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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2002
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Commission File Number 1-10689
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LIZ CLAIBORNE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2842791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1441 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
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Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- -----
Based upon the closing sale price on the New York Stock Exchange composite
tape on June 28, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the registrant's
Common Stock, par value $1 per share, held by non-affiliates of the registrant
on such date was approximately $3,380,000,000. For purposes of this calculation,
only executive officers and directors are deemed to be the affiliates of the
registrant.
Number of shares of the registrant's Common Stock, par value $1 per share,
outstanding as of March 19, 2003: 107,344,918 shares.
Documents Incorporated by Reference:
Registrant's Proxy Statement relating to its Annual Meeting of Stockholders
to be held on May 22, 2003-Part III.
PART I
Item 1. Business.
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OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
General
- -------
Liz Claiborne, Inc. designs and markets an extensive range of branded
women's and men's apparel, accessories and fragrance products. Our current
portfolio of brands spans most apparel and non-apparel categories, reaching
consumers regardless of age, gender, size, attitude, shopping or value
preference. Our products run the full fashion gamut, from classic and
traditional to modern and contemporary, for every wearing occasion. Our brands
include AXCESS, BORA BORA, CLAIBORNE, CRAZY HORSE, CURVE, DANA BUCHMAN, ELLEN
TRACY, ELISABETH, EMMA JAMES, FIRST ISSUE, J. H. COLLECTIBLES, LAUNDRY BY SHELLI
SEGAL, LIZ CLAIBORNE, LUCKY BRAND, MARVELLA, MEXX, MONET, MONET 2, RUSS, SIGRID
OLSEN, TRIFARI and VILLAGER. In addition, we hold certain licenses for men's,
junior's and women's sportswear, jeanswear and activewear under the DKNY(R)
JEANS and DKNY(R) ACTIVE trademarks, women's sportswear under the CITY DKNY(R)
trademark, women's apparel products under the KENNETH COLE NEW YORK, REACTION
KENNETH COLE and UNLISTED trademarks, and fragrance, cosmetic and beauty
products under the CANDIE'S trademark.
Under our multi-channel distribution strategy, our brands are available at
over 26,000 different retail locations throughout the world, including virtually
all upscale, mainstream, promotional and chain department stores and the
Company's own specialty and outlet stores, and on our Lucky Brand, Elisabeth and
Mexx E-commerce sites. We believe that we are one of the largest suppliers of
"better" women's branded apparel in the United States.
As used herein, the terms "Company", "we", "us" and "our" refer to Liz
Claiborne, Inc., a Delaware corporation, together with its consolidated
subsidiaries.
In May 2001, we completed the acquisition of 100% of the equity interest of
Mexx Group, B.V., a privately held fashion apparel company, incorporated and
existing under the laws of The Netherlands ("Mexx"). As a result of our
acquisition of Mexx, we offer a wide range of mid-price, branded merchandise for
women, men and children, targeting the 20-40 year old modern consumer, under
various MEXX trademarks. 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 located in the Benelux and Germanic
regions. Mexx's wholesale business, which accounted for approximately 68% of
Mexx's total net sales for fiscal year 2002, sells products 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 32% of Mexx's total net sales in fiscal year 2002, consists of 71
Mexx owned and operated retail stores, 162 concession stores and 21 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. See Note 2 of Notes to Consolidated Financial Statements. We have
recently announced plans to open MEXX retail stores in the United States.
On July 9, 2002, we completed the purchase of 100% of the equity interest
of Mexx Canada, Inc., a privately held fashion apparel and accessories company
based in Montreal, Canada ("Mexx Canada"). Mexx Canada distributes the Company's
MEXX brand in all Canadian provinces, principally through its retail business
and to a lesser extent its wholesale business. See Note 2 of Notes to
Consolidated Financial Statements.
On September 30, 2002, we completed the purchase of 100% of the equity
interest of Ellen Tracy, Inc. , a privately held fashion apparel company ("Ellen
Tracy"). Ellen Tracy designs, wholesales and markets a wide range of women's
sportswear under several trademarks, including ELLEN TRACY, LINDA ALLARD ELLEN
TRACY and COMPANY ELLEN TRACY. Ellen Tracy products are sold in the "bridge"
market (which is the market between the "better" and "designer" markets),
predominantly through select specialty stores and upscale department stores
throughout the United States and Canada. See Note 2 of Notes to Consolidated
Financial Statements.
Business Segments
- -----------------
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail. In addition to these segments, we license to third
parties the right to manufacture, market and sell at wholesale selected products
bearing the Company's trademarks. Wholesale Apparel consists of businesses that
design, manufacture and market to the Company's wholesale customers women's and
men's apparel under various trademarks owned or licensed by the Company.
Wholesale Non-Apparel consists of businesses that design, manufacture and market
to our wholesale customers accessories, cosmetics
2
and jewelry products under various trademarks owned or licensed by the Company.
Retail consists of businesses that sell merchandise designed and manufactured by
the Wholesale Apparel and Wholesale Non-Apparel segments to the public through
Company-operated specialty retail and outlet stores, and concession stores where
our products are sold in third-party owned locations. See Note 20 of Notes to
Consolidated Financial Statements and "Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company also
segments 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).
Wholesale Apparel. We offer a variety of women's and men's apparel
------------------
products. Substantially all products in each sportswear collection are sold at
retail as separate items.
The LIZ CLAIBORNE business offers career and casual sportswear in misses
and petite sizes under four of our trademarks: COLLECTION, which offers
careerwear with desk-to-dinner versatility; LIZSPORT, which offers all-American
sportswear, including twill products, for less formal work settings and casual
occasions; LIZWEAR JEANS, which offers denim and denim-related sportswear,
including twills and fashion coordinates; and LIZ & CO., our soft dressing
concept, which offers versatile casual knitwear.
The LIZ CLAIBORNE WOMAN business offers classic careerwear, weekend casual
and wardrobe basics in large sizes (including petite proportions) under our LIZ
CLAIBORNE WOMAN trademark.
The MEXX business offers a wide range of men's, women's and children's
fashion apparel and accessories for sale outside of the United States under
several trademarks including MEXX, which offers men's and women's fashion
sportswear, MEXXSPORT, which offers performance sportswear, and XX BY MEXX,
which offers coordinated contemporary separates. See Note 2 of Notes to
Consolidated Financial Statements for a discussion of our acquisition of MEXX.
The Men's business offers men's business-casual wear and sportswear under
our CLAIBORNE trademark; a line of moderate priced men's wear and dress shirts
under our CRAZY HORSE trademark; and a line of moderate priced, fashion-forward
men's apparel under our AXCESS/Men trademark. In 2002, we licensed to a
third-party the right to design, manufacture and distribute a line of dress
shirts under the CLAIBORNE trademark. See Note 3 of Notes to Consolidated
Financial Statements.
The DANA BUCHMAN business offers collections of products for the women's
"bridge" market with elegant styling in distinctive fabrics, in misses, large
and petite sizes under our DANA BUCHMAN trademark.
The ELLEN TRACY business offers women's sportswear for the "bridge" market
under our LINDA ALLARD ELLEN TRACY and COMPANY ELLEN TRACY trademarks. See Note
2 of Notes to Consolidated Financial Statements for a discussion of the
acquisition of Ellen Tracy, Inc.
The Special Markets business offers women's updated career and casual
clothing at moderate prices under the following Company trademarks: EMMA JAMES
(related separates for the casual workplace sold in department stores nationally
and in Japan); VILLAGER (relaxed separates for soft career and weekend dressing
sold principally in Mervyn's and Kohl's department stores); FIRST ISSUE (casual
career and everyday wear, sold principally in Sears department stores); RUSS
(casual separates sold principally in Wal-Mart stores); and CRAZY HORSE (casual
separates sold principally at J.C. Penney stores). In January 2002, we
introduced and commenced shipping a line of fashion-forward women's apparel
under the AXCESS trademark, which is currently sold at Mervyn's and Kohl's
department stores. In January 2003, we commenced shipping a line of updated
comfortable relaxed apparel under the J.H. COLLECTIBLES trademark (sold in
department stores nationally) and a line of casual and business-casual apparel
under the CRAZY HORSE COLLECTION trademark (sold principally at J.C. Penney
stores). See "Competition; Certain Risks" below. We ceased offering products
under our MEG ALLEN line in the third quarter of 2002.
We hold the exclusive license to design, produce, market and sell men's,
junior's and women's sportswear, jeanswear and activewear under the DKNY(R)
JEANS and DKNY(R) ACTIVE trademarks and logos for sale in the Western
Hemisphere. We also hold the exclusive license to design, produce, market and
sell a line of women's career and casual sportswear for the "better" market,
under the CITY DKNY(R) trademark and logo for sale in the United States and
Canada. See Note 3 of Notes to Consolidated Financial Statements.
Our SIGRID OLSEN business, which we own by virtue of our ownership of 97.5%
of Segrets, Inc. ("Segrets"), offers a range of women's sportswear in misses,
large and petite sizes under several trademarks, including SIGRID OLSEN
COLLECTION, which offers sportswear with a contemporary influence, SIGRID OLSEN
SPORT, which offers updated casual sportswear with a novelty inspiration, and SO
BLUE BY SIGRID OLSEN, which offers contemporary casual
3
sportswear with a jeanswear influence. See Note 2 of Notes to Consolidated
Financial Statements for a discussion of our acquisition of Segrets, Inc.
Our LUCKY BRAND business offers women's and men's denim-based sportswear
under various LUCKY BRAND trademarks. See Note 2 of Notes to Consolidated
Financial Statements for a discussion of our acquisition of Lucky Brand
Dungarees, Inc.
We hold the exclusive license to manufacture, design, market and
distribute, in North America, a "better" women's modern sportswear line under
the KENNETH COLE NEW YORK label, a women's status denim and sportswear line
under the REACTION KENNETH COLE label and a junior-sized apparel line under the
UNLISTED label (which has not yet commenced shipping). See Note 3 of Notes to
Consolidated Financial Statements. Effective December 2002, we terminated our
license to manufacture, design, market and distribute socks and belts bearing
the KENNETH COLE NEW YORK, REACTION KENNETH COLE and UNLISTED labels.
The LAUNDRY business offers women's modern sportswear and dresses under the
LAUNDRY BY SHELLI SEGAL label, primarily to select department and specialty
stores.
Each of the above businesses presented four seasonal collections during
2002, except DANA BUCHMAN and ELLEN TRACY, which presented three collections,
and LAUNDRY which presented five collections.
Wholesale Non-Apparel. We offer a wide variety of women's accessory
----------------------
products and men's and women's cosmetic products through our non-apparel
business.
The Accessories business offers an array of handbags/small leather goods
and fashion accessories under the LIZ CLAIBORNE, LUCKY BRAND (which commenced
shipping in the fourth quarter of 2002), and SIGRID OLSEN (which commenced
shipping in the first quarter of 2003) trademarks. We recently announced that we
will offer a line of handbags/small leather goods under the ELLEN TRACY
trademark commencing in the third quarter of 2003.
The Special Markets Accessories business offers jewelry, handbags and
fashion accessories under our AXCESS, CRAZY HORSE, FIRST ISSUE and VILLAGER
trademarks.
The Jewelry business offers a selection of jewelry under the LIZ CLAIBORNE,
LUCKY BRAND, MONET, MONET 2, TRIFARI and MARVELLA trademarks. For information
regarding the Company's acquisition of the MONET, MONET 2, TRIFARI and MARVELLA
trademarks, see Note 2 of Notes to Consolidated Financial Statements.
Additionally, we hold the license to manufacture, design, market and distribute
women's jewelry bearing the KENNETH COLE NEW YORK and REACTION KENNETH COLE
labels. See Note 3 of Notes to Consolidated Financial Statements.
The offerings of our Accessories, Special Markets Accessories and Jewelry
businesses mirror major fashion trends and are intended to complement many of
our other product lines.
Our cosmetics business offers fragrance and bath and body-care products
under our CLAIBORNE FOR MEN, CLAIBORNE SPORT, CURVE (for women and men), LIZ
CLAIBORNE, LIZSPORT, LUCKY YOU LUCKY BRAND (for women and men), MAMBO (for women
and men), REALITIES and VIVID trademarks and fragrances, cosmetics and beauty
products under the CANDIE'S trademark, which we license from Candie's, Inc. We
commenced shipping a line of cosmetics (for women and men) under the BORA BORA
trademark in the third quarter of 2002.
Retail. On February 20, 2003, we announced changes in our specialty retail
------
store strategy, which provide for the closing of all 22 of our LIZ CLAIBORNE
brand specialty stores in the United States by the end of the second quarter of
fiscal 2003. The Company intends to convert five of these stores to either a
MEXX or SIGRID OLSEN retail format. The Company recorded a pre-tax restructuring
charge of $7.1 million (net of the reversal of $2.8 million in over-accruals
related to a prior restructuring charge) covering the costs associated with
lease obligations, asset write-offs, severance and closing costs for these
stores. See Note 13 of Consolidated Financial Statements. These closures will
not affect the LIZ CLAIBORNE brand specialty retail and concessions operating
outside of the United States nor any LIZ CLAIBORNE outlet stores.
The Company also announced its intention to open approximately three MEXX
stores and six SIGRID OLSEN specialty retail stores in the United States in
2003, five of which are expected to be conversions from existing LIZ CLAIBORNE
locations. The purpose will be to gauge consumer response to both retail
concepts. To this end, a separate specialty retail value chain is in place to
ensure that product development, merchandising, sourcing, logistics,
presentation and management are retail-specific. The first MEXX store in the
United States is expected to be at 650 Fifth Avenue, New York City, the present
location of the flagship LIZ CLAIBORNE specialty store. It is scheduled to open
in early Fall 2003. The first SIGRID OLSEN store is scheduled to open in late
Summer 2003 in the Boston area.
4
Specialty Retail Stores. As of March 19, 2003, we operated a total of 214
specialty retail stores, comprised of 116 stores within the United States and 98
retail stores outside of the United States, primarily in Western Europe and
Canada, under various Company trademarks. Our European LIZ CLAIBORNE flagship
store, an approximately 3,000 square foot facility, is located on Regent Street
in London, England.
The following table sets forth information, as of March 19, 2003, with
respect to our specialty retail stores:
U.S. RETAIL SPECIALTY STORES
------------------------------------------------------------------------------
Approximate Average Store
Specialty Store Format Number of Stores Size by Square Footage
-------------------------- -------------------- ------------------------------
LUCKY BRAND DUNGAREES 67 2,400
ELISABETH 36 3,200
LIZ CLAIBORNE 6 7,500
DANA BUCHMAN 4 5,500
LAUNDRY BY SHELLI SEGAL 2 1,500
CLAIBORNE 1 3,100
-------------------------- -------------------- ------------------------------
FOREIGN RETAIL SPECIALTY STORES
------------------------------------------------------------------------------
Approximate Average Store
Specialty Store Format Number of Stores Size by Square Footage
-------------------------- -------------------- ------------------------------
MEXX 71 3,600
MEXX Canada 26 4,800
LIZ CLAIBORNE 1 3,000
-------------------------- -------------------- ------------------------------
Outlet Stores. As of March 19, 2003, we operated a total of 249 outlet
stores, comprised of 194 outlet stores within the United States and 55 outlet
stores outside of the United States, primarily in Western Europe and Canada,
under various Company owned and licensed trademarks.
The following table sets forth information, as of March 19, 2003, with
respect to our outlet stores:
U.S. OUTLET STORES
------------------------------------------------------------------------------
Approximate Average Store
Format Number of Stores Size by Square Footage
-------------------------- -------------------- ------------------------------
LIZ CLAIBORNE 113 11,000
ELISABETH 23 3,500
DKNY(R)JEANS 18 2,900
ELLEN TRACY 14 3,900
DANA BUCHMAN 13 2,200
Special Brands 6 3,100
CLAIBORNE 4 2,400
LUCKY BRAND DUNGAREES 3 3,000
-------------------------- -------------------- ------------------------------
FOREIGN OUTLET STORES:
------------------------------------------------------------------------------
Approximate Average Store
Format Number of Stores Size by Square Footage
-------------------------- -------------------- ------------------------------
LIZ CLAIBORNE 23 2,000
MEXX 21 2,900
MEXX Canada 11 5,100
-------------------------- -------------------- ------------------------------
Concession Stores. We operate concession stores in select retail stores,
under two formats: shop-in-shop stores (where the space is owned and operated by
the department store in which the retail selling space is located, while we own
the inventory) and high street concession stores (where the retail store is
leased and operated by a third-party specialty retailer, while we own the
inventory). As of March 19, 2003, the Company operated a total of 482 concession
stores in Western Europe. We do not operate any concession stores in the United
States.
The following table sets forth information, as of March 19, 2003, with
respect to our concession stores:
FOREIGN CONCESSIONS:
-------------------------- --------------------
Concession Store Format Number of Stores
-------------------------- --------------------
LIZ CLAIBORNE Apparel 165
MEXX 162
MONET Jewelry 155
-------------------------- --------------------
5
Licensing. We license many of our brands to third-parties with specialized
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skills, thereby extending each licensed brand's market presence. We currently
have twenty-seven license arrangements pursuant to which third-party licensees
produce merchandise under Company trademarks in accordance with designs
furnished or approved by us, the present terms of which (not including renewal
terms) expire at various dates through 2010. Each of the licenses provides for
the payment to the Company of a percentage of the licensee's sales of the
licensed products against a guaranteed minimum royalty which generally increases
over the term of the agreement. Revenues from our licensing operations are not
included under our wholesale apparel or wholesale non-apparel segments, but are
instead included as part of "Corporate/Eliminations," as reflected in Note 20 of
Notes to Consolidated Financial Statements.
The following table sets forth information with respect to select aspects
of our licensing business:
- ------------------------------------------------- ---------------------------------------------------------------
PRODUCTS BRANDS
- ------------------------------------------------- ---------------------------------------------------------------
Women's career, casual and sport shoes LIZ CLAIBORNE, CRAZY HORSE, ELLEN TRACY, FIRST ISSUE, LUCKY
BRAND, MEXX, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Dresses LIZ CLAIBORNE, ELISABETH
- ------------------------------------------------- ---------------------------------------------------------------
Women's and Men's outerwear LIZ CLAIBORNE, CLAIBORNE, CRAZY HORSE, DANA BUCHMAN, ELISABETH
- ------------------------------------------------- ---------------------------------------------------------------
Cosmetics and Fragrances ELLEN TRACY, MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Women's Legwear ELLEN TRACY, LUCKY BRAND, MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Leather apparel LUCKY BRAND
- ------------------------------------------------- ---------------------------------------------------------------
Leather outerwear ELLEN TRACY, LUCKY BRAND
- ------------------------------------------------- ---------------------------------------------------------------
Women's and Men's slippers LIZ CLAIBORNE, CLAIBORNE, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Women's swimwear LIZ CLAIBORNE, CRAZY HORSE, LUCKY BRAND, MEXX, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Women's intimate apparel LIZ CLAIBORNE, LUCKY BRAND, MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Optic Products LIZ CLAIBORNE, CLAIBORNE, CRAZY HORSE, ELLEN TRACY, FIRST
ISSUE, MEXX, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Women's and Men's sunglasses LIZ CLAIBORNE, CLAIBORNE, CRAZY HORSE, ELLEN TRACY, LUCKY
BRAND, MEXX, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Women's Belts ELLEN TRACY
- ------------------------------------------------- ---------------------------------------------------------------
Children's and Women's Jewelry MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Men's accessories CLAIBORNE, CRAZY HORSE, LUCKY BRAND
- ------------------------------------------------- ---------------------------------------------------------------
Men's pants CLAIBORNE
- ------------------------------------------------- ---------------------------------------------------------------
Bed and Bath LIZ CLAIBORNE, MEXX, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Men's dress shirts CLAIBORNE
- ------------------------------------------------- ---------------------------------------------------------------
Men's formalwear and accessories CLAIBORNE
- ------------------------------------------------- ---------------------------------------------------------------
Men's tailored clothing CLAIBORNE
- ------------------------------------------------- ---------------------------------------------------------------
Men's socks CLAIBORNE, LUCKY BRAND, MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Men's shoes LUCKY BRAND, MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Men's and Boy's neckwear CLAIBORNE, CRAZY HORSE
- ------------------------------------------------- ---------------------------------------------------------------
Women's neckwear ELLEN TRACY
- ------------------------------------------------- ---------------------------------------------------------------
Tabletop Products CRAZY HORSE, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Flooring LIZ CLAIBORNE
- ------------------------------------------------- ---------------------------------------------------------------
Children's apparel LIZ CLAIBORNE, CLAIBORNE, LUCKY BRAND
- ------------------------------------------------- ---------------------------------------------------------------
Children's legwear and socks MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Children's shoes MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Children's sunglasses MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Children's swimwear MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Women's sleepwear/loungewear LIZ CLAIBORNE, ELISABETH, LUCKY BRAND, VILLAGER
- ------------------------------------------------- ---------------------------------------------------------------
Men's sleepwear/loungewear CLAIBORNE, LUCKY BRAND
- ------------------------------------------------- ---------------------------------------------------------------
Women's, Men's and Children's Watches MEXX
- ------------------------------------------------- ---------------------------------------------------------------
Furniture MEXX
- ------------------------------------------------- ---------------------------------------------------------------
6
SALES AND MARKETING
Our products are sold at over 26,000 points of sale worldwide. In 2002,
sales in our domestic segment accounted for approximately 82% of our sales. Our
domestic wholesale sales are made primarily to department store chains and
specialty store customers. Retail sales are made through our own retail and
outlet stores. Wholesale sales are also made to international customers,
military exchanges and other outlets.
Internationally, our products are sold in over 100 markets. In 2002, sales
in our international segment accounted for approximately 18% of our sales. In
Western Europe, wholesale sales are made primarily to department stores and
specialty store customers, while retail sales are made through concession stores
within department store locations, as well as our own retail and outlet stores.
In Canada, we operate an import wholesale business which sells our products
primarily to department store chains and specialty stores, while retail sales
are made through our own retail and outlet stores. In Japan, we have several
licensing and distribution agreements to manufacture, distribute and operate
dedicated department store shop-in-shops under the EMMA JAMES, DANA BUCHMAN and
LUCKY BRAND trademarks. In other international markets, we operate principally
through licenses with third parties which operate free-standing retail stores
and dedicated department store shops. Our international accounts also purchase
fragrances and related products through third-party distributors.
Approximately 81% of 2002 wholesale sales (or 66% of total sales) were made
to our 100 largest customers. Except for Dillard's Department Stores, Inc.,
which accounted for approximately 11% of 2002 and 2001 wholesale sales (or 9% of
2002 and 10% of 2001 total sales), no single customer accounted for more than 6%
of our 2002 or 2001 wholesale sales (or 5% of 2002 and 2001 total sales).
However, certain of our customers are under common ownership; when considered
together as a group under common ownership, sales to the eight department store
customers which were owned at year-end 2002 by Federated Department Stores, Inc.
accounted for approximately 16% of 2002 and 17% of 2001 wholesale sales (or 13%
of 2002 and 14% of 2001 total sales), and wholesale sales to the eight
department store customers which were owned at year-end 2002 by The May
Department Stores Company accounted for approximately 12% of 2002 and 13% of
2001 wholesale sales (or 10% of 2002 and 11% of 2001 total sales). See Note 10
of Notes to Consolidated Financial Statements. Many major department store
groups make centralized buying decisions; accordingly, any material change in
our relationship with any such group could have a material adverse effect on our
operations. We expect that our largest customers will continue to account for a
significant percentage of our sales. Sales to the Company's department and
specialty store customers are made primarily through our New York City
showrooms.
Orders from our customers generally precede the related shipping periods by
several months. Our largest customers discuss with us retail trends and their
plans regarding their anticipated levels of total purchases of our products for
future seasons. These discussions are intended to assist us in planning the
production and timely delivery of our products. We continually monitor retail
sales in order to directly assess consumer response to our products.
We have implemented in-stock reorder programs in several divisions to
enable customers to reorder certain items through electronic means for quick
delivery. See "Manufacturing" below. Many of our retail customers participate in
our in-stock reorder programs through their own internal replenishment systems.
During 2002, we continued our domestic in-store sales, marketing and
merchandising programs designed to encourage multiple item, regular price sales,
build one-on-one relationships with consumers and maintain our merchandise
presentation standards. The LIZEDGE program services our LIZ CLAIBORNE apparel
brands by training sales associates on suggested selling techniques, product,
merchandise presentation and client development strategies. Our men's,
accessories, jewelry, cosmetics, DANA BUCHMAN, ELLEN TRACY, LAUNDRY BY SHELLI
SEGAL, LUCKY BRAND JEANS, SIGRID OLSEN and licensed DKNY(R) Jeans, CITY DKNY(R),
KENNETH COLE NEW YORK businesses have service and merchandising programs similar
to LIZEDGE.
In 2002, we further expanded our domestic in-store shop programs, designed
to enhance the presentation of our products on department store selling floors
generally through the use of proprietary fixturing, merchandise presentations
and in-store graphics. Currently, in-store shops operate under the following
brand names: LIZ CLAIBORNE, CRAZY HORSE, DKNY(R) JEANS, CLAIBORNE, EMMA JAMES,
KENNETH COLE NEW YORK, FIRST ISSUE, CITY DKNY(R), MEXX CANADA, SIGRID OLSEN,
DANA BUCHMAN, LUCKY BRAND, LAUNDRY. Our accessories business also offers an
in-store shop program.
In 2002, we installed, in the aggregate, 971 in-store shops, and, in 2003,
we plan to install, in the aggregate, approximately 600 additional in-store
shops. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Position, Capital Resources and
Liquidity."
7
We spent approximately $160 million on marketing for all of our brands in
2002, including approximately $44 million on national advertising, compared to
approximately $155 million on marketing for all of our brands, including
approximately $46 million spent on national advertising, in 2001.
We maintain several consumer websites, including www.elisabeth.com, which
offers ELISABETH branded apparel for sale directly to consumers;
www.danabuchman.com, which provides information on DANA BUCHMAN branded apparel;
www.ellentracy.com, which provides information on ELLEN TRACY branded apparel;
www.lizclaiborne.com, which provides information regarding the Company,
including information on our LIZ CLAIBORNE branded apparel and accessories
products; www.luckybrandjeans.com, which provides information on LUCKY BRAND
branded apparel and offers a selection of LUCKY BRAND apparel for sale directly
to consumers; and www.sigridolsen.com, which provides information on SIGRID
OLSEN branded apparel. In addition, in Germany, the MEXX business, pursuant to
an arrangement with Otto Versand (GmbH & Co.), offers MEXX branded merchandise
for sale directly through www.mexx.com and through exclusive mail-order
catalogs.
MANUFACTURING
We do not own any product manufacturing facilities; all of our products are
manufactured in accordance with our specifications through arrangements with
independent suppliers.
Products produced in the Far East, the Caribbean and Central America
represent a substantial portion of the Company's sales. We also source product
in the United States and other regions. During 2002, several hundred suppliers
manufactured our products. Our products are currently manufactured in 38
different countries, including China, Saipan, Hong Kong, Taiwan, the Dominican
Republic, Sri Lanka, Indonesia and the Philippines. We continually seek
additional suppliers throughout the world for our sourcing needs. Our largest
supplier of finished products manufactured less than 6% of our purchases of
finished products during 2002. In each of 2002, 2001 and 2000, our ten largest
suppliers for each such year manufactured approximately 36% of our purchases of
finished products for each such year. We expect that the percentage of
production represented by our largest suppliers will remain at its current level
for the next year in light of the Company's ongoing worldwide factory
certification initiative, under which we allocate large portions of our
production requirements to suppliers appearing to have superior capacity,
quality (of product, operation and human rights compliance) and financial
resources. Our purchases from our suppliers are effected through individual
purchase orders specifying the price and quantity of the items to be produced.
We do not have any long-term, formal arrangements with any of the suppliers
which manufacture our products. We believe that we are the largest customer of
many of our manufacturing suppliers and consider our relations with such
suppliers to be satisfactory.
Most of our fabrics, trimmings and other raw materials are obtained in bulk
from various foreign and domestic suppliers. Where we purchase completed product
"packages" from our contractors, the contractor is responsible to purchase all
necessary raw materials and other product components. Inasmuch as we intend to
continue to move towards purchasing an increasing portion of our products as
"packages," we have continued our development of a group of "approved suppliers"
to supply raw materials and other product components to our contractors for use
in "packages"; we anticipate continuing the practice of purchasing a substantial
portion of our products as "packages" in 2003. We do not have any long-term,
formal arrangements with any supplier of raw materials. To date, we have
experienced little difficulty in satisfying our raw material requirements and
consider our sources of supply adequate.
We operate under substantial time constraints in producing each of our
collections. See "Sales and Marketing" above. In order to deliver, in a timely
manner, merchandise which reflects current tastes, we attempt to schedule a
substantial portion of our materials and manufacturing commitments relatively
late in the production cycle, thereby favoring suppliers able to make quick
adjustments in response to changing production needs. However, in order to
secure necessary materials and manufacturing facilities, we must make
substantial advance commitments, often as much as seven months prior to the
receipt of firm orders from customers for the items to be produced. We continue
to seek to reduce the time required to move products from design to the
customer.
If we should misjudge our ability to sell our products, we could be faced
with substantial outstanding fabric and/or manufacturing commitments, resulting
in excess inventories. See "Competition; Certain Risks" below.
Our arrangements with foreign suppliers are subject to the risks of doing
business abroad, including currency fluctuations and revaluations, restrictions
on the transfer of funds, terrorist activities and, in certain parts of the
world, political, economic and currency instability. Our operations have not
been materially affected by any such factors to date. However, due to the large
portion of our products which are produced abroad, any substantial disruption of
our relationships with our foreign suppliers could adversely affect our
operations.
8
We require all of our suppliers to adhere to the Liz Claiborne Standards of
Engagement, which include strict standards prohibiting the use of child labor,
restricting working hours, requiring the payment of the greater of local minimum
wage or the prevailing industry wage, as well as regarding working conditions
generally. We have an ongoing program in place to monitor our suppliers'
compliance with our Standards. In this regard, we regularly inspect our
suppliers' factories. Should we learn of a supplier's failure to comply with our
Standards, either as a result of an inspection or otherwise, we require that the
supplier act quickly in order to comply. If a supplier fails to correct a
compliance deficiency, or if we determine that the supplier will be unable to
correct a deficiency, we reserve the right to terminate our business
relationship with the supplier. In addition, we are a participating company in
the Fair Labor Association's program. The Fair Labor Association is a non-profit
organization dedicated to improving working conditions.
IMPORT AND IMPORT RESTRICTIONS
Virtually all of the Company's merchandise imported into the United States
is subject to United States duties. In addition, bilateral agreements between
the major exporting countries and the United States impose quotas that limit the
amount of certain categories of merchandise that may be imported into the United
States. Quota represents the right, pursuant to bilateral or other international
trade arrangements, to export amounts of certain categories of merchandise into
a country or territory pursuant to a visa or license. The majority of such
agreements contain "consultation" clauses which allow the United States, under
certain circumstances, to impose unilateral restrictions on the importation of
certain categories of merchandise that are not subject to specified limits under
the terms of an agreement. These bilateral agreements have been negotiated under
the framework of the MultiFiber Arrangement ("MFA"), which has been in effect
since 1974. The United States, a participant in international negotiations known
as the "Uruguay Round", ratified legislation enacting and implementing the
various agreements of the Uruguay Round, effective January 1, 1995, including
the Uruguay Round Agreement on Textiles and Clothing which requires World Trade
Organization member countries to phase out textile and apparel quotas in three
stages over a ten year period. In addition, it regulates trade in non-integrated
textile and apparel quotas during the ten-year transition period. However, even
with respect to integrated textile and apparel quota categories, the United
States remains free to establish numerical restraints in response to a
particular product being imported in such increased quantities as to cause (or
threaten) serious damage to the relevant domestic industry. United States
legislation implementing the Uruguay Round also changed the rule of origin for
many textiles and apparel products effective July 1, 1996, with certain minor
exceptions. This change now determines country of origin based on "assembly" for
most textile and apparel products. The Uruguay Round also incorporates modest
duty reductions for textile and apparel products over a ten-year staging
schedule. This will likely result in a modification of current patterns of
international trade with respect to apparel and textiles.
In addition, each of the countries in which our products are sold has laws
and regulations regarding import restrictions and quotas. Because the United
States and other countries in which our products are manufactured and sold may,
from time to time, impose new quotas, duties, tariffs, surcharges or other
import controls or restrictions, or adjust presently prevailing quota
allocations or duty or tariff rates or levels, we maintain a program of
intensive monitoring of import and quota-related developments. As we do not own
quota, we must therefore work with our suppliers and vendors to secure the visas
or licenses required to ship our products. We seek continually to minimize our
potential exposure to import and quota-related risks through, among other
measures, allocation of production to merchandise categories that are not
subject to quota pressures, adjustments in product design and fabrication,
shifts of production among countries and manufacturers, as well as through
geographical diversification of our sources of supply. Textile and apparel
quotas are currently scheduled to be eliminated as of January 1, 2005; such
changes may significantly impact sourcing patterns.
In light of the very substantial portion of our products which are
manufactured by foreign suppliers, the enactment of new legislation or the
administration of current international trade regulations, executive action
affecting textile agreements, or the implementation of the scheduled elimination
of quota, including the possibility of changes in sourcing patterns, could
adversely affect our operations. See "Competition; Certain Risks" below.
DISTRIBUTION
We distribute virtually all of our products through facilities we own or
lease. Our principal distribution facilities are located in California, New
Jersey, Ohio, Pennsylvania, Rhode Island and The Netherlands. See "Properties"
below.
9
BACKLOG
At March 19, 2003, our order book reflected unfilled customer orders for
approximately $1.02 billion of merchandise, as compared to approximately $803
million at March 20, 2002. These orders represent our order backlog. The amounts
indicated include both confirmed and unconfirmed orders which we believe, based
on industry practice and our past experience, will be confirmed. We expect that
substantially all such orders will be filled within the 2003 fiscal year. We
note that the amount of order backlog at any given date is materially affected
by a number of factors, including seasonal factors, the mix of product, the
timing of the receipt and processing of customer orders, and scheduling of the
manufacture and shipping of the product, which in some instances is dependent on
the desires of the customer. Accordingly, order book data should not be taken as
providing meaningful period-to-period comparisons.
TRADEMARKS
We own and/or use a variety of trademarks in connection with our businesses
and products.
The following table summarizes the principal trademarks we own and/or use
in connection with our businesses and products:
AXCESS LUCKY BRAND BABY
AXCESS/MEN LUCKY BRAND DUNGAREES
BORA BORA LUCKY BRAND DUNGAREES OF AMERICA TOO TOUGH TO DIE
CLAIBORNE LUCKY BRAND KIDS
CLAIBORNE BOYS LUCKYVILLE
CLAIBORNE SPORT LUCKY YOU LUCKY BRAND
CRAZY HORSE MAMBO
CURVE MARVELLA
DANA BUCHMAN MEXX
DANA BUCHMAN WOMAN MEXX KIDS
COMPANY ELLEN TRACY MEXX SPORT
ELLEN TRACY MINI MEXX
ELISABETH MONET
EMMA JAMES MONET 2
FIRST ISSUE REALITIES
HOT PINK RUSS
J.H. COLLECTIBLES RUSS WOMAN
LAUNDRY BY SHELLI SEGAL SIGRID OLSEN
LINDA ALLARD ELLEN TRACY SIGRID OLSEN SPORT
LIZ SIGRID OLSEN COLLECTION
LIZ & CO. SIGRID OLSEN PETITES
LIZ CLAIBORNE SIGRID OLSEN WOMAN
LIZ CLAIBORNE BABY SO BLUE BY SIGRID OLSEN
LIZ CLAIBORNE COLLECTION TRIFARI
LIZ CLAIBORNE KIDS TRIPLE XXX DUNGAREES
LIZ CLAIBORNE WOMAN VILLAGER
LIZGOLF VIVID
LIZSPORT WOMEN'S WORK
LIZWEAR JEANS XX BY MEXX
LUCKY BRAND
Licensed Trademarks
CANDIE'S KENNETH COLE NEW YORK
CITY DKNY(R) REACTION KENNETH COLE
DKNY(R) ACTIVE UNLISTED
DKNY(R) JEANS
In addition, we own and/or use the LC logomark, our triangular logomark,
our triangle within a triangle icon, the DANA BUCHMAN leaf design and LUCKY
BRAND's four leaf clover design, pocket design and fly placement trademarks.
We have registered or applied for registration of a multitude of
trademarks, including those referenced above, for use on apparel and
apparel-related products, including accessories, cosmetics and jewelry in the
United States as well as in numerous foreign territories. We also have a number
of design patents. We regard our trademarks and other proprietary rights
10
as valuable assets and believe that they have significant value in the marketing
of our products. We vigorously protect our trademarks and other intellectual
property rights against infringement.
COMPETITION; CERTAIN RISKS
We believe that, based on sales, we are among the largest fashion apparel
and related accessories companies operating in the United States. Although we
are unaware of any comprehensive trade statistics, we believe, based on our
knowledge of the market and available trade information, that measured by sales,
we are one of the largest suppliers of "better" women's branded apparel in the
United States. Our principal competitors in the United States within the
"better" women's sportswear market include Jones Apparel Group, Inc., Polo Ralph
Lauren Corporation and Tommy Hilfiger Corporation. The principal competitors of
the MEXX business are Esprit, Benetton, Zara and Next.
Notwithstanding our position as one of the largest fashion apparel and
related accessories companies in the United States, we are subject to intense
competition as the apparel and related product markets are highly competitive,
both within the United States and abroad.
Risks Associated with Competition and the Marketplace
- -----------------------------------------------------
Our ability to compete successfully within the marketplace depends on a
variety of factors, including:
o The current challenging retail and macroeconomic environment, including the
levels of consumer confidence and discretionary spending, and levels of
customer traffic within department stores, malls and other shopping and
selling environments;
o Our ability to effectively anticipate, gauge and respond to changing
consumer demands and tastes, across multiple product lines, shopping
channels and geographics;
o Our ability to translate market trends into appropriate, saleable product
offerings relatively far in advance, while minimizing excess inventory
positions, including our ability to correctly balance the level of our
fabric and/or merchandise commitments with actual customer orders;
o Consumer and customer demand for, and acceptance and support of, our
products (especially by our largest customers) which are in turn dependent,
among other things, on product design, quality, value and service;
o Our ability, especially through our sourcing, logistics and technology
functions, to operate within substantial production and delivery
constraints, including risks associated with the possible failure of our
unaffiliated manufacturers to manufacture and deliver products in a timely
manner, to meet quality standards or to comply with our policies regarding
labor practices or applicable laws or regulations;
o The financial condition of, and consolidations, restructurings and other
ownership changes in, the apparel (and related products) industry and the
retail industry;
o Risks associated with our 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 our products
specifically;
o Our ability to respond to the strategic and operational initiatives of our
largest customers, as well as to the introduction of new products or
pricing changes by our competitors; and
o Our ability to obtain sufficient retail floor space and to effectively
present products at retail.
Economic, Social and Political Factors
- --------------------------------------
Also impacting the Company and our operations are a variety of economic,
social and political factors, including the following:
o Risks associated with war, the threat of war, and terrorist activities,
including reduced shopping activity as a result of public safety concerns
and disruption in the receipt and delivery of merchandise;
o Changes in national and global microeconomic and macroeconomic conditions
in the markets where we sell or source our products, including the levels
of consumer confidence and discretionary spending, consumer income growth,
personal debt levels, rising energy costs and energy shortages, and
fluctuations in foreign currency exchange rates, interest rates and stock
market volatility;
o Changes in social, political, legal and other conditions affecting foreign
operations;
o Risks of increased sourcing costs, including costs for materials and labor;
o Any significant disruption in our relationships with our suppliers,
manufacturers and employees;
o Work stoppages by any of our suppliers or service providers, such as, for
example, the recent West Coast port workers lock-out;
o The enactment of new legislation or the administration of current
international trade regulations, or executive action affecting
international textile agreements, including the United States' reevaluation
of the trading status of certain
11
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; and
o Risks related to our ability to establish, defend and protect our
trademarks and other proprietary rights and other risks relating to
managing intellectual property issues.
Risks Associated with Acquisitions and the Entry into New Markets
- -----------------------------------------------------------------
As part of our growth strategy, we review from time to time the possible
entry into new markets, either through acquisitions, internal development
activities, or licensing. The entry into new markets (including the development
and launch of new product categories and product lines), is accompanied by a
variety of risks inherent in any such new business venture, including the
following:
o Risks that the new market activities may require methods of operations and
marketing and financial strategies different from those employed in our
other businesses;
o Certain new businesses may be lower margin businesses and may require us 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 our historical buyers,
customers and competitors;
o Possible difficulties, delays and/or unanticipated costs in integrating the
business, operations, personnel, and/or systems of an acquired business;
o Risks that projected or satisfactory level of sales, profits and/or return
on investment for an acquired business will not be generated;
o Risks involving our ability to retain and appropriately motivate key
personnel of the acquired business;
o Risks that expenditures required for capital items or working capital will
be higher than anticipated;
o Risks associated with unanticipated events and unknown or uncertain
liabilities;
o Uncertainties relating to our ability to successfully integrate an
acquisition, maintain product licenses, or successfully launch new products
and lines; and
o With respect to businesses where we act as licensee, the 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 our
control.
EMPLOYEES
At December 28, 2002, we had approximately 12,000 full-time employees
worldwide, as compared with approximately 10,400 full-time employees at December
29, 2001.
In the United States and Canada, we are bound by collective bargaining
agreements with the Union of Needletrades, Industrial and Textile Employees
(UNITE), and agreements with various related locals. These agreements cover
approximately 1,790 of our full-time employees, and expire on May 31, 2003 and
thereafter. It is anticipated that the agreements expiring in 2003 will be
renegotiated for an additional three year term. In addition, we are also
currently bound by a Jobbers Agreement with UNITE which expires on May 31, 2003.
Most of the UNITE-represented employees are employed in warehouse and
distribution facilities we operate in California, New Jersey, Ohio, Pennsylvania
and Rhode Island. In addition, we are bound by an agreement with the Industrial
Professional & Technical Workers International Union, covering approximately 158
of our full-time employees at our Santa Fe Springs, California facility and
expiring on May 14, 2005.
We consider our relations with our employees to be satisfactory and to date
we have not experienced any interruption of our operations due to labor
disputes. While relations with the union have historically been amicable, we
cannot conclusively eliminate the risk of a labor dispute at one or more of our
facilities during negotiations of our collective bargaining agreements with
UNITE and its related locals. While we do not foresee the likelihood of a
prolonged labor dispute, any substantial labor disruption could adversely affect
our operations.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to these reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available
free of charge on our website, located at www.lizclaiborneinc.com, as soon as
reasonably practicable after they are filed with or furnished to the Securities
and Exchange Commission. These reports are also available on the Securities and
Exchange Commission's Internet website at www.sec.gov. The information contained
on our website is not intended to be included as part of, or incorporated by
reference into, this Annual Report on Form 10-K.
12
Item 2. Properties.
----------
Our distribution and administrative functions are conducted in both leased
and owned facilities. We also lease space for our retail specialty, outlet and
concession stores. We believe that our existing facilities are well maintained,
in good operating condition and, upon occupancy of additional space, will be
adequate for our present level of operations, although from time to time we use
unaffiliated third parties to provide distribution services to meet our
distribution requirements. See Note 10 of Notes to Consolidated Financial
Statements.
Our principal executive offices and showrooms, as well as our sales,
merchandising and design staffs, are located at 1441 Broadway, New York, New
York, where we lease approximately 287,000 square feet under a master lease,
which expires at the end of 2012 and contains certain renewal options and rights
of first refusal for additional space. Most of our business segments use this
facility. The following table sets forth information with respect to our other
key properties:
- -----------------------------------------------------------------------------------------------------------------
Key Properties:
- -----------------------------------------------------------------------------------------------------------------
Approximate
Location(1) Primary Use Square Footage Leased/Owned
- ----------------------------------- ------------------------------------- ------------------- -------------------
Santa Fe Springs, California Apparel Distribution Center 600,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Vernon, California Offices/Apparel Distribution Center 123,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Mississauga, Canada Offices/Apparel Distribution Center 183,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Dayton, New Jersey Non-Apparel Distribution Center 226,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Dayton, New Jersey Non-Apparel Distribution Center 179,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
North Bergen, New Jersey Offices/Apparel Distribution Center 620,000 Owned
- ----------------------------------- ------------------------------------- ------------------- -------------------
North Bergen, New Jersey Offices 300,000 Owned
- ----------------------------------- ------------------------------------- ------------------- -------------------
Secaucus, New Jersey Apparel Distribution Center 164,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Westchester, Ohio Apparel Distribution Center 600,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Mt. Pocono, Pennsylvania(2) Apparel Distribution Center 150,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Mt. Pocono, Pennsylvania Apparel Distribution Center 1,230,000 Owned
- ----------------------------------- ------------------------------------- ------------------- -------------------
Lincoln, Rhode Island Non-Apparel Distribution Center 115,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
Voorschoten, The Netherlands(3) Offices/Apparel Distribution Center 295,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
(1) We also lease showroom, warehouse and office space in various other
domestic and international locations.
(2) This facility is on an 80-acre site which we own.
(3) This property is used solely by our MEXX business.
Pursuant to financing obtained through an off-balance sheet arrangement
commonly referred to as a synthetic lease, we have constructed the Westchester,
Ohio facility and the Lincoln, Rhode Island facility. See "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations:
Financial Position, Capital Resources and Liquidity"; and Note 10 of Notes to
Consolidated Financial Statements for a discussion of this arrangement. During
2002, we closed our Montgomery, Alabama facility and are seeking to dispose of
our interest therein. We are also seeking to sell our approximately 270,000
square foot facility in Augusta, Georgia (located on a 98-acre site and
previously used in connection with a dyeing and finishing joint venture), which
is currently sublet to a third-party.
Item 3. 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 Notes 10 and 24 of Notes to Consolidated Financial Statement.
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
13
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 "FLSA Action").
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 Ninth Circuit Court of Appeals subsequently denied the
non-settling defendants' petition for interlocutory review of the grant of class
certification. At the end of September 2002, plaintiffs and all of the factory
and retailer non-settling defendants other than Levi Strauss & Co. reached
agreement to settle the Federal Action, the State Court Action and the FLSA
action. At a hearing held on October 31, 2002, the Court granted conditional
preliminary approval of the September 2002 settlement and scheduled a Fairness
Hearing to be held on March 22, 2003, to determine whether to grant final
approval to the prior settlement agreements and the September 2002 settlement.
Under the terms of the Company's 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.
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
14
Executive Officers of the Registrant.
- ------------------------------------
Information as to the executive officers of the Company, as of March 19,
2003, is set forth below:
Name Age Position(s)
Paul R. Charron 60 Chairman of the Board and Chief Executive Officer
Michael Scarpa 47 Senior Vice President and Chief Financial Officer
Angela Ahrendts 42 Executive Vice President
Lawrence D. McClure 54 Senior Vice President - Human Resources
Trudy F. Sullivan 53 Executive Vice President
Robert J. Zane 63 Senior Vice President - Manufacturing, Sourcing,
Distribution and Logistics
Executive officers serve at the discretion of the Board of Directors.
Mr. Charron joined the Company as Vice Chairman and Chief Operating
Officer, and became a Director, in 1994. In 1995, Mr. Charron became President
(a position he held until October 1996) and Chief Executive Officer of the
Company. In 1996, Mr. Charron became Chairman of the Board of the Company. Prior
to joining the Company, Mr. Charron served in various executive capacities at VF
Corporation, an apparel manufacturer, including Group Vice President and
Executive Vice President, from 1988.
Mr. Scarpa joined the Company in 1983 as budget manager and served in
various management positions thereafter. In 1991, Mr. Scarpa was promoted to
Vice President - Divisional Controller and in 1995 he was promoted to Vice
President - Financial Planning and Operations. Effective July 2000, he became
Vice President - Chief Financial Officer, and in July 2002 he became Senior Vice
President-Chief Financial Officer.
Ms. Ahrendts joined the Company in 1998 as Vice President - Corporate
Merchandising and Design. In March 2001, Ms. Ahrendts was promoted to Senior
Vice President Corporate Merchandising and Group President for Laundry by Shelli
Segal, Lucky Brand Dungarees, the Company's Men's business and the licensed
Kenneth Cole New York and DKNY(R) businesses, and became Executive Vice
President in March, 2002. Prior to joining the Company, Ms. Ahrendts served as
Executive Vice President of Henri Bendel, a division of the Limited, an apparel
specialty store retailer, from 1996 to 1998.
Mr. McClure joined the Company in 2000 as Senior Vice President - Human
Resources. Prior to joining the Company, Mr. McClure served as Vice President,
Human Resources of Dexter Corporation, a specialty materials company, from 1995.
Ms. Sullivan joined the Company in 2001 as Group President for the
Company's Casual, Collection and Elisabeth businesses, and became Executive Vice
President in March 2002. Prior to joining the Company, Ms. Sullivan was
President of J. Crew Group, Inc., a vertical retail and catalog apparel company,
from 1997 to 2001.
Mr. Zane joined the Company in 1995 and served from 1995 to 2000 as Senior
Vice President - Manufacturing and Sourcing. In 2000, Mr. Zane became Senior
Vice President - Manufacturing, Sourcing, Distribution and Logistics. Prior to
joining the Company, Mr. Zane owned and operated Medallion Tekstil, a private
label manufacturing company he founded in 1989.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
MARKET INFORMATION
The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol LIZ. The table below sets forth the high and low closing sale
prices of the Common Stock (based on the NYSE composite tape) for the periods
indicated. On December 19, 2001, the Company declared a two-for-one stock split
in the form of a stock dividend payable on January 16, 2002 to stockholders of
record on December 31, 2001. All share price data, including historical data,
has been adjusted to reflect the stock split.
Calendar Period High Low
--------------- ---- ---
2002:
1st Quarter $30.31 $24.88
2nd Quarter 32.17 27.68
3rd Quarter 31.14 24.70
4th Quarter 32.65 24.22
2001:
1st Quarter $25.45 $20.88
2nd Quarter 26.34 21.88
3rd Quarter 27.14 18.85
4th Quarter 25.84 18.63
RECORD HOLDERS
On March 19, 2003, the closing sale price of the Company's Common Stock was
$30.26. As of March 19, 2003, the approximate number of record holders of Common
Stock was 6,545.
DIVIDENDS
The Company has paid regular quarterly cash dividends since May 1984.
Quarterly dividends for the last two fiscal years were paid as follows:
Calendar Period Dividends Paid per Common Share
--------------- -------------------------------
2002:
1st Quarter $0.05625
2nd Quarter 0.05625
3rd Quarter 0.05625
4th Quarter 0.05625
2001:
1st Quarter $0.05625
2nd Quarter 0.05625
3rd Quarter 0.05625
4th Quarter 0.05625
The Company currently plans to continue paying quarterly cash dividends on
its Common Stock. The amount of any such dividend will depend on the Company's
earnings, financial position, capital requirements and other relevant factors.
In December 1989, the Board of Directors first authorized the repurchase,
as market and business conditions warranted, of the Company's Common Stock for
cash in open market purchases and privately negotiated transactions. From time
to time thereafter, the Board has authorized additional repurchases. As of March
19, 2003, the Company had expended
16
an aggregate of $1.457 billion of the $1.675 billion authorized under its stock
repurchase program, covering approximately 84.8 million shares.
EQUITY COMPENSATION
The following table summarizes information about The Liz Claiborne, Inc.
Outside Directors' 1991 Stock Ownership Plan (the "Outside Directors Plan"); The
Liz Claiborne, Inc. 1992 Stock Incentive Plan; The Liz Claiborne, Inc. 2000
Stock Incentive Plan (the "2000 Plan"); and The Liz Claiborne, Inc. 2002 Stock
Incentive Plan (the "2002 Plan"), which together comprise all of our existing
equity compensation plans, as of December 28, 2002. Our stockholders have
approved all of these plans.
(a) (b) (c)
Number of Number of Securities
Securities to be Remaining Available for
Issued Upon Weighted Average Future Issuance Under
Exercise of Exercise Price of Equity Compensation
Outstanding Outstanding Plans (Excluding
Options, Warrants Options, Warrants Securities Reflected in
Plan Category and Rights and Rights Column (a))
------------- ---------- ---------- -----------
Equity Compensation
Plans Approved by
Stockholders...... 8,720,732 (1) $23.00 11,891,576 (2) (3)
- ----------------------- --------------------- -------------------- ------------------------
Equity Compensation
Plans Not Approved by
Stockholders...... 0 N/A 0
- ----------------------- --------------------- -------------------- ------------------------
TOTAL............. 8,720,732 $23.00 11,891,576
- ----------------------- --------------------- -------------------- ------------------------
- -----------------------
(1) Includes 13,375 shares of Common Stock issuable under the Outside Directors
Plan pursuant to participants' elections thereunder to defer certain
director compensation.
(2) Includes 367,678 shares representing the maximum number of shares of Common
Stock issuable as of December 28, 2002 under the Outside Directors Plan.
The maximum number of shares of Common Stock authorized for award under
such Plan is not a fixed number but is determined by a formula which sets
the maximum number at one-half of one percent (.50%) of the number of
shares of stock issued and outstanding from time to time.
(3) In addition to options, warrants and rights, the 2000 Plan and the 2002
Plan authorize the issuance of restricted stock, unrestricted stock and
performance stock. Each of the 2000 and the 2002 Plans contains a sub-limit
on the aggregate number of shares of restricted Common Stock which may be
issued; the sub-limits are set at 1,000,000 shares under the 2000 Plan and
1,800,000 shares under the 2002 Plan.
17
Item 6. Selected Financial Data.
-----------------------
The following table sets forth certain information regarding the Company's
operating results and financial position and is qualified in its entirety by the
consolidated financial statements and notes thereto which appear elsewhere
herein:
(All dollar amounts in thousands except per common share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net Sales $3,717,503 $3,448,522 $3,104,141 $2,806,548 $2,535,268
Gross Profit 1,619,635 1,427,250 1,233,872 1,097,582 997,102
Net Income 231,165** 192,057** 184,595** 192,442 169,377**
Working capital 612,191 638,281 535,811 483,967 695,757
Total assets 2,296,318 1,951,255 1,512,159 1,411,801 1,392,791
Long term obligations 377,838 402,345 284,219 131,085 --
Stockholders' equity 1,286,361 1,056,161 834,285 902,169 981,110
Per common share data*:
Basic earnings 2.19** 1.85** 1.73** 1.56 1.29**
Diluted earnings 2.16** 1.83** 1.72** 1.56 1.29**
Book value at year end 12.02 10.04 8.15 7.95 7.67
Dividends paid .23 .23 .23 .23 .23
Weighted average common
shares outstanding** 105,592,062 103,993,824 106,813,198 123,046,930 131,005,704
Weighted average common
shares and share
equivalents outstanding* 107,195,872 105,051,035 107,494,886 123,439,182 131,693,552
* Adjusted for a two-for-one stock split of the Company's common stock,
payable in the form of a 100% stock dividend to shareholders of record as
of the close of business on December 31, 2001. The 100% stock dividend was
paid on January 16, 2002.
** Includes the after tax effect of a restructuring charge of $4,547 ($7,130
pre-tax) or $.04 per common share in 2002, a restructuring charge of $9,632
($15,050 pre-tax) or $.09 per common share in 2001, restructuring charges
of $13,466 ($21,041 pretax) or $.13 per common share and a special
investment gain of $5,606 ($8,760 pretax or $.05 per common share in 2000
and a restructuring charge of $17,100 ($27,000 pretax) or $.13 per common
share in 1998.
18
Item 7. 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.
o Wholesale Apparel consists of women's and men's apparel designed and
------------------
marketed worldwide under various trademarks owned by the Company or
licensed by the Company from third-party owners; this segment includes our
core LIZ CLAIBORNE businesses (career and casual, which includes
COLLECTION, LIZSPORT, LIZWEAR and LIZ & CO.), bridge (DANA BUCHMAN and
ELLEN TRACY), men's (CLAIBORNE), moderate-priced special markets (AXCESS,
CRAZY HORSE, EMMA JAMES, FIRST ISSUE, RUSS, VILLAGER and J.H. COLLECTIBLES
(to be launched in Spring 2003)), 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.
o Wholesale Non-Apparel 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.
o Retail consists of our worldwide retail operations that sell most of these
------
apparel and non-apparel products to the public through our 233 specialty
retail stores, 250 outlet stores and 482 international concession stores
(where the retail selling space is either owned and operated by the
department store in which the retail selling space is located or leased and
operated by a third party, while, in each case, the Company owns the
inventory). This segment includes stores operating under the following
formats: MEXX, LUCKY BRAND DUNGAREES, LIZ CLAIBORNE, ELISABETH, DKNY(R)
JEANS, DANA BUCHMAN, ELLEN TRACY and MONET, as well as our Special Brands
Outlets which include products from our Special Markets divisions. On
February 20, 2003, we announced our decision to close our 22 LIZ CLAIBORNE
specialty retail stores (see Note 13 of Notes to Consolidated Financial
Statements).
The Company, as licensor, also licenses to third parties the right to
produce and market products bearing certain Company-owned trademarks. The
resultant royalty income is not allocated to any of the specified operating
segments, but is rather included in the line "Sales from external customers"
under the caption "Corporate/Eliminations" in Note 20 of Notes to Consolidated
Financial Statements.
As a result of our May 2001 acquisition of Mexx Group B.V. ("MEXX"), we
also present our results on the following geographic basis:
o Domestic: wholesale customers and Company specialty retail and outlet
--------
stores located in the United States; and
o International: wholesale customers and Company specialty retail and outlet
-------------
stores and concession stores located outside of the United States,
primarily MEXX and MEXX Canada.
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 20 of Notes to
Consolidated Financial Statements.
In May 2001, we acquired 100% of the equity interest of MEXX, a privately
held Netherlands based fashion apparel company, incorporated and existing under
the laws of The Netherlands. MEXX designs and markets a wide range of mid-price,
branded merchandise for women, men and children, targeting the 20-40 year old
modern consumer. MEXX's products are sold via wholesale and retail formats in
more than 40 countries in Europe, the Asia-Pacific region, and the Middle East,
with core markets in the Benelux and Germanic regions. Please refer to Note 2 of
Notes to Consolidated Financial Statements for a discussion of the MEXX
acquisition.
MEXX's wholesale business, which accounted for approximately 68% and 71% of
MEXX's total net sales for fiscal years 2002 and 2001, respectively, 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 32% and 29% of MEXX's total net sales in fiscal
years 2002 and 2001, respectively, consists of 71 company owned and operated
retail stores, 162 concession stores and 21 outlet stores. MEXX operates at a
higher selling, general and administrative expenses ("SG&A") rate than the
Company average due to the fact that MEXX operates a geographically diverse and
relatively large retail business, which is generally more expensive to operate
than a wholesale business. MEXX also has licensed a variety of
19
its trademarks for use on a number of non-apparel items, including fragrances,
shoes, handbags, costume jewelry and watches.
In June 2002, we 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 in
North America commencing with the Spring 2003 selling season. The line, which is
produced by Kellwood's subsidiary, Smart Shirts Ltd., a global manufacturer of
men's shirts, was previously produced and sold by the Company's CLAIBORNE
division. 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 options to renew for
two additional 3-year periods if certain sales thresholds are met.
On July 9, 2002, we acquired 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 average exchange rate in
effect during that period). The total purchase price consisted of: (a) an
initial cash payment made at the closing date of $15.2 million; (b) a second
payment due at the end of the first quarter 2003 based on business performance
in 2002, which is currently expected to be approximately 27 million Canadian
dollars (or approximately $17 million based on the exchange rate in effect at
December 28, 2002); and (c) a contingent payment equal to 28% of the equity
value of MEXX Canada, to be determined as a multiple of MEXX Canada's earnings
and cash flow performance for the year ended either 2004 or 2005. The selection
of the measurement year for the contingent payment is at either party's option.
The Company estimates that if the 2004 measurement year is selected the payment
will be in the range of 35 - 45 million Canadian dollars (or $22 - 29 million
based on the exchange rate in effect at December 28, 2002). Unaudited pro forma
information related to this acquisition is not included, as the impact of this
transaction is not material to our consolidated results.
On September 30, 2002, we acquired 100 percent of the equity interest of
Ellen Tracy, Inc. and related companies ("Ellen Tracy") for a purchase price of
approximately $175.6 million, including the assumption of debt. Ellen Tracy, a
privately held fashion apparel company, designs, wholesales and markets women's
sportswear. Based in New York City, Ellen Tracy sells its products at bridge
price points which are somewhat higher than the Company's core better-priced
businesses, predominantly to select specialty stores and upscale department
stores. Brands include ELLEN TRACY, LINDA ALLARD ELLEN TRACY and COMPANY ELLEN
TRACY. Ellen Tracy achieved net sales of approximately $171 million in 2001.
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.
20
2002 VS. 2001
- -------------
The following table sets forth our operating results for the year ended
December 28, 2002 compared to the year ended December 29, 2001:
Year ended Variance
------------------------------------------------------------------
December 28, December 29,
Dollars in millions 2002 2001 $ %
- -------------------------------------------------------------------------------------------------------
Net Sales $ 3,717.5 $ 3,448.5 $ 269.0 7.8%
Gross Profit 1,619.6 1,427.3 192.3 13.5%
Selling, general and
administrative expenses 1,222.6 1,080.5 142.1 13.2%
Restructuring charge 7.1 15.1 (8.0) (52.6)%
Operating Income 389.9 331.7 58.2 17.5%
Other (expense) income-net (2.3) (3.5) (1.2) (34.0)%
Interest (expense) income-net (25.1) (28.1) (3.0) (10.6)%
Provision for income taxes 131.3 108.0 23.3 21.5%
Net Income $ 231.2 $ 192.1 39.1 20.4%
Net Sales
- ---------
Net sales for 2002 were $3.718 billion, an increase of $269 million, or
7.8%, over net sales for 2001. This overall increase was primarily due to a
$229.8 million increase in sales of our European MEXX operation reflecting the
inclusion of a full year of sales as well as growth, an aggregate of $63.6
million in increases resulting from the inclusion of our recently acquired ELLEN
TRACY and MEXX Canada businesses, and gains in our Special Markets, LUCKY BRAND
DUNGAREES, SIGRID OLSEN branded businesses and non-apparel Jewelry and Handbags
businesses. These increases were offset primarily by planned decreases with
respect to our core LIZ CLAIBORNE apparel business, in light of anticipated
conservative buying patterns of our retail customers resulting from, among other
things, the impact of September 11, 2001 on consumer spending in the first half
of the year, as well as last year's higher sales levels reflecting the impact of
our aggressive liquidation of excess inventories in the latter half of 2001.
2002 and 2001 net sales were not materially impacted by foreign currency
fluctuations. Net Sales results for our business segments as well as a
geographic breakout are provided below:
Wholesale Apparel net sales increased $128.8 million, or 5.1%, to $2.665
------------------
billion.
o The increase principally reflected the following:
- $145.8 million of additional net sales reflecting the inclusion of a
full year's sales of MEXX (acquired in May 2001) as well as continued
growth in MEXX's business;
- The inclusion of an aggregate of $41.2 million of sales of our
recently acquired ELLEN TRACY and MEXX Canada businesses.
o These increases were partially offset by a $102.9 million decrease in our
core domestic LIZ CLAIBORNE businesses. Approximately half of this decrease
reflected planned unit decreases in light of anticipated conservative
buying patterns of our retailer customers in the first half of the year,
one-third of this decrease reflected reduced sales to our own retail stores
and the remainder was due to last year's higher sales levels as a result of
our aggressive liquidation of excess inventory in the latter half of 2001.
o The remainder of our Wholesale Apparel businesses experienced, in the
aggregate, a net increase of approximately $44.7 million. This change
resulted from sales increases in our Special Markets and SIGRID OLSEN
businesses, due in each case to higher unit volume partially offset by
lower average unit selling prices due to the inclusion of more lower-priced
items in the product offerings; and in our LUCKY BRAND DUNGAREES and Men's
DKNY(R)Jeans and Active businesses, due in each case to higher unit volume
and higher average unit selling prices reflecting stronger demand. These
increases were partially offset by decreases in our DANA BUCHMAN and Men's
Sportswear and Furnishings businesses, reflecting overall planned unit
decreases in light of anticipated conservative buying patterns of our
retailer customers in the first half of the year, as well as last year's
aforementioned aggressive excess inventory liquidation.
21
Wholesale Non-Apparel increased $15.5 million, or 3.1%, to $511.6 million.
---------------------
o The increase reflected a total gain of $19.7 million in our LIZ CLAIBORNE
Jewelry and Handbags businesses, due in each case to higher unit volume.
o These increases were offset by decreases in our Cosmetics business, due to
lower promotional sales, partially offset by year-over-year sales increases
in our MAMBO fragrance (launched in August 2001) and the introduction of
our BORA BORA fragrance in August 2002.
Retail net sales increased $102.9 million, or 16.7%, to $718.6 million.
------
o The increase principally reflected the following:
- $84.0 million of sales increases in our MEXX stores, reflecting the
inclusion of a full year's sales as well as the net addition of 7 new
stores;
- The inclusion of an aggregate of $22.4 million of sales from the
addition of 37 new MEXX Canada stores (acquired in July 2002) and 15
new ELLEN TRACY Outlet stores (acquired in September 2002); and
- The addition of 14 new LUCKY BRAND DUNGAREES Specialty Retail stores.
o The above increases were partially offset by the following comparable store
sales decreases due to a general decline in traffic and lower inventories
at the store level resulting from conservative planning reflecting the
challenging retail environment:
- Approximate 6% decline in our Outlet stores; and
- Approximate 7% decline in our Specialty Retail stores.
International net sales increased $263.0 million, or 63.0% (to $680.2
-------------
million), due principally to a $229.8 million increase in MEXX sales, reflecting
the inclusion of a full year's sales as well as growth in Europe in both MEXX's
Wholesale and Retail operations, and, to a lesser extent, the inclusion of $23.8
million of sales from our recently acquired MEXX Canada business. Domestic net
--------
sales increased $6.0 million, or 0.2% (to $3,037.3 million), due principally to
the recent acquisition of ELLEN TRACY, partially offset by conservative planning
in the domestic portion of our Wholesale Apparel segment.
Gross Profit
- ------------
Gross profit dollars increased $192.3 million, or 13.5%, in 2002 over 2001.
Gross profit as a percent of net sales increased to 43.6% in 2002 from 41.4% in
2001. The increase in gross profit rate reflected 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 gross profit rate also benefited from a higher proportion of
full-priced sales in our Jewelry, Handbags, Special Markets, LUCKY BRAND
DUNGAREES Wholesale, LAUNDRY and Men's DKNY(R) Jeans and Active businesses, as
well as the inclusion of a full year's results of MEXX, which runs at a higher
gross margin rate than the Company average, reflecting its larger retail
component. These increases were partially offset by lower gross margins in our
Specialty Retail stores, Cosmetics, LIZ CLAIBORNE, Fashion Accessories,
CLAIBORNE Men's and Women's DKNY(R) Jeans and Active and CITY DKNY(R) businesses
and, in the fourth quarter, additional expenses related to the West Coast dock
strike and slightly higher promotional activity at retail.
SG&A
- ----
Selling, general and administrative expenses (SG&A) increased $142.1
million, or 13.2%, in 2002 over 2001. These expenses as a percent of net sales
increased to 32.9% in 2002 from 31.3% in 2001. These SG&A dollar and rate
increases were principally due to the inclusion of a full year of the results of
MEXX, which has a relatively higher SG&A rate than the Company average due to
the fact that MEXX operates a geographically diverse and relatively large retail
business, which is generally more expensive to operate than a wholesale
business. The increase also reflected the lower proportion of sales derived from
our relatively lower-cost core LIZ CLAIBORNE businesses, as well as the opening
of new LUCKY BRAND DUNGAREES Specialty Retail and Outlet stores. We also
incurred higher SG&A costs and rates in our Women's DKNY(R) Jeans and Active and
CITY DKNY(R) businesses as well as through the inclusion of the newly acquired
MEXX Canada and ELLEN TRACY businesses, which each run at a higher SG&A rate
than the Company average. The increase in 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 SFAS No. 142,
"Accounting for Goodwill and Other Intangibles," as well as lower SG&A costs and
rates in our CLAIBORNE Men's, Special Markets, LAUNDRY and KENNETH COLE NEW YORK
Women's businesses.
22
Restructuring Charge
- --------------------
We recorded a $7.1 million pretax ($4.5 million after tax) net
restructuring charge in the fourth quarter of 2002. The charge covers costs
associated with the closure of all twenty-two LIZ CLAIBORNE specialty retail
stores. The determination to close the stores is intended to eliminate
redundancy between this retail format and the wide department store base in
which the Company's products are available. The $9.9 million charge includes
costs associated with lease obligations ($5.4 million), asset write-offs ($3.3
million) and other store closing costs ($1.2 million), offset by $2.8 million
deemed no longer necessary of the Company's previous restructuring liability
originally recorded in December 2001. The closure of these stores is expected to
result in annual savings of approximately $3 million and will result in fewer
than 100 jobs expected to be lost. We expect that these activities will be
substantially complete by December 2003.
Operating Income
- ----------------
As a result of the factors described above, operating income increased
$58.2 million, or 17.5%, to $389.9 million in 2002 over 2001. Operating income
as a percent of net sales increased to 10.5% in 2002 compared to 9.6% in 2001.
Operating income by business segment as well as a geographic breakout is
provided below:
o Wholesale Apparel operating profit increased $36.9 million to $326.7
------------------
million (12.3% of net sales) in 2002 compared to $289.8 million (11.4% of
net sales) in 2001. Our domestic LIZ CLAIBORNE business produced increased
profits despite lower sales and gross margins primarily due to expense
management and cost reduction initiatives. Operating income also benefitted
from a higher proportion of sales in our Special Markets and SIGRID OLSEN
businesses, partially offset by reduced profits in our Women's DKNY(R)
Jeans and Active and CITY DKNY(R) and CLAIBORNE Men's businesses.
o Wholesale Non-Apparel operating profit increased $0.9 million to $47.1
----------------------
million (9.2% of net sales) in 2002 compared to $46.2 million (9.3% of net
sales) in 2001, principally due to increases in our Jewelry business,
partially offset by reduced profit dollars in our Cosmetics business.
o Retail operating profit decreased $1.5 million to $67.8 million (9.4% of
------
net sales) in 2002 compared to $69.3 million (11.3% of net sales) in 2001,
principally reflecting reduced comparable store sales and increased
operating expenses from the additional store base in our Outlet stores and
LUCKY BRAND DUNGAREES Specialty Stores, as well as operating losses in our
LIZ CLAIBORNE and ELISABETH Specialty Stores, partially offset by the
inclusion of a full year's profits from the MEXX Retail stores.
o Domestic operating profit increased by $45.7 million, or 15.7%, to $336.1
--------
million, due to the gross profit improvements discussed above.
International operating profit increased $12.5 million, or 30.2% (to $53.8
-------------
million) due to the inclusion of profits from our recently acquired MEXX
and MEXX Canada businesses.
Net Other Expense
- -----------------
Net other expense in fiscal 2002 was $2.3 million, principally comprised of
$3.8 million of minority interest expense (which relates to the 15% minority
interest in Lucky Brand Dungarees, Inc. and the 2.5% minority interest in
Segrets, Inc.), partially offset by other non-operating income, primarily
comprised of net foreign exchange gains, compared to $3.5 million in 2001,
comprised of $3.6 million of minority interest expense, partially offset by
other non-operating income.
Net Interest Expense
- --------------------
Net interest expense in fiscal 2002 was $25.1 million, principally
comprised of interest expense on the Eurobond offering incurred to finance our
acquisition of MEXX, compared to $28.1 million in 2001, representing interest
expense on commercial paper borrowings, incurred to finance our strategic
initiatives including costs associated with our acquisitions and capital
expenditures, and the Eurobond offering.
Provision for Income Taxes
- --------------------------
Our tax provision for 2002 was $131.3 million, or 36.2% of pretax income,
as compared to $108.0 million, or 36.0% of pretax income in 2001. The higher
rate resulted primarily from increased taxes associated with foreign operations.
Net Income
- ----------
Net income increased in 2002 to $231.2 million from $192.1 million in 2001
and increased as a percent of net sales to 6.2% in 2002 from 5.6% in 2001, due
to the factors described above. Diluted earnings per common share increased
18.0% to $2.16 in 2002 from $1.83 in 2001. Our average diluted shares
outstanding increased by 2.1 million shares in 2002, to 107.2 million, as a
result of the exercise of stock options and the effect of dilutive securities.
23
2001 VS. 2000
- -------------
The following table sets forth our operating results for the year ended
December 29, 2001 compared to the year ended December 30, 2000:
Year ended Variance
------------------------------------------------------------------
December 28, December 29,
Dollars in millions 2002 2001 $ %
- -------------------------------------------------------------------------------------------------------
Net Sales $ 3,448.5 $ 3,104.1 $ 344.4 11.1%
Gross Profit 1,427.3 1,233.9 193.4 15.7%
Selling, general and
administrative expenses 1,080.5 909.1 171.4 18.8%
Restructuring charge 15.1 21.1 (6.0) (28.5)%
Operating Income 331.7 303.7 28.0 9.2%
Other (expense) income-net (3.5) 6.6 (10.1) (152.7)%
Interest (expense) income-net (28.1) (21.9) (6.2) 28.3%
Provision for income taxes 108.0 103.8 4.2 4.0%
Net Income 192.1 184.6 7.5 4.0%
Net Sales
- ---------
Our net sales for 2001 were $3.45 billion, an increase of 11.1%, compared
to $3.10 billion in 2000. Our net sales for 2001 and 2000 were not materially
impacted by foreign currency fluctuations. Net Sales results for our business
segments are provided below:
Wholesale Apparel net sales increased $162.1 million, or 6.8%, to $2.536
------------------
billion.
o The increase primarily reflected the inclusion of the following:
- $205.1 million resulting from the inclusion of sales of MEXX;
- $39.9 million increase in our licensed Women's DKNY(R) Jeans and
Active and CITY DKNY(R) businesses due primarily to the inclusion of
sales of our licensed CITY DKNY(R) business (launched in January
2001);
o These increases were partially offset by a $118.9 million sales decline in
our core domestic LIZ CLAIBORNE businesses due to the adverse affect of the
events of September 11, 2001 and planned decreases resulting from
conservative buying patterns of our retailer customers.
o The remainder of our Wholesale Apparel businesses, in aggregate,
experienced a net increase of approximately $36.0 million, reflecting sales
increases in our LUCKY BRAND DUNGAREES business, due to higher unit volume
reflecting stronger demand, and in our SIGRID OLSEN business, due to higher
average unit selling prices partially offset by lower unit volume
reflecting the inclusion of more higher-priced items in the product mix.
These increases were partially offset by a decrease in our LAUNDRY
business, reflecting overall planned unit decreases in light of anticipated
conservative buying patterns of our retailer customers.
Wholesale Non-Apparel net sales increased $73.1 million, or 17.3%, to
----------------------
$496.1 million.
o The increase was primarily due to the following sales increases:
- $51.1 million in our Jewelry business, due to the inclusion of a full
year of sales from our MONET business acquired in July 2000; and
- $20.5 million in our Cosmetics business, due primarily to the launch
of our MAMBO fragrance in August 2001.
o The remainder of the increase was due to a slight sales increase in our
Handbags business, principally reflecting higher unit volume, partially
offset by a decline in our Fashion Accessories business due to lower unit
volume.
Retail net sales increased $129.2 million, or 26.5%, to $615.7 million.
------
o The increase in net sales of our Retail segment principally reflected the
following:
- The inclusion of $77.4 million of sales from our recently acquired
MEXX stores, including 18 Outlet stores, 35 high street concession
stores and 110 concession shop-in-shop stores;
- 15 new domestic Outlet stores on a period-to-period basis (we ended
the year with 211 total Outlet stores including the 18 MEXX Outlet
stores); and
24
- The addition of 25 new LUCKY BRAND DUNGAREES Specialty Retail stores
on a period-to-period basis (we ended the year with a total of 197
Specialty Retail stores), coupled with an approximate 4% comparable
store sales increase in our LUCKY BRAND DUNGAREES Specialty Retail
stores.
o These increases were partially offset by the following comparable store
sales decreases:
- A decline in our Outlet stores of approximately 1%; and
- A decline in the balance of our Specialty Retail stores of
approximately 1%.
International net sales increased by $298.0 million, or 250.0%, to $417.2
-------------
million, due primarily to the inclusion of $282.5 million of sales of our
recently acquired MEXX business and, to a lesser extent, an increase of $12.1
million resulting from the inclusion of a full year of sales of our MONET
business (acquired in July 2000). Domestic net sales increased by $46.4 million,
or 1.6%, to $3.031 billion. The increase in Domestic net sales was primarily due
--------
to increases in our Wholesale Non-Apparel segment, resulting from the inclusion
of a full year's sales from our MONET business, and our Retail segment, due to
the aforementioned additional store base, partially offset by a slight decrease
in our Wholesale Apparel segment.
Gross Profit
- ------------
Gross profit dollars increased $193.4 million, or 15.7%, in 2001 over 2000.
Gross profit as a percent of sales increased to 41.4% in 2001 from 39.7% in 2000
due to the increased proportion of our relatively higher-margin Wholesale
Non-Apparel segment, primarily due to the inclusion of a full year's sales from
our MONET business and the launch of our MAMBO fragrance, as well as the
increased proportion of our relatively higher-margin Retail segment, driven by
the inclusion of the MEXX stores and the opening of additional stores in other
formats. The increase in the gross profit rate also reflected significantly
lower unit sourcing costs as a result of the continued consolidation and
optimization of our worldwide supplier base, combined with the continued
improvement in the matching of our production orders with our customer orders
through the use of systems implemented in late 1999 and revamped business
processes. The Company also benefited from the inclusion of MEXX, which runs at
a relatively higher gross margin rate than the Company average, and higher
margins realized in our DKNY(R) JEANS Women's, DANA BUCHMAN and SIGRID OLSEN
businesses. These increases were partially offset by lower gross margins in our
LIZ CLAIBORNE and CRAZY HORSE Men's businesses, due, in each case, primarily to
the liquidation of excess inventories.
SG&A
- ----
SG&A increased $171.4 million, or 18.8%, in 2001 over 2000. These expenses
as a percent of net sales increased to 31.3% in 2001 from 29.3% in 2000,
principally reflecting the increased proportion of sales of our relatively
higher cost Wholesale Non-Apparel segment, which experienced higher marketing
costs in our Cosmetics business associated with the launch of our MAMBO brand
and relatively higher SG&A rates in our recently acquired MONET business. Dollar
and percentage increases in SG&A also reflect our recently acquired MEXX
business, which runs at a relatively higher SG&A rate than the Company average.
Additionally, we experienced increases in our Retail segment due to the opening
of new stores and the inclusion of our recently acquired MEXX stores. Lower
sales in our relatively lower-cost LIZ CLAIBORNE businesses also contributed to
the increase. Additionally, the Company incurred higher compensation expenses as
a result of the vesting of certain incentive equity instruments previously
granted under the Company's stock incentive plan, as well as goodwill
amortization generated by our recent acquisitions.
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 divisional 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 2001 restructuring charge reduced net income by $9.6 million (after
tax), or $0.09 per common share. The Company anticipates annual savings
associated with this restructuring to be between $15-$18 million. These
restructuring activities are substantially complete through December 2002. In
September 2000, we recorded a net restructuring charge of $5.4 million (pretax),
representing a charge of $6.5 million, principally to cover the closure of eight
under-performing Specialty Retail stores in formats that no longer fit into our
retail strategy, the closure of one of our recently acquired divisional offices,
and severance related costs, offset by the $1.1 million deemed no longer
necessary of the Company's restructuring liability originally recorded in
December 1998. In December 2000, we recorded a restructuring charge of $15.6
million (pretax) to further maximize business segment synergies. This charge
consisted of $10.6 million for operating and administrative costs associated
with the elimination of 270 jobs and $5.0 million for real estate
consolidations. Significant items included in the charge were contract
termination costs, severance and related benefits for staff reductions,
estimated occupancy costs
25
and asset writedowns. The 2000 restructuring charges reduced net income by $13.5
million, or $0.13 per common share. The Company anticipates annual savings
associated with the 2000 restructuring charges to be between $13-$16 million.
Operating Income
- ----------------
Operating income increased $28.0 million, or 9.2%, to $331.7 million in
2001 compared to 2000, and decreased to 9.6% of sales in 2001 from 9.8% in 2000.
o Wholesale Apparel operating profit increased $2.8 million to $289.8 million
-----------------
(11.4% of sales) in 2001 compared to $287.0 million (12.1% of sales) in
2000, principally reflecting increased profits in our DKNY(R) JEANS
Women's, DANA BUCHMAN, SIGRID OLSEN and Special Markets businesses and the
inclusion of the income from our recently acquired MEXX business, partially
offset by reduced sales and gross margins in our core domestic LIZ
CLAIBORNE and LAUNDRY businesses.
o Wholesale Non-Apparel operating income increased $12.6 million to $46.2
----------------------
million (9.3% of sales) in 2001 compared to $33.6 million (7.9% of sales)
in 2000, primarily due to the inclusion of a full year of profits from our
MONET business and, to a lesser extent, the launch of our MAMBO fragrance
and increases in our Handbags business, partially offset by a reduction in
our Fashion Accessories business.
o Retail operating income increased $6.5 million to $69.3 million (11.3% of
------
sales) in 2001 compared to $62.8 million (12.9% of sales) in 2000,
principally reflecting the inclusion of the Retail stores of our recently
acquired MEXX business, increases in our Specialty Retail stores due to
higher gross margins overall, and 25 new LUCKY BRAND DUNGAREES stores on a
period-to-period basis, partially offset by higher operating expenses in
our Outlet store business.
o International operating income increased $32.9 million, or 391.6%, to $41.4
-------------
million primarily due to the inclusion of our recently acquired MEXX
business. Domestic operating income decreased $4.9 million, or 1.7%, to
--------
$290.4 million primarily due to a decrease in our Wholesale Apparel
segment.
Net Other Expense
- -----------------
Net other expense in 2001 was $3.5 million, comprised of $3.6 million of
minority interest and partially offset by other non-operating income, compared
to net other income of $6.6 million in 2000. Other income in 2000 included a
special investment gain of $8.8 million related to our sale of marketable equity
securities, net of associated expenses, partially offset by $2.2 million of
minority interest expense and other non-operating expenses.
Net Interest Expense
- --------------------
Net interest expense in 2001 was $28.1 million compared to $21.9 million in
2000. This increase of $6.2 million represents the incremental interest cost on
the debt incurred to finance our strategic initiatives including costs
associated with our recently acquired businesses, capital expenditures
(primarily related to the technological upgrading of our distribution facilities
and information systems) and in-store merchandise shop expenditures.
Provision for Income Taxes
- --------------------------
The 2001 effective income tax rate remained unchanged from 2000 at 36.0%.
Net Income
- ----------
Due to the factors described above, net income increased $7.5 million in
2001 to $192.1 million from $184.6 million and declined as a percent of net
sales to 5.6% in 2001 from 5.9% in 2000. Diluted earnings per share ("EPS")
(adjusted for a two-for-one stock split in the form of a one hundred percent
stock dividend paid on January 16, 2002 to shareholders of record as of December
31, 2001 (the "stock dividend")), was $1.83 in 2001 compared to $1.72 in 2000,
reflecting higher net income and a lower number of average outstanding common
shares and share equivalents in 2001. Our average diluted shares outstanding
declined by 2.4 million in 2001 on a period-to-period basis, to 105.1 million,
as a result of our stock repurchase program. We purchased 155,000 shares during
2001 for $2.9 million and 12.3 million shares during 2000 for $247.7 million.
FORWARD OUTLOOK
- ---------------
The economic and retail environments continue to be uncertain and
challenging. Many larger issues impact consumer confidence and propensity to
spend. These include significant geopolitical issues which remain unresolved,
volatility in the capital markets and an economy which, despite showing signs of
growth, continues to struggle. Accordingly, we are proceeding prudently and
conservatively in planning our business going forward. Looking forward, for
fiscal 2003, we are optimistic that we can achieve a sales increase of 9 - 11%
and EPS for fiscal 2003 in the range of $2.47 - $2.52 including EPS accretion in
fiscal 2003 of $0.05 - $0.07 resulting from the Ellen Tracy acquisition. For the
first quarter of fiscal 2003, current visibility indicates that we forecast a
sales increase of 14 - 16% and EPS in the range of $0.56 - $0.58. For the second
quarter, we are forecasting sales gains of 9% - 12% and EPS in the range of
$0.39 - $0.41. The above estimates do not reflect
26
any anticipated impact of acquisitions that are not accounted for at the time of
filing. The foregoing forward-looking statements are qualified in their entirety
by reference to the risks and uncertainties set forth under the heading
"STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE" below.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
Our primary ongoing cash requirements are to fund growth in working capital
(primarily accounts receivable and inventory) to support projected increased
sales, investment in the technological upgrading of our distribution centers and
information systems and other expenditures related to retail store expansion,
in-store merchandise shops and normal maintenance activities. In 2002 and 2001,
we also required cash to fund our acquisition program. Sources of liquidity to
fund ongoing and future cash requirements include cash flows from operations,
cash and cash equivalents, securities on hand, our commercial paper program and
bank lines of credit; in 2001, we issued Euro-denominated bonds (the
"Eurobonds") to fund our acquisition of MEXX.
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, including the contingent payments described below, 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.
2002 vs. 2001
- -------------
We ended 2002 with $276.3 million in cash and marketable securities,
compared to $160.6 million at December 29, 2001, and with $399.7 million of debt
outstanding compared to $387.3 million. This $103.3 million improvement in our
debt net of cash position over the last twelve months is primarily attributable
to the differences in working capital due to the factors discussed below,
partially offset by the approximately $206.3 million in purchase price payments
connected with our acquisitions of ELLEN TRACY and MEXX Canada.
Accounts receivable increased $8.3 million, or 2.3%, at December 28, 2002
compared to December 29, 2001 due to the assumption of the accounts receivable
of our recently acquired ELLEN TRACY and MEXX Canada businesses, which accounted
for approximately 85% of the increase.
Inventories decreased $26.8 million, or 5.5%, at the end of 2002 compared
to the end of 2001. These decreases reflect 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, as well as supply and demand balancing aided by technology. Our
average inventory turnover rate increased to 4.7 times for the year ended
December 28, 2002 from 4.0 times for the 12-month period ended December 29,
2001.
Borrowings under our commercial paper and revolving credit facilities
peaked at $114.9 million during 2002; at December 28, 2002, borrowings under
these facilities were $12.6 million.
Net cash provided by operating activities was $421.8 million during 2002,
compared to $329.2 million in 2001. This $92.6 million change in cash flow was
primarily due to $86.0 million of cash provided by working capital in 2002
compared to a $4.8 million use of cash in 2001, driven primarily by
year-over-year changes in the accounts receivable, accrued expense, accounts
payable and inventory balances, as well as the increase in net income of $39.1
million from 2001.
Net cash used in investing activities was $306.8 million in fiscal 2002,
compared to $384.7 million in fiscal 2001. The 2002 net cash used primarily
reflected capital and in-store merchandise shop expenditures of $88.9 million
and $206.3 million for the purchase of MEXX Canada and ELLEN TRACY; 2001 net
cash used primarily reflected $274.1 million in connection with the acquisition
of our MEXX business, along with capital and in-store merchandise shop
expenditures of $107.0 million.
Net cash used in financing activities was $39.2 million in fiscal 2002,
compared to $131.1 million provided by financing activities in fiscal 2001. The
$170.3 million year over year decrease primarily reflected the issuance of
$309.6 million of Eurobonds in 2001 to finance the May 2001 acquisition of MEXX
and a decrease of $6.6 million in net proceeds from the exercise of stock
options, partially offset by the assumption of $17.2 million of short term debt
in 2002 and a $126.3 million year-over-year decrease in the repayment of the
commercial paper program.
27
2001 vs. 2000
- -------------
We ended 2001 with $160.6 million in cash and marketable securities,
compared to $54.6 million at the end of 2000, and $387.3 million of debt
compared to $269.2 million of debt outstanding at the end of 2000. This $12.1
million change in our cash and debt position over the last twelve months is
primarily attributable to our expenditure of $274.1 million, net of cash
acquired, for purchase price payments in connection with the acquisitions of
MEXX and MONET, $107.0 million for capital expenditures (primarily related to
the technological upgrading of our distribution facilities and information
systems) and in-store merchandise shop expenditures and $2.9 million for the
repurchase of common stock, offset by $309.6 million in proceeds from the
Eurobonds. Our borrowings under the commercial paper program peaked at $449.7
million during the year; at December 29, 2001, our borrowings under the program
were $77.7 million.
Net cash provided by operating activities was $329.2 million in 2001,
compared to $268.0 million in 2000. This $61.2 million change in cash flow was
primarily due to $24.5 million of higher depreciation expense in 2001 and cash
generated from a $4.8 million decrease in net working capital in 2001 compared
to a $27.5 million use of cash for working capital in 2000, driven primarily by
year over year changes in the accounts receivable, inventory and accrued expense
balances.
Accounts receivable increased $94.4 million, or 35.3%, at year end 2001
compared to year end 2000. This increase primarily reflected the assumption of
the accounts receivable of our recently acquired MEXX business, which accounted
for approximately 62% of the increase.
Inventories increased $8.1 million, or 1.7%, at year end 2001 compared to
2000 primarily due to our recently acquired MEXX business. Excluding the
inventories of MEXX, our inventories were down 11.7%. The majority of this
decrease was driven by improved processes and procedures put in place 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 decreased to 4.0 times (4.1 times excluding MEXX) in 2001 from 4.3 times in
2000. The Company continued to take a conservative approach to inventory
management in 2002.
Net cash used in investing activities was $384.7 million in 2001, compared
to $147.5 million in 2000. The 2001 net cash used primarily reflected purchase
price payments of $274.1 million, net of cash acquired, in connection with our
acquisition of the MEXX business, along with capital and in-store merchandise
shop expenditures of $107.0 million, compared to 2000 capital and in-store
merchandise shop expenditures of $88.1 million and purchase price payments of
$58.9 million in connection with the acquisitions of our MONET, LAUNDRY, LUCKY
BRAND DUNGAREES, SIGRID OLSEN and licensed KENNETH COLE businesses.
Net cash provided by financing activities was $131.1 million in 2001,
compared to $99.4 million used in financing activities in 2000. The $230.5
million year over year increase primarily reflected the issuance of $309.6
million of Eurobonds to finance the May 2001 purchase of MEXX, a decrease of
$244.8 million expended for stock purchases, and an increase in net proceeds
from the exercise of stock options of $20.0 million, partially offset by a net
repayment under our commercial paper program of $191.5 million during 2001
compared to net borrowings of $153.1 million in 2000.
Commitments and Capital Expenditures
- ------------------------------------
The Company expects that it will make additional payments in 2003 of
approximately $25 million and $17 million in connection with the acquisitions of
LUCKY BRAND DUNGAREES and MEXX Canada, respectively (see Note 2 of Notes to
Consolidated Financial Statements).
The Company may also be required to make additional payments in 2004 in
connection with its acquisitions of our MEXX, LUCKY BRAND DUNGAREES and MEXX
Canada businesses (see Note 2 of Notes to Consolidated Financial Statements).
These payments primarily result from contingent payment and other provisions
contained in the terms of the acquisitions. Management estimates these payments
if required to be made in 2004 would fall in the range of $140 - 150 million for
MEXX, $32 - 45 million for LUCKY BRAND DUNGAREES, and $22 - 29 million for MEXX
Canada. These payments will be made in either cash or shares of the Company's
common stock.
Our anticipated capital expenditures for 2003 approximate $95 million.
These expenditures consist 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 retail stores. Capital expenditures and working
capital cash needs are expected to be financed with net cash provided by
operating activities and our revolving credit, commercial paper program, trade
letter of credit and other credit facilities.
28
The following table summarizes as of December 28, 2002 the Company's
contractual cash obligations by future period (see Notes 2, 3, 10 and 11 of
Notes to Consolidated Financial Statements):
Payments due by period
------------------------------------------------------------------------
Contractual cash obligations Less than After
(In thousands) 1 year 1-3 years 4-5 years 5 years Total
- -------------------------------------------------------------------------------------------------------------------
Operating leases $ 112,526 $ 193,525 $ 159,033 $ 295,708 $ 760,792
Inventory Purchase commitments 594,024 -- -- -- 594,024
Eurobonds -- -- 365,161 -- 365,161
Guaranteed minimum licensing royalties 19,764 43,812 27,000 68,000 158,576
Revolving credit facility 12,564 -- -- -- 12,564
Short-term borrowings 16,358 -- -- -- 16,358
Synthetic lease 3,028 7,241 65,431 -- 75,700
Additional acquisition purchase price
payments 42,214 224,000 -- -- 266,214
Other obligations 5,631 -- -- -- 5,631
Financing Arrangements
- ----------------------
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 2 of Notes to 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 2 of
Notes to 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
included a $50 million multicurrency revolving credit line. This facility and
the Company's $250 million bank facility (collectively, the "Agreement"), which
were scheduled to mature in November 2002 and November 2003, respectively,
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services, and were used as a liquidity facility to support the issuance
of A2/P2 rated commercial paper. The Agreement had 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.
On October 21, 2002, the Company received a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the $500
million, 364-day unsecured credit facility scheduled to mature in November 2002,
and a $375 million, three-year bank revolving credit facility, replacing the
existing $250 million bank facility which was scheduled to mature in November
2003. The three-year facility includes a $75 million multi-currency revolving
credit line which permits the Company to borrow in U.S. dollars, Canadian
dollars and Euros. 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 Eurocurrency 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. 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. At December 28, 2002, the Company had no
commercial paper outstanding and $12.6 million of borrowings denominated in Euro
at an interest rate of 3.6%. The carrying amount of the Company's borrowings
under the commercial paper program approximate fair value because the interest
rates are based on floating rates, which are determined by prevailing market
rates.
29
As of December 28, 2002, the Company had lines of credit aggregating $469
million, which were primarily available to cover trade letters of credit. At
December 28, 2002 and December 29, 2001 the Company had outstanding trade
letters of credit of $291 million and $228 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.
As of December 28, 2002, MEXX had short-term credit facilities available of
approximately 40.0 million Euros (or $41.8 million based on the exchange rate in
effect on such date), of which 15.7 million Euros (or $16.4 million based on the
exchange rate in effect on such date) was outstanding.
As of December 29, 2001, the Company had lines of credit aggregating $410
million, which were primarily available to cover trade letters of credit. At
December 29, 2001 and December 30, 2000, the Company had outstanding letters of
credit of $228 million and $271 million, respectively, primarily to
collateralize the Company's obligations to third parties for the purchase of
inventory.
Off-Balance Sheet Arrangements
- ------------------------------
On May 22, 2001, the Company entered into an off-balance sheet financing
arrangement (commonly referred to as a "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 lessor under the operating lease arrangements is an
independent third-party limited partnership, which has contributed equity in
excess of 3.5% of the total value of the estimated aggregate cost to complete
these facilities. The cost to complete these facilities was $63.7 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 maximum
guarantee is approximately $54 million. The guarantee becomes effective if the
company declines to purchase the facilities at the end of the lease and the
lessor is unable to sell the property at a price equal to or greater than the
original cost. The Company selected this financing arrangement to take advantage
of the favorable financing rates such an arrangement afforded as opposed to the
rates available under alternative real estate financing options. The lessor
financed the acquisition of the facilities through funding provided by
third-party financial institutions. The lessor has no affiliation or
relationship with the Company or any of its employees, directors or affiliates,
and 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 Consolidated Statements of
Income.
Hedging Activities
- ------------------
At December 28, 2002, the Company had entered into various Euro currency
collars with a net notional amount of $80.0 million with maturity dates from
January 2003 through December 2003 with values ranging between 0.9800 and 1.1000
U.S. dollar per Euro as compared to $55 million at December 29, 2001. At
December 28, 2002, the Company had forward contracts maturing through December
2003 to sell 58.5 million Euros. The notional value of the foreign exchange
forward contracts was approximately $61.0 million at December 28, 2002, as
compared with approximately $34.6 million at December 29, 2001. Unrealized
(losses) gains for outstanding foreign exchange forward contracts and currency
options were approximately ($5.2) million at December 28, 2002 and approximately
$400,000 at December 29, 2001.
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 change
in fair value of the effective portion of 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 will be
recognized in earnings.
Amounts in Accumulated other comprehensive loss are reclassified to
current-period earnings when the hedged transaction affects earnings.
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 this Annual Report on Form 10-K.
30
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, inventories,
goodwill and other intangibles, 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. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods. 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 title
passes and when merchandise has been shipped from the Company's distribution
centers or contractors. Wholesale revenue is recorded net of returns, discounts
and allowances. Returns and allowances require pre-approval from management.
Discounts are based on trade terms. Estimates for end of season allowances are
based on historic trends, seasonal results, an evaluation of current economic
conditions and retailer performance. The Company's historical estimates of these
costs have not differed materially from actual results. Retail store revenues
are recognized at the time of sale to consumers. Retail revenues are recorded
net of returns. Licensing revenues are accrued at the contractually guaranteed
minimum levels.
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
expected 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. The Company's historical estimates of these costs have not differed
materially from actual results.
Inventories, Net
- ----------------
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 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.
Estimates may differ from actual results due to quantity, quality and mix of
products in inventory, consumer and retailer preferences and market conditions.
The Company's historical estimates of these costs have not differed materially
from actual results.
Goodwill And Other Intangibles
- ------------------------------
In 2002 the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires that goodwill and intangible assets with indefinite lives
are to no longer be amortized, but rather be tested at least annually for
impairment. This pronouncement also requires that intangible assets with
definite lives continue to be amortized over their respective 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 SFAS No. 142 effective December 30, 2001. Trademarks that are
owned are no longer amortized, as they have been deemed to have indefinite
lives. Such trademarks are reviewed at least annually for potential value
impairment. Trademarks that are licensed by the Company from third parties are
amortized over the individual terms of the respective license agreements, which
range from 5 to 15 years. Intangible merchandising rights are amortized over a
period of four years. Intangibles amounted to $226.6 million in 2002 and $95.0
million in 2001, net of accumulated amortization of $52.2 million as of December
28, 2002 and $46.3 million as of December 29, 2001.
The recoverability of the carrying values of all long-lived assets with
definite lives is reevaluated when changes in circumstances indicate the assets'
value may be impaired. Impairment testing is based on a review of forecasted
operating cash flows and the profitability of the related business. For the
three-year period ended December 28, 2002, there are no material adjustments to
the carrying values of any long-lived assets resulting from these evaluations.
31
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit
sharing, contracted advertising, professional fees, and other outstanding
Company obligations are assessed based on claims experience and 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
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.
The Company hedges its net investment position in Euros. 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 quarter-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.
Inflation
- ---------
The rate of inflation over the past few years has not had a significant
impact on our sales or profitability.
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 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.
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
32
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
adopted the provisions of SFAS No. 145 upon its effective date.
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 adopted the
provisions of SFAS No. 146 effective December 29, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 effective December 28, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
implemented the disclosure provisions of FIN 45 in its December 28, 2002
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51)" ("FIN 46"). FIN 46
addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The Company will be
required to implement the other provisions of FIN 46 in 2003. The Company does
not believe the counterparty to the synthetic lease is a variable entity.
Therefore, the Company does not believe that FIN 46 will have a material impact
on its financial statements.
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 2003, or any other future period, including those herein
under the heading "Future Outlook" or otherwise, 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," "estimate," "project," "management expects,"
"the Company believes," "we are optimistic that we can," "current visibility
indicates that we forecast" 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. Included among the factors that could cause actual results to
materially differ are risks with respect to the following:
Risks Associated with Competition and the Marketplace
- -----------------------------------------------------
The apparel and related product markets are highly competitive, both within
the United States and abroad. The Company's ability to compete successfully
within the marketplace depends on a variety of factors, including:
o The current challenging retail and macroeconomic environment, including the
levels of consumer confidence and discretionary spending, and levels of
customer traffic within department stores, malls and other shopping and
selling environments;
33
o The Company's ability to effectively anticipate, gauge and respond to
changing consumer demands and tastes, across multiple product lines,
shopping channels and geographies;
o The Company's ability to translate market trends into appropriate, saleable
product offerings relatively far in advance, while minimizing excess
inventory positions, including the Company's ability to correctly balance
the level of its fabric and/or merchandise commitments with actual customer
orders;
o Consumer and customer demand for, and acceptance and support of, Company
products (especially by the Company's largest customers) which are in turn
dependent, among other things, on product design, quality, value and
service;
o The ability of the Company, especially through its sourcing, logistics and
technology functions, to operate within substantial production and delivery
constraints, including 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;
o The financial condition of, and consolidations, restructurings and other
ownership changes in, the apparel (and related products) industry and the
retail industry;
o 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;
o The Company's ability to respond to the strategic and operational
initiatives of its largest customers, as well as to the introduction of new
products or pricing changes by its competitors; and
o The Company's ability to obtain sufficient retail floor space and to
effectively present products at retail.
Economic, Social and Political Factors
- --------------------------------------
Also impacting the Company and its operations are a variety of economic,
social and political factors, including the following:
o Risks associated with war, the threat of war, and terrorist activities,
including reduced shopping activity as a result of public safety concerns
and disruption in the receipt and delivery of merchandise;
o Changes in national and global microeconomic and macroeconomic conditions
in the markets where the Company sells or sources its products, including
the levels of consumer confidence and discretionary spending, consumer
income growth, personal debt levels, rising energy costs and energy
shortages, and fluctuations in foreign currency exchange rates, interest
rates and stock market volatility;
o Changes in social, political, legal and other conditions affecting foreign
operations;
o Risks of increased sourcing costs, including costs for materials and labor;
o Any significant disruption in the Company's relationships with its
suppliers, manufacturers and employees;
o Work stoppages by any Company suppliers or service providers, such as, for
example, the recent West Coast port workers lock-out;
o The enactment of new legislation or the administration of current
international trade regulations, or executive action affecting
international textile agreements, including the United States' 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; and
o 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.
Risks Associated with Acquisitions and the Entry into New Markets
- -----------------------------------------------------------------
The Company, as part of its growth strategy, reviews from time to time its
possible entry into new markets, either through acquisitions, internal
development activities, or licensing. The entry into new markets (including the
development and launch of new product categories and product lines), is
accompanied by a variety of risks inherent in any such new business venture,
including the following:
o Risks that the new market activities may require methods of operations and
marketing and financial strategies different from those employed in the
Company's other businesses;
o 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;
o Possible difficulties, delays and/or unanticipated costs in integrating the
business, operations, personnel, and/or systems of an acquired business;
o Risks that projected or satisfactory level of sales, profits and/or return
on investment for an acquired business will not be generated;
o Risks involving the Company's ability to retain and appropriately motivate
key personnel of the acquired business;
o Risks that expenditures required for capital items or working capital will
be higher than anticipated;
34
o Risks associated with unanticipated events and unknown or uncertain
liabilities;
o Uncertainties relating to the Company's ability to successfully integrate
an acquisition, maintain product licenses, or successfully launch new
products and lines; and
o With respect to businesses where the Company acts as licensee, the 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 this 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 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
We have exposure to interest rate volatility primarily relating to interest
rate changes applicable to our commercial paper borrowings and revolving loans
under our credit facility. These loans bear interest at rates which vary with
changes in prevailing market rates.
We do not speculate on the future direction of interest rates. As of
December 28, 2002 and December 29, 2001 our exposure to changing market rates
was as follows:
Dollars in millions December 28, 2002 December 29, 2001
- ----------------------------------------------------------------------
Variable rate debt $34.6 $77.7
Average interest rate 3.8% 3.1%
A ten percent change in the average rate would have resulted in a $0.2
million change in interest expense during 2002.
We finance our capital needs through available cash and marketable
securities, operating cash flow, letters of credit, synthetic lease and bank
revolving credit facilities, other credit facilities and commercial paper
issuances. Our floating rate bank revolving credit facility, bank lines and
commercial paper program expose us to market risk for changes in interest rates.
As of December 28, 2002, we have not employed interest rate hedging to mitigate
such risks with respect to our floating rate facilities. We believe that our
recent Eurobond offering, which is a fixed rate obligation, partially mitigates
the risks with respect to our variable rate financing.
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 collars 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 completed.
At December 28, 2002 and December 29, 2001, the Company had outstanding
foreign currency collars with net notional amounts aggregating to $80.0 million
and $55.0 million, respectively. The Company had forward contracts aggregating
to $61.0 million at December 28, 2002 and $34.6 million at December 29, 2001.
Unrealized (losses) gains for outstanding foreign currency options and foreign
exchange forward contracts were approximately ($5.2) million at December 28,
2002 and approximately $400,000 at December 29, 2001. A sensitivity analysis to
changes in the foreign currencies when measured against the U.S. dollar
indicates if the U.S. dollar uniformly weakened by 10% against all of the hedged
currency exposures, the fair value of instruments would decrease by $9.4
million. Conversely, if the U.S. dollar uniformly strengthened by 10% against
all of the hedged currency exposures, the fair value of these instruments would
increase by $12.2 million. Any resulting changes in the fair value would be
offset by changes in the underlying balance sheet positions. The sensitivity
analysis assumes a parallel shift in foreign currency exchange rates. The
assumption that exchange rates change in a parallel fashion may overstate the
impact of changing exchange rates on assets and liabilities denominated in
foreign currency. The Company does not hedge all transactions denominated in
foreign currency.
35
The table below presents the amount of contracts outstanding, the contract
rate and unrealized gain or (loss), as of December 28, 2002:
U.S. Dollar Contract Unrealized
Currency in thousands Amount Rate Gain (Loss)
- -------------------------------------------------------------------------------------------------
Forward Contracts:
Euros $61,000 0.9360 to 0.9800 $(5,304)
Average Rate Collar Contracts:
Euros $80,000 0.9800 to 1.1000 $ 88
The table below presents the amount of contracts outstanding, the contract
rate and unrealized gain or (loss), as of December 29, 2001:
U.S. Dollar British Pound Contract Unrealized
Currency in thousands Amount Sterling Amount Rate Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
Forward Contracts:
Canadian dollars $ 4,421 0.6316 $ 22
British pound sterling 700 1.4005 (24)
Euros 26,033 0.9099 752
Euros (pound) 2,400 0.6206 (71)
Average Rate Collar Contracts:
Euros $55,000 0.8582 to 0.9378 $ (290)
36
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See the "Index to Consolidated Financial Statements and Schedules"
appearing at the end of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
With respect to Executive Officers of the Company, see Part I of this
Annual Report on Form 10-K.
Information with respect to Directors of the Company which is called for by
this Item 10 is incorporated by reference to the information set forth under the
heading "Election of Directors" in the Company's Proxy Statement relating to its
2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 2003 Proxy Statement").
Item 11. Executive Compensation.
----------------------
Information called for by this Item 11 is incorporated by reference to the
information set forth under the heading "Executive Compensation" in the
Company's 2003 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
Information called for by this Item 12 is incorporated by reference to the
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's 2003
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors" and "Executive
Compensation-Employment Arrangements" in the Company's 2003 Proxy Statement.
Item 14. Controls and Procedures.
-----------------------
Within the 90 days prior to the date of this Annual Report on Form 10-K,
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of disclosure
controls and procedures as provided in Rule 13a-14 under the Securities Exchange
Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely fashion.
There have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
37
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
----------------------------------------------------------------
(a) 1. Financial Statements. PAGE REFERENCE
2002 FORM 10-K
--------------
MANAGEMENT'S REPORT AND
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 to F-4
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 28, 2002 and December 29, 2001 F-5
Consolidated Statements of Income for the
Three Fiscal Years Ended December 28, 2002 F-6
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended December 28, 2002 F-7 to F-8
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended December 28, 2002 F-9
Notes to Consolidated Financial Statements F-10 to F-36
2. Schedules.
SCHEDULE II - Valuation and Qualifying Accounts F-37
NOTE: Schedules other than those referred to above and parent company
condensed financial statements have been omitted as inapplicable
or not required under the instructions contained in Regulation
S-X or the information is included elsewhere in the financial
statements or the notes thereto.
38
3. Exhibits.
Exhibit
No. Description
- ------- -----------
2(a) - Share Purchase Agreement, dated as of May 15, 2001, among Liz
Claiborne, Inc., Liz Claiborne 2 B.V., LCI Acquisition U.S., and
the other parties signatory thereto (incorporated herein by
reference from Exhibit 2.1 to Registrant's Form 8-K dated May 23,
2001 and amended on July 20, 2001).
3(a) - Restated Certificate of Incorporation of Registrant (incorporated
herein by reference from Exhibit 3(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended June 26, 1993).
3(b) - By-laws of Registrant, as amended (incorporated herein by
reference from Exhibit 3(b) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1992 [the "1992
Annual Report"]).
4(a) - Specimen certificate for Registrant's Common Stock, par value
$1.00 per share (incorporated herein by reference from Exhibit
4(a) to the 1992 Annual Report).
4(b) - Rights Agreement, dated as of December 4, 1998, between
Registrant and First Chicago Trust Company of New York
(incorporated herein by reference from Exhibit 1 to Registrant's
Form 8-A dated as of December 4, 1998).
4(b)(i) - Amendment to the Rights Agreement, dated November 11, 2001,
between Registrant and The Bank of New York, appointing The Bank
of New York as Rights Agent (incorporated herein by reference
from Exhibit 1 to Registrant's Form 8-A12B/A dated as of January
30, 2002).
4(c) - Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and
Dexia Banque Internationale A. Luxembourg (incorporated herein by
reference from Exhibit 10 to Registrant's Form 10-Q for the
period ended June 30, 2001).
10(a) - Reference is made to Exhibit 4(b) filed hereunder, which is
incorporated herein by this reference.
10(b)+ - Liz Claiborne Savings Plan (the "Savings Plan"), as amended and
restated (incorporated herein by reference from Exhibit 10(f) to
Registrant's Annual report on Form 10-K for the fiscal year ended
December 30, 1989 [the "1989 Annual Report"]).
10(b)(i)+ - Trust Agreement dated as of July 1, 1994, between Liz Claiborne,
Inc. and IDS Trust Company (incorporated herein by reference from
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for
the period ended July 2, 1994).
10(c)+ - Amendment Nos. 1 and 2 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g) to the 1992 Annual Report).
10(c)(i)+ - Amendment Nos. 3 and 4 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g)(i) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 26, 1993 [the
"1993 Annual Report"]).
10(c)(ii)+ - Amendment No. 5 to the Savings Plan (incorporated herein by
reference from Exhibit 10(a) to Registrant's Quarterly Report on
Form 10-Q for the period ended July 2, 1994).
10(c)(iii)+ - Amendment No. 6 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e) (iii) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996 [the
"1996 Annual Report"]).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
39
Exhibit
No. Description
- ------- -----------
10(c)(iv)+ - Amendment No. 7 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(iv) to the 1996 Annual Report).
10(c)(v)+ - Amendment No. 8 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(v) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998 [the "1997
Annual Report"]).
10(c)(vi)+ - Amendment No. 9 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(vi) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999 [the "1998
Annual Report"]).
10(d)+ - Amended and Restated Liz Claiborne Profit-Sharing Retirement Plan
(the "Profit-Sharing Plan") (incorporated herein by reference
from Exhibit 10(h) to the 1992 Annual Report).
10(e)+ - Trust Agreement related to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(jj) to the 1983 Annual
Report).
10(e)(i)+ - Amendment Nos. 1 and 2 to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(i)(i) to the 1993 Annual
Report).
10(e)(ii)+ - Amendment No. 3 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended October 1, 1994).
10(e)(iii)+ - Amendment No. 4 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended July 1, 1995).
10(e)(iv)+ - Amendment No. 5 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(iv) to the 1996 Annual Report).
10(e)(v)+ - Amendment No. 6 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(v) to the 1998 Annual Report).
10(f)+ - Merger Amendment to the Profit-Sharing Plan, the Lucky Brand
Employee Retirement Plan and Trust, the Segrets, Inc. 401(k)
Profit Sharing Plan, and the Savings Plan (incorporated herein by
reference from Exhibit 10(h) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 2000 [the "1999
Annual Report"]).
10(g)+* - The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as
amended and restated.
10(h)+ - National Collective Bargaining Agreement, made and entered into
as of June 1, 2000, by and between Liz Claiborne, Inc. and the
Union of Needletrades, Industrial and Textile Employees (UNITE)
for the period June 1, 2000 through May 31, 2003 (incorporated
herein by reference from Exhibit 10(h) to the 2000 Annual
Report).
10(h)(i)+ - Jobbers Agreement, made and entered into as of June 1, 2000, by
and between Liz Claiborne, Inc. and the Union of Needletrades,
Industrial and Textile Employees (UNITE) for the period June 1,
2000 through May 31, 2003 (incorporated herein by reference from
Exhibit 10(h)(i) to the 2000 Annual Report).
10(i)+* - Description of Liz Claiborne, Inc. 2002 Salaried Employee
Incentive Bonus Plan.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
40
Exhibit
No. Description
- ------- -----------
10(j) - Lease, dated as of January 1, 1990 (the "1441 Lease"), for
premises located at 1441 Broadway, New York, New York between
Registrant and Lechar Realty Corp. (incorporated herein by
reference from Exhibit 10(n) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990).
10(j)(i) - First Amendment: Lease Extension and Modification Agreement,
dated as of January 1, 1998, to the 1441 Lease (incorporated
herein by reference from Exhibit 10(k) (i) to the 1999 Annual
Report).
10(j)(ii) - Second Amendment to Lease, dated as of September 19, 1998, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(j)(iii) - Third Amendment to Lease, dated as of September 24, 1999, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(j)(iv) - Fourth Amendment to Lease, effective as of July 1, 2000, to the
1441 Lease (incorporated herein by reference from Exhibit
10(j)(iv) to the 2002 Annual Report).
10(k)+ - Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991
Stock Ownership Plan (the "Outside Directors' 1991 Plan")
(incorporated herein by reference from Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 [the "1995 Annual Report"]).
10(k)(i)+ - Form of Option Agreement under the Outside Directors' 1991 Plan
(incorporated herein by reference from Exhibit 10(m)(i) to the
1996 Annual Report).
10(l)+ - Liz Claiborne, Inc. 1992 Stock Incentive Plan (the "1992 Plan")
(incorporated herein by reference from Exhibit 10(p) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10(l)(i)+ - Amendment No. 1 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(p)(i) to the 1993 Annual Report).
10(l)(ii)+ - Amendment No. 2 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(ii) to the 1997 Annual Report).
10(l)(iii)+ - Amendment No. 3 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(iii) to the 1998 Annual Report).
10(m)+ - Form of Option Agreement under the 1992 Plan (incorporated herein
by reference from Exhibit 10(r) to the 1992 Annual Report).
10(n)+ - Form of Option Grant Certificate under the 1992 Plan
(incorporated herein by reference from Exhibit 10(q) to the 1996
Annual Report).
10(o)+ - Form of Restricted Career Share Agreement under the 1992 Plan
(incorporated herein by reference from Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995).
10(p)+ - Form of Restricted Transformation Share Agreement under the 1992
Plan (incorporated herein by reference from Exhibit 10(s) to the
1997 Annual Report).
10(q)+ - Description of Supplemental Life Insurance Plans (incorporated
herein by reference from Exhibit 10(q) to the 2000 Annual
Report).
10(r)+ - Description of unfunded death/disability benefits for certain
executives (incorporated herein by reference from Exhibit 10(u)
to the 1992 Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
41
Exhibit
No. Description
- ------- -----------
10(s)+ - Amended and Restated Liz Claiborne ss.162(m) Cash Bonus Plan
(incorporated herein by reference from Exhibit 10(t) to the 1999
Annual Report).
10(t)+ - Liz Claiborne, Inc. Supplemental Executive Retirement Plan
effective as of January 1, 2002, constituting an amendment,
restatement and consolidation of the Liz Claiborne, Inc.
Supplemental Executive Retirement Plan and the Liz Claiborne,
Inc. Bonus Deferral Plan.
10(t)(i)+ - Trust Agreement dated as of January 1, 2002, between Liz
Claiborne, Inc. and Wilmington Trust Company (incorporated herein
by reference from Exhibit 10(t)(i) to the 2002 Annual Report).
10(u)+ - Employment Agreement dated as of May 9, 1994, between Registrant
and Paul R. Charron (the "Charron Agreement") (incorporated
herein by reference from Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended April 2, 1994).
10(u)(i)+ - Amendment to the Charron Agreement, dated as of November 20, 1995
(incorporated herein by reference from Exhibit 10(x)(i) to the
1995 Annual Report).
10(u)(ii)+ - Amendment to the Charron Agreement, dated as of September 19,
1996, (including the Liz Claiborne Retirement Income Accumulation
Plan for the benefit of Mr. Charron [the "Accumulation Plan"])
(incorporated herein by reference from Exhibit 10(y)(ii) to the
1996 Annual Report).
10(u)(iii)+ - Amendment to the Accumulation Plan, dated January 3, 2002
(incorporated herein by reference from Exhibit 10(u)(iii) to the
2002 Annual Report).
10(u)(iv)+ - Change of Control Agreement, between Registrant and Paul R.
Charron (incorporated herein by reference from Exhibit (v)(iii)
to the 2000 Annual Report).
10(v)+* - Change of Control Agreement, between Registrant and Angela J.
Ahrendts.
10(w)+* - Change of Control Agreement, between Registrant and Trudy F.
Sullivan.
10(x) - Three Year Revolving Credit Agreement, dated as of October 21,
2002,among Registrant, various lending parties and JPMorgan Chase
Bank (as administrative agent) (incorporated herein by reference
from Exhibit 10(z)(i) to Registrant's October 21, 2002 Quarterly
Report on Form 10-Q for the period ended September 28, 2002 [the
"3rd Quarter 2002 10-Q"]).
10(y) - 364-Day Revolving Credit Agreement, dated as of October 21, 2002,
among Registrant, various lending parties and JPMorgan Chase Bank
(as administrative agent) (incorporated herein by reference from
Exhibit 10(z)(ii) to the 3rd Quarter 2002 10-Q).
10(z)+ - Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan")
(incorporated herein by reference from Exhibit 4(e) to
Registrant's Form S-8 dated as of January 25, 2001.)
10(z)(i)+ - Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit 10(z)(i) to the
2000 Annual Report).
10(z)(ii) - Form of Executive Team Leadership Restricted Share Agreement
under the Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
"2000 Plan")(incorporated herein by reference from Exhibit 10(a)
to Registrant's Form 10-Q for the period ended September 29, 2001
[the "3rd Quarter 2001 10-Q"] ).
10(z)(iii) - Form or Restricted Key Associates Performance Shares Agreement
under the 2000 Plan (incorporated herein by reference from
Exhibit 10(b) to the 3rd Quarter 2001 10-Q).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
42
Exhibit
No. Description
- ------- -----------
10(aa)+ - Liz Claiborne, Inc. 2002 Stock Incentive Plan (the "2002 Plan")
(incorporated herein by reference from Exhibit 10(y)(i) to
Registrant's Form 10-Q for the period ended June 29, 2002 [the
"2nd Quarter 2002 10-Q"]).
10(aa)(i)+ - Amendment No. 1 to the 2002 Plan (incorporated herein by
reference from Exhibit 10(y)(iii) to the 2nd Quarter 2002 10-Q).
10(aa)(ii)+ - Form of Option Grant Certificate under the 2002 Plan
(incorporated herein by reference from Exhibit 10(y)(ii) to the
2nd Quarter 2002 10-Q).
21* - List of Registrant's Subsidiaries.
23* - Consent of Independent Public Accountants.
99* - Undertakings.
99.1* - Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2* - Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) - Reports on Form 8-K.
On September 30, 2002, the Company filed a current report on Form
8-K pursuant to Item 5 thereof, reporting the Company's
acquisition of Ellen Tracy, Inc.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
43
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 26, 2003.
LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
---------------------------- -----------------------------
Michael Scarpa, Elaine H. Goodell,
Senior Vice President and Vice President-Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(principal financial officer) (principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on March 26, 2003.
Signature Title
/s/ Paul R. Charron Chairman of the Board, Chief Executive
- ------------------------------------ Officer and Director
Paul R. Charron (principal executive officer)
/s/ Bernard W. Aronson Director
- ------------------------------------
Bernard W. Aronson
/s/ Raul J. Fernandez Director
- ------------------------------------
Raul J. Fernandez
/s/ J. James Gordon Director
- ------------------------------------
J. James Gordon
/s/ Nancy J. Karch Director
- ------------------------------------
Nancy J. Karch
/s/ Kenneth P. Kopelman Director
- ------------------------------------
Kenneth P. Kopelman
/s/ Kay Koplovitz Director
- ------------------------------------
Kay Koplovitz
/s/ Arthur C. Martinez Director
- ------------------------------------
Arthur C. Martinez
/s/ Oliver R. Sockwell Director
- ------------------------------------
Oliver R. Sockwell
/s/ Paul E. Tierney, Jr. Director
- ------------------------------------
Paul E. Tierney, Jr.
44
LIZ CLAIBORNE, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Paul R. Charron, certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Paul R. Charron
- --------------------
Paul R. Charron
Chairman of the Board and Chief Executive Officer
45
CERTIFICATION
- -------------
I, Michael Scarpa, certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Michael Scarpa
- --------------------
Michael Scarpa
Senior Vice President, Chief Financial Officer
46
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Number
------
MANAGEMENT'S REPORT AND
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 to F-4
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 28, 2002 and December 29, 2001 F-5
Consolidated Statements of Income for the
Three Fiscal Years Ended December 28, 2002 F-6
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended December 28, 2002 F-7 to F-8
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended December 28, 2002 F-9
Notes to Consolidated Financial Statements F-10 to F-36
SCHEDULE II - Valuation and Qualifying Accounts F-37
NOTE: Schedules other than those referred to above and parent company
condensed financial statements have been omitted as inapplicable
or not required under the instructions contained in Regulation
S-X or the information is included elsewhere in the financial
statements or the notes thereto.
F-1
MANAGEMENT'S REPORT
The management of Liz Claiborne, Inc. is responsible for the preparation,
objectivity and integrity of the consolidated financial statements and other
information contained in this Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and include some amounts that are based on
management's informed judgments and best estimates.
To help assure that financial information is reliable and assets are
safeguarded, management maintains a system of internal controls and procedures
which we believe is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.
The independent public accountants have audited our consolidated financial
statements as described in their report. In the course of their audits, the
independent public accountants have developed an overall understanding of the
Company's accounting and financial controls and have conducted other tests as
they considered necessary to support their opinion on the financial statements.
The independent public accountants report their findings and recommendations to
management and the Audit Committee of the Board of Directors. Control procedures
are implemented or revised as appropriate to respond to these recommendations.
There have not been any material control weaknesses brought to the attention of
management or the Audit Committee during the periods covered by the reports of
the independent public accountants. However, in as much as the independent
public accountants' audits consisted of selected tests of control policies and
procedures and did not cover the entire system of internal control, they would
not necessarily disclose all weaknesses which might exist.
The Audit Committee, which consists solely of non-management directors, meets
with the independent public accountants, internal auditors and management
periodically to review their respective activities and the discharge of their
respective responsibilities. Both the independent public accountants and the
internal auditors have unrestricted access to the Audit Committee, with or
without management, to discuss the scope and results of their audits and any
recommendations regarding the system of internal controls.
/s/ Paul R. Charron /s/ Michael Scarpa
- ------------------------------------ -----------------------------------
Paul R. Charron Michael Scarpa
Chairman of the Board Senior Vice President and
and Chief Executive Officer Chief Financial Officer
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Liz Claiborne, Inc.:
We have audited the accompanying consolidated balance sheet of Liz
Claiborne, Inc. and subsidiaries (the "Company") as of December 28, 2002 and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. Our audit also included the financial statement
schedule for the year ended December 28, 2002, listed in the Index at Item
15(a)2. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. The Company's financial statements and financial statement schedules
as of December 29, 2001, and for each of the years in the two-year period then
ended were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements and stated that
such 2001 and 2000 financial statement schedules, when considered in relation to
the 2001 and 2000 basic financial statements taken as a whole, presented fairly,
in all material respects, the information set forth therein, in their report
dated February 19, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 28,
2002 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, such financial statement schedules for
the year ended December 28, 2002, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Notes 1 and 7 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and other
tangible assets to conform to Statement of Financial Accounting Standards No.
142.
/s/ Deloitte & Touche LLP
New York, New York
February 19, 2003
F-3
Reports of Independent Public Accountants
The following report is a copy of a previously issued Report of Independent
Public Accountants. This report relates to prior years financial statements.
This report has not been reissued by Arthur Andersen LLP.
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited the accompanying consolidated balance sheets of Liz Claiborne,
Inc. (a Delaware corporation) and subsidiaries as of December 29, 2001 and
December 30, 2000, and the related consolidated statements of income, retained
earnings, comprehensive income and changes in capital accounts and cash flows
for each of the three fiscal years in the period ended December 29, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liz Claiborne, Inc.
and subsidiaries as of December 29, 2001 and December 30, 2000, and the results
its operations and its cash flows for each of the three fiscal years ended
December 29, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial statements and, in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
February 19, 2002
F-4
CONSOLIDATED BALANCE SHEETS
Liz Claiborne, Inc. and Subsidiaries
All amounts in thousands except share data December 28, 2002 December 29, 2001
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 239,524 $ 127,635
Marketable securities 36,808 32,993
Accounts receivable - trade, net 370,468 362,189
Inventories, net 461,154 487,923
Deferred income taxes 45,877 37,386
Other current assets 49,340 40,399
----------- -----------
Total current assets 1,203,171 1,088,525
Property and Equipment - Net 378,303 352,001
Goodwill - Net 478,869 404,654
Intangibles - Net 226,577 95,037
Other Assets 9,398 11,038
----------- -----------
$ 2,296,318 $ 1,951,255
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Short term borrowings $ 21,989 $ --
Accounts payable 252,993 236,906
Accrued expenses 289,757 199,772
Income taxes payable 26,241 13,566
----------- -----------
Total current liabilities 590,980 450,244
Long-Term Debt 377,725 387,345
Other Non-Current Liabilities 113 15,000
Deferred Income Taxes 33,709 37,314
Commitments and Contingencies (Note 10)
Minority Interest 7,430 5,191
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
Capital in excess of par value 95,708 89,266
Retained earnings 2,283,692 2,077,737
Unearned compensation expense (10,185) (16,704)
Accumulated other comprehensive loss (28,317) (5,346)
----------- -----------
2,517,335 2,321,390
Common stock in treasury, at cost - 69,401,831 shares in
2002 and 71,212,310 shares in 2001 (1,230,974) (1,265,229)
----------- -----------
Total stockholders' equity 1,286,361 1,056,161
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,296,318 $ 1,951,255
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
CONSOLIDATED STATEMENTS OF INCOME
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
----------------------------------------------------------------
All dollar amounts in thousands except per common share data December 28, 2002 December 29, 2001 December 30, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 3,717,503 $ 3,448,522 $ 3,104,141
Cost of goods sold 2,097,868 2,021,272 1,870,269
----------- ----------- -----------
Gross Profit 1,619,635 1,427,250 1,233,872
Selling, general & administrative expenses 1,222,617 1,080,483 909,142
Restructuring charge 7,130 15,050 21,041
----------- ----------- -----------
Operating Income 389,888 331,717 303,689
Other (expense) income - net (2,318) (3,511) 6,658
Interest expense - net (25,124) (28,117) (21,917)
----------- ----------- -----------
Income Before Provision for Income Taxes 362,446 300,089 288,430
Provision for income taxes 131,281 108,032 103,835
----------- ----------- -----------
Net Income $ 231,165 $ 192,057 $ 184,595
=========== =========== ===========
Net Income per Common Share:
Basic $ 2.19 $ 1.85 $ 1.73
=========== =========== ===========
Diluted $ 2.16 $ 1.83 $ 1.72
=========== =========== ===========
Dividends Paid per Common Share $ .23 $ .23 $ .23
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
Accumula-
COMMON STOCK Capital ted Other TREASURY SHARES
------------------ in Excess Comprehen- Unearned -----------------------
Number of of Par Retained sive In- Compen- Number of
All dollar amounts in thousands Shares Amount Value Earnings come (Loss) sation Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1 2000 176,437,234 $176,437 $80,257 $1,748,599 $(3,263) $ (9,097) 62,997,154 $(1,090,764) $ 902,169
Net income -- -- -- 184,595 -- -- -- -- 184,595
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- (3,625) -- -- -- (3,625)
Adjustment to unrealized (losses)
on available for sale securities -- -- -- -- (768) -- -- -- (768)
----------
Total comprehensive income 180,202
Exercise of stock options and
related tax benefits -- -- 3,551 (4,517) -- -- (1,318,188) 23,718 22,752
Cash dividends declared -- -- -- (24,027) -- -- -- -- (24,027)
Purchase of common stock -- -- -- -- -- -- 12,310,610 (247,670) (247,670)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- -- (142) -- 1,462 29,224 (461) 859
----------- -------- ------- ---------- ------- -------- ---------- ----------- ----------
BALANCE, DECEMBER 30, 2000 176,437,234 $176,437 $83,808 $1,904,508 $(7,656) (7,635) 74,018,800 $(1,315,177) $ 834,285
Net income -- -- 192,057 -- -- -- -- 192,057
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- 4,928 -- -- -- 4,928
Gains (losses) on cash flow hedging --
derivatives -- -- -- -- (250) -- -- (250)
Adjustment to unrealized (losses) --
on available for sale securities -- -- -- -- (2,368) -- -- (2,368)
----------
Total comprehensive income 194,367
Exercise of stock options and
related tax benefits -- -- 5,458 -- -- -- (2,363,076) 38,561 44,019
Cash dividends declared -- -- -- (23,317) -- -- -- -- (23,317)
Purchase of common stock -- -- -- -- -- -- 155,000 (2,854) (2,854)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- -- 4,489 -- (9,069) (598,414) 14,241 9,661
----------- -------- ------- ---------- ------- -------- ---------- ----------- ----------
BALANCE, DECEMBER 29, 2001 176,437,234 $176,437 $89,266 $2,077,737 $(5,346) $(16,704) 71,212,310 $(1,265,229) $1,056,161
=========== ======== ======= ========== ======= ======== ========== =========== ==========
F-7
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS (continued)
Liz Claiborne, Inc. and Subsidiaries
Accumula-
COMMON STOCK Capital ted Other TREASURY SHARES
------------------ in Excess Comprehen- Unearned -----------------------
Number of of Par Retained sive In- Compen- Number of
All dollar amounts in thousands Shares Amount Value Earnings come (Loss) sation Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 29, 2001 176,437,234 $176,437 $89,266 $2,077,737 $ (5,346) $(16,704) 71,212,310 $(1,265,229) $1,056,161
Net income -- -- -- 231,165 -- -- -- -- 231,165
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- 19,496) -- -- -- (19,496)
Gains (losses) on cash flow hedging
derivatives -- -- -- -- (5,859) -- -- -- (5,859)
Adjustment to unrealized (losses)
on available for sale securities -- -- -- -- 2,384 -- -- -- 2,384
----------
Total comprehensive income 208,194
Exercise of stock options and
related tax benefits -- -- 6,258 (1,211) -- -- (1,784,524) 33,781 38,828
Cash dividends declared -- -- -- (23,802) -- -- -- -- (23,802)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- 184 (197) -- 6,519 (25,955) 474 6,980
----------- -------- ------- ---------- -------- -------- ---------- ----------- ----------
BALANCE, DECEMBER 28, 2002 176,437,234 $176,437 $95,708 $2,283,692 $(28,317) $(10,185) 69,401,831 $(1,230,974) $1,286,361
=========== ======== ======= ========== ======== ======== ========== =========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
------------------------------------------------------------
All dollar amounts in thousands December 28, 2002 December 29, 2001 December 30, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 231,165 $ 192,057 $ 184,595
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 96,395 101,491 77,033
Deferred income taxes (9,209) 11,925 8,418
Non cash portion of restructuring charge 3,266 15,050 21,041
Other-net 14,210 13,442 4,410
Changes in current assets and liabilities, exclusive of acquisitions:
(Increase) decrease in accounts receivable - trade, net (1,126) (44,957) 29,245
Decrease (increase) in inventories 49,120 37,535 (46,408)
(Increase) decrease in other current assets (10,636) 10,813 16,811
Increase in accounts payable 10,606 13,249 9,834
Increase (decrease) in accrued expenses 24,976 (23,335) (37,428)
Increase in income taxes payable 13,066 1,943 414
----------- ----------- -----------
Net cash provided by operating activities 421,833 329,213 267,965
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of investment instruments (90) (83) (14,654)
Disposals of investment instruments -- -- 14,573
Purchases of property and equipment (80,020) (82,236) (66,711)
Purchases of trademarks and licenses -- -- (3,683)
Payments for acquisitions, net of cash acquired (206,264) (274,142) (55,178)
Payments for in-store merchandise shops (8,851) (24,718) (21,381)
Other-net (11,573) (3,496) (496)
----------- ----------- -----------
Net cash used in investing activities (306,798) (384,675) (147,530)
----------- ----------- -----------
Cash Flows from Financing Activities:
Short term borrowings 17,199 -- --
Proceeds from Eurobond issue -- 309,619 --
Commercial paper - net (65,162) (191,492) 153,134
Proceeds from exercise of common stock options 32,570 39,193 19,201
Dividends paid (23,802) (23,317) (24,027)
Purchase of common stock, net of put warrant premiums -- (2,854) (247,670)
----------- ----------- -----------
Net cash (used in) provided by financing activities (39,195) 131,149 (99,362)
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash 36,049 4,928 (3,625)
----------- ----------- -----------
Net Change in Cash and Cash Equivalents 111,889 80,615 17,448
Cash and Cash Equivalents at Beginning of Year 127,635 47,020 29,572
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 239,524 $ 127,635 $ 47,020
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
NATURE OF OPERATIONS
- --------------------
Liz Claiborne, Inc. is engaged primarily in the design and marketing of a broad
range of apparel, accessories and fragrances.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Liz Claiborne,
Inc. and its wholly-owned and majority-owned subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
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 and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates by their nature are based on judgments and available
information. Therefore, actual results could differ from those estimates. It is
possible such changes could occur in the near term.
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, inventories,
goodwill and other intangibles, 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. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods. 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 the Company's wholesale operations is recognized at the time
title passes and merchandise has been shipped from the Company's distribution
centers or contractors. Wholesale revenue is recorded net of returns, discounts
and allowances. Returns and allowances require pre-approval from management.
Discounts are based on trade terms. Estimates for end of season allowances are
based on historic trends, seasonal results, an evaluation of current economic
conditions and retailer performance. The Company's historical estimates of these
costs have not differed materially from actual results. Retail store revenues
are recognized at the time of sale to consumers. Retail revenues are recorded
net of returns. Licensing revenues are accrued at the contractually guaranteed
minimum levels.
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
expected 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 expected recoveries and the evaluation of current market
conditions. The Company's historical estimates of these costs have not differed
materially from actual results.
Inventories, Net
- ----------------
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
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
category of inventory of the Company's 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. Estimates may differ
from actual results due to quantity, quality and mix of products in inventory,
consumer and retailer preferences and market conditions. The Company's
historical estimates of these costs have not differed materially from actual
results.
Goodwill And Other Intangibles
- ------------------------------
In 2002 the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and intangible assets with indefinite lives are to no
longer be amortized, but rather be tested at least annually for impairment. This
pronouncement also requires that intangible assets with definite lives continue
to be amortized over their respective 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 SFAS No. 142
effective December 30, 2001. Trademarks that are owned are no longer amortized,
as they have been deemed to have indefinite lives. Such trademarks are reviewed
at least annually for potential value impairment. Trademarks that are licensed
by the Company from third parties are amortized over the individual terms of the
respective license agreements, which range from 5 to 15 years. Intangible
merchandising rights are amortized over a period of four years.
The recoverability of the carrying values of all long-lived assets with definite
lives is reevaluated when changes in circumstances indicate the assets' value
may be impaired. Impairment testing is based on a review of forecasted operating
cash flows and the profitability of the related business. For the three-year
period ended December 28, 2002, there were no material adjustments to the
carrying values of any long-lived assets resulting from these evaluations.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on claims experience and 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 the Company's 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.
The Company hedges its net investment position in Euros. 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 quarter-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.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
OTHER SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------
Fair Value of Financial Instruments
- -----------------------------------
The fair value of cash and cash equivalents, receivables and accounts payable
approximates their carrying value due to their short-term maturities. The fair
value of long-term debt instruments approximates the carrying value and is
estimated based on the current rates offered to the Company for debt of similar
maturities.
Cash And Cash Equivalents
- -------------------------
All highly liquid investments with an original maturity of three months or less
at the date of purchase are classified as cash equivalents.
Marketable Securities
- ---------------------
Investments are stated at market. The estimated fair value of the marketable
securities is based on quoted prices in an active market. Gains and losses on
investment transactions are determined using the specific identification method
and are recognized in income based on settlement dates. Unrealized gains and
losses on securities held for sale are included in Accumulated other
comprehensive income (loss) until realized. Interest is recognized when earned.
All marketable securities are considered available-for-sale.
Property And Equipment
- ----------------------
Property and equipment is stated at cost less accumulated depreciation and
amortization. Buildings and building improvements are depreciated using the
straight-line method over their estimated useful lives of 20 to 39 years.
Machinery and equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives of three to seven years.
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful lives of the assets.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of non-U.S. subsidiaries have been translated at year-end
exchange rates. Revenues and expenses have been translated at average rates of
exchange in effect during the year. Resulting translation adjustments have been
included in Accumulated other comprehensive income (loss). Gains and losses on
translation of intercompany loans with foreign subsidiaries of a long-term
investment nature are also included in this component of stockholders' equity.
Cost of Goods Sold
- ------------------
Cost of goods sold includes the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs and
provisions for shrinkage.
Advertising, Promotion and Marketing
- ------------------------------------
All costs associated with advertising, promoting and marketing of Company
products are expensed during the periods when the activities take place. Costs
associated with cooperative advertising programs under which the Company, at its
discretion, agrees to share costs, under negotiated contracts, of customers'
advertising and promotional expenditures, are expensed when the related revenues
are recognized. Advertising and promotion expenses were $119.8 million in 2002,
$115.2 million in 2001 and $116.9 million in 2000. Marketing expenses, including
in-store and other Company-sponsored activities, were $41.9 million in 2002,
$40.5 million in 2001 and $36.5 million in 2000.
Shipping and handling costs
- ---------------------------
Shipping and handling costs are included as a component of Selling, General &
Administrative Expenses in the Consolidated Statements of Income. In fiscal
years 2002, 2001 and 2000 shipping and handling costs approximated $177.4
million, $170.4 million and $153.5 million, respectively.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Stock-based compensation
- ------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option grants. Had compensation costs for the
Company's stock option grants been determined based on the fair value at the
grant dates for awards under these plans in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts as follows:
Fiscal Year Ended
In thousands except for --------------------------------------------------------
per share data December 28, 2002 December 29, 2001 December 30, 2000
- -------------------------------------------------------------------------------------------------
Net income:
As reported $ 231,165 $ 192,057 $ 184,595
Total stock-based employee
compensation expense determined
under fair value based method for
all awards*, net of tax 16,786 13,336 9,314
----------- ----------- -----------
Pro forma $ 214,379 $ 178,721 $ 175,281
=========== =========== ===========
Basic earnings per share:
As reported $2.19 $1.85 $1.73
Pro forma $2.03 $1.72 $1.64
Diluted earnings per share:
As reported $2.16 $1.83 $1.72
Pro forma $2.02 $1.72 $1.64
* "All awards" refers to awards granted, modified, or settled in fiscal
periods beginning after December 15, 1994 - that is, awards for which the
fair value was required to be measured under SFAS No. 123
For this purpose, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2002, 2001 and 2000,
respectively: dividend yield of 0.8%, 0.9% and 1.1%, expected volatility of 39%,
46% and 40%, risk free interest rates of 2.7%, 4.4% and 5.0%, and expected lives
of five years for all periods.
Fiscal Year
- -----------
The Company's fiscal year ends on the Saturday closest to December 31. The 2002,
2001 and 2000 fiscal years each reflected a 52-week period.
Cash Dividend and Common Stock Repurchase
- -----------------------------------------
On January 29, 2003, 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 March 17, 2003 to stockholders of record at the close of business on
February 24, 2003. As of December 28, 2002, the Company has $218.3 million
remaining in buyback authorization under its share repurchase program.
Prior Years' Reclassification
- -----------------------------
Certain items previously reported in specific captions in the accompanying
financial statements and notes have been reclassified to conform to the current
year's classifications.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 2: ACQUISITIONS
------------
On September 30, 2002, the Company acquired 100 percent of the equity interest
of Ellen Tracy, Inc., a privately held fashion apparel company, and its related
companies (collectively, "Ellen Tracy") for a cash purchase price of
approximately $175.6 million, including the assumption of debt. Ellen Tracy
designs, wholesales and markets women's sportswear. Based in New York City,
Ellen Tracy sells its products predominantly to select specialty stores and
upscale department stores at "bridge" price points which are somewhat higher
than the Company's core better-priced businesses. Brands include Ellen Tracy,
Linda Allard Ellen Tracy and Company Ellen Tracy. Ellen Tracy achieved net sales
of approximately $171 million in 2001. The fair market value of assets acquired
was $90.4 million (including $60.3 million of trademarks) and liabilities
assumed were $44.1 million resulting in goodwill of approximately $129.3
million. 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.
On July 9, 2002, the Company acquired 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
(both at wholesale and through its own retail operations) 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: (a) an initial cash payment made
at the closing date of $15.2 million; (b) a second payment to be made at the end
of the first quarter 2003 based on business performance in 2002, currently
expected to be approximately 27 million Canadian dollars (or $17 million based
on the exchange rate as of December 28, 2002); and (c) a contingent payment
equal to 28% of the equity value of Mexx Canada to be determined as a multiple
of Mexx Canada's earnings and cash flow performance for the year ended 2004 or
2005. The selection of the measurement year for the contingent payment is at
either party's option. The Company estimates that if the 2004 measurement year
is selected, this payment will be in the range of approximately 35 - 45 million
Canadian dollars (or $22 - 29 million based on the exchange rate as of December
28, 2002). The fair market value of assets acquired was $20.5 million and
liabilities assumed were $17.7 million resulting in Goodwill of $29.6 million.
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.
On May 23, 2001, the Company acquired 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 consisting of:
(a) 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), and (b) a
contingent payment equal to 28% of the equity value of Mexx to be determined as
a multiple of Mexx's earnings and cash flow performance for the year ended 2003,
2004 or 2005. The selection of the measurement year for the contingent payment
is at either party's option. The Company estimates that if the 2003 measurement
year is selected, the contingent payment would be in the range of approximately
134 - 144 million Euros (or $140 - 150 million based on the exchange rate as of
December 28, 2002). 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, 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. The excess purchase price over fair market value
of the underlying net assets acquired was $199.7 million. The purchase price
includes an adjustment for transaction fees associated with the acquisition and
the expenses associated with the closure of certain under-performing 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. The fair
market value of assets acquired was $179.2 million and liabilities assumed were
$91.2 million.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The following unaudited pro forma information assumes the Mexx acquisition had
occurred on January 2, 2000. The pro forma information, as presented below, is
not indicative of the results that would have been obtained had the transaction
occurred on January 2, 2000, nor is it indicative of the Company's future
results.
Fiscal Year Ended
----------------------------------------
December 28, December 29, December 30,
Dollars in thousands 2002 2001 2000
except per share data Actual Pro forma Pro forma
- --------------------------------------------------------------------------------
Net sales $3,717,503 $3,591,273 $3,456,863
Net income 231,165 180,297 177,063
Basic earnings per share $2.19 $1.73 $1.66
Diluted earnings per share $2.16 $1.72 $1.65
The above pro forma amounts reflect adjustments for interest expense from
additional borrowings necessary to finance the acquisition and income tax effect
based upon a pro forma effective tax rate of 36% in 2001 and 2000. 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.
On July 26, 2000, the Company acquired the majority of the assets of the Monet
Group ("Monet") for a total purchase price of $40.2 million. Monet is a leading
designer and marketer of branded fashion jewelry sold through department stores,
popular priced merchandisers and internationally under the Monet, Monet Pearl,
Monet Signature, Monet2, Trifari and Marvella brands. Excess purchase price over
fair market value of the underlying net assets was allocated to goodwill and
property based on estimates of fair values. The fair value of assets acquired
was $46.4 million and liabilities assumed were $16.0 million. 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.
On June 8, 1999, the Company acquired 85.0 percent of the equity interest of
Lucky Brand Dungarees, Inc. ("Lucky Brand"), whose core business consists of the
Lucky Brand line of women's and men's denim-based sportswear. The acquisition
was accounted for using the purchase method of accounting. The total purchase
price consisted of a cash payment made at the closing date of approximately $85
million, and a payment to be made on March 31, 2003 of approximately $25
million. An additional payment of $12.7 million was made in 2000 for tax-related
purchase price adjustments. Commencing in June 2004, the Company may elect to,
or be required to, purchase the remaining equity interest of Lucky Brand at an
amount equal to its then fair market value, or under certain circumstances at a
20% premium on such value. The Company estimates this payment would be in the
range of approximately $32 - $45 million if the purchase occurred in 2004.
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.
On February 12, 1999, the Company acquired 84.5 percent of the equity interest
of Segrets, Inc., whose core business consists of the Sigrid Olsen women's
apparel lines. In the fourth quarter of 1999, the Company purchased an
approximately 3.0 percent additional equity interest. In November 2000, the
Company increased its equity interest to 97.5 percent. Commencing in February
2004, the Company may elect to, or be required to, purchase the remaining equity
interest at an amount equal to its then fair market value. 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.
The contingent payments related to the Mexx, Mexx Canada and Lucky Brand
acquisitions will be accounted for as additional purchase price.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 3: LICENSING COMMITMENTS
---------------------
In June 2002, the Company consummated an exclusive license agreement with
Kellwood Company ("Kellwood") under which Kellwood was granted the license to
design, manufacture, market, sell and distribute men's dress shirts under the
Claiborne label in North America commencing with the Spring 2003 selling season.
The line, which is being produced by Kellwood's subsidiary, Smart Shirts Ltd., a
global manufacturer of men's shirts, was previously produced and sold by the
Company's Claiborne Men's division. 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
options to renew for two additional 3-year periods if certain sales thresholds
are met.
In August 1999, the Company consummated exclusive license agreements with
Kenneth Cole Productions, Inc. ("KCP") to manufacture, design, market and
distribute women's apparel products in North America under the trademarks
"Kenneth Cole New York," "Reaction Kenneth Cole" and "Unlisted.com." The initial
term of the license agreement runs through December 31, 2004. The Company has
options to renew for three additional 5-year periods if certain sales thresholds
are met. In December 2002, the Company consummated an exclusive license
agreement with KCP to design, manufacture, market and distribute women's jewelry
in the United States under the trademarks "Kenneth Cole New York" and "Reaction
Kenneth Cole." The initial term of the license agreement runs through December
31, 2006. The Company has an option to renew for an additional two-year period
if certain thresholds are met. Under each of these agreements, the Company is
obligated to pay a royalty equal to a percentage of net sales of licensed
products.
In July 1998, the Company consummated an exclusive license agreement with
Candie's, Inc. to manufacture, market, distribute and sell a line of fragrances
for men and women using "Candie's" marks and logos. Under the agreement, the
Company is obligated to pay royalty equal to a percentage of net sales of the
"Candie's(R)" products. The initial term of the license agreement runs through
December 31, 2013, with an option to renew for an additional 10-year period if
certain sales thresholds are met.
The Company has an exclusive license agreement with an affiliate of Donna Karan
International, Inc. to design, produce, market and sell men's and women's
sportswear, jeanswear and activewear products in the Western Hemisphere under
the "DKNY(R) Jeans" and "DKNY(R) Active" marks and logos. Under the agreement,
the Company is obligated to pay a royalty equal to a percentage of net sales of
the "DKNY(R) Jeans" and "DKNY(R) Active" products. The initial term of the
license agreement runs through December 31, 2012; the Company has an option to
renew for an additional 15-year period if certain sales thresholds are met. The
Company also has an additional exclusive license agreement to design, produce,
market and sell in the Western Hemisphere a line of women's career and casual
sportswear for the "better" market under the trademark City DKNY(R). Under the
agreement, the Company is obligated to pay a royalty equal to a percentage of
net sales of the licensed products. The initial term of the license agreement
runs through December 31, 2005; the Company has options to renew for two
additional 5-year periods if certain sales thresholds are met.
Certain of the above licenses are subject to minimum guarantees totaling $158.6
million and running through 2013; there is no maximum limit on the license fee.
NOTE 4: MARKETABLE SECURITIES
---------------------
In August 1999, the Company, in conjunction with the consummation of a license
agreement with Kenneth Cole Productions, Inc. purchased one million shares of
Kenneth Cole Productions, Inc. Class A stock for $29.0 million. In March 2000, a
three-for-two stock split increased the number of shares owned by the Company to
1.5 million shares. In accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of December 28, 2002 and December 29, 2001, the marketable
securities are considered available for sale and are recorded at fair market
value with unrealized losses net of taxes reported as a component of Accumulated
other comprehensive income (loss).
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The following is a summary of available-for-sale marketable securities at
December 28, 2002 and December 29, 2001:
Gross Unrealized
--------------------- Estimated
December 28, 2002 (in thousands) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
Equity securities $ 29,000 $ 2,590 $ -- $ 31,590
Other holdings 8,689 -- 3,471 5,218
---------- ---------- --------- ----------
Total $ 37,689 $ 2,590 $ 3,471 $ 36,808
========== ========== ========= ==========
Gross Unrealized
--------------------- Estimated
December 29, 2001 (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
========== ========== ========= ==========
For 2002, 2001 and 2000, gross realized gains on sales of available-for-sale
securities totaled $0, $0 and $10,044,000, respectively.
NOTE 5: INVENTORIES, NET
----------------
Inventories are summarized as follows:
In thousands December 28, 2002 December 29, 2001
- ------------------------------------------------------------------------------
Raw materials $ 26,069 $ 29,649
Work in process 5,824 7,061
Finished goods 429,261 451,213
----------- -----------
$ 461,154 $ 487,923
=========== ===========
NOTE 6: PROPERTY AND EQUIPMENT, NET
---------------------------
Property and equipment consisted of the following:
In thousands December 28, 2002 December 29, 2001
- ------------------------------------------------------------------------------
Land and buildings $ 140,311 $ 144,299
Machinery and equipment 313,161 303,388
Furniture and fixtures 122,815 98,100
Leasehold improvements 235,859 198,446
----------- -----------
812,146 744,233
Less: Accumulated depreciation
and amortization 433,843 392,232
----------- -----------
$ 378,303 $ 352,001
=========== ===========
Depreciation and amortization expense of property and equipment was $70.6
million, $61.9 million and $51.7 million for fiscal years 2002, 2001 and 2000,
respectively.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 7: GOODWILL AND INTANGIBLES, NET
-----------------------------
The Company adopted the provisions of SFAS No. 142 effective December 30, 2001.
As required under SFAS No. 142, the Company completed its transitional
impairment tests as of December 29, 2001 and its annual impairment test as of
the first day of the third quarter of fiscal 2002. No impairment was recognized.
The following tables disclose the carrying value of all the intangible assets:
December 28, 2002 December 29, 2001
--------------------------------------- -------------------------------------
Gross Gross
Carrying Accum. Carrying Accum. Estimated
In thousands Amount Amort. Net Amount Amort. Net Lives
- ------------------------------------------------------------------------------------------------------------------ ------------
Amortized intangible assets:
Licensed trademarks $ 42,849 $ (10,184) $ 32,665 $ 42,849 $ (5,530) $ 37,319 5-15 years
Merchandising rights 73,920 (42,064) 31,856 85,309 (40,731) 44,578 4 years
--------- --------- --------- --------- --------- ---------
Total $ 116,769 $ (52,248) $ 64,521 $ 128,158 $ (46,261) $ 81,897
========= ========= ========= ========= ========= =========
Unamortized intangible assets:
Owned trademarks $ 162,056 $ 13,140
--------- ---------
Total $ 226,577 $ 95,037
========= =========
Intangible amortization expense for 2002, 2001 and 2000 amounted to $22.8
million, $20.8 million and $21.4 million, respectively.
The estimated intangible amortization expense for the next five years is as
follows:
(In millions)
Fiscal Year Amortization Expense
- ----------------------------------------------------------------
2003 $18.7
2004 14.1
2005 7.6
2006 3.1
2007 2.4
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The changes in carrying amount of goodwill for the twelve months ended December
28, 2002 are as follows:
Wholesale Wholesale
In thousands Apparel Non-Apparel Total
- --------------------------------------------------------------------------------
Balance December 29, 2001 $ 366,797 $ 37,857 $ 404,654
Acquisition of Mexx Canada* 29,587 -- 29,587
Acquisition of Ellen Tracy* 129,285 -- 129,285
Acquisition of Mexx Austria 655 -- 655
Finalization of purchase price allocation (6,696) -- (6,696)
Additional purchase price of Lucky Brand
Dungarees 10,000 -- 10,000
Reclassification to Trademarks (60,578) (28,038) (88,616)
---------- ---------- ----------
Balance December 28, 2002 $ 469,050 $ 9,819 $ 478,869
========== ========== ==========
* Pending finalization of purchase price allocation.
There is no goodwill recorded in the Company's 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 twelve months ended
December 29, 2001 and December 30, 2000:
Twelve Months Ended
--------------------------------------
December 28, December 29, December 30,
2002 2001 2000
In thousands except per share data Actual Pro forma Pro forma
- --------------------------------------------------------------------------------
Net income, as reported $ 231,165 $ 192,057 $ 184,595
Discontinued amortization of goodwill and
intangibles, net of tax -- 10,503 5,809
--------- --------- ---------
Net income, adjusted 231,165 202,560 190,404
========= ========= =========
Basic earnings per share, as reported 2.19 1.85 1.73
Discontinued amortization of goodwill and
intangibles, net of tax -- 0.10 0.05
--------- --------- ---------
Basic earnings per share, adjusted 2.19 1.95 1.78
========= ========= =========
Diluted earnings per share, as reported 2.16 1.83 1.72
Discontinued amortization of goodwill and
intangibles, net of tax -- 0.10 0.05
--------- --------- ---------
Diluted earnings per share, adjusted $ 2.16 $ 1.93 $ 1.77
========= ========= =========
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 8: ACCRUED EXPENSES
----------------
Accrued expenses consisted of the following:
In thousands December 28, 2002 December 29, 2001
- ------------------------------------------------------------------------------
Payroll and bonuses $ 64,018 $ 37,406
Taxes, other than taxes on income 12,210 5,053
Employee benefits 51,595 44,208
Advertising 25,049 16,367
Restructuring reserve 11,377 15,748
Additional purchase price payments 42,214 --
Other 83,294 80,990
----------- -----------
$ 289,757 $ 199,772
=========== ===========
NOTE 9: INCOME TAXES
------------
The provisions for income taxes are as follows:
Fiscal Year Ended
---------------------------------------------------------
In thousands December 28, 2002 December 29, 2001 December 30, 2000
- ----------------------------------------------------------------------------
Current:
Federal $ 107,157 $ 89,237 $ 78,396
Foreign 18,663 10,131 5,708
State & local 15,600 10,800 10,750
----------- ----------- -----------
Total Current $ 141,420 $ 110,168 $ 94,854
Deferred:
Federal $ (7,644) $ 10,899 $ 7,974
Foreign (4,304) (14,155) 158
State & local 1,809 1,120 849
----------- ----------- -----------
Total Deferred (10,139) (2,136) 8,981
----------- ----------- -----------
$ 131,281 $ 108,032 $ 103,835
=========== =========== ===========
Liz Claiborne, Inc. and its U.S. subsidiaries file a consolidated federal income
tax return. Deferred income tax benefits and deferred income taxes represent the
tax effects of revenues, costs and expenses which are recognized for tax
purposes in different periods from those used for financial statement purposes.
The current income tax provisions exclude approximately $5,916,000 in 2002,
$4,511,000 in 2001 and $3,551,000 in 2000 arising from the tax benefits related
to the exercise of nonqualified stock options. These amounts have been credited
to capital in excess of par value. In addition, the current income tax provision
does not reflect the deferred tax liability from the Company's acquisition of
Mexx of approximately $475,000 and the valuation allowance against the net
operating loss carryforwards acquired as part of the acquisition of Mexx.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The effective income tax rate differs from the statutory federal income tax rate
as follows:
Fiscal Year Ended
-----------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
- --------------------------------------------------------------------------------
Federal tax provision at
statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal benefit 2.8 2.3 2.4
Other-net (1.6) (1.3) (1.4)
------- ------- -------
36.2% 36.0% 36.0%
======= ======= =======
The components of net deferred taxes arising from temporary differences as of
December 28, 2002 and December 29, 2001 are as follows:
December 28, 2002 December 29, 2001
--------------------------------------------------------
In thousands Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Asset Liability Asset Liability
- ------------------------------------------------------------------------------------------
Inventory valuation $ 8,356 $ -- $ 10,236 $ --
Unremitted earnings from foreign
subsidiaries -- -- -- 16,419
Restructuring charge 10,854 -- 10,593 --
Deferred compensation -- 10,414 -- 10,207
Nondeductible accruals 13,110 -- 14,867 --
Unrealized investment losses 3,612 -- 2,624 --
Net operating loss carryforwards 15,806 -- 13,286 --
Valuation allowance (6,035) -- (5,829) --
Depreciation -- 2,384 2,582 --
Other-net 174 20,911 (10,973) 10,688
--------- --------- --------- ---------
$ 45,877 $ 33,709 $ 37,386 $ 37,314
========= ========= ========= =========
As of December 28, 2002, Mexx had net operating loss carryforwards of
approximately $45,162,000, (that begins to expire in 2005), available to reduce
future foreign taxable income. A deferred tax asset has been established;
however, a valuation allowance of $6,035,000 has reduced the deferred tax assets
because it is more likely than not that certain of these assets will not be used
to reduce future tax payments. The valuation allowance increased $0.2 million
from the prior year, as management now believes that it is more likely than not
that certain deferred tax assets will not be used to reduce future tax payments.
As of December 29, 2001, Mexx had net operating loss carryforwards of
approximately $37,844,000 (that begin to expire in 2005) available to reduce
future foreign taxable income. A deferred tax asset has been established;
however, a valuation allowance of $5,829,000 has reduced the deferred tax assets
because it is more likely than not that certain of these assets will not be used
to reduce future tax payments.
The Company has provided Federal income taxes on unremitted earnings from its
international subsidiaries that may be remitted back to the United States.
Federal income taxes were not provided on unremitted earnings expected to be
permanently reinvested internationally of approximately $8.0 million.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 10: COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
--------------------------------------------
The Company leases office, showroom, warehouse/distribution and retail space and
computers and other equipment under various noncancelable operating lease
agreements which expire through 2023. Rental expense for 2002, 2001 and 2000 was
approximately $124,610,000, $100,748,000 and $71,523,000 respectively. The above
rental expense amounts exclude associated costs such as real estate taxes and
common area maintenance.
At December 28, 2002, the minimum aggregate rental commitments are as follows:
(In thousands) (In thousands)
Fiscal Year Operating Leases Fiscal Year Operating Leases
- ----------------------------------------------------------------------
2003 $112,526 2006 $ 84,305
2004 102,137 2007 74,728
2005 91,388 Thereafter 295,708
Certain rental commitments have renewal options extending through the fiscal
year 2031. Some of these renewals are subject to adjustments in future periods.
Many of the leases call for additional charges, some of which are based upon
various escalations, and, in the case of retail leases, the gross sales of the
individual stores above base levels.
At December 28, 2002 and December 29, 2001, the Company had entered into
short-term commitments for the purchase of raw materials and for the production
of finished goods totaling approximately $594,024,000 and $506,328,000,
respectively.
In the normal course of business, the Company extends credit, on open account,
to its retail customers, after a credit analysis is performed based on a number
of financial and other criteria. Federated Department Stores, May Department
Stores and Dillard's Department Stores accounted for approximately 16%, 12% and
11%, respectively, of wholesale net sales in 2002, 17%, 13% and 11%,
respectively, of wholesale net sales in 2001 and 18%, 14% and 16%, respectively,
of wholesale net sales in 2000. The Company does not believe that this
concentration of sales and credit risk represents a material risk of loss with
respect to its financial position as of December 28, 2002.
In the United States and Canada, the Company is bound by collective bargaining
agreements with the Union of Needletrades, Industrial and Textile Employees
(UNITE) and agreements with various related locals. These agreements cover
approximately 1,790 of the Company's full-time employees and expire on May 31,
2003 and it is anticipated that they will be renegotiated for an additional
three-year term. In addition, the Company is also currently bound by a Jobbers
Agreement with UNITE which expires on May 31, 2003. Most of the
UNITE-represented employees are employed in warehouse and distribution
facilities the Company operates in California, New Jersey, Ohio and
Pennsylvania. In addition, the Company is bound by an agreement with the
Industrial Professional & Technical Workers International Union, covering
approximately 158 of its full-time employees at its Santa Fe Springs, California
facility and expiring on May 14, 2005.
The Company considers its relations with its employees to be satisfactory and to
date has not experienced any interruption of its operations due to labor
disputes. While relations with the union have historically been amicable, the
Company cannot conclusively eliminate the likelihood of a labor dispute at one
or more of its facilities during negotiations of its collective bargaining
agreements with UNITE and its related locals. While the Company does not foresee
the likelihood of a prolonged labor dispute, any substantial labor disruption
could adversely affect its operations.
On May 22, 2001, the Company entered into an off-balance sheet financing
arrangement (commonly referred to as a "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 lessor under the operating lease arrangements is an
independent third-party limited partnership, which has contributed equity in
excess of 3.5% of the total value of the estimated aggregate cost to complete
these facilities. The cost to complete these
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
facilities was $63.7 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 maximum guarantee is approximately $54 million. The guarantee
becomes effective if the Company declines to purchase the facilities at the end
of the lease and the lessor is unable to sell the property at a price equal to
or greater than the original cost. The Company selected this financing
arrangement to take advantage of the favorable financing rates such an
arrangement afforded as opposed to the rates available under alternative real
estate financing options. The lessor financed the acquisition of the facilities
through funding provided by third-party financial institutions. The lessor has
no affiliation or relationship with the Company or any of its employees,
directors or affiliates, and 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
Consolidated Statements of Income.
See Note 2 of Notes to Consolidated Financial Statements for information
regarding contingent payments related to acquisitions made by the Company.
The Company is a party to several pending legal proceedings and claims. Although
the outcome of such actions 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 results of operations or financial position (see Note 24 of
Notes to Consolidated Financial Statements).
NOTE 11: DEBT AND LINES OF CREDIT
------------------------
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 2 of Notes to 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. As of
December 28, 2002 and December 29, 2001, the balance outstanding of these bonds
was 350 million Euros ($365.2 million at the exchange rate in effect on December
28, 2002). These bonds are designated as a hedge of the Company's net investment
in Mexx (see Note 2 of Notes to Consolidated Financial Statements). As of
December 28, 2002, Accumulated other comprehensive income (loss) reflects
approximately $55 million in unrealized exchange rate losses related to these
bonds.
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
included a $50 million multicurrency revolving credit line. This facility and
the Company's $250 million bank facility (collectively, the "Agreement"), which
were scheduled to mature in November 2002 and November 2003, respectively,
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services, and were used as a liquidity facility to support the issuance
of A2/P2 rated commercial paper. The Agreement had 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.
On October 21, 2002, the Company received a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the $500
million, 364-day unsecured credit facility scheduled to mature in November 2002,
and a $375 million, three-year bank revolving credit facility, replacing the
existing $250 million bank facility which was scheduled to mature in November
2003. The three-year facility includes a $75 million multi-currency revolving
credit line which permits the Company to borrow in U.S. dollars, Canadian
dollars and Euros. 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 Eurocurrency rate option with a spread based on the Company's
long-term credit rating. The Agreement contains certain customary covenants,
including financial covenants requiring
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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. 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. At
December 28, 2002, the Company had approximately $12.6 million of borrowings
denominated in Euro at an interest rate of 3.6%. The carrying amount of the
Company's borrowings under the commercial paper program approximate fair value
because the interest rates are based on floating rates, which are determined by
prevailing market rates. The borrowings under the Agreement are classified as
long-term debt as of December 28, 2002 as the Company intends to refinance such
obligations on a long-term basis and believes it is able to do so.
As of December 28, 2002, the Company had lines of credit aggregating $469
million, which were primarily available to cover trade letters of credit. At
December 28, 2002 and December 29, 2001, the Company had outstanding trade
letters of credit of $291 million and $228 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. Substantially all of the Company's debt will mature in 2003 with the
exception of the $365.2 million of Eurobonds which mature in 2006.
NOTE 12: DERIVATIVE INSTRUMENTS AND FOREIGN CURRENCY RISK MANAGEMENT PROGRAMS
--------------------------------------------------------------------
At December 28, 2002, the Company had entered into various Euro currency collars
with a net notional amount of $80.0 million, maturity dates from January 2003
through December 2003 and values ranging between 0.9800 and 1.1000 U.S. dollar
per Euro as compared to $55 million at December 29, 2001. At December 28, 2002,
the Company had forward contracts maturing through December 2003 to sell 58.5
million Euros. The notional value of the foreign exchange forward contracts was
approximately $61.0 million at December 28, 2002, as compared with approximately
$34.6 million at December 29, 2001. Unrealized (losses) gains for outstanding
foreign exchange forward contracts and currency options were approximately
($5.2) million at December 28, 2002 and approximately $400,000 at December 29,
2001.
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 began in January 2003 and
will 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 change
in fair value of the effective portion of the interest rate swap is recorded as
a component of Accumulated other comprehensive income (loss) since these swaps
are designated as cash flow hedges. The ineffective portion of these swaps will
be recognized in earnings.
NOTE 13: RESTRUCTURING CHARGES
---------------------
In December 2002, the Company recorded a net restructuring charge of $7.1
million (pretax), representing a charge of $9.9 million in connection with the
closure of all 22 domestic LIZ CLAIBORNE brand specialty stores, offset by $2.8
million reversal of liabilities recorded in connection with the December 2001
restructuring that are no longer required. This determination to close the
stores is intended to eliminate redundancy between this retail format and the
wide department store base in which LIZ CLAIBORNE products are available. The
$9.9 million charge includes costs associated with lease obligations ($5.4
million), asset write-offs ($3.3 million) and other store closing costs ($1.2
million); of these amounts, approximately $6.6 million is expected to be paid
out in cash. The remaining balance of the 2002 restructuring liability as of
December 28, 2002 was $11.4 million. The Company expects that these activities
will be substantially complete by December 2003.
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 the Company's brands which requires
positioning in different locations and the elimination of its large "world"
store concept, and five Outlet stores, due to the elimination of two of its
branded store
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
formats; $3.5 million for the closure of four of its 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 December 29,
2001 was $15.7 million. These activities were substantially complete as of
December 28, 2002.
In September 2000, the Company recorded a net restructuring charge of $5.4
million (pretax), representing a charge of $6.5 million, principally to cover
the closure of eight under-performing Specialty Retail stores in formats that no
longer fit into its retail strategy, the closure of one of its recently acquired
divisional offices, and severance related costs, offset by the $1.1 million
deemed no longer necessary of the Company's previous restructuring liability
originally recorded in December 1998.
In December 2000, the Company recorded a restructuring charge of $15.6 million
(pretax) to further maximize business segment synergies. This charge consisted
of $10.6 million for operating and administrative costs associated with the
elimination of nearly 270 jobs and $5.0 million for real estate consolidations.
Significant items included in the charge are estimated contract termination
costs, severance and related benefits for staff reductions, estimated occupancy
costs and asset writedowns. Asset writedowns of $2.4 million consisted
principally of showrooms and administrative offices deemed no longer necessary
in the Company's Wholesale Apparel segment. These restructuring activities were
substantially completed as of December 29, 2001. The fiscal 2000 restructuring
charges reduced net income by $13.5 million, or $0.13 per common share.
A summary of the changes in the restructuring reserves is as follows:
Estimated
Store Operating and Occupancy Costs
Closure Administrative and Asset Write
In millions Costs Exit Costs Downs Total
- --------------------------------------------------------------------------------
Balance at January 1, 2000 $ 5.1 $ -- $ -- $ 5.1
2000 provision 5.4 11.8 5.0 22.2
2000 spending (3.9) (0.4) (2.4) (6.7)
2000 reserve reduction (1.1) -- -- (1.1)
------ ------ ------ ------
Balance at December 30, 2000 $ 5.5 $ 11.4 $ 2.6 $ 19.5
------ ------ ------ ------
2001 provision 4.6 7.6 6.8 19.0
2001 spending (2.1) (9.7) (7.1) (18.9)
2001 reserve reduction (2.4) (1.5) -- (3.9)
------ ------ ------ ------
Balance at December 29, 2001 $ 5.6 $ 7.8 $ 2.3 $ 15.7
------ ------ ------ ------
2002 provision 9.9 -- -- 9.9
Reclassification (2.1) -- 2.1 --
2002 spending (3.5) (6.3) (1.6) (11.4)
2002 reserve reduction (2.1) (0.4) (0.3) (2.8)
------ ------ ------ ------
Balance at December 28, 2002 $ 7.8 $ 1.1 $ 2.5 $ 11.4
====== ====== ====== ======
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 14: OTHER (EXPENSE) INCOME - NET
----------------------------
Other (expense) income - net consists of the following:
Fiscal Year Ended
---------------------------------------------------------
In thousands December 28, 2002 December 29, 2001 December 30, 2000
- --------------------------------------------------------------------------------
Investment gain $ -- $ -- $ 8,760
Minority interest (3,789) (3,645) (2,218)
Other 1,471 134 116
-------- -------- --------
$ (2,318) $ (3,511) $ 6,658
======== ======== ========
NOTE 15: STOCK PLANS
-----------
In March 1992, March 2000 and March 2002, the Company adopted the "1992 Plan,"
the "2000 Plan" and the "2002 Plan," respectively, under which nonqualified
options to acquire shares of common stock may be granted to officers, other key
employees, consultants and, in the case of the 1992 and 2000 plans, outside
directors selected by the Company's Compensation Committee ("the committee").
Payment by option holders upon exercise of an option may be made in cash or,
with the consent of the committee, by delivering previously acquired shares of
Company common stock or any other method approved by the committee. Stock
appreciation rights may be granted in connection with all or any part of any
option granted under the plans, and may also be granted without a grant of a
stock option. The grantee of a stock appreciation right has the right, with the
consent of the committee, to receive either in cash or in shares of common
stock, an amount equal to the appreciation in the fair market value of the
covered shares from the date of grant to the date of exercise. Options and
rights are exercisable over a period of time designated by the committee and are
subject to such other terms and conditions as the committee determines. Vesting
schedules will be accelerated upon a change of control of the Company. Options
and rights may generally not be transferred during the lifetime of a holder.
Awards under the 2000 and 2002 Plans may also be made in the form of incentive
stock options, dividend equivalent rights, restricted stock, unrestricted stock
and performance shares. Exercise prices for awards under the 2000 and 2002 Plans
are determined by the committee; to date, all stock options have been granted at
an exercise price not less than the quoted market value of the underlying shares
on the date of grant.
The 2000 Plan provides for the issuance of up to 10,000,000 shares of common
stock with respect to options, stock appreciation rights and other awards
granted under the 2000 Plan. At December 28, 2002, there were available for
future grant 2,523,898 shares under the 2000 Plan. The 2000 Plan expires in
2010. Upon shareholder approval of the 2000 Plan in May 2000, the Company ceased
issuing grants under the 1992 Plan; awards made thereunder prior to its
termination remain in effect in accordance with their terms.
The 2002 Plan provides for the issuance of up to 9,000,000 shares of common
stock with respect to options, stock appreciation rights and other awards
granted under the 2002 Plan. As of December 28, 2002 no awards had been made
under the 2002 Plan. The 2002 plan expires in 2012.
Since January 1990, the Company has delivered treasury shares upon the exercise
of stock options. The difference between the cost of the treasury shares, on a
first-in, first-out basis, and the exercise price of the options has been
reflected in stockholders' equity. If the exercise price of the options is
higher than the cost of the treasury shares, the amount is reflected in capital
in excess of par value. If the exercise price of the options is lower than the
cost of the treasury shares, the amount is reflected in retained earnings.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Changes in common shares under option for the three fiscal years in the period
ended December 28, 2002 are summarized as follows:
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
Exercise Price Exercise Price Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
Beginning of year 7,584,482 $ 20.10 7,228,550 $ 18.23 5,668,942 $ 17.38
Granted 3,266,175 26.21 3,851,000 22.08 3,762,400 18.47
Exercised (1,784,524) 18.25 (2,363,076) 18.20 (1,318,188) 14.57
Cancelled (358,776) 22.25 (1,131,992) 18.90 (884,604) 19.28
----------- ------- ----------- ------- ----------- -------
End of year 8,707,357 $ 23.00 7,584,482 $ 20.10 7,228,550 $ 18.23
=========== ======= =========== ======= =========== =======
Exercisable at end of year 1,657,582 $ 19.95 1,179,594 $ 18.73 1,711,674 $ 18.46
=========== ======= =========== ======= =========== =======
Weighted average fair value of
options granted during the year $ 9.50 $ 9.49 $ 7.21
The following table summarizes information about options outstanding at December
28, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------
Weighted Average
Range of Outstanding at Remaining Contractual Weighted Average Exercisable at Weighted Average
Exercise Prices Dec. 28, 2002 Life Exercise Price Dec. 28, 2002 Exercise Price
- -------------------------------------------------------------------------------------------------------------
$ 8.50 - $ 17.50 207,065 6.0 years $ 16.25 200,065 $ 16.24
17.51 - 22.50 4,869,467 7.4 years 20.74 1,397,317 20.25
22.51 - 35.50 3,630,825 8.9 years 26.42 60,200 25.45
$ 8.50 - $ 35.50 8,707,357 8.0 years $ 23.00 1,657,582 $ 19.95
In January 2001 and May 2001, the committee granted 84,966 shares of restricted
stock issued under the 2000 Plan; these shares are subject to restrictions on
transfer and risk of forfeiture until earned by continued service and vest as
follows: 20% on each of the third, fourth and fifth grant date anniversary, and
the remaining 40% on the sixth grant date anniversary, with acceleration of
vesting upon the achievement of certain financial and non-financial goals. The
unearned compensation is being amortized over a period equal to the anticipated
vesting period.
In January 2001, the committee authorized the grant of 1,034,000 shares of
common stock to a group of key executives. As of December 28, 2002, 733,000 of
these shares remained outstanding. These shares are subject to restrictions on
transfer and subject to risk of forfeiture until earned by continued employment.
The restrictions expire in January 2007. The expiration of restrictions may be
accelerated if the total return on the Company's common stock exceeds that of a
predetermined group of competitors or upon the occurrence of certain other
events. The unearned compensation is being amortized over a period equal to the
anticipated vesting period.
In 1998, the committee granted 733,300 shares of common stock to a group of key
executives. As of December 28, 2002, 67,918 of these shares remained
outstanding. These shares are subject to restrictions on transfer and subject to
risk of forfeiture until earned by continued employment. The restrictions expire
on July 6, 2007. Given that the total return on the Company's common stock
exceeded that of a predetermined group of competitors for the period of January
1, 1998 through March 1, 2001, the expiration of the restrictions on 80% of such
shares was accelerated as of March 1, 2001. During the first quarter of 2001,
the Company recorded a charge to operating income of approximately $5 million as
compensation expense to reflect such accelerations. The shares that did not vest
on an accelerated basis remain restricted; the expiration of restrictions may be
accelerated if the total return of the Company's common stock exceeds that of a
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
predetermined group of competitors or upon the occurrence of certain other
events. The unearned compensation on such unvested shares is being amortized
over a period equal to the anticipated vesting period.
The Company's outside directors' stock ownership plan provides non-employee
directors, as part of their annual retainer, shares of common stock with a value
of $15,000 on the first business day of each fiscal year. The shares so issued
are nontransferable for a period of three years following the grant date,
subject to certain exceptions. In 2002, 5,279 shares of common stock were issued
under this plan. This plan also provides each non-employee director a grant of
options to purchase 2,000 shares of common stock on the first business day of
each fiscal year. Not more than one half of one percent (0.50%) of the shares of
common stock outstanding from time to time may be issued under the plan, which
will expire in ten years. Additionally, effective July 2000, each non-employee
director is entitled to receive on the first business day of each fiscal year a
grant of options to purchase 4,000 shares under the 2000 Plan.
NOTE 16: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
------------------------------------------------------------------
The Company maintains a qualified defined contribution plan (the "401(k)/Profit
Sharing Plan") for eligible U.S. employees of the Company and adopting
affiliates, which has two component parts: a cash or deferred arrangement under
section 401(k) of the Internal Revenue Code and a profit sharing portion. To be
eligible to participate in either portion of the 401(k)/Profit Sharing Plan,
employees must be at least age 21 and not covered by a collective bargaining
agreement; there are additional eligibility and vesting rules for each of the
401(k)/Profit Sharing Plan components. As of January 1, 2002, full-time
employees may begin to make pre-tax contributions and receive employer matching
contributions to the 401(k) portion of the 401(k)/Profit Sharing Plan after six
months of employment with the Company, while part-time employees must complete a
12-month period in which they are credited with 1,000 hours of service. To be
eligible for the profit sharing component, an employee must have 12 months and
1,000 hours of service and a participant must be credited with 1000 hours of
service during, and be employed by the Company or one of its affiliates on the
last day of, the calendar year to share in the profit sharing contribution for
that year.
Company 401(k) matching contributions vest (i.e., become non-forfeitable) on a
schedule of 20% for the first two years of elapsed service with the Company and
its affiliates and 20% for each year of service thereafter. Profit sharing
contributions, if any, are made annually at the discretion of the Board of
Directors, and vest 100% after five years of elapsed service.
Under the 401(k) portion of the 401(k)/Profit Sharing Plan, participants may,
subject to applicable IRS limitations, contribute from 1% to 15%, (effective
January 1, 2003, 1% to 50%,), of their salaries on a pretax basis; the
401(k)/Profit Sharing Plan provides for automatic enrollment at a contribution
rate of 3% when an eligible employee first becomes entitled to participate in
the 401(k) portion of the 401(k)/Profit Sharing Plan, unless the employee elects
otherwise. Participants' pretax contributions are matched at the rate of $0.50
for each dollar contributed by the participant that does not exceed 6% of
eligible compensation.
The Company's aggregate 401(k)/Profit Sharing Plan contribution expense for
2002, 2001 and 2000, which is included in Selling, general and administrative
expenses, was approximately $9,789,000, $7,731,000 and $6,888,000, respectively.
The Company has a non-qualified supplemental retirement plan for certain highly
compensated employees whose benefits under the 401(k)/Profit Sharing Plan are
expected to be constrained by the operation of certain Internal Revenue Code
limitations. The supplemental plan provides a benefit equal to the difference
between the contribution that would be made for an executive under the
tax-qualified plan absent such limitations and the actual contribution under
that plan. The supplemental plan also allows certain highly compensated
employees to defer up to 15% (effective January 1, 2003, up to 50%) of their
base salary and up to 100% of their annual bonus. Supplemental benefits
attributable to participant deferrals are fully vested at all times and the
balance of a participant's benefits vests on the same basis as the matching
contribution under the 401(k)/Profit Sharing Plan. This supplemental plan is not
funded. As of January 1, 2002, the Company established an irrevocable "rabbi"
trust to which the Company plans to make contributions to provide a source of
funds to assist in meeting its obligations under the plan. The principal of the
trust, and earnings thereon, are to be used exclusively for the participants
under the plan, subject to the claims of the Company's general creditors.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The Company's expenses (recoveries) related to these plans, which are included
in Selling, general and administrative expenses, were approximately $502,000,
$13,000 and ($224,000) in 2002, 2001 and 2000, respectively.
The Company has established an unfunded deferred compensation arrangement for a
senior executive which accrues over an eight year period as of the first day of
each fiscal year beginning in 1996, based on an amount equal to 15% of the sum
of the senior executive's base salary and bonus. The accrued amount plus
earnings will become fully vested on January 1, 2005, provided the senior
executive is the Chairman of the Board and Chief Executive Officer of the
Company on such date. This arrangement also provides for the deferral of an
amount equal to the portion of the executive's base salary that exceeds $1
million. The deferred amount plus earnings will be fully vested at all times.
NOTE 17: STOCKHOLDER RIGHTS PLAN
-----------------------
In December 1998, the Company adopted a new Stockholder Rights Plan to replace
the then expiring plan originally adopted in December 1988. Under the new Plan,
one preferred stock purchase right is attached to each share of common stock
outstanding. The rights are nominally exercisable under certain circumstances,
to buy 1/100 share of a newly created Series A Junior Participating Preferred
Stock for $150. If any person or group (referred to as an "Acquiring Person")
becomes the beneficial owner of 15% or more of the Company's common stock (20%
or more in the case of certain acquisitions by institutional investors), each
right, other than rights held by the Acquiring Person which become void, will
become exercisable for common stock having a market value of twice the exercise
price of the right. If anyone becomes an Acquiring Person and afterwards the
Company or 50% or more of its assets is acquired in a merger, sale or other
business combination, each right (other than voided rights) will become
exercisable for common stock of the acquirer having a market value of twice the
exercise price of the right. The rights, which expire on December 21, 2008 and
do not have voting rights, may be amended by the Company's Board of Directors
and redeemed by the Company at $0.01 per right at any time before any person or
group becomes an Acquiring Person.
NOTE 18: EARNINGS PER COMMON SHARE
-------------------------
The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with SFAS No. 128 "Earnings per Share."
Fiscal Year Ended
----------------------------------------
December 28, December 29, December 30,
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Net income $ 231,165 $ 192,057 $ 184,595
Weighted average common shares
outstanding 105,592 103,994 106,813
Effect of dilutive securities:
Stock options and restricted
stock grants 1,604 1,057 682
Weighted average common shares and
common share equivalents 107,196 105,051 107,495
NOTE 19: CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
---------------------------------------------------------------
During fiscal 2002, 2001 and 2000, the Company made income tax payments of
approximately $109,536,000, $83,851,000 and $94,742,000, respectively. The
Company made interest payments of approximately $23,939,000, $15,093,000 and
$20,438,000 in 2002, 2001 and 2000, respectively. Other non-cash activities in
the twelve months ended December 28, 2002 include the reclassification of $15.0
million from Other Non-Current Liabilities to Accrued expenses and a $27.2
million liability included in Accrued expenses associated with a future payment
related to the Lucky Brand Dungarees, Inc. and Mexx Canada acquisitions.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 20: 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 by the Company or licensed by the Company from third-party
owners, including 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 the Company's
worldwide retail operations that sell most of these apparel and non-apparel
products to the public through the Company's specialty retail stores, outlet
stores, and concession stores. As a result of the Company's 2001 acquisition of
Mexx, the Company also presents its results on a geographic basis between
Domestic (wholesale customers and Company specialty retail and outlet stores
based in the United States) and International (wholesale customers and Company
specialty retail, outlet and concession stores based outside of the United
States). The Company, as licensor, also licenses to third parties the right to
produce and market products bearing certain Company-owned trademarks; the
resultant royalty income is not allocated to any of the specified operating
segments, but is rather included in the line "Sales from external customers"
under the caption "Corporate/Eliminations."
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 its
2002 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.
December 28, 2002
-------------------------------------------------------------------------------------
Wholesale Wholesale Corporate/
In thousands Apparel Non-Apparel Retail Eliminations Totals
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Sales from external customers $ 2,496,586 $ 486,172 $ 718,642 $ 16,103 $ 3,717,503
Intercompany sales 168,452 25,450 -- (193,902) --
------------ ------------ ------------ ------------ ------------
Total net sales 2,665,038 511,622 718,642 (177,799) 3,717,503
============ ============ ============ ============ ============
Depreciation and amortization expense 68,526 5,745 20,757 1,367 96,395
OPERATING INCOME:
Segment operating income (loss) from
external customers 287,412 34,107 67,810 559 389,888
Intercompany segment operating income
(loss) 39,331 13,041 -- (52,372) --
------------ ------------ ------------ ------------ ------------
Total operating income (loss) 326,743 47,148 67,810 (51,813) 389,888
============ ============ ============ ============ ============
Segment assets 1,505,014 176,728 430,201 460,605 2,572,548
Expenditures for long-lived assets 238,687 960 51,268 -- 290,915
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
December 29, 2001
-------------------------------------------------------------------------------------
Wholesale Wholesale Corporate/
In thousands Apparel Non-Apparel Retail Eliminations Totals
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Sales from external customers $ 2,345,925 $ 473,562 $ 615,714 $ 13,321 $ 3,448,522
Intercompany sales 190,310 22,518 -- (212,828) --
------------ ------------ ------------ ------------ ------------
Total net sales 2,536,235 496,080 615,714 (199,507) 3,448,522
============ ============ ============ ============ ============
Depreciation and amortization expense 70,318 6,795 20,476 3,902 101,491
OPERATING INCOME:
Segment operating income (loss) from
external customers 240,497 33,624 69,284 (11,688) 331,717
Intercompany segment operating income
(loss) 49,347 12,526 -- (61,873) --
------------ ------------ ------------ ------------ ------------
Total operating income (loss) 289,844 46,150 69,284 (73,561) 331,717
============ ============ ============ ============ ============
Segment assets 1,512,923 166,721 358,677 189,339 2,227,660
Expenditures for long-lived assets 144,998 3,473 126,484 -- 274,955
December 30, 2000
-------------------------------------------------------------------------------------
Wholesale Wholesale Corporate/
In thousands Apparel Non-Apparel Retail Eliminations Totals
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Sales from external customers $ 2,203,358 $ 399,710 $ 486,547 $ 14,526 $ 3,104,141
Intercompany sales 170,799 23,252 -- (194,051) --
------------ ------------ ------------ ------------ ------------
Total net sales 2,374,157 422,962 486,547 (179,525) 3,104,141
============ ============ ============ ============ ============
Depreciation and amortization expense 57,448 5,497 11,339 2,749 77,033
OPERATING INCOME:
Segment operating income (loss) from
external customers 234,486 21,725 62,786 (15,308) 303,689
Intercompany segment operating income
(loss) 52,553 11,836 -- (64,389) --
------------ ------------ ------------ ------------ ------------
Total operating income (loss) 287,039 33,561 62,786 (79,697) 303,689
============ ============ ============ ============ ============
Segment assets 1,295,046 161,768 151,575 193,928 1,802,317
Expenditures for long-lived assets 62,380 42,359 16,010 -- 120,749
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
In the "Corporate/Eliminations" column of each period presented, the segment
assets consists primarily of corporate buildings, machinery and equipment and
licenses and trademarks purchased by the Company. The segment operating loss
consists primarily of the elimination of the profit transfer from the Retail
segment to the wholesale segments, and $7,130,000, $15,050,000 and $21,041,000
of restructuring charges in 2002, 2001 and 2000, respectively.
December 28, 2002 December 29, 2001 December 30, 2000
-------------------------------------------------------------------------------------------
In thousands Domestic International Domestic International Domestic International
- ------------------------------------------------------------------------------------------------------------------------------------
Sales from external customers $ 3,037,325 $ 680,178 $ 3,031,318 $ 417,204 $ 2,984,927 $ 119,214
Depreciation and amortization expense 82,629 13,766 87,498 13,993 74,907 2,126
Segment operating income 336,056 53,832 290,357 41,360 295,276 8,413
Segment assets 1,925,216 647,332 1,746,660 481,000 1,748,935 53,382
Expenditures for long-lived assets 235,827 55,088 46,420 228,535 118,752 1,997
A reconciliation to adjust segment assets to consolidated assets follows:
December 28, December 29, December 30,
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Total segment assets $ 2,572,548 $ 2,227,660 $ 1,802,317
Intercompany receivables (16,067) (18,200) (12,859)
Investments in wholly-owned
subsidiaries (249,473) (298,128) (290,869)
Other (10,690) 39,923 13,570
----------- ----------- -----------
Total consolidated assets $ 2,296,318 $ 1,951,255 $ 1,512,159
=========== =========== ===========
NOTE 21: OTHER COMPREHENSIVE INCOME (LOSS)
---------------------------------
Accumulated other comprehensive loss is comprised the effects of foreign
currency translation and changes in unrealized gains and losses on securities as
detailed below:
In thousands December 28, 2002 December 29, 2001
- --------------------------------------------------------------------------------
Foreign currency translation (loss) gain $ (21,644) $ (2,148)
(Losses) on cash flow hedging derivatives (6,109) (250)
Unrealized (losses) on securities (564) (2,948)
----------- -----------
Accumulated other comprehensive (loss),
net of tax $ (28,317) $ (5,346)
=========== ===========
The losses on cash flow hedging derivatives are reclassified to current year
gain or loss each year due to the short lives of these instruments.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The following table contains the components of the adjustment to unrealized
(losses) on available for sale securities included in the Consolidated
Statements of Retained Earnings, Comprehensive Income and Changes in Capital
Accounts.
December 28, December 29, December 30,
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Unrealized (loss) on available for sale
securities, net of tax:
Unrealized holding gain (loss) $ 2,384 $ (2,368) $ (1,212)
Reclassification adjustment -- -- 444
----------- ----------- -----------
Net unrealized gain (loss) $ 2,384 $ (2,368) $ (768)
=========== =========== ===========
NOTE 22: RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
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 adopted the provisions of SFAS No. 145
upon its effective date.
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 adopted the
provisions of SFAS No. 146 effective December 29, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the
disclosure provisions of SFAS No. 148 effective December 28, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has
implemented the disclosure provisions of FIN 45 in its December 28, 2002
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51)" ("FIN 46"). FIN 46
addresses consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The Company will be
required
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
to implement the other provisions of FIN 46 in 2003. The Company does not
believe the counterparty to the synthetic lease is a variable interest entity.
Therefore, the Company does not believe that FIN 46 will have a material impact
on its financial statements.
NOTE 23: RELATED PARTY TRANSACTIONS
--------------------------
During 2002, 2001 and 2000, the Company paid the law firm, Kramer, Levin,
Naftalis & Frankel LLP, of which Kenneth P. Kopelman (a Director of the Company)
is a partner, approximately $1.52 million, $872,000 and $1.55 million,
respectively, for fees incurred in connection with legal services provided to
the Company. The 2002 amount represents approximately 1% of such firm's 2002 fee
revenue.
During fiscal years 2002, 2001 and 2000 the Company and certain of its
contractors purchased, in the ordinary course of their business for use in the
manufacture of Company products, fabric from certain European textile mills for
which Gordon Textiles International, Ltd. ("GTIL") acts as sales agent in the
United States. J. James Gordon, a Director of the Company whose term will expire
at the Company's 2003 Annual Meeting of stockholders, is the sole stockholder of
GTIL. Such fabric purchases during each year aggregated approximately $300,000,
$1.5 million and $3.0 million, respectively. GTIL received commissions from its
client mills, at customary industry rates, in respect to such sales aggregating
to approximately $31,000, $79,000 and $150,000, respectively.
The foregoing transactions between the Company and these entities were effected
on an arm's-length basis, with services provided at fair market value.
During 2002 and 2001, the Company leased a certain office facility from Amex
Property B.V. ("Amex"), a company whose principal owner is Rattan Chadha,
President and Chief Executive Officer of Mexx, under a 20-year lease agreement.
The space houses the principal headquarters of Mexx Group B.V. in Voorschoten,
Netherlands. The rental paid to Amex during fiscal year 2002 and for the period
of May 23, 2001 through December 29, 2001 was 628,000 and 365,000 Euros (or
$594,000 and $324,000, respectively, based on the exchange rates in effect
during such period).
During 2002, the Company leased a factory outlet and warehouse as well as an
office and inventory liquidation center from RAKOTTA HOLDINGS Inc. ("RAKOTTA"),
a company whose principal owner is Joseph Nezri, President of MEXX Canada Inc.,
under two lease agreements expiring January 30, 2006. The rent paid to RAKOTTA
for the period July 9, 2002 through December 28, 2002 was approximately 452,000
Canadian dollars (or $289,000 based on the exchange rate in effect during the
period).
The Company believes that each of the transactions described above was effected
on terms no less favorable to the Company than those that would have been
realized in transactions with unaffiliated entities or individuals.
NOTE 24: 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.
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
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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 "FLSA Action").
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 Ninth Circuit Court of Appeals subsequently denied the
non-settling defendants' petition for interlocutory review of the grant of class
certification. At the end of September 2002, plaintiffs and all of the factory
and retailer non-settling defendants other than Levi Strauss & Co. reached
agreement to settle the Federal Action, the State Court Action and the FLSA
action. At a hearing held on October 31, 2002, the Court granted conditional
preliminary approval of the September 2002 settlement and scheduled a Fairness
Hearing to be held on March 22, 2003, to determine whether to grant final
approval to the prior settlement agreements and the September 2002 settlement.
Under the terms of the Company's 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.
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 25: UNAUDITED QUARTERLY RESULTS
---------------------------
Unaudited quarterly financial information for 2002 and 2001 is set forth in the
table below:
March June September December
In thousands except for ------------------------------------------------------------------------------------------------
per share data 2002 2001 2002 2001 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $892,893 $826,650 $789,517 $727,035 $1,041,200 $1,008,356 $993,893 $886,481
Gross profit 366,098 322,862 352,631 308,239 457,642 423,329 443,264 372,820
Net income 50,913 45,500 38,804 32,467 83,490 72,611 57,958 (1) 41,479 (2)
Basic earnings per share $ .49 $ .44 $ .37 $ .31 $ .79 $ .70 $ .55 (1) $ .40 (2)
Diluted earnings per share $ .48 $ .44 $ .36 $ .31 $ .78 $ .69 $ .54 (1) $ .39 (2)
Dividends paid per common share $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06
(1) Includes the after tax effect of a restructuring charge of $4,547 ($7,130
pretax) or $.04 per share.
(2) Includes the after tax effect of a restructuring charge of $9,632 ($15,050
pretax) or $.09 per share.
F-36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
Column A Column B Column C Column D Column E
Additions
--------------------------------------
(In thousands) Balance at (1) Charged (2) Charged to
Beginning to Costs and Other Accounts - Deductions - Balance at
Description of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 28, 2002
Accounts Receivable - allowance for
doubtful accounts $ 4,173 $ 917 $ -- $ 1,313 (A) $ 3,777
--------- --------- --------- --------- ---------
Restructuring Reserve $ 15,748 $ 9,942 $ (2,812)(C) $ 11,501 (B) $ 11,377
--------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 29, 2001
Accounts Receivable - allowance for
doubtful accounts $ 2,695 $ 2,391 $ -- $ 913 (A) $ 4,173
--------- --------- --------- --------- ---------
Restructuring Reserve $ 19,438 $ 18,950 $ (3,900)(C) $ 18,740 (B) $ 15,748
--------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 30, 2000
Accounts Receivable - allowance for
doubtful accounts $ 2,255 $ 1,438 $ -- $ 998 (A) $ 2,695
--------- --------- --------- --------- ---------
Restructuring Reserve $ 5,056 $ 22,115 $ (1,074)(C) $ 6,659 (B) $ 19,438
--------- --------- --------- --------- ---------
Notes:
(A) Uncollectible accounts written off, less recoveries.
(B) Charges to the restructuring reserve are for the purposes for which the
reserve was created.
(C) This amount of the restructuring reserve was deemed to no longer be
necessary. As a result, this amount was taken as a reduction to the
restructuring charge through earnings for the applicable fiscal year.
F-37
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
2(a) - Share Purchase Agreement, dated as of May 15, 2001, among Liz
Claiborne, Inc., Liz Claiborne 2 B.V., LCI Acquisition U.S., and
the other parties signatory thereto (incorporated herein by
reference from Exhibit 2.1 to Registrant's Form 8-K dated May 23,
2001 and amended on July 20, 2001).
3(a) - Restated Certificate of Incorporation of Registrant (incorporated
herein by reference from Exhibit 3(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended June 26, 1993).
3(b) - By-laws of Registrant, as amended (incorporated herein by
reference from Exhibit 3(b) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1992 [the "1992
Annual Report"]).
4(a) - Specimen certificate for Registrant's Common Stock, par value
$1.00 per share (incorporated herein by reference from Exhibit
4(a) to the 1992 Annual Report).
4(b) - Rights Agreement, dated as of December 4, 1998, between
Registrant and First Chicago Trust Company of New York
(incorporated herein by reference from Exhibit 1 to Registrant's
Form 8-A dated as of December 4, 1998).
4(b)(i) - Amendment to the Rights Agreement, dated November 11, 2001,
between Registrant and The Bank of New York, appointing The Bank
of New York as Rights Agent (incorporated herein by reference
from Exhibit 1 to Registrant's Form 8-A12B/A dated as of January
30, 2002).
4(c) - Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and
Dexia Banque Internationale A. Luxembourg (incorporated herein by
reference from Exhibit 10 to Registrant's Form 10-Q for the
period ended June 30, 2001).
10(a) - Reference is made to Exhibit 4(b) filed hereunder, which is
incorporated herein by this reference.
10(b)+ - Liz Claiborne Savings Plan (the "Savings Plan"), as amended and
restated (incorporated herein by reference from Exhibit 10(f) to
Registrant's Annual report on Form 10-K for the fiscal year ended
December 30, 1989 [the "1989 Annual Report"]).
10(b)(i)+ - Trust Agreement dated as of July 1, 1994, between Liz Claiborne,
Inc. and IDS Trust Company (incorporated herein by reference from
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for
the period ended July 2, 1994).
10(c)+ - Amendment Nos. 1 and 2 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g) to the 1992 Annual Report).
10(c)(i)+ - Amendment Nos. 3 and 4 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g)(i) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 26, 1993 [the
"1993 Annual Report"]).
10(c)(ii)+ - Amendment No. 5 to the Savings Plan (incorporated herein by
reference from Exhibit 10(a) to Registrant's Quarterly Report on
Form 10-Q for the period ended July 2, 1994).
10(c)(iii)+ - Amendment No. 6 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e) (iii) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996 [the
"1996 Annual Report"]).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
Exhibit
No. Description
- ------- -----------
10(c)(iv)+ - Amendment No. 7 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(iv) to the 1996 Annual Report).
10(c)(v)+ - Amendment No. 8 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(v) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998 [the "1997
Annual Report"]).
10(c)(vi)+ - Amendment No. 9 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(vi) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999 [the "1998
Annual Report"]).
10(d)+ - Amended and Restated Liz Claiborne Profit-Sharing Retirement Plan
(the "Profit-Sharing Plan") (incorporated herein by reference
from Exhibit 10(h) to the 1992 Annual Report).
10(e)+ - Trust Agreement related to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(jj) to the 1983 Annual
Report).
10(e)(i)+ - Amendment Nos. 1 and 2 to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(i)(i) to the 1993 Annual
Report).
10(e)(ii)+ - Amendment No. 3 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended October 1, 1994).
10(e)(iii)+ - Amendment No. 4 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended July 1, 1995).
10(e)(iv)+ - Amendment No. 5 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(iv) to the 1996 Annual Report).
10(e)(v)+ - Amendment No. 6 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(v) to the 1998 Annual Report).
10(f)+ - Merger Amendment to the Profit-Sharing Plan, the Lucky Brand
Employee Retirement Plan and Trust, the Segrets, Inc. 401(k)
Profit Sharing Plan, and the Savings Plan (incorporated herein by
reference from Exhibit 10(h) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 2000 [the "1999
Annual Report"]).
10(g)+* - The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as
amended and restated.
10(h)+ - National Collective Bargaining Agreement, made and entered into
as of June 1, 2000, by and between Liz Claiborne, Inc. and the
Union of Needletrades, Industrial and Textile Employees (UNITE)
for the period June 1, 2000 through May 31, 2003 (incorporated
herein by reference from Exhibit 10(h) to the 2000 Annual
Report).
10(h)(i)+ - Jobbers Agreement, made and entered into as of June 1, 2000, by
and between Liz Claiborne, Inc. and the Union of Needletrades,
Industrial and Textile Employees (UNITE) for the period June 1,
2000 through May 31, 2003 (incorporated herein by reference from
Exhibit 10(h)(i) to the 2000 Annual Report).
10(i)+* - Description of Liz Claiborne, Inc. 2002 Salaried Employee
Incentive Bonus Plan.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
- ------- -----------
10(j) - Lease, dated as of January 1, 1990 (the "1441 Lease"), for
premises located at 1441 Broadway, New York, New York between
Registrant and Lechar Realty Corp. (incorporated herein by
reference from Exhibit 10(n) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990).
10(j)(i) - First Amendment: Lease Extension and Modification Agreement,
dated as of January 1, 1998, to the 1441 Lease (incorporated
herein by reference from Exhibit 10(k) (i) to the 1999 Annual
Report).
10(j)(ii) - Second Amendment to Lease, dated as of September 19, 1998, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(j)(iii) - Third Amendment to Lease, dated as of September 24, 1999, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(j)(iv) - Fourth Amendment to Lease, effective as of July 1, 2000, to the
1441 Lease (incorporated herein by reference from Exhibit
10(j)(iv) to the 2002 Annual Report).
10(k)+ - Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991
Stock Ownership Plan (the "Outside Directors' 1991 Plan")
(incorporated herein by reference from Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 [the "1995 Annual Report"]).
10(k)(i)+ - Form of Option Agreement under the Outside Directors' 1991 Plan
(incorporated herein by reference from Exhibit 10(m)(i) to the
1996 Annual Report).
10(l)+ - Liz Claiborne, Inc. 1992 Stock Incentive Plan (the "1992 Plan")
(incorporated herein by reference from Exhibit 10(p) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10(l)(i)+ - Amendment No. 1 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(p)(i) to the 1993 Annual Report).
10(l)(ii)+ - Amendment No. 2 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(ii) to the 1997 Annual Report).
10(l)(iii)+ - Amendment No. 3 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(iii) to the 1998 Annual Report).
10(m)+ - Form of Option Agreement under the 1992 Plan (incorporated herein
by reference from Exhibit 10(r) to the 1992 Annual Report).
10(n)+ - Form of Option Grant Certificate under the 1992 Plan
(incorporated herein by reference from Exhibit 10(q) to the 1996
Annual Report).
10(o)+ - Form of Restricted Career Share Agreement under the 1992 Plan
(incorporated herein by reference from Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995).
10(p)+ - Form of Restricted Transformation Share Agreement under the 1992
Plan (incorporated herein by reference from Exhibit 10(s) to the
1997 Annual Report).
10(q)+ - Description of Supplemental Life Insurance Plans (incorporated
herein by reference from Exhibit 10(q) to the 2000 Annual
Report).
10(r)+ - Description of unfunded death/disability benefits for certain
executives (incorporated herein by reference from Exhibit 10(u)
to the 1992 Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
Exhibit
No. Description
- ------- -----------
10(s)+ - Amended and Restated Liz Claiborne ss.162(m) Cash Bonus Plan
(incorporated herein by reference from Exhibit 10(t) to the 1999
Annual Report).
10(t)+ - Liz Claiborne, Inc. Supplemental Executive Retirement Plan
effective as of January 1, 2002, constituting an amendment,
restatement and consolidation of the Liz Claiborne, Inc.
Supplemental Executive Retirement Plan and the Liz Claiborne,
Inc. Bonus Deferral Plan.
10(t)(i)+ - Trust Agreement dated as of January 1, 2002, between Liz
Claiborne, Inc. and Wilmington Trust Company (incorporated herein
by reference from Exhibit 10(t)(i) to the 2002 Annual Report).
10(u)+ - Employment Agreement dated as of May 9, 1994, between Registrant
and Paul R. Charron (the "Charron Agreement") (incorporated
herein by reference from Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended April 2, 1994).
10(u)(i)+ - Amendment to the Charron Agreement, dated as of November 20, 1995
(incorporated herein by reference from Exhibit 10(x)(i) to the
1995 Annual Report).
10(u)(ii)+ - Amendment to the Charron Agreement, dated as of September 19,
1996, (including the Liz Claiborne Retirement Income Accumulation
Plan for the benefit of Mr. Charron [the "Accumulation Plan"])
(incorporated herein by reference from Exhibit 10(y)(ii) to the
1996 Annual Report).
10(u)(iii)+ - Amendment to the Accumulation Plan, dated January 3, 2002
(incorporated herein by reference from Exhibit 10(u)(iii) to the
2002 Annual Report).
10(u)(iv)+ - Change of Control Agreement, between Registrant and Paul R.
Charron (incorporated herein by reference from Exhibit (v)(iii)
to the 2000 Annual Report).
10(v)+* - Change of Control Agreement, between Registrant and Angela J.
Ahrendts.
10(w)+* - Change of Control Agreement, between Registrant and Trudy F.
Sullivan.
10(x) - Three Year Revolving Credit Agreement, dated as of October 21,
2002,among Registrant, various lending parties and JPMorgan Chase
Bank (as administrative agent) (incorporated herein by reference
from Exhibit 10(z)(i) to Registrant's October 21, 2002 Quarterly
Report on Form 10-Q for the period ended September 28, 2002 [the
"3rd Quarter 2002 10-Q"]).
10(y) - 364-Day Revolving Credit Agreement, dated as of October 21, 2002,
among Registrant, various lending parties and JPMorgan Chase Bank
(as administrative agent) (incorporated herein by reference from
Exhibit 10(z)(ii) to the 3rd Quarter 2002 10-Q).
10(z)+ - Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan")
(incorporated herein by reference from Exhibit 4(e) to
Registrant's Form S-8 dated as of January 25, 2001.)
10(z)(i)+ - Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit 10(z)(i) to the
2000 Annual Report).
10(z)(ii) - Form of Executive Team Leadership Restricted Share Agreement
under the Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
"2000 Plan")(incorporated herein by reference from Exhibit 10(a)
to Registrant's Form 10-Q for the period ended September 29, 2001
[the "3rd Quarter 2001 10-Q"] ).
10(z)(iii) - Form or Restricted Key Associates Performance Shares Agreement
under the 2000 Plan (incorporated herein by reference from
Exhibit 10(b) to the 3rd Quarter 2001 10-Q).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
- ------- -----------
10(aa)+ - Liz Claiborne, Inc. 2002 Stock Incentive Plan (the "2002 Plan")
(incorporated herein by reference from Exhibit 10(y)(i) to
Registrant's Form 10-Q for the period ended June 29, 2002 [the
"2nd Quarter 2002 10-Q"]).
10(aa)(i)+ - Amendment No. 1 to the 2002 Plan (incorporated herein by
reference from Exhibit 10(y)(iii) to the 2nd Quarter 2002 10-Q).
10(aa)(ii)+ - Form of Option Grant Certificate under the 2002 Plan
(incorporated herein by reference from Exhibit 10(y)(ii) to the
2nd Quarter 2002 10-Q).
21* - List of Registrant's Subsidiaries.
23* - Consent of Independent Public Accountants.
99* - Undertakings.
99.1* - Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2* - Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) - Reports on Form 8-K.
On September 30, 2002, the Company filed a current report on Form
8-K pursuant to Item 5 thereof, reporting the Company's
acquisition of Ellen Tracy, Inc.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.