SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 5, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ......................to.........................
Commission file number: 1-10689
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LIZ CLAIBORNE, INC.
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(Exact name of registrant as specified in its
charter)
Delaware 13-2842791
- ----------------------------- ---------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1441 Broadway, New York, New York 10018
- ------------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(212) 354-4900
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(Registrant's telephone number, including area
code)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act). Yes X No .
----- -----
The number of shares of Registrant's Common Stock, par value $1.00 per
share, outstanding at May 9, 2003 was 107,357,261.
2
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
APRIL 5, 2003
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of April 5, 2003,
December 28, 2002 and March 30, 2002........................ 3
Condensed Consolidated Statements of Income for the Three
Month Periods Ended April 5, 2003 and March 30, 2002........ 4
Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended April 5, 2003 and March 30, 2002........ 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 31
Item 4. Controls and Procedures.......................................... 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 32
Item 5. Other Information................................................ 33
Item 6. Exhibits and Reports on Form 8-K................................. 33
SIGNATURES ................................................................. 34
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.... 35
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
April 5, December 28, March 30,
2003 2002 2002
------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 72,063 $ 239,524 $ 73,082
Marketable securities 38,688 36,808 36,820
Accounts receivable - trade, net 555,200 370,468 565,340
Inventories, net 452,285 461,154 415,763
Deferred income taxes 44,595 45,877 37,474
Other current assets 72,519 49,340 58,951
------------ ------------ ------------
Total current assets 1,235,350 1,203,171 1,187,430
------------ ------------ ------------
Property and Equipment - Net 383,736 378,303 355,816
Goodwill - Net 478,565 478,869 404,654
Intangibles - Net 221,806 226,577 88,122
Other Assets 8,650 9,398 9,780
------------ ------------ ------------
Total Assets $ 2,328,107 $ 2,296,318 $ 2,045,802
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings $ 23,083 $ 21,989 $ --
Accounts payable 219,194 252,993 240,459
Accrued expenses 191,932 283,458 201,534
Income taxes payable 32,307 26,241 21,396
------------ ------------ ------------
Total current liabilities 466,516 584,681 463,389
------------ ------------ ------------
Long-Term Debt 452,666 377,725 401,619
Other Non-Current Liabilities 6,853 6,412 4,884
Deferred Income Taxes 40,521 33,709 44,006
Commitments and Contingencies
Minority Interest 7,731 7,430 5,309
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- -- --
Common stock, $1 par value, authorized shares -
250,000,000, issued shares - 176,437,234 176,437 176,437 176,437
Capital in excess of par value 99,124 95,708 91,946
Retained earnings 2,335,859 2,283,692 2,122,050
Unearned compensation expense (8,447) (10,185) (15,667)
Accumulated other comprehensive loss (29,238) (28,317) (1,166)
------------ ------------ ------------
2,573,735 2,517,335 2,373,600
Common stock in treasury, at cost, 68,779,525, 69,401,831
and 70,349,777 shares (1,219,915) (1,230,974) (1,247,005)
------------ ------------ ------------
Total stockholders' equity 1,353,820 1,286,361 1,126,595
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 2,328,107 $ 2,296,318 $ 2,045,802
============ ============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Three Months Ended
-----------------------------
(14 Weeks) (13 Weeks)
April 5, March 30,
2003 2002
-----------------------------
Net Sales $ 1,075,599 $ 892,893
Cost of goods sold 619,830 526,795
------------ ------------
Gross Profit 455,769 366,098
Selling, general & administrative expenses 348,304 280,652
------------ ------------
Operating Income 107,465 85,446
Other (expense) income - net (308) 171
Interest expense - net (6,636) (6,066)
------------ ------------
Income Before Provision for Income Taxes 100,521 79,551
Provision for income taxes 36,389 28,638
------------ ------------
Net Income $ 64,132 $ 50,913
============ ============
Net Income per Weighted Average Share, Basic $0.60 $0.49
Net Income per Weighted Average Share, Diluted $0.59 $0.48
Weighted Average Shares, Basic 106,299 104,732
Weighted Average Shares, Diluted 107,960 106,189
Dividends Paid per Common Share $0.06 $0.06
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Three Months Ended
--------------------------------
(14 Weeks) (13 Weeks)
April 5, March 30,
2003 2002
--------------------------------
Cash Flows from Operating Activities:
Net income $ 64,132 $ 50,913
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 25,442 21,850
Deferred income taxes 5,565 4,941
Other - net 5,327 4,151
Change in current assets and liabilities, exclusive of
acquisitions:
(Increase) in accounts receivable - trade (184,732) (203,151)
Decrease in inventories 8,869 72,160
(Increase) in other current assets (21,043) (4,686)
(Decrease) increase in accounts payable (39,780) 3,552
(Decrease) in accrued expenses (44,392) (18,237)
Increase in income taxes payable 6,066 7,831
------------ ------------
Net cash used in operating activities (174,546) (60,676)
------------ ------------
Cash Flows from Investing Activities:
Purchases of investment instruments (20) (19)
Purchases of property and equipment (23,785) (23,707)
Payments for acquisitions (43,123) --
Payments for in-store merchandise shops (211) (1,971)
Other - net (1,948) (345)
------------ ------------
Net cash used in investing activities (69,087) (26,042)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from short-term debt 1,094 --
Commercial paper - net 64,529 19,194
Proceeds from exercise of common stock options 11,785 17,126
Dividends paid (5,983) (5,898)
------------ ------------
Net cash provided by financing activities 71,425 30,422
------------ ------------
Effect of Exchange Rate Changes on Cash 4,747 1,743
------------ ------------
Net Change in Cash and Cash Equivalents (167,461) (54,553)
Cash and Cash Equivalents at Beginning of Period 239,524 127,635
------------ ------------
Cash and Cash Equivalents at End of Period $ 72,063 $ 73,082
============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Liz Claiborne, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company") included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted from this report, as is permitted by such rules
and regulations; however, the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K. Results of acquired companies are included in our operating results
from the date of acquisition, and, therefore, operating results on a
period-to-period basis are not comparable. Information presented as of December
28, 2002 is derived from audited statements. Certain items previously reported
in specific captions in the accompanying financial statements have been
reclassified to conform to the current period's classifications.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged primarily in the design and marketing of a broad range of
apparel, accessories and fragrances.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of 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
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Condensed 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 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-month
periods ended April 5, 2003 and March 30, 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
8
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Euro. 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.
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
period-end exchange rates. Revenues and expenses have been translated at average
rates of exchange in effect during the quarter. Resulting translation
adjustments have been included in Accumulated other comprehensive income (loss).
Gains and losses on translation
9
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Shipping and handling costs
- ---------------------------
Shipping and handling costs are included as a component of Selling, General &
Administrative Expenses in the Condensed Consolidated Statements of Income.
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:
Three Months Ended
-----------------------------
(14 Weeks) (13 Weeks)
April 5, March 30,
(In thousands except for per share data) 2003 2002
- ---------------------------------------- -----------------------------
Net income:
As reported $ 64,132 $ 50,913
Total stock-based employee compensation
expense determined under fair value
based method for all awards*, net of tax 4,028 4,211
------------ ------------
Pro forma $ 60,104 $ 46,702
============ ============
Basic earnings per share:
As reported $0.60 $0.49
Pro forma $0.57 $0.45
Diluted earnings per share:
As reported $0.59 $0.48
Pro forma $0.56 $0.45
* "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 2003 and 2002: dividend yield of
0.8%, expected volatility of 39%, risk free interest rates of 2.7% and expected
lives of five years.
Fiscal Year
- -----------
The Company's fiscal year ends on the Saturday closest to December 31. The 2003
fiscal year reflects a 53-week period resulting in a 14-week first quarter, as
compared to the 2002 fiscal year, which reflected a 52-week period and a 13-week
first quarter.
10
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Dividend and Common Stock Repurchase
- -----------------------------------------
On March 12, 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 June 16, 2003 to stockholders of record at the close of business on June
2, 2003. As of May 8, 2003, 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.
2. SUBSEQUENT EVENT
On April 7, 2003, the Company acquired 100 percent of the equity interest of
Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) ("Juicy Couture"). Based in
Southern California, Juicy Couture is a premium designer, marketer and
wholesaler of sophisticated basics for women, men and children and is recognized
around the world as a leading contemporary brand of casual lifestyle clothing.
Juicy Couture had sales of approximately $47 million in 2002. The total purchase
price consists of (i) an initial payment, including the assumption of debt, of
approximately $42.7 million before adjustments, and (ii) a contingent payment
equal to 30% of the equity value of Juicy Couture to be determined as a multiple
of Juicy Couture's earnings for one of the years ended 2005, 2006 or 2007. The
selection of the measurement year for the contingent payment is at either
party's option. The Company currently estimates that, if the 2005 measurement
year is selected, the contingent payment would be in the range of approximately
$45 - $55 million.
Juicy Couture sells its products predominantly through select specialty stores
such as Scoop, Barney's, Bergdorf Goodman, Henri Bendel and Fred Segal.
Department store distribution is limited to upscale purveyors such as Neiman
Marcus, Saks Fifth Avenue, Bloomingdale's, Marshall Field's and Nordstrom. The
Company also has agreements with international distributors in Europe, Canada
and Asia. Juicy Couture products are available in over 840 specialty stores and
approximately 280 department stores throughout the United States, as well as
over 300 stores internationally. Juicy Couture primarily targets the
fashion-conscious woman between the ages of 18 and 45, as well as aspirational
teens and baby boomers. Unaudited pro forma information related to this
acquisition is not included, as the impact of this transaction is not material
to the consolidated results of the Company.
3. ACQUISITIONS AND LICENSING COMMITMENTS
On September 30, 2002, the Company acquired 100 percent of the equity interest
of Ellen Tracy, Inc., which was a privately held fashion apparel company, and
its related companies (collectively, "Ellen Tracy") for a 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 $89.3 million (including (i) $60.3 million of trademarks and (ii) a
reduction of $1.1 million from December 28, 2002 primarily due to a change in a
deferred tax asset) and liabilities assumed were $44.1 million resulting in
goodwill of approximately $130.4 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 operated 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 made at the end of
the first quarter 2003 of 26.4 million Canadian dollars (or $17.9 million based
on the exchange rate as of April 5, 2003); and (c) a contingent payment
11
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, this payment would be in the range of approximately 35 - 45
million Canadian dollars (or $24 - 31 million based on the exchange rate as of
April 5, 2003). 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.
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 commenced with the Spring 2003 selling season.
The line, which will be 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
an option 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.
4. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign currency
translation, changes in the spot value of Eurobonds designated as a net
investment hedge, changes in unrealized gains and losses on securities and
changes in the fair value of cash flow hedges. Total comprehensive income for
interim periods was as follows:
Three Months Ended
------------------------------
(14 Weeks) (13 Weeks)
April 5, March 30,
(Dollars in thousands) 2003 2002
- ---------------------- ------------------------------
Net income $ 64,132 $ 50,913
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) 6,621 (3,176)
Foreign currency translation of Eurobond (10,413) 4,919
Changes in unrealized gains on securities 1,191 2,437
Changes in fair value of cash flow hedges 1,680 --
------------ ------------
Total comprehensive income, net of tax $ 63,211 $ 55,093
============ ============
12
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accumulated other comprehensive income (loss) consists of the following:
April 5, December 28, March 30,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ----------------------------------------------
Foreign currency translation (loss) $ (25,436) $ (21,644) $ (405)
(Losses) on cash flow hedging derivatives (4,429) (6,109) (250)
Unrealized gains (losses) on securities 627 (564) (511)
------------ ------------ ------------
Accumulated other comprehensive (loss), net
of tax $ (29,238) $ (28,317) $ (1,166)
============ ============ ============
5. MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at April
5, 2003, December 28, 2002 and March 30, 2002:
April 5, 2003
----------------------------------------------------
Unrealized Estimated
-------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- ----------------------------------------------------
Equity securities $ 29,000 $ 4,450 $ -- $ 33,450
Other holdings 8,708 -- (3,470) 5,238
--------- ---------- ---------- ------------
Total $ 37,708 $ 4,450 $ (3,470) $ 38,688
========= ========== ========== ============
December 28, 2002
----------------------------------------------------
Unrealized Estimated
-------------------------
(Dollars 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
========= ========== ========== ============
March 30, 2002
----------------------------------------------------
Unrealized Estimated
-------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- ----------------------------------------------------
Equity securities $ 29,000 $ 1,105 $ -- $ 30,105
Other holdings 8,618 -- (1,903) 6,715
--------- ---------- ---------- ------------
Total $ 37,618 $ 1,105 $ (1,903) $ 36,820
========= ========== ========== ============
For the three months ended April 5, 2003 and March 30, 2002, there were no
realized gains or losses on sales of available-for-sale securities. The net
adjustments to unrealized holding gains and losses on available-for-sale
securities for the three months ended April 5, 2003 and March 30, 2002 were a
gain of $1,191,000 (net of $670,000 in taxes) and a gain of $2,437,000 (net of
$1,371,000 in taxes), respectively, which were included in Accumulated other
comprehensive loss.
6. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
April 5, December 28, March 30,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ------------------------------------------------
Raw materials $ 24,256 $ 26,069 $ 22,698
Work in process 5,275 5,824 4,764
Finished goods 422,754 429,261 388,301
------------ ------------ ------------
$ 452,285 $ 461,154 $ 415,763
============ ============ ============
13
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
April 5, December 28, March 30,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ------------------------------------------------
Land and buildings $ 140,311 $ 140,311 $ 144,300
Machinery and equipment 315,101 313,161 303,421
Furniture and fixtures 122,644 122,815 99,857
Leasehold improvements 244,100 235,859 210,578
------------ ------------ ------------
822,156 812,146 758,156
Less: Accumulated depreciation
and amortization 438,420 433,843 402,340
------------ ------------ ------------
$ 383,736 $ 378,303 $ 355,816
============ ============ ============
8. GOODWILL AND INTANGIBLES, NET
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 useful lives are no
longer to be amortized, but will rather be tested at least annually for
impairment. SFAS No. 142 also requires that intangible assets with finite useful
lives will continue to be amortized over their respective useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company adopted the provisions of SFAS No. 142 effective December 30, 2001.
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. 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 table discloses the carrying value of all the intangible assets:
April 5, December 28, March 30,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ------------------------------------------------
Amortized intangible assets:
- ----------------------------
Gross Carrying Amount:
Licensed trademarks $ 42,849 $ 42,849 $ 42,849
Merchandising rights 74,123 73,920 83,371
------------ ------------ ------------
Subtotal $ 116,972 $ 116,769 $ 126,220
------------ ------------ ------------
Accumulated Amortization:
Licensed trademarks $ (11,115) $ (10,184) $ (6,541)
Merchandising rights (46,107) (42,064) (44,697)
------------ ------------ ------------
Subtotal $ (57,222) $ (52,248) $ (51,238)
------------ ------------ ------------
Net:
Licensed trademarks $ 31,734 $ 32,665 $ 36,308
Merchandising rights 28,016 31,856 38,674
------------ ------------ ------------
Total amortized intangible
assets, net $ 59,750 $ 64,521 $ 74,982
============ ============ ============
Unamortized intangible assets:
Owned trademarks $ 162,056 $ 162,056 $ 13,140
------------ ------------ ------------
Total intangible assets $ 221,806 $ 226,577 $ 88,122
============ ============ ============
14
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible amortization expense was $5.0 million for each of the three months
ended April 5, 2003 and March 30, 2002.
The estimated intangible amortization expense for the next five years is as
follows:
(In thousands)
Fiscal Year Amortization Expense
- ----------------------------------------------------------------
2003 $18.7
2004 14.1
2005 7.6
2006 3.1
2007 2.4
The changes in carrying amount of goodwill for the three months ended April 5,
2003 are as follows:
Wholesale Wholesale
(Dollars in thousands) Apparel Non-Apparel Total
- ---------------------- ------------------------------------------------
Balance December 28, 2002 $ 469,050 $ 9,819 $ 478,869
Reversal of unused purchase accounting reserves (3,311) -- (3,311)
Translation difference 1,870 -- 1,870
Additional purchase price of Ellen Tracy 1,137 -- 1,137
------------ ------------ ------------
Balance April 5, 2003 $ 468,746 $ 9,819 $ 478,565
============ ============ ============
There is no goodwill recorded in our retail segment.
9. DEBT
On August 7, 2001, the Company issued 350 million Euro (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 180-day unsecured credit facility, the proceeds of
which were primarily used to finance the Company's acquisition of Mexx on May
23, 2001. Interest on the Eurobonds is being paid on an annual basis until
maturity. As of April 5, 2003, December 28, 2002 and March 30, 2002, the balance
outstanding of these bonds was 350 million Euro ($375.6 million at the exchange
rate in effect on April 5, 2003). These bonds are designated as a hedge of our
net investment in Mexx. As of April 5, 2003, Accumulated other comprehensive
income (loss) reflects approximately $66 million in unrealized exchange rate
losses related to these bonds.
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 Euro. 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 April 5, 2003, the Company had approximately
$59.5 million of commercial paper outstanding, with a weighted average
15
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interest rate of 1.4% and $35.0 million of borrowings denominated in foreign
currencies at an interest rate of 3.3%. 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 April 5, 2003 as the Company intends to refinance such obligations on
a long-term basis and believes it is able to do so.
As of April 5, 2003, the Company had lines of credit aggregating $498 million,
which were primarily available to cover trade letters of credit. At April 5,
2003, December 28, 2002 and March 30, 2002, the Company had outstanding trade
letters of credit of $288 million, $291 million and $207 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 $375.6 million of Eurobonds, which mature in
2006.
10. CONTINGENCIES AND COMMITMENTS
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 Condensed Consolidated
Statements of Income. In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities (an interpretation of ARB No. 51)"
("FIN 46") (see Note 16 of Notes to Condensed Consolidated Financial
Statements). As a result of the structure of the third-party lessor, the
synthetic lease arrangements are being amended to comply with the requirements
of FIN 46. These amendments are not expected to have a material impact on the
Company's financial statements. If the arrangements are not amended by July 5,
2003, the end of the second quarter, the synthetic lease may fail to qualify for
off-balance sheet treatment.
The Company has not entered into any other off-balance sheet arrangements other
than normal operating leases.
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 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
16
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The Fairness Hearing was held on March 22, 2003. At the conclusion, the Court
reserved final decision on whether to approve the settlement agreements and the
September 2002 settlement. On April 23, 2003, the Court entered an Order and
Final Judgment Approving Settlement and Dismissing with Prejudice the Brylane
Action. The Company believes that implementation of the terms of the approved
settlement will not have a material adverse effect on its financial position or
results of operations.
11. RESTRUCTURING CHARGE
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
April 5, 2003 was $8.7 million. The Company expects that these activities will
be substantially complete by December 2003.
17
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating & Occupancy
Store Closure Administrative Costs & Asset
(Dollars in millions) Costs Exit Costs Write Downs Total
- --------------------- ----------------------------------------------------------------
Balance at December 28, 2002 $ 7.8 $ 1.1 $ 2.5 $ 11.4
Spending for three months ended April 5, 2003 (0.8) (0.5) (1.4) (2.7)
------ ------ ------ ------
Balance at April 5, 2003 $ 7.0 $ 0.6 $ 1.1 $ 8.7
====== ====== ====== ======
12. EARNINGS PER COMMON SHARE
The following is a reconciliation of the shares outstanding used in the
calculation of basic and diluted earnings per share:
Three Months Ended
------------------------------
April 5, March 30,
(Amounts in thousands) 2003 2002
- ---------------------- ------------------------------
Weighted average common shares outstanding 106,299 104,732
Effect of dilutive securities:
Stock options and restricted stock grants 1,661 1,457
------------ ------------
Weighted average common shares outstanding and
common share equivalents 107,960 106,189
============ ============
13. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the three months ended April 5, 2003, the Company made income tax
payments of $22,165,000 and interest payments of $366,000. During the three
months ended March 30, 2002, the Company made income tax payments of $4,467,000
and interest payments of $947,000.
14. 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 our worldwide
retail operations that sell most of these apparel and non-apparel products to
the public through our specialty retail stores, outlet stores, and concession
stores. As a result of the Company's 2001 acquisition of Mexx, the Company 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 our
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
18
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
For the Three Months Ended April 5, 2003
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Sales from external customers $ 775,803 $ 121,386 $ 171,768 $ 6,642 $ 1,075,599
Intercompany sales 55,310 7,384 -- (62,694) --
----------- ----------- ----------- ----------- -----------
Total net sales $ 831,113 $ 128,770 $ 171,768 $ (56,052) $ 1,075,599
=========== =========== =========== =========== ===========
OPERATING INCOME:
Segment operating income (loss)
from external customers $ 88,670 $ 9,102 $ 5,118 $ 4,575 $ 107,465
Intercompany segment operating
income (loss) 3,641 1,237 -- (4,878) --
----------- ----------- ----------- ----------- -----------
Total operating income (loss) $ 92,311 $ 10,339 $ 5,118 $ (303) $ 107,465
=========== =========== =========== =========== ===========
For the Three Months Ended March 30, 2002
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Sales from external customers $ 636,522 $ 106,224 $ 146,432 $ 3,715 $ 892,893
Intercompany sales 43,797 4,013 -- (47,810) --
----------- ----------- ----------- ----------- -----------
Total net sales $ 680,319 $ 110,237 $ 146,432 $ (44,095) $ 892,893
=========== =========== =========== =========== ===========
OPERATING INCOME:
Segment operating income (loss)
from external customers $ 75,550 $ 7,013 $ 1,723 $ 1,160 $ 85,446
Intercompany segment operating
income (loss) 1,434 1,568 -- (3,002) --
----------- ----------- ----------- ----------- -----------
Total operating income (loss) $ 76,984 $ 8,581 $ 1,723 $ (1,842) $ 85,446
=========== =========== =========== =========== ===========
April 5, December 28, March 30,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ---------------------------------------------
SEGMENT ASSETS:
Wholesale Apparel $ 1,785,432 $ 1,505,014 $ 1,565,283
Wholesale Non-Apparel 203,596 176,728 198,477
Retail 447,898 430,201 388,965
Corporate 168,377 460,605 184,915
Eliminations (277,196) (276,230) (291,838)
----------- ----------- -----------
Total assets $ 2,328,107 $ 2,296,318 $ 2,045,802
=========== =========== ===========
19
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
GEOGRAPHIC DATA:
Three Months Ended
-----------------------------
April 5, March 30,
(Dollars in thousands) 2003 2003
- ---------------------- -----------------------------
NET SALES:
Domestic sales $ 854,033 $ 741,839
International sales 221,566 151,054
----------- -----------
Total net sales $ 1,075,599 $ 892,893
=========== ===========
OPERATING INCOME:
Domestic operating income $ 90,461 $ 73,942
International operating income 17,004 11,504
----------- -----------
Total operating income $ 107,465 $ 85,446
=========== ===========
April 5, December 28, March 30,
(Dollars in thousands) 2003 2002 2002
- ---------------------- -------------------------------------------
TOTAL ASSETS:
Domestic assets $ 1,683,724 $ 1,648,986 $ 1,554,303
International assets 644,383 647,332 491,499
----------- ----------- -----------
Total assets $ 2,328,107 $ 2,296,318 $ 2,045,802
=========== =========== ===========
15. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
At April 5, 2003, the Company had entered into various Euro currency collars
with a net notional amount of $80.0 million, maturity dates from June 2003
through December 2003 and values ranging between 1.05 and 1.10 U.S. dollar per
Euro as compared to $80 million at December 28, 2002 and $55 million at March
30, 2002. At April 5, 2003, the Company had forward contracts maturing through
December 2003 to sell 23.8 million Euro. The notional value of the foreign
exchange forward contracts was approximately $23.0 million at April 5, 2003, as
compared with approximately $61.0 million at December 28, 2002 and approximately
$5.6.million at March 30, 2002. Unrealized (losses) gains for outstanding
foreign exchange forward contracts and currency options were approximately
($1.8) million at April 5, 2003, approximately ($5.2) million at December 28,
2002 and approximately $27,000 at March 30, 2002.
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 is
recognized currently in earnings and was not material for the three months ended
April 5, 2003.
16. NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," to require
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company is currently evaluating the impact of SFAS No.
149 on its results of operations and financial position.
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
20
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 does
not believe that FIN 45 will have a material impact on its financial statements.
In January 2003, the FASB issued FIN 46, which addresses consolidation by
business enterprises of certain variable interest entities, commonly referred to
as special purpose entities. As previously discussed, the Company is amending
the terms of the synthetic lease to comply with the provisions of FIN 46. The
Company does not believe that these amendments will have a material impact on
its financial statements.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail.
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 (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), specialty
apparel (SIGRID OLSEN), premium denim (LUCKY BRAND DUNGAREES) and
contemporary sportswear and dress (LAUNDRY, JUICY COUTURE) 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, TRIFARI and MARVELLA
labels.
o Retail consists of our worldwide retail operations that sell most of these
------
apparel and non-apparel products to the public through our 216 specialty
retail stores, 255 outlet stores and 468 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 and the test openings of SIGRID OLSEN and
MEXX store formats in the United States (see Note 11 of Notes to Condensed
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 14 of Notes to Condensed Consolidated Financial
Statements.
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 Group B.V. ("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 14 of Notes to Condensed
Consolidated Financial Statements.
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 operated as a third party distributor (both at
wholesale and through its own retail operations) 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 made at the end of the first
quarter 2003 of 26.4 million Canadian dollars (or $17.9 million based on the
exchange rate in effect as of April 5, 2003); 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
22
payment would be in the range of 35 - 45 million Canadian dollars (or $24 - 31
million based on the exchange rate in effect at April 5, 2003). 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., which was a privately held fashion apparel company, and its related
companies (collectively "Ellen Tracy") for a 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. 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 April 7, 2003, we acquired 100 percent of the equity interest of Juicy
Couture, Inc. (formerly, Travis Jeans Inc.) ("JUICY COUTURE"). Based in southern
California, JUICY COUTURE is a premium designer, marketer and wholesaler of
sophisticated basics for women, men and children and is recognized around the
world as a leading contemporary brand of casual lifestyle clothing. JUICY
COUTURE sells its products predominantly through select specialty stores and
upscale department stores. JUICY COUTURE had sales of approximately $47 million
in 2002. The total purchase price consisted of (i) an initial payment, including
the assumption of debt, of approximately $42.7 million before adjustments, and
(ii) a contingent payment equal to 30% of the equity value of JUICY COUTURE to
be determined as a multiple of JUICY COUTURE's earnings for one of the years
ended 2005, 2006 or 2007. The selection of the measurement year for the
contingent payment is at either party's option. We estimate that if the 2005
measurement year is selected, the contingent payment would be in the range of
$45-$55 million. Unaudited proforma information related to this acquisition is
not included as the impact of this transaction is not material to our
consolidated results.
THREE MONTHS ENDED APRIL 5, 2003 COMPARED TO THREE MONTHS ENDED MARCH 30, 2002
- ------------------------------------------------------------------------------
The following table sets forth our operating results for the three months ended
April 5, 2003 (comprised of 14 weeks) compared to the three months ended March
30, 2002 (comprised of 13 weeks):
Three months ended Variance
-----------------------------------------------------------------
April 5, March 30,
Dollars in millions 2003 2002 $ %
- ------------------- -----------------------------------------------------------------
Net Sales $ 1,075.6 $ 892.9 $ 182.7 20.5%
Gross Profit 455.8 366.1 89.7 24.5%
Selling, general and administrative expenses 348.3 280.7 67.6 24.1%
Operating Income 107.5 85.4 22.1 25.9%
Other (expense) income-net (0.3) 0.2 (0.5) (250.0)%
Interest (expense) income-net (6.7) (6.1) 0.6 9.8%
Provision for income taxes 36.4 28.6 7.8 27.3%
Net Income 64.1 50.9 13.2 25.9%
Net Sales
- ---------
Net sales for the first quarter of 2003 were $1,075.6 million, an increase of
$182.7 million, or 20.5% over net sales for the first quarter of 2002. The
acquisitions of ELLEN TRACY and MEXX CANADA added approximately $58 million in
net sales during the quarter. Approximately $36 million of the quarter increase
was due to the impact of
23
currency exchange rate fluctuations, primarily as a result of the strengthening
of the Euro. Additionally, the first quarter of 2003 was 14 weeks long, as
compared to 13 weeks in 2002; we do not believe this extra week had a material
impact on our overall sales results for the quarter. Net sales results for our
business segments are provided below:
Wholesale Apparel net sales increased $139.3 million, or 21.9%, to $775.8
- -----------------
million.
o The increase was primarily due to the following:
- The inclusion of $44.7 million of sales of our recently acquired Ellen
Tracy business (acquired in September 2002).
- A $34.9 million sales increase in our Special Markets business
primarily reflecting the introduction of our J.H. COLLECTIBLES, CRAZY
HORSE COLLECTION and Women's and Men's AXCESS lines.
- A $23.9 million sales increase in our non-domestic businesses
resulting from currency exchange rate fluctuations;
o The remainder of our Wholesale Apparel businesses in aggregate experienced
a net increase of approximately $35.8 million, reflecting increases in our
MEXX, SIGRID OLSEN, CLAIBORNE Men's, LUCKY BRAND DUNGAREES and Men's
DKNY(R) JEANS and ACTIVE businesses primarily as a result of higher volume
reflecting higher demand compared to the prior year, partially offset by a
slight decrease in our core LIZ CLAIBORNE businesses.
Wholesale Non-Apparel net sales increased $15.2 million, or 14.3%, to $121.4
- ----------------------
million.
o The increase was due to an aggregate increase of $15.4 million in our LIZ
CLAIBORNE Jewelry and Handbags businesses, due primarily to higher unit
volume resulting from higher demand. There was also a small increase in our
Fashion Accessories and MONET businesses.
o These increases were partially offset by a sales decrease in our Cosmetics
business, resulting from lower unit sales due to reduced demand.
Retail net sales increased $25.3 million, or 17.3%, to $171.8 million.
- ------
o The increase reflected the following:
- A $13.8 million increase in sales of our MEXX stores, due primarily to
the effect of currency exchange rate fluctuations resulting from the
stronger Euro and the net addition of 35 new MEXX concession stores
and two MEXX Outlet stores;
- The inclusion of $6.0 million of sales from our 27 recently acquired
MEXX Canada stores (acquired in July 2002);
- Increases from our LUCKY BRAND DUNGAREES Specialty Retail business due
to the addition of 11 new stores over the last twelve months;
- The inclusion of $3.9 million of sales from the recently acquired
ELLEN TRACY Outlet stores (acquired in September 2002); and
- A 1.1% increase in Specialty Retail store comparable store sales.
Excluding the extra week in the 2003 first quarter, comparable store
sales would have declined 5.0% from the 2002 first quarter.
o The increases were partially offset by the following decreases (inclusive
of our international stores):
- An approximate 4% decline in our Outlet stores comparable store sales,
reflecting reduced inventory available to the outlet stores as a
result of our inventory control initiatives as well as an general
decline in retail traffic. Excluding the extra week in the 2003 first
quarter, outlet store comparable store sales would have been down
9.6%; and
- A decline in our Specialty Retail store sales, due to the closing of
20 LIZ CLAIBORNE Specialty Retail stores in the last twelve months.
We ended the quarter with a total of 255 Outlet stores, 216 Specialty Retail
stores and 468 international concession stores.
Domestic net sales increased by $112.2 million, or 15.1%, to $854.0 million for
- --------
the reasons previously discussed. International net sales increased $70.5
-------------
million, or 46.7% (to $221.6 million), due principally to an increase in sales
of our MEXX business as previously discussed and the inclusion of $9.7 million
of sales of our MEXX Canada business (acquired in July 2002). As previously
stated, approximately $36 million of the increase was due to the impact of
currency exchange rate fluctuations.
24
Gross Profit
- ------------
Gross profit dollars increased $89.7 million, or 24.5%, in the first quarter of
2003 over the first quarter of 2002. Gross profit as a percent of net sales
(referred to as "gross profit rate") increased to 42.4% in 2003 from 41.0% in
2002. The increasing 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) and continued lower unit sourcing costs, as a result of the
continued consolidation and optimization of our worldwide supplier base, in
combination with current favorable market conditions as a result of ongoing
excess offshore sourcing capacity. The Company's gross profit rate also
benefited from a higher proportion of full-priced sales in our LIZ CLAIBORNE
Jewelry and MONET businesses, from higher margins in our Outlet stores, and the
inclusion of ELLEN TRACY and MEXX CANADA as well as sales growth in our MEXX
business, all of which run at a higher gross margin rate than the Company
average. These increases were partially offset by higher promotional activity at
retail which resulted in higher than planned markdowns.
SG&A
- ----
SG&A increased $67.6 million, or 24.1%, in the first quarter of 2003 over the
first quarter of 2002. These expenses as a percent of net sales (referred to as
"SG&A rate") increased to 32.4% in 2003 from 31.4% in 2002. The SG&A rate
increase primarily reflected increased expenses in our relatively higher-cost
Retail segment and reduced comparable store sales in the outlet stores, as well
as a lower proportion of sales represented by our relatively lower-cost Casual
business. Also contributing to the SG&A rate increase were the acquisitions of
ELLEN TRACY and MEXX CANADA and growth in our MEXX Europe business, as these
businesses operate at SG&A rates higher than the Company average. The increase
in our SG&A expense was partially mitigated by ongoing Company-wide expense
management and cost reduction initiatives, as well as lower SG&A costs and rates
in our Special Markets businesses.
Operating Income
- ----------------
As a result of the factors described above, operating income for the first
quarter of 2003 was $107.5 million, an increase of $22.1 million, or 25.9%, over
last year. Operating income as a percent of net sales increased to 10.0% in 2003
compared to 9.6% in 2002. Operating income by business segment is provided
below:
o Wholesale Apparel operating profit increased $13.1 million to $88.7 million
-----------------
(11.4% of net sales) in 2003 compared to $75.6 million (11.9% of net sales)
in 2002, principally reflecting the inclusion of our recently acquired
ELLEN TRACY business and increased profits in our Special Markets business,
due primarily to the introduction of the J.H. COLLECTIBLES, CRAZY HORSE
Collection and Men's AXCESS lines, as well as in our SIGRID OLSEN and
LAUNDRY businesses, partially offset by reduced profits in our core LIZ
CLAIBORNE and Women's DKNY(R) JEANS and ACTIVE and CITY DKNY(R) businesses
due to increased promotional activity.
o Wholesale Non-Apparel operating profit increased $2.1 million to $9.1
----------------------
million (7.5% of net sales) in 2003 compared to $7.0 million (6.6% of net
sales) in 2002, principally due to increases in our Handbags and Jewelry
businesses partially offset by a decrease in our Cosmetics business.
o Retail operating profit increased $3.4 million to $5.1 million (3.0% of net
------
sales) in 2003 compared to $1.7 million (1.2% of net sales) in 2002,
principally reflecting increased gross profit rates in our Outlet stores,
an increase in profits from our MEXX Retail stores and the inclusion of
profits from our recently acquired MEXX Canada Retail stores, partially
offset by increased losses in our LIZ CLAIBORNE and ELISABETH Specialty
Stores.
Domestic operating profit increased by $16.5 million, or 22.3%, to $90.5
- --------
million, due to the improvements in gross profit discussed above. International
-------------
operating profit increased $5.5 million, or 47.8% to $17.0 million primarily due
to increased profits from our MEXX business.
Net Other Expense
- -----------------
Net other expense in the first quarter of 2003 was $0.3 million, principally
comprised 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.) and, to a lesser extent, other non-operating expenses, compared
to net other income of $0.2 million in 2002, comprised of other non-operating
income, partially offset by minority interest expense.
Net Interest Expense
- --------------------
Net interest expense in the first quarter of 2003 was $6.7 million, compared to
$6.1 million in 2002, both of which were principally comprised of interest
expense on the Eurobond offering and other borrowings incurred to finance
25
our acquisition of MEXX and our other strategic initiatives including costs
associated with our acquisitions and capital expenditures. Interest expense
increased primarily as a result of currency exchange rate fluctuations.
Provision for Income Taxes
- --------------------------
The provision for income taxes in the first quarter reflected a slightly
increased income tax rate at 36.2% versus 36.0% in the prior year due to an
increase in taxes from foreign operations.
Net Income
- ----------
Net income increased in the first quarter of 2003 to $64.1 million, or 6.0% of
net sales, from $50.9 million in the first quarter of 2002, or 5.7% of net
sales, due to the factors described above. Diluted earnings per common share
increased 22.9% to $0.59 in 2003, up from $0.48 in 2002. Our average diluted
shares outstanding increased by 1.8 million shares in the first quarter of 2003
on a period-to-period basis, to 108.0 million, as a result of the exercise of
stock options and the effect of dilutive securities. Since the end of 2002, we
have not purchased any additional shares under our buyback program. As of April
5, 2003, we have $218.3 million remaining in buyback authorization under our
share repurchase program.
FORWARD OUTLOOK
- ---------------
The economic and retail environments continue to be uncertain and challenging.
Accordingly, we are proceeding prudently and conservatively in planning our
business going forward. Looking forward, for the second quarter of 2003, we are
optimistic that we can achieve a sales increase of 10 - 13% and EPS in the range
of $0.39 - $0.41. For fiscal 2003, we are forecasting a sales increase of 9 -
11% and EPS in the range of $2.49 - $2.55. The foregoing forward-looking
statements are qualified in their entirety by the 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 2003 and 2002,
we also required cash to fund our acquisition program. Sources of liquidity to
fund ongoing 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 operations, our commercial paper program and
bank and letter of credit facilities will be sufficient to fund our future
liquidity requirements and that we will be able to adjust the amounts available
under these facilities if necessary. Such sufficiency and availability may be
adversely affected by a variety of factors, including, without limitation,
retailer and consumer acceptance of the Company's products, which may impact the
Company's financial performance, maintenance of the Company's investment grade
credit rating, as well as interest rate and exchange rate fluctuations.
We ended the first quarter of 2003 with $110.8 million in cash and marketable
securities, compared to $276.3 million and $109.9 million at December 28, 2002
and March 30, 2002, respectively, and with $475.7 million of debt outstanding
compared to $399.7 million and $401.6 million at December 28, 2002 and March 30,
2002, respectively. This $241.5 million and $73.2 million increase in our debt
net of cash position over the last three and twelve months, respectively, is
attributable to the 2002 acquisitions of ELLEN TRACY and MEXX CANADA, as well as
additional payments made in connection with the acquisition of Lucky Brand
Dungarees as discussed below and the differences in working capital due to the
factors discussed below.
Accounts receivable decreased $10.1 million, or 1.8%, at the end of first
quarter 2003 compared to the end of first quarter 2002, due to improvements made
in our days' sales outstanding as well as the timing of shipments made during
the quarter. Accounts receivable increased $184.7 million, or 49.9%, at April 5,
2003 compared to December 28, 2002 due to the timing of shipments and increases
in sales.
26
Inventories increased $36.5 million, or 8.8%, at the end of first quarter 2003
compared to the end of first quarter 2002, and decreased $8.9 million, or 1.9%
at April 5, 2003 compared to December 28, 2002. The decrease from December 28,
2002 is a result of our continued conservative planning and inventory control
processes and procedures. The increase in inventory from March 30, 2002 is
primarily a result of the acquisitions of ELLEN TRACY and MEXX CANADA and the
new business lines launched. Our average inventory turnover rate increased to
4.8 times for the 12-month period ended April 5, 2003 from 4.7 times for the
12-month period ended December 28, 2002 and 4.1 times for the 12-month period
ended March 30, 2002. The Company continues to take a conservative approach to
inventory management through 2003.
Borrowings under our commercial paper and revolving credit facilities peaked at
$119.4 million during the first three months of 2003; at April 5, 2003, our
borrowings under the these facilities were $94.5 million.
Net cash used by operating activities was $174.5 million in the first three
months of 2003, compared to $60.7 million used in 2002. This $113.8 million
change in cash flow was primarily due to $275.0 million use of cash for working
capital in 2003 compared to $142.5 million in 2002, driven primarily by
year-over-year changes in the accounts receivable, accounts payable and
inventory balances, partially offset by the increase in net income of $13.2
million in the first three months of 2003 from the first three months of 2002.
Net cash used in investing activities was $69.1 million in the first three
months of 2003, compared to $26.0 million in 2002. The 2003 net cash used
primarily reflected capital and acquisition related expenditures of $67.1
million; 2002 net cash used primarily reflected $25.7 million in capital
expenditures. In March of 2003 we made additional payments of $25 million and
26.4 million Canadian dollars ($17.9 million based on the exchange rate in
effect at April 5, 2003) in connection with the acquisitions of Lucky Brand
Dungarees and Mexx Canada in accordance with the terms of the purchase
agreements.
Net cash provided by financing activities was $71.4 million in the first three
months of 2003, compared to $30.4 million in 2002. The $41.0 million year over
year increase primarily reflected the issuance of $64.5 million of commercial
paper.
Our anticipated capital expenditures for 2003 approximate $95 million, of which
$24.0 million has been expended through April 5, 2003. These expenditures
consisted primarily of the continued technological upgrading and expansion of
our management information systems and distribution facilities (including
certain building and equipment expenditures) and the opening of stores. Capital
expenditures and working capital cash needs will be financed with net cash
provided by operating activities and our revolving credit, trade letter of
credit and other credit facilities.
On 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 Euro. 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 April 5, 2003, the Company had approximately
$59.5 million of commercial paper outstanding, with a weighted average interest
rate of 1.4% and $35.0 million of borrowings denominated in foreign currencies
at an interest rate of 3.3%. 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
April 5, 2003 as the Company intends to refinance such obligations on a
long-term basis and is able to do so.
27
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 Condensed Consolidated
Statements of Income. In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities (an interpretation of ARB No. 51)"
("FIN 46") (see Note 16 of Notes to Condensed Consolidated Financial
Statements). As a result of the structure of the third-party lessor, the
synthetic lease arrangements are being amended to comply with the requirements
of FIN 46. These amendments are not expected to have a material impact on the
Company's financial statements. If the arrangements are not amended by July 5,
2003, the end of the second quarter, the synthetic lease may fail to qualify for
off-balance sheet treatment.
As of April 5, 2003, the Company had lines of credit aggregating $498 million,
which were primarily available to cover trade letters of credit. At April 5,
2003, December 28, 2002 and March 30, 2002, the Company had outstanding trade
letters of credit of $288 million, $291 million and $207 million, respectively.
These letters of credit, which have terms ranging from one to ten months,
primarily collateralize the Company's obligations to third parties for the
purchase of inventory. The fair value of these letters of credit approximates
contract values. Substantially all of the Company's debt will mature in 2003
with the exception of the $375.6 million of Eurobonds, which mature in 2006.
At April 5, 2003, the Company had entered into various Euro currency collars
with a net notional amount of $80.0 million with maturity dates from June 2003
through December 2003 with values of between 1.05 and 1.10 U.S. dollar per Euro
as compared to $80 million at December 28, 2002 and $55 million at March 30,
2002. At April 5, 2003, the Company had forward contracts maturing through
December 2003 to sell 23.8 million Euro. The notional value of the foreign
exchange forward contracts was approximately $23.0 million at April 5, 2003, as
compared with approximately $61.0 million at December 28, 2002 and approximately
$5.6 million at March 30, 2002. Unrealized (losses) gains for outstanding
foreign exchange forward contracts and currency options were approximately
($1.8) million at April 5, 2003, approximately ($5.2) million at December 28,
2002 and approximately $27,000 at March 30, 2002.
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 is
recognized currently in earnings and was not material for the three months ended
April 5, 2003.
The Company may be required to make additional payments in connection with its
acquisitions (see Notes 2 and 3 of Notes to Condensed Consolidated Financial
Statements).
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
28
accounting policies employed by the Company, including the use of estimates, are
presented in the Notes to Consolidated Financial Statements in our 2002 Annual
Report on Form 10-K.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, accounts receivable - trade, net, inventories,
accrued expenses and derivative instruments. In applying such policies
management must use some amounts that are based upon its informed judgments and
best estimates. Because of the uncertainty inherent in these estimates, actual
results could differ from estimates used in applying the critical accounting
policies. The Company is not aware of any reasonably likely events or
circumstances, which would result in different amounts being reported that would
materially affect its financial condition or results of operations.
Revenue Recognition
- -------------------
Revenue within our wholesale operations is recognized at the time when
merchandise is shipped from the Company's distribution centers, or if shipped
direct from contractor to customer, when title passes. Wholesale revenue is net
of returns, discounts and allowances. Discounts and allowances are recognized
when the related revenues are recognized. Retail store revenues are recognized
at the time of sale. Retail revenues are net of returns.
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, the Company extends credit to customers, which
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Condensed Consolidated Balance Sheets, is net of allowances and
anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial
statements, assessments of collectibility based on historic trends and an
evaluation of the impact of economic conditions. An allowance for discounts is
based on those discounts relating to open invoices where trade discounts have
been extended to customers. Costs associated with potential returns of
unsaleable products as well as allowable customer markdowns and operational
charge backs, net of historical recoveries, are included as a reduction to net
sales and are part of the provision for allowances included in Accounts
Receivable - Trade, Net. These provisions result from divisional seasonal
negotiations as well as historic deduction trends net of historic recoveries and
the evaluation of current market conditions.
Inventories
- -----------
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons fashion
product. Market value of distressed inventory is valued based on historical
sales trends for this category of inventory of our individual product lines, the
impact of market trends and economic conditions, and the value of current orders
in house relating to the future sales of this type of inventory.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on statistical trends, open contractual
obligations, and estimates based on projections and current requirements.
Derivative Instruments and Foreign Currency Risk Management Programs
- --------------------------------------------------------------------
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
which requires that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized currently in
earnings in either income (loss) from continuing operations or Accumulated other
comprehensive income (loss), depending on the timing and designated purpose of
the derivative. The impact on the Company's financial condition, results of
operations and cash flows, upon the adoption of these pronouncements, was
immaterial.
29
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 Euro. To accomplish this, the
Company borrows directly in foreign currency and designates a portion of foreign
currency debt as a hedge of net investments. Under SFAS No. 133, changes in the
fair value of these instruments are immediately recognized in foreign currency
translation adjustment, a component of Accumulated other comprehensive income
(loss), to offset the change in the value of the net investment being hedged.
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize month-end balance
sheet and other expected exposures. These derivative instruments do not qualify
as cash flow hedges under SFAS No. 133 and are recorded at fair value with all
gains or losses, which have not been significant, recognized in current period
earnings immediately.
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 fiscal 2003, any fiscal quarter of fiscal 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;
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;
30
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, including its union employees;
o Work stoppages by any Company suppliers or service providers, such as, for
example, the recent West Coast port workers lock-out, or by the Company's
union employees;
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;
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.
31
Reference is also made to the other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices as are set forth in our 2002 Annual Report on Form 10-K,
including, without limitation, those set forth under the heading
"Business-Competition; Certain Risks."
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates, which may adversely affect its financial position,
results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through the use of fixed rate financial instruments and, when
deemed appropriate, through the use of interest rate derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes. However, the Company, from time to time, may use interest
rate derivative financial instruments to help manage its exposure to interest
rate movements and reduce borrowing costs. Our objective for holding interest
rate derivative instruments is to decrease the volatility of earnings and cash
flow associated with fluctuation in these rates.
We finance our capital needs through available cash and marketable securities,
operating cash flow, letters of credit, commercial paper issuances, synthetic
lease and bank revolving credit facilities and other credit facilities. Our
commercial paper program, floating rate bank revolving credit facility and bank
lines expose us to market risk for changes in interest rates. We believe that
our Eurobond offering and the interest rate swap agreements, which are fixed
rate obligations, partially mitigate the risks with respect to variable interest
rates given that, as a general matter, fixed rate debt reduces the risk of
potentially higher variable rates.
The acquisitions of MEXX and MEXX Canada, which transact business in foreign
currencies, have increased the Company's exposure to exchange rate fluctuations.
We mitigate the risks associated with changes in foreign currency rates through
foreign exchange forward contracts and average rate foreign currency options to
hedge transactions denominated in foreign currencies for periods of generally
less than one year and to hedge expected payment of transactions with our
non-U.S. subsidiaries, which now include MEXX and MEXX Canada. Gains and losses
on any ineffective portion of these contracts, which hedge specific foreign
currency denominated commitments, are recognized in the period in which the
transaction affects earnings.
As part of the European Economic and Monetary Union, a single currency (the
"Euro") has replaced the national currencies of the principal European countries
(other than the United Kingdom) in which the Company conducts business and
manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. Under the regulations
governing the transition to a single currency, there is a "no compulsion, no
prohibition" rule, which states that no one can be prevented from using the Euro
after January 1, 2002 and no one was obliged to use the Euro before July 2002.
In keeping with this rule, the Company is currently using the Euro for invoicing
and payments. The transition to the Euro did not have a material adverse effect
on the business or consolidated financial condition of the Company.
At April 5, 2003, the Company had $77.1 million of long-term floating rate debt,
representing 17% of our total long-term debt outstanding as of such date. Our
average variable rate borrowing for the three months ended April 5, 2003 was
$38.0 million, with an average interest rate of 2.31%. If the three months'
average rate increased or decreased by 10%, our interest expense would have
changed by $23,000; accordingly, we do not believe that our exposure to interest
rate changes is material.
Reference is also made to our 2002 Annual Report on Form 10-K, under the heading
"Certain Interest Rate and Foreign Currency Risks."
32
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," to require
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contract entered into or modified
after June 30, 2003. The Company is currently evaluating the impact of SFAS No.
149 on its results of operations and financial position.
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 does not
believe that FIN 45 will have a material impact on its financial statements.
In January 2003, the FASB issued FIN 46, which addresses consolidation by
business enterprises of certain variable interest entities, commonly referred to
as special purpose entities. As previously discussed, the Company is amending
the terms of the synthetic lease to comply with the provisions of FIN 46. The
Company does not believe that these amendments will have a material impact on
its financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, 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
quarterly 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position. Please refer to Note 10 and Note 24 of Notes to Consolidated Financial
Statements in our 2002 Annual Report on Form 10-K.
In January 1999, two actions were filed in California naming as defendants more
than a dozen United States-based apparel companies that source garments from
Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationship with the factories, have violated various federal and state laws.
One action, filed in California Superior Court in San Francisco by a union and
three public interest groups, alleges unfair competition and false advertising
(the "State Court Action"). The State Court Action seeks equitable relief,
unspecified amounts for restitution and disgorgement of profits, interest and an
award of attorney's fees. The second, filed in the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges claims under the civil RICO statute and the Alien Tort Claims
Act, premised on supposed violations of the federal anti-peonage and indentured
servitude statutes, as well as other violations of Saipan and international law,
and seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory defendants
on behalf of a
33
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.
The Fairness Hearing was held on March 22, 2003. At the conclusion, the Court
reserved final decision on whether to approve the settlement agreements and the
September 2002 settlement. On April 23, 2003, the Court entered an Order and
Final Judgment Approving Settlement and Dismissing with Prejudice the Brylane
Action. Management is of the opinion that implementation of the terms of the
approved settlement will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 5. OTHER INFORMATION
During the quarterly period covered by this filing, the Audit Committee of the
Company's Board of Directors approved the engagement of the Company's external
auditors to perform certain non-audit services to assist management in its
compliance with certain regulatory and compliance matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1* Certification of Chief Executive Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K.
A Current Report on Form 8-K was filed with the SEC on April 9, 2003 by the
Company relating to the acquisition of Travis Jeans Inc.
A Current Report on Form 8-K was filed with the SEC on May 1, 2003 by the
Company relating to the results of operations for the three-month period
ended April 5, 2003.
* Filed herewith.
34
SIGNATURES
- ----------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DATE: May 16, 2003
LIZ CLAIBORNE, INC. LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
----------------------------- -------------------------------------
MICHAEL SCARPA ELAINE H. GOODELL
Senior Vice President - Vice President - Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(Principal financial officer) (Principal accounting officer)
35
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 quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: May 16, 2003
/s/ Paul R. Charron
- ------------------------
Paul R. Charron
Chairman of the Board and Chief Executive Officer
36
CERTIFICATION
- -------------
I, Michael Scarpa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: May 16, 2003
/s/ Michael Scarpa
- ------------------------
Michael Scarpa
Senior Vice President, Chief Financial Officer