subject to risks inherent in
such transactions, including compliance with terms set forth in the applicable
license agreements, including among other things the maintenance of certain
levels of sales, and the public perception and/or acceptance of the licensor's
brands or other product lines, which are not within the Company's control.
Reference is also made to the other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices as are set forth in our 2001 Annual Report on Form 10-K,
including, without limitation, those set forth under the heading
"Business-Competition; Certain Risks."
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates, which may adversely affect its financial position,
results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through the use of fixed rate financial instruments and, when
deemed appropriate, through the use of interest rate derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes. However, the Company, from time to time, may use interest
rate derivative financial instruments to help manage its exposure to interest
rate movements and reduce borrowing costs. Our objective for holding interest
rate derivative instruments is to decrease the volatility of earnings and cash
flow associated with fluctuation in these rates.
We finance our capital needs through available cash and marketable securities,
operating cash flow, letter of credit, commercial paper issuances, synthetic
lease and bank revolving credit facilities and other credit facilities. Our
commercial paper program, floating rate bank revolving credit facility and bank
lines expose us to market risk for changes in interest rates. We believe that
our Eurobond offering and the interest rate swap agreements, which are fixed
rate obligations, partially mitigate the risks with respect to our variable rate
financing. We anticipate using interest rate hedging instruments to further
mitigate such risks during 2002.
The acquisition of MEXX, which transacts business in foreign currencies, has
increased the Company's exposure to exchange rate fluctuations. We mitigate the
risks associated with changes in foreign currency rates through foreign exchange
forward contracts and average rate foreign currency options to hedge
transactions denominated in foreign currencies for periods of generally less
than one year and to hedge expected payment of intercompany transactions with
our non-U.S. subsidiaries, which now include MEXX. Gains and losses on
contracts, which hedge specific foreign currency denominated commitments, are
recognized in the period in which the transaction is affects earnings.
As part of the European Economic and Monetary Union, a single currency (the
"Euro") has replaced the national currencies of the principal European countries
(other than the United Kingdom) in which the Company conducts business and
manufacturing. The conversion rates between the Euro and the participating
nations' currencies
28
were fixed as of January 1, 1999, with the participating national currencies
being removed from circulation between January 1, 2002 and June 30, 2002 and
replaced by Euro notes and coinage. Under the regulations governing the
transition to a single currency, there is a "no compulsion, no prohibition"
rule, which states that no one can be prevented from using the Euro after
January 1, 2002 and no one is obliged to use the Euro before July 2002. In
keeping with this rule, the Company is currently using the Euro for invoicing
and payments. The transition to the Euro did not have a material adverse effect
on the business or consolidated financial condition of the Company.
Reference is also made to our 2001 Annual Report on Form 10-K, under the heading
"Certain Interest Rate and Foreign Currency Risks."
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on Issue No. 01-9 (formerly EITF
Issue 00-25), "Accounting for Consideration Given to a Customer or a Reseller of
the Vendor's Products." This issue addresses the recognition, measurement and
income statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus only impacted revenue and expense classifications and did not
change reported net income. In accordance with the consensus reached, the
Company adopted the required accounting beginning December 30, 2001, the first
day of fiscal year 2002, and the impact of this required accounting does not
have a material impact on the revenue and expense classifications in the
Company's Condensed Consolidated Statements of Income.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 also
extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company adopted the provisions of SFAS No. 144
effective December 30, 2001, and the adoption did not have a significant effect
on the Company's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The Company will adopt the provisions of SFAS No. 145
upon its effective date and does not expect it to have a material effect on
Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact of SFAS No. 146 on its results of operations or financial
position.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position. See Note 9 and Note 23 of Notes to Consolidated Financial Statement in
our 2001 Annual Report on Form 10-K.
29
In January 1999, two actions were filed in California naming as defendants more
than a dozen United States-based apparel companies that source garments from
Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationship with the factories, have violated various federal and state laws.
One action, filed in California Superior Court in San Francisco by a union and
three public interest groups, alleges unfair competition and false advertising
(the "State Court Action"). The State Court Action seeks equitable relief,
unspecified amounts for restitution and disgorgement of profits, interest and an
award of attorney's fees. The second, filed in the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges claims under the civil RICO statute and the Alien Tort Claims
Act, premised on supposed violations of the federal anti-peonage and indentured
servitude statutes, as well as other violations of Saipan and international law,
and seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory defendants
on behalf of a putative class of their workers, alleges violations of federal
and Saipanese wage and employment laws.
The Company sources products in Saipan but was not named as a defendant in the
actions. The Company and certain other apparel companies not named as defendants
were advised in writing, however, that they would be added as parties if a
consensual resolution of the complaint claims could not be reached. In the wake
of that notice, which was accompanied by a draft complaint, the Company entered
into settlement negotiations and subsequently entered into an agreement to
settle all claims that were or could have been asserted in the Federal or State
Court Actions. To date, eighteen other apparel companies have also settled these
claims. As part of the settlement, the Company has since been named as a
defendant, along with certain other settling apparel companies, in a Federal
Court action styled Doe I, et al. v. Brylane, L.P. et al. (the "Brylane
Action"), initially brought in the United States District Court for the District
of Hawaii, that mirror portions of the larger State and Federal Actions but does
not include RICO and certain of the other claims alleged in those Actions. The
action filed against the Company will remain inactive unless the settlement is
not finally approved by the Federal Court. The agreements concluded by the
Company and other retailers are subject to federal court approval, which has
been delayed by virtue of the Hawaii District Court's June 23, 2000 decision to
transfer the Federal Action to Saipan. Plaintiffs petitioned the Ninth Circuit
Court of Appeals for the Writ of Mandamus reversing that ruling. On March 22,
2001, the Court of Appeals denied Plaintiff's petition, and the Federal Action
and the Brylane Action have been transferred to Saipan. The court in Saipan held
a hearing on February 14, 2002 on Plaintiffs' motions to certify the proposed
class and to preliminarily approve the settlement. On May 10, 2002, the court
issued an opinion and order granting preliminary approval of the settlement and
of similar settlements with certain other retailers and also certifying the
proposed class. The Fairness Hearing to determine whether to grant final
approval of the settlements is currently scheduled for January 23, 2003. The
non-settling defendants have petitioned the Ninth Circuit Court of Appeals for
the right to take an interlocutory appeal from the grant of class certification.
That petition is pending. Under the terms of the settlement agreement, if the
settlement does not receive final federal court approval, the Company will be
entitled to a refund of the entire settlement amount except for funds of up to
$10,000 spent on costs of notice. Because the litigation is at a preliminary
stage, with virtually no merits discovery having taken place, if the settlement
is not executed or is not finally approved by the federal court, we cannot at
this juncture determine the likelihood of a favorable or unfavorable outcome or
the magnitude of the latter if it were to occur. Although the outcome of any
such litigation cannot be determined with certainty, management is of the
opinion that the final outcome should not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2002 Annual Meeting of Stockholders held on May 16, 2002, the
stockholders of the Company (i) approved the Liz Claiborne, Inc. 2002 Stock
Incentive Plan (the number of affirmative votes cast was 48,846,781, the number
of negative votes cast was 36,727,981, and the number of abstentions was 763,627
and the number of broker non-votes was 11,450,570); (ii) rejected a stockholder
proposal seeking shareholder approval for all future executive officer severance
pay agreements (the number of affirmative votes cast was 17,038,242, the number
of negative votes cast was 67,311,417, and the number of abstentions was
1,988,730 and the number of broker non-votes was 11,450,570); (iii) rejected a
stockholder proposal to adopt a policy stating that the public accounting firm
retained by our Company to provide audit services, or any affiliated company,
should not also be retained to provide non-audit services to our Company (the
number of affirmative votes cast was 12,707,745, the number of negative votes
cast was 72,299,378, and the number of abstentions was 1,331,266 and the number
of
30
broker non-votes was 11,450,570); and (iv) elected the following nominees to the
Company's Board of Directors, to serve until the 2005 annual meeting of
stockholders and until their respective successors are duly elected and
qualified, except for Mr. Gordon, who, pursuant to the Company's Board of
Directors current retirement policy, will retire at the 2003 Annual Meeting
after having served one year of his three-year term.
Votes
Nominee For Withheld
- ------------------------------------------------------------------
Paul R. Charron 96,400,241 1,388,718
J. James Gordon 95,276,736 2,512,223
Kay Koplovitz 96,329,220 1,459,739
ITEM 5. OTHER INFORMATION
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002 (the "Act"), the Company
is responsible for listing the non-audit services approved in the Second Quarter
by the Company's Audit Committee to be performed by the Company's external
auditors. Non-audit services are defined in the Act as services other than those
provided in connection with an audit or a review of the financial statements of
the Company.
During the quarterly period covered by this filing, the Audit Committee approved
the engagements of the Company's external auditors for the following non-audit
services: (1) audit of the Company's 401K Savings and Profit Sharing Plan for
the 2001 fiscal year, (2) services in connection with potential transactions,
(3) audit of the Company's operations in Puerto Rico, and (4) domestic and
international tax advice and services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(y)(i)* Liz Claiborne, Inc. 2002 Stock Incentive Plan (the "2002 Plan").
10(y)(ii)* Form of Option Grant Certificate under the 2002 Plan.
10(y)(iii)* Amendment No. 1 to the 2002 Plan.
99.1* Certification of Chief Executive Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K.
A Current Report on Form 8-K dated May 16, 2002 was filed with the SEC by
the Company relating to the change in the Company's independent public
accountants.
* Filed herewith.
31
SIGNATURES
- ----------
PURSUANT TO THE REQUIREMENTS 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.
DATE: August 13, 2002
LIZ CLAIBORNE, INC. LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
----------------------------- -------------------------------------
MICHAEL SCARPA ELAINE H. GOODELL
Senior Vice President - Vice President - Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(Principal financial officer) (Principal accounting officer)