UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2004
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ommission File Number 1-10689
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LIZ CLAIBORNE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2842791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1441 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
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Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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Based upon the closing sale price on the New York Stock Exchange composite
tape on July 3, 2003, the last business day of the registrant's most recently
completed second fiscal quarter, which quarter ended July 5, 2003, the aggregate
market value of the registrant's Common Stock, par value $1 per share, held by
non-affiliates of the registrant on such date was approximately $3,791,932,000.
For purposes of this calculation, only executive officers and directors are
deemed to be the affiliates of the registrant.
Number of shares of the registrant's Common Stock, par value $1 per share,
outstanding as of March 2, 2004: 110,794,722 shares.
Documents Incorporated by Reference:
Registrant's Proxy Statement relating to its Annual Meeting of Stockholders
to be held on May 20, 2004-Part III.
PART I
Item 1. Business.
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OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
General
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Liz Claiborne, Inc. designs and markets an extensive portfolio of branded
women's and men's apparel, accessories and fragrance products. Our current
portfolio of brands includes most apparel and non-apparel categories, reaching
consumers regardless of age, gender, size, attitude, shopping or value
preference. Our products run the full fashion gamut, from classic and
traditional to modern and contemporary, for every wearing occasion. Our brands
include AXCESS, BORA BORA, CLAIBORNE, CRAZY HORSE, CURVE, DANA BUCHMAN,
ELISABETH, ELLEN TRACY, EMMA JAMES, ENYCE, FIRST ISSUE, INTUITIONS, J. H.
COLLECTIBLES, JANE STREET, JUICY COUTURE, LAUNDRY BY SHELLI SEGAL, LIZ
CLAIBORNE, LUCKY BRAND, MAMBO, MARVELLA, MEXX, MONET, MONET 2, REALITIES, SIGRID
OLSEN, SPARK, TRIFARI and VILLAGER. In addition, we hold certain licenses for
men's, junior's and women's sportswear, jeanswear and activewear under the
DKNY(R) JEANS and DKNY(R) ACTIVE trademarks, women's sportswear under the CITY
DKNY(R) trademark, women's apparel products under the KENNETH COLE NEW YORK,
REACTION KENNETH COLE and UNLISTED.COM trademarks, jewelry products under the
KENNETH COLE NEW YORK and REACTION KENNETH COLE trademarks, and fragrance,
cosmetic and beauty products under the CANDIE'S trademark.
Under our multi-channel distribution strategy, our brands are available at
over 30,000 different retail locations throughout the world, including our own
specialty retail and outlet stores, and on our Elisabeth, Lucky Brand, and Mexx
E-commerce sites. We believe that we are one of the largest suppliers of women's
branded apparel and accessories in the United States.
As used herein, the terms "Company", "we", "us" and "our" refer to Liz
Claiborne, Inc., a Delaware corporation, together with its consolidated
subsidiaries.
On April 7, 2003, we completed the purchase of Juicy Couture, Inc. ("Juicy
Couture"), formerly Travis Jeans, Inc., a privately held fashion apparel
company. Juicy Couture offers a line of upscale casual lifestyle apparel for
women, men and children under various Juicy Couture trademarks. Juicy Couture
products are sold predominately through select upscale specialty stores and
department stores throughout the United States and through distributors in Asia,
Canada and Europe. See Note 2 of Notes to Consolidated Financial Statements.
On December 1, 2003, we completed the purchase of Enyce Holding, LLC
("Enyce"), a privately held fashion apparel company. Enyce offers fashion
forward streetwear for men and women under the ENYCE (R) and LADY ENYCE (R)
trademarks. Enyce products are sold predominately through specialty store
chains, better specialty stores and select department stores throughout the
United States and through distributors in Canada, Germany and Japan. See Note 2
of Notes to Consolidated Financial Statements.
Business Segments
- -----------------
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail. We also license to third parties the right to produce
and market products bearing certain Company-owned trademarks. See Note 20 of
Notes to Condensed Consolidated Financial Statements and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We also present our results on the following geographic basis:
o Domestic: wholesale customers and our specialty retail and outlet
stores located in the United States; and
o International: wholesale customers and our specialty retail and outlet
stores and concession stores located outside of the United States.
2
Wholesale Apparel. This segment consists of women's, men's and children's
-----------------
apparel designed, marketed, produced and sold worldwide under various trademarks
that we own or license from third-party owners. Substantially all products in
each sportswear collection are sold at retail as separate items.
Our LIZ CLAIBORNE business offers women's career and casual sportswear for
the "better" market, in misses and petite sizes, including knitwear, twill and
denim products, under our LIZ CLAIBORNE trademark. As previously announced,
commencing with the Spring 2004 season, products previously offered under our
COLLECTION, LIZSPORT, LIZWEAR JEANS and LIZ & CO. trademarks will be offered
under our LIZ CLAIBORNE trademark. This business also offers a line of women's
performancewear under the LIZ GOLF trademark.
Our LIZ CLAIBORNE WOMAN business offers classic careerwear, weekend casual
and wardrobe basics in large sizes (including petite proportions) under our LIZ
CLAIBORNE WOMAN trademark.
Our MEXX business offers a wide range of men's, women's and children's
fashion apparel and accessories for sale outside of the United States under
several trademarks including MEXX (men's and women's fashion sportswear),
MEXXSPORT (performance sportswear), and XX BY MEXX (coordinated contemporary
separates). See Note 2 of Notes to Consolidated Financial Statements for a
discussion of our acquisition of MEXX. Commencing with the third quarter of
2003, MEXX products are sold in domestic specialty retail stores operated under
the MEXX tradename. See Retail below.
Our Men's business offers men's business-casual wear and sportswear under
our CLAIBORNE trademark; a line of moderate priced men's wear and dress shirts
under our CRAZY HORSE trademark; and a line of moderate priced, fashion-forward
men's apparel under our AXCESS/Men trademark. This business also offers a line
of men's sportswear, jeanswear and activewear under the DKNY(R) JEANS and
DKNY(R) ACTIVE trademarks and logos, pursuant to the exclusive license we hold
to design, produce, market and sell these products in the Western Hemisphere. We
license to a third-party the right to design, manufacture and distribute a line
of dress shirts under the CLAIBORNE trademark. See Note 3 of Notes to
Consolidated Financial Statements.
Our DANA BUCHMAN business offers collections of products for the women's
"bridge" market, in misses, large and petite sizes under our DANA BUCHMAN
trademark.
Our ELLEN TRACY business offers women's sportswear for the "bridge" market
under our ELLEN TRACY, LINDA ALLARD ELLEN TRACY and COMPANY ELLEN TRACY
trademarks. See Note 2 of Notes to Consolidated Financial Statements for a
discussion of the acquisition of Ellen Tracy, Inc.
Our Special Markets business offers women's updated career and casual
clothing at moderate prices under the following Company trademarks: AXCESS
(fashion-forward women's apparel, sold principally in Mervyn's and Kohl's
department stores), EMMA JAMES (related separates for the casual workplace, sold
principally in department stores); VILLAGER (relaxed separates for soft career
and weekend dressing, sold principally in Mervyn's and Kohl's department
stores); FIRST ISSUE (casual career and everyday wear, sold principally in Sears
department stores); CRAZY HORSE (casual separates, sold principally in J.C.
Penney stores); CRAZY HORSE COLLECTION (casual and business-casual apparel, sold
principally in J.C. Penney stores); and J.H. COLLECTIBLES (a collection of
relaxed feminine apparel, sold principally in department stores). During 2003,
we ceased selling products under our RUSS trademark at Wal-Mart stores. See
"Competition; Certain Risks" below.
Our DKNY(R) JEANS and DKNY(R) ACTIVE business offers junior's and women's
sportswear, jeanswear and activewear under the DKNY(R) JEANS and DKNY(R) ACTIVE
trademarks and logos for sale in the Western Hemisphere, pursuant to the
exclusive license we hold to design, produce, market and sell these products.
See Note 3 of Notes to Consolidated Financial Statements.
Our CITY DKNY(R) business offers women's career and casual sportswear for
the "better" market, under the CITY DKNY(R) trademark and logo for sale in the
United States, pursuant to the exclusive license we hold to design, produce,
market and sell these products. See Note 3 of Notes to Consolidated Financial
Statements.
Our SIGRID OLSEN business, which we own by virtue of our ownership of 97.5%
of Segrets, Inc ("Segrets"), offers a range of women's sportswear in misses,
large and petite sizes under several trademarks, including SIGRID OLSEN
COLLECTION (sportswear with a contemporary influence), SIGRID OLSEN SPORT
(updated casual sportswear with a novelty inspiration), and SO BLUE BY SIGRID
OLSEN (contemporary casual sportswear with a jeanswear influence). See Note 2 of
Notes to Consolidated Financial Statements for a discussion of our acquisition
of Segrets, Inc.
Our LUCKY BRAND business offers women's and men's denim-based sportswear
under various LUCKY BRAND
3
trademarks. See Note 2 of Notes to Consolidated Financial Statements for a
discussion of our acquisition of Lucky Brand Dungarees, Inc.
Our KENNETH COLE NEW YORK business offers "better" women's modern
sportswear under the KENNETH COLE NEW YORK label, and women's status denim and
sportswear under the REACTION KENNETH COLE label and has the right to offer
junior-sized apparel under the UNLISTED.COM label, for sale in North America
pursuant to the exclusive license we hold to manufacture, design, market and
distribute these products. The term of the license agreement is scheduled to
expire on December 31, 2004. See Note 3 of Notes to Consolidated Financial
Statements.
Our LAUNDRY business offers women's modern sportswear and dresses under the
LAUNDRY BY SHELLI SEGAL trademark. In January 2004, this business introduced a
line of dresses under our JANE STREET trademark, to be sold primarily through
department and specialty stores. Shipping of the JANE STREET line is expected to
commence in the third quarter of 2004.
Our JUICY COUTURE business offers upscale women's, men's and children's
casual wear under various JUICY COUTURE trademarks. See Note 2 of Notes to
Consolidated Financial Statements for a discussion of the acquisition of JUICY
COUTURE.
Our ENYCE business offers men's and women's fashion forward streetwear
under our ENYCE and LADY ENYCE trademarks. See Note 2 of Notes to Consolidated
Financial Statements for a discussion of the acquisition of ENYCE.
Each of the above businesses presented four seasonal collections during
2003, except DANA BUCHMAN and ELLEN TRACY, which presented three collections,
and LAUNDRY and JUICY COUTURE, which presented five collections.
In November 2003, we introduced a line of women's sportswear for the
"better" market under our REALITIES trademark, to be sold in Bloomingdale's,
Lord & Taylor, Nordstrom and other select department stores. Shipping of the
REALITIES line commenced in January 2004.
In January 2004, we commenced shipping a line of women's sportswear under
our INTUITIONS trademark, for sale exclusively at Dillard's department stores.
Wholesale Non-Apparel. This segment consists of accessories, jewelry and
----------------------
cosmetics designed, marketed, produced and sold worldwide under various
trademarks we own or license from third-party owners.
Our Accessories business offers an array of handbags, small leather goods
and fashion accessories under our LIZ CLAIBORNE, LUCKY BRAND, MEXX, SIGRID OLSEN
(which commenced shipping in the first quarter of 2003), and ELLEN TRACY (which
commenced shipping in the third quarter of 2003) trademarks. In February 2004,
we commenced shipping lines of accessories under our INTUITIONS and JUICY
COUTURE trademarks. We will commence shipping a line of accessories under our
REALITIES trademark in the third quarter of 2004.
Our Special Markets Accessories business offers jewelry, handbags and
fashion accessories under our CRAZY HORSE and VILLAGER trademarks, and jewelry
and handbags under our AXCESS trademark.
Our Jewelry business offers a selection of jewelry under our LIZ CLAIBORNE,
LUCKY BRAND, MEXX, MONET, MONET 2, TRIFARI and MARVELLA trademarks. In February
2004, we commenced shipping lines of jewelry under our INTUITIONS and JUICY
COUTURE trademarks. We will commence shipping a line of jewelry under our
REALITIES trademark in the third quarter of 2004. We also hold the license to
manufacture, design, market and distribute women's jewelry bearing the KENNETH
COLE NEW YORK and REACTION KENNETH COLE trademarks. See Note 3 of Notes to
Consolidated Financial Statements.
The offerings of our Accessories, Special Markets Accessories and Jewelry
businesses mirror major fashion trends and are intended to complement many of
our other product lines.
Our Cosmetics business offers fragrance and bath and body-care products for
women under our LIZ CLAIBORNE and LIZSPORT, for men under our CLAIBORNE SPORT,
and for men and women under our BORA BORA, CURVE, CURVE CRUSH, LUCKY YOU LUCKY
BRAND and MAMBO trademarks. We also offer fragrances, cosmetics and beauty
products (for women and men) under the CANDIE'S trademark, which we license from
Candie's, Inc. We commenced shipping a line of fragrance and bath and body-care
products (for women and men) under our SPARK trademark in July 2003.
4
Retail. This segment consists of our worldwide retail operations that sell
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our apparel and non-apparel products to the public through our specialty retail
stores, outlet stores and international concession stores (where the retail
selling space is either owned and operated by the department store or leased and
operated by a third party, while, in each case, we own the inventory).
During 2003, we completed the previously announced closing of our LIZ
CLAIBORNE specialty retail store format in the United States, and launched our
MEXX and SIGRID OLSEN specialty retail store formats in the United States. See
Note 13 of Consolidated Financial Statements.
Specialty Retail Stores. As of March 2, 2004, we operated a total of 235
specialty retail stores, comprised of 124 retail stores within the United States
and 111 retail stores outside of the United States, primarily in Western Europe
and Canada, under various Company trademarks. Our European LIZ CLAIBORNE
flagship store, an approximately 3,000 square foot facility, is located on
Regent Street in London, England.
The following table sets forth information, as of March 2, 2004, with
respect to our specialty retail stores:
U.S. RETAIL SPECIALTY STORES
----------------------------- ------------------ ---------------------------
Approximate Average Store
Specialty Store Format Number of Stores Size by Square Footage
----------------------------- ------------------ ---------------------------
LUCKY BRAND DUNGAREES 74 2,400
ELISABETH 32 3,200
SIGRID OLSEN 7 2,400
DANA BUCHMAN 4 4,700
LAUNDRY BY SHELLI SEGAL 3 1,700
MEXX 3 16,200
ELLEN TRACY 1 3,400
FOREIGN RETAIL SPECIALTY STORES
----------------------------- ------------------ ---------------------------
Approximate Average Store
Specialty Store Format Number of Stores Size by Square Footage
----------------------------- ------------------ ---------------------------
MEXX 80 4,000
MEXX Canada 30 5,000
LIZ CLAIBORNE 1 3,000
Outlet Stores. As of March 2, 2004, we operated a total of 263 outlet
stores, comprised of 196 outlet stores within the United States and 67 outlet
stores outside of the United States, primarily in Western Europe and Canada,
under various Company owned and licensed trademarks.
5
The following table sets forth information, as of March 2, 2004, with
respect to our outlet stores:
U.S. OUTLET STORES
----------------------------- ------------------ -----------------------------
Approximate Average Store
Format Number of Stores Size by Square Footage
----------------------------- ------------------ ---------------------------
LIZ CLAIBORNE 118 11,000
LIZ CLAIBORNE WOMAN * 21 3,400
DKNY(R)JEANS 17 2,900
ELLEN TRACY 11 3,500
DANA BUCHMAN 12 2,200
Special Brands 6 3,100
CLAIBORNE 4 2,400
LUCKY BRAND DUNGAREES 4 2,800
ELLEN TRACY/DANA
BUCHMAN HYBRID 3 4,300
FOREIGN OUTLET STORES
----------------------------- ------------------ ---------------------------
Approximate Average Store
Format Number of Stores Size by Square Footage
----------------------------- ------------------ ---------------------------
MEXX 30 2,900
LIZ CLAIBORNE 20 2,400
MEXX Canada 17 5,800
* Includes outlet stores formerly operated under the ELISABETH tradename.
Concession Stores. We operate concession stores in select retail stores,
under two formats: shop-in-shop stores (where the space is owned and operated by
the department store in which the retail selling space is located, while we own
the inventory) and high street concession stores (where the retail store is
leased and operated by a third-party specialty retailer, while we own the
inventory). As of March 2, 2004, the Company operated a total of 553 concession
stores in Europe. We do not operate any concession stores in the United States.
The following table sets forth information, as of March 2, 2004, with
respect to our concession stores:
FOREIGN CONCESSIONS
----------------------------- ------------------
Concession Store Format Number of Stores
----------------------------- ------------------
LIZ CLAIBORNE Apparel 178
MEXX 210
MONET Jewelry 165
Licensing. We license many of our brands to third parties with specialized
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skills, thereby extending each licensed brand's market presence. We currently
have fifty-one license arrangements pursuant to which third-party licensees
produce merchandise under Company trademarks in accordance with designs
furnished or approved by us, the present terms of which (not including renewal
terms) expire at various dates through 2010. Each of the licenses provides for
the payment to the Company of a percentage of the licensee's sales of the
licensed products against a guaranteed minimum royalty which generally increases
over the term of the agreement. Royalty income from our licensing operations is
not included under our wholesale apparel or wholesale non-apparel segments, but
is instead included in "Sales from external customers" under
"Corporate/Eliminations." See Note 20 of Notes to Consolidated Financial
Statements.
6
The following table sets forth information with respect to select aspects
of our licensing business:
- ------------------------------------- ------------------------------------------
PRODUCTS BRANDS
- ------------------------------------- ------------------------------------------
Women's and Men's outerwear LIZ CLAIBORNE, AXCESS, CLAIBORNE, CRAZY
HORSE, DANA BUCHMAN, ELLEN TRACY
- ------------------------------------- ------------------------------------------
Women's and Men's slippers LIZ CLAIBORNE, CLAIBORNE
- ------------------------------------- ------------------------------------------
Women's and Men's sunglasses LIZ CLAIBORNE, AXCESS, CLAIBORNE, ELLEN
TRACY, LUCKY BRAND, MEXX, VILLAGER
- ------------------------------------- ------------------------------------------
Women's and Men's belts CLAIBORNE, ELLEN TRACY
- ------------------------------------- ------------------------------------------
Women's and Men's footwear LIZ CLAIBORNE, AXCESS, CLAIBORNE, COMPANY
ELLEN TRACY, ELLEN TRACY, LINDA ALLARD
ELLEN TRACY, LUCKY BRAND, MEXX, VILLAGER
- ------------------------------------- ------------------------------------------
Women's intimate apparel LIZ CLAIBORNE, LUCKY BRAND, MEXX
- ------------------------------------- ------------------------------------------
Women's legwear AXCESS, ELLEN TRACY, LUCKY BRAND, MEXX
- ------------------------------------- ------------------------------------------
Women's neckwear ELLEN TRACY
- ------------------------------------- ------------------------------------------
Women's sleepwear/loungewear LIZ CLAIBORNE, AXCESS, LUCKY BRAND,
VILLAGER
- ------------------------------------- ------------------------------------------
Women's swimwear LIZ CLAIBORNE, LUCKY BRAND, MEXX
- ------------------------------------- ------------------------------------------
Women's, Men's and Children's watches MEXX
- ------------------------------------- ------------------------------------------
Women's accessories LUCKY
- ------------------------------------- ------------------------------------------
Women's dresses and suits LIZ CLAIBORNE, AXCESS, FIRST ISSUE
- ------------------------------------- ------------------------------------------
Men's accessories AXCESS, CLAIBORNE, CRAZY HORSE, LUCKY
BRAND
- ------------------------------------- ------------------------------------------
Men's and Boy's neckwear AXCESS, CLAIBORNE, CRAZY HORSE
- ------------------------------------- ------------------------------------------
Men's dress shirts CLAIBORNE
- ------------------------------------- ------------------------------------------
Men's formalwear and accessories CLAIBORNE
- ------------------------------------- ------------------------------------------
Men's pants CLAIBORNE
- ------------------------------------- ------------------------------------------
Men's sleepwear/loungewear/underwear AXCESS, CLAIBORNE, LUCKY BRAND
- ------------------------------------- ------------------------------------------
Men's socks CLAIBORNE, LUCKY BRAND, MEXX
- ------------------------------------- ------------------------------------------
Men's tailored clothing CLAIBORNE
- ------------------------------------- ------------------------------------------
Children's apparel LIZ CLAIBORNE, CLAIBORNE, LUCKY BRAND
- ------------------------------------- ------------------------------------------
Bed and Bath LIZ CLAIBORNE, MEXX, VILLAGER
- ------------------------------------- ------------------------------------------
Children's legwear and socks MEXX
- ------------------------------------- ------------------------------------------
Children's shoes MEXX
- ------------------------------------- ------------------------------------------
Children's sunglasses MEXX
- ------------------------------------- ------------------------------------------
Children's swimwear LUCKY BRAND, MEXX
- ------------------------------------- ------------------------------------------
Jewelry MEXX
- ------------------------------------- ------------------------------------------
Cosmetics and Fragrances ELLEN TRACY, MEXX
- ------------------------------------- ------------------------------------------
Decorative fabrics LIZ CLAIBORNE
- ------------------------------------- ------------------------------------------
Flooring LIZ CLAIBORNE
- ------------------------------------- ------------------------------------------
Furniture LIZ CLAIBORNE, MEXX
- ------------------------------------- ------------------------------------------
Home storage LIZ CLAIBORNE
- ------------------------------------- ------------------------------------------
Optic Products LIZ CLAIBORNE, CLAIBORNE, ELLEN TRACY,
FIRST ISSUE, MEXX
- ------------------------------------- ------------------------------------------
Sewing Patterns ELLEN TRACY
- ------------------------------------- ------------------------------------------
Tabletop Products LIZ CLAIBORNE, CRAZY HORSE, VILLAGER
- ------------------------------------- ------------------------------------------
Umbrellas MEXX
- ------------------------------------- ------------------------------------------
SALES AND MARKETING
Domestic sales accounted for approximately 78% of our 2003, and 82% of our
2002, net sales. Our domestic wholesale sales are made primarily to department
store chains and specialty store customers. Retail sales are made through our
own retail and outlet stores. Wholesale sales are also made to international
customers, military exchanges and other outlets.
International sales accounted for approximately 22% of our 2003, and 18% of
our 2002, net sales. In Europe, wholesale sales are made primarily to department
store and specialty store customers, while retail sales are made through
concession
7
stores within department store locations, as well as our own retail and outlet
stores. In Canada, wholesale sales are made primarily to department store chains
and specialty stores, and retail sales are made through our own retail and
outlet stores. In other international markets, including Asia and Central and
South America, we operate principally through third party licensees, virtually
all of which purchase products from us for re-sale at free-standing retail
stores and dedicated department store shops they operate. We also sell to
distributors who resell our products in these territories. Our international
accounts also purchase fragrances and related products through third-party
distributors.
Our 100 largest customers accounted for approximately 85% of 2003 wholesale
sales (or 69% of total sales), as compared with approximately 81% of 2002
wholesale sales (or 66% of total sales). Except for Dillard's Department Stores,
Inc., which accounted for approximately 9% of 2003 and approximately 11% of 2002
wholesale sales (or 7% of 2003 and 9% of 2002 total sales), no single customer
accounted for more than 6% of 2003 or 2002 wholesale sales (or 5% of 2003 and
2002 total sales). However, certain of our customers are under common ownership;
when considered together as a group under common ownership, sales to the eight
department store customers which were owned at year-end 2003 by Federated
Department Stores, Inc. accounted for approximately 15% of 2003 and
approximately 16% of 2002 wholesale sales (or 12% of 2003 and 13% of 2002 total
sales), and wholesale sales to the eight department store customers which were
owned at year-end 2003 by The May Department Stores Company accounted for
approximately 10% of 2003 and approximately 12% of 2002 wholesale sales (or 8%
of 2003 and 10% of 2002 total sales). See Note 10 of Notes to Consolidated
Financial Statements. Many major department store groups make centralized buying
decisions; accordingly, any material change in our relationship with any such
group could have a material adverse effect on our operations. We expect that our
largest customers will continue to account for a significant percentage of our
sales. Sales to the Company's domestic department and specialty store customers
are made primarily through our New York City showrooms. Internationally, sales
to our department and specialty store customers are made through several of our
showrooms, including in the Netherlands and Germany.
For further information concerning our domestic and international sales,
see Note 20 of Notes to Consolidated Financial Statements and "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Orders from our customers generally precede the related shipping periods by
several months. Our largest customers discuss with us retail trends and their
plans regarding their anticipated levels of total purchases of our products for
future seasons. These discussions are intended to assist us in planning the
production and timely delivery of our products. We continually monitor retail
sales in order to directly assess consumer response to our products.
We have implemented in-stock reorder programs in several divisions to
enable customers to reorder certain items through electronic means for quick
delivery. See "Manufacturing" below. Many of our retail customers participate in
our in-stock reorder programs through their own internal replenishment systems.
During 2003, we continued our domestic in-store sales, marketing and
merchandising programs designed to encourage multiple item, regular price sales,
build one-on-one relationships with consumers and maintain our merchandise
presentation standards. These programs train sales associates on suggested
selling techniques, product, merchandise presentation and client development
strategies and are offered for many of our businesses, including our Accessories
and Jewelry, Cosmetics, DANA BUCHMAN, ELLEN TRACY, LAUNDRY BY SHELLI SEGAL, LIZ
CLAIBORNE, LUCKY BRAND JEANS, Men's and SIGRID OLSEN businesses, and our
licensed DKNY(R) Jeans, CITY DKNY(R), and KENNETH COLE NEW YORK businesses.
In 2003, we further expanded our domestic in-store shop programs, designed
to enhance the presentation of our products on department store selling floors
generally through the use of proprietary fixturing, merchandise presentations
and in-store graphics. Currently, in-store shops operate under the following
brand names: CITY DKNY(R), CLAIBORNE, CRAZY HORSE, DANA BUCHMAN, DKNY(R) JEANS,
ELLEN TRACY, EMMA JAMES, FIRST ISSUE, J.H. COLLECTIBLES, JUICY COUTURE, KENNETH
COLE NEW YORK, LAUNDRY, LIZ CLAIBORNE, LUCKY BRAND, MEXX, SIGRID OLSEN and
VILLAGER. Our Accessories business also offers an in-store shop program.
In 2003, we installed, in the aggregate, 1,039 in-store shops, and, in
2004, we plan to install, in the aggregate, approximately 600 additional
in-store shops. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Position, Capital Resources and
Liquidity."
We spent approximately $175 million on marketing for all of our brands in
2003, including approximately $45 million on national advertising. This compares
with 2002 aggregate marketing expenditures of approximately $160 million,
including approximately $44 million on national advertising.
We maintain several consumer websites, including www.elisabeth.com, which
offers plus-size apparel for sale directly to
8
consumers; www.enyce.com, which provides information on ENYCE branded apparel;
www.danabuchman.com, which provides information on DANA BUCHMAN branded apparel;
www.ellentracy.com, which provides information on ELLEN TRACY branded apparel;
www.lizclaiborne.com, which provides information regarding the Company,
including information on our LIZ CLAIBORNE branded apparel and accessories
products; www.juicycouture.com, which provides information on JUICY COUTURE
branded apparel; www.luckybrandjeans.com, which provides information on LUCKY
BRAND branded apparel and offers a selection of LUCKY BRAND apparel for sale
directly to consumers; and www.sigridolsen.com, which provides information on
SIGRID OLSEN branded apparel. In addition, in Germany, the MEXX Direct business,
pursuant to an arrangement with Otto Versand (GmbH & Co.), offers MEXX branded
merchandise for sale directly through www.mexx.com and through exclusive
mail-order catalogs.
MANUFACTURING
We do not own any product manufacturing facilities; all of our products are
manufactured in accordance with our specifications through arrangements with
independent suppliers.
Products produced in the Far East, the Caribbean, Central America and
Europe represent a substantial portion of the Company's sales. We also source
product in the United States and other regions. During 2003, several hundred
suppliers manufactured our products; such products were manufactured by
suppliers located in approximately 50 countries, including China, Saipan, Hong
Kong, Taiwan, Turkey, the Dominican Republic, Sri Lanka, Indonesia and the
Philippines. We continually seek additional suppliers throughout the world for
our sourcing needs. Our largest supplier of finished products manufactured
approximately 6% of our purchases of finished products during 2003. In each of
2003, 2002 and 2001, our ten largest suppliers for the year manufactured in
aggregate approximately 35% of our purchases of finished products. We expect
that the percentage of production represented by our largest suppliers will
increase in 2004 in light of the Company's ongoing worldwide factory
certification initiative, under which we allocate large portions of our
production requirements to suppliers appearing to have superior capacity,
quality (of product, operation and human rights compliance) and financial
resources. Our purchases from our suppliers are effected through individual
purchase orders specifying the price and quantity of the items to be produced.
We do not have any long-term, formal arrangements with any of the suppliers
which manufacture our products. We believe that we are the largest customer of
many of our manufacturing suppliers and consider our relations with such
suppliers to be satisfactory.
Most of our products are purchased as completed product "packages" from our
manufacturing contractors, where the contractor purchases all necessary raw
materials and other product components, according to our specifications. When we
do not purchase "packages", we obtain fabrics, trimmings and other raw materials
in bulk from various foreign and domestic suppliers, which items are then
delivered to our manufacturing contractors for use in our products. Inasmuch as
we intend to continue to move towards purchasing an increasing portion of our
products as "packages," we have continued our development of a group of
"approved suppliers" to supply raw materials and other product components to our
contractors for use in "packages". We do not have any long-term, formal
arrangements with any supplier of raw materials. To date, we have experienced
little difficulty in satisfying our raw material requirements and consider our
sources of supply adequate.
We operate under substantial time constraints in producing each of our
collections. See "Sales and Marketing" above. In order to deliver, in a timely
manner, merchandise which reflects current tastes, we attempt to schedule a
substantial portion of our materials and manufacturing commitments relatively
late in the production cycle, thereby favoring suppliers able to make quick
adjustments in response to changing production needs. However, in order to
secure necessary materials and manufacturing facilities, we must make
substantial advance commitments, often as much as seven months prior to the
receipt of firm orders from customers for the items to be produced. We continue
to seek to reduce the time required to move products from design to the
customer.
If we should misjudge our ability to sell our products, we could be faced
with substantial outstanding fabric and/or manufacturing commitments, resulting
in excess inventories. See "Competition; Certain Risks" below.
Our arrangements with foreign suppliers are subject to the risks of doing
business abroad, including currency fluctuations and revaluations, restrictions
on the transfer of funds, terrorist activities and, in certain parts of the
world, political, economic and currency instability. Our operations have not
been materially affected by any such factors to date. However, due to the very
substantial portion of our products which are produced abroad, any substantial
disruption of our relationships with our foreign suppliers could adversely
affect our operations.
We expect all of our suppliers to adhere to the Liz Claiborne Standards of
Engagement, which include standards relating to child labor, working hours, wage
payments, and working conditions generally. We have an ongoing program in place
to monitor our suppliers' compliance with our Standards. In this regard, each
year, our internal or external monitors inspect a
9
substantial portion of our suppliers' factories. Should we learn of a supplier's
failure to comply with our Standards, we urge that supplier to act quickly in
order to comply. If a supplier fails to correct a compliance deficiency, or if
we determine that the supplier will be unable to correct a deficiency, we may
terminate our business relationship with the supplier. In addition, we are a
participating company in the Fair Labor Association's program. The Fair Labor
Association is a non-profit organization dedicated to improving working
conditions.
IMPORT AND IMPORT RESTRICTIONS
Virtually all of our merchandise imported into the United States, Canada,
and Europe is subject to duties and quota. Quota represents the right, pursuant
to bilateral or other international trade arrangements, to export amounts of
certain categories of merchandise into a country or territory pursuant to a visa
or license. Pursuant to agreements between the major exporting countries and the
United States, the importation of certain categories of our products is subject
to quotas limiting the amount of the products that may be imported into the
United States. The majority of these agreements were negotiated under the
framework of the MultiFiber Arrangement, which has been in effect since 1974,
and contain "consultation" clauses which allow the United States, under certain
circumstances, to impose unilateral restrictions on the importation of certain
categories of products that are not subject to specified limits under the terms
of such agreement. However, the Agreement on Textiles and Clothing mandates the
elimination of quota on textile and apparel products quotas for World Trade
Organization countries, including the United States, Canada and European
countries, on January 1, 2005. As a result, there will be changes in the
international textiles and apparel trade, which may significantly impact our
sourcing patterns. This impact may come as early as 2004 in the event of quota
shortfalls resulting from countries being unable to meet their 2004 quota needs.
While in the past countries were able to use a portion of the following year's
quota to fulfill their quota needs ("quota borrowing"), the elimination of quota
in 2005 results in the elimination of any opportunity for quota borrowing.
Furthermore, notwithstanding quota elimination, under China's accession
agreement for membership in the World Trade Organization, the United States and
other World Trade Organization members (including Canada and European countries)
may re-impose quotas on specific categories of products in the event it is
determined that imports from China have surged and are threatening to create a
market disruption for such categories of products (so called "safeguard quota").
In addition, the United States may unilaterally impose additional duties in
response to a particular product being imported in such increased quantities as
to cause (or threaten) serious damage to the relevant domestic industry
(generally known as "anti-dumping" actions).
In addition, each of the countries in which our products are sold has laws
and regulations regarding import restrictions and quotas. Because the United
States and the other countries in which our products are manufactured and sold
may, from time to time, impose new quotas, duties, tariffs, surcharges or other
import controls or restrictions, or adjust presently prevailing quota
allocations or duty or tariff rates or levels, we maintain a program of
intensive monitoring of import and quota-related issues. As we do not own quota,
we must therefore work with our suppliers and vendors to secure the visas or
licenses required to ship our products. We seek continually to minimize our
potential exposure to import and quota-related risks through, among other
measures, allocation of production to merchandise categories that are not
subject to quota pressures, adjustments in product design and fabrication,
shifts of production among countries and manufacturers, as well as through
geographical diversification of our sources of supply.
In light of the very substantial portion of our products which are
manufactured by foreign suppliers, the enactment of new legislation or the
administration of current international trade regulations, executive action
affecting textile agreements, or the implementation of the scheduled elimination
of quota, including likely resulting changes in sourcing patterns, could
adversely affect our operations. Although we generally expect that the upcoming
elimination of quota will result, over the long term, in an overall reduction in
the cost of apparel produced abroad, the transition to the non-quota environment
(including, for example, the elimination of the opportunity for quota borrowing
in 2004 and the implementation of any safeguard quota) may result, over the near
term, in cost increases for certain categories of products and in disruption of
the supply chain for certain products categories. See "Competition; Certain
Risks" below.
DISTRIBUTION
We distribute virtually all of our products through facilities we own or
lease. Our principal distribution facilities are located in California, New
Jersey, Ohio, Pennsylvania, Rhode Island and The Netherlands. See "Properties"
below.
BACKLOG
At March 2, 2004, our order book reflected unfilled customer orders for
approximately $1.099 billion of merchandise, as compared to approximately $1.102
billion at March 19, 2003. These orders represent our order backlog. The amounts
indicated include both confirmed and unconfirmed orders which we believe, based
on industry practice and our past experience, will be confirmed. We expect that
substantially all such orders will be filled within the 2004 fiscal year. We
10
note that the amount of order backlog at any given date is materially affected
by a number of factors, including seasonal factors, the mix of product, the
timing of the receipt and processing of customer orders, and scheduling of the
manufacture and shipping of the product, which in some instances is dependent on
the desires of the customer. Accordingly, order book data should not be taken as
providing meaningful period-to-period comparisons.
TRADEMARKS
We own and/or use a variety of trademarks in connection with our businesses
and products.
The following table summarizes the principal trademarks we own and/or use
in connection with our businesses and products:
AXCESS LIZGOLF
AXCESS/MEN LOVE P&G
BORA BORA LUCKY BRAND
CHOOSE JUICY LUCKY BRAND BABY
CLAIBORNE LUCKY BRAND DUNGAREES
CLAIBORNE BOYS LUCKY BRAND DUNGAREES OF AMERICA TOO TOUGH TO DIE
CLAIBORNE SPORT LUCKY BRAND KIDS
CRAZY HORSE LUCKYVILLE
CURVE LUCKY YOU
CURVE CRUSH LUCKY YOU LUCKY BRAND
DANA BUCHMAN MADE IN THE GLAMOROUS U.S.A.
DANA BUCHMAN WOMAN MAMBO
COMPANY ELLEN TRACY MARVELLA
ELLEN TRACY MEXX
ELISABETH MEXX KIDS
EMMA JAMES MEXX SPORT
ENYCE MINI MEXX
FIRST ISSUE MONET
HOT PINK MONET 2
INTUITIONS REALITIES
JANE STREET RUSS
J.H. COLLECTIBLES SIGRID OLSEN
JUICY SIGRID OLSEN SPORT
JUICY BABY SIGRID OLSEN COLLECTION
JUICY COUTURE SIGRID OLSEN PETITES
JUICY GIRL SIGRID OLSEN WOMAN
JUICY JEANS SO BLUE
LADY ENYCE SPARK
LAUNDRY BY SHELLI SEGAL SWE
LINDA ALLARD ELLEN TRACY TRIFARI
LIZ TRIPLE XXX DUNGAREES
LIZ CLAIBORNE VILLAGER
LIZ CLAIBORNE BABY VIVID
LIZ CLAIBORNE KIDS WOMEN'S WORK
LIZ CLAIBORNE WOMAN XX BY MEXX
Licensed Trademarks
CANDIE'S KENNETH COLE NEW YORK
CITY DKNY(R) REACTION KENNETH COLE
DKNY(R)ACTIVE UNLISTED
DKNY(R) JEANS
In addition, we own and/or use the LC logomark, our triangular logomark,
our triangle within a triangle icon, the DANA BUCHMAN leaf design, LUCKY BRAND's
four-leaf clover design and fly placement, and the JUICY COUTURE crest
trademarks.
We have registered or applied for registration of a multitude of
trademarks, including those referenced above, for use on apparel and
apparel-related products, including accessories, cosmetics and jewelry in the
United States as well as in numerous foreign territories. We also have a number
of design patents. We regard our trademarks and other proprietary rights
11
as valuable assets and believe that they have significant value in the marketing
of our products. We vigorously protect our trademarks and other intellectual
property rights against infringement.
COMPETITION; CERTAIN RISKS
We believe that, based on sales, we are among the largest fashion apparel
and related accessories companies operating in the United States and Europe.
Although we are unaware of any comprehensive trade statistics, we believe, based
on our knowledge of the market and available trade information, that measured by
sales, we are one of the largest suppliers of "better" women's branded apparel
in the United States. Our principal competitors in the United States within the
"better" women's sportswear market in department stores include Jones Apparel
Group, Inc., Polo Ralph Lauren Corporation and Tommy Hilfiger Corporation. The
principal competitors of our MEXX European business include Esprit, Benetton,
Zara and Next.
Notwithstanding our position as one of the largest fashion apparel and
related accessories companies in the United States, we are subject to intense
competition as the apparel and related product markets are highly competitive,
both within the United States and abroad.
Risks Associated with Competition and the Marketplace
- -----------------------------------------------------
Our ability to compete successfully within the marketplace depends on a
variety of factors, including:
o The current challenging retail and macroeconomic environment, including the
levels of consumer confidence and discretionary spending, and levels of
customer traffic within department stores, malls and other shopping and
selling environments, and a continuation of the deflationary trend in
prices for apparel products;
o Our ability to effectively anticipate, gauge and respond to changing
consumer demands and tastes, across multiple product lines, shopping
channels and geographies;
o Our ability to translate market trends into appropriate, saleable product
offerings relatively far in advance, while minimizing excess inventory
positions, including our ability to correctly balance the level of our
fabric and/or merchandise commitments with actual customer orders;
o Consumer and customer demand for, and acceptance and support of, our
products (especially by our largest customers) which are in turn dependent,
among other things, on product design, quality, value and service;
o Our ability, especially through our sourcing, logistics and technology
functions, to operate within substantial production and delivery
constraints, including risks associated with the possible failure of our
unaffiliated manufacturers to manufacture and deliver products in a timely
manner, to meet quality standards or to comply with our policies regarding
labor practices or applicable laws or regulations;
o The financial condition of, and consolidations, restructurings and other
ownership changes in, the apparel (and related products) industry and the
retail industry;
o Risks associated with our dependence on sales to a limited number of large
United States department store customers, including risks related to
customer requirements for vendor margin support, and those related to
extending credit to customers, risks relating to retailers' buying patterns
and purchase commitments for apparel products in general and our products
specifically;
o Our ability to respond to the strategic and operational initiatives of our
largest customers, as well as to the introduction of new products or
pricing changes by our competitors; and
o Our ability to obtain sufficient retail floor space and to effectively
present products at retail.
Economic, Social and Political Factors
- --------------------------------------
Also impacting the Company and our operations are a variety of economic,
social and political factors, including the following:
o Risks associated with war, the threat of war, and terrorist activities,
including reduced shopping activity as a result of public safety concerns
and disruption in the receipt and delivery of merchandise;
o Changes in national and global microeconomic and macroeconomic conditions
in the markets where we sell or source our products, including the levels
of consumer confidence and discretionary spending, consumer income growth,
personal debt levels, rising energy costs and energy shortages, and
fluctuations in foreign currency exchange rates, interest rates, stock
market volatility, and currency devaluations in countries in which we
source product;
o Changes in social, political, legal and other conditions affecting foreign
operations;
o Risks of increased sourcing costs, including costs for materials and labor;
12
o Any significant disruption in our relationships with our suppliers,
manufacturers and employees, including our union employees;
o Work stoppages by any of our suppliers or service providers, or by our
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 the January 1,
2005 elimination of quota, which may significantly impact sourcing
patterns; and
o Risks related to our ability to establish, defend and protect our
trademarks and other proprietary rights and other risks relating to
managing intellectual property issues.
Risks Associated with Acquisitions and New Product Lines and Markets
- --------------------------------------------------------------------
As part of our growth strategy, we from time to time acquire new product
lines and/or enter new markets, including through licensing arrangements. These
activities (which also include the development and launch of new product
categories and product lines), are accompanied by a variety of risks inherent in
any new business venture, including the following:
o Risks that the new product line or market activities may require methods of
operations and marketing and financial strategies different from those
employed in our other businesses;
o Certain new businesses may be lower margin businesses and may require us to
achieve significant cost efficiencies. In addition, these businesses may
involve buyers, store customers and/or competitors different from our
historical buyers, customers and competitors;
o Possible difficulties, delays and/or unanticipated costs in integrating the
business, operations, personnel, and/or systems of an acquired business;
o Risks that projected or satisfactory level of sales, profits and/or return
on investment for a new business will not be generated;
o Risks involving our ability to retain and appropriately motivate key
personnel of an acquired business;
o Risks that expenditures required for capital items or working capital will
be higher than anticipated;
o Risks associated with unanticipated events and unknown or uncertain
liabilities;
o Uncertainties relating to our ability to successfully integrate an
acquisition, maintain product licenses, or successfully launch new products
and lines; and
o With respect to businesses where we act as licensee, the risks inherent in
such transactions, including compliance with terms set forth in the
applicable license agreements, including among other things the maintenance
of certain levels of sales, and the public perception and/or acceptance of
the licensor's brands or other product lines, which are not within our
control.
EMPLOYEES
At January 3, 2004, we had approximately 13,000 full-time employees
worldwide, as compared with approximately 12,000 full-time employees at December
28, 2002.
In the United States and Canada, we are bound by collective bargaining
agreements with the Union of Needletrades, Industrial and Textile Employees
(UNITE), and agreements with related locals which expire at various dates
through the period December 2004 through May 2006. These agreements cover
approximately 1,550 of our full-time employees. Most of the UNITE-represented
employees are employed in warehouse and distribution facilities we operate in
California, New Jersey, Ohio, Pennsylvania and Rhode Island. In addition, we are
bound by an agreement with the Industrial Professional & Technical Workers
International Union, covering approximately 235 of our full-time employees at
our Santa Fe Springs, California facility and expiring on May 14, 2005.
We consider our relations with our employees to be satisfactory and to date
we have not experienced any interruption of our operations due to labor
disputes.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are
available free of charge on our website, located at www.lizclaiborneinc.com, as
soon as reasonably practicable after they are filed with or furnished to the
Securities and Exchange Commission. These reports are also available on the
Securities and Exchange Commission's Internet website at www.sec.gov. The
information contained on our website is not intended to be included as part of,
or incorporated by reference into, this Annual Report on Form 10-K.
13
Item 2. Properties.
----------
Our distribution and administrative functions are conducted in both leased
and owned facilities. We also lease space for our retail specialty, outlet and
concession stores. We believe that our existing facilities are well maintained,
in good operating condition and, upon occupancy of additional space, will be
adequate for our present level of operations, although from time to time we use
unaffiliated third parties to provide distribution services to meet our
distribution requirements. See Note 10 of Notes to Consolidated Financial
Statements.
Our principal executive offices and showrooms, as well as sales,
merchandising and design staffs, are located at 1441 Broadway, New York, New
York, where we lease approximately 290,000 square feet under a master lease
which expires at the end of 2012 and contains certain renewal options and rights
of first refusal for additional space, and additional space of approximately
65,000 under three other lease agreements, two of which expire in 2006. Most of
our business segments use this facility. In addition, in North Bergen, New
Jersey, we own and operate an approximately 300,000 square foot office complex
which houses operational staff. The following table sets forth information with
respect to our other key properties:
- -----------------------------------------------------------------------------------------------------------------
Key Properties:
- -----------------------------------------------------------------------------------------------------------------
Approximate
Location(1) Primary Use Square Footage Leased/Owned
- ----------------------------------- ------------------------------------- ------------------- -------------------
Santa Fe Springs, California Apparel Distribution Center 600,000 Leased
Vernon, California Offices/Apparel Distribution Center 123,000 Leased
Mississauga, Canada Offices/Apparel Distribution Center 183,000 Leased
Dayton, New Jersey Non-Apparel Distribution Center 226,000 Leased
Dayton, New Jersey Non-Apparel Distribution Center 179,000 Leased
North Bergen, New Jersey Offices/Apparel Distribution Center 620,000 Owned
Secaucus, New Jersey Apparel Distribution Center 164,000 Leased
Westchester, Ohio Apparel Distribution Center 600,000 Leased
Mt. Pocono, Pennsylvania Apparel Distribution Center 150,000 Leased
Mt. Pocono, Pennsylvania(2) Apparel Distribution Center 1,230,000 Owned
Lincoln, Rhode Island Non-Apparel Distribution Center 115,000 Leased
Voorschoten, The Netherlands(3) Offices/Apparel Distribution Center 295,000 Leased
- ----------------------------------- ------------------------------------- ------------------- -------------------
(1) We also lease showroom, warehouse and office space in various other domestic
and international locations.
(2) This facility is on an 80-acre site which we own.
(3) This property is used solely by our MEXX business.
Pursuant to financing obtained through an off-balance sheet arrangement
commonly referred to as a synthetic lease, we have constructed the Westchester,
Ohio and Lincoln, Rhode Island facilities. See "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations: Financial
Position, Capital Resources and Liquidity"; and Note 10 of Notes to Consolidated
Financial Statements for a discussion of this arrangement. We are seeking to
dispose of our interests in an approximately 290,000 square foot warehouse and
distribution facility in Montgomery, Alabama, and our approximately 270,000
square foot facility in Augusta, Georgia (located on a 98-acre site and
previously used in connection with a dyeing and finishing joint venture).
Item 3. Legal Proceedings.
-----------------
Various legal actions are pending against the Company. Although the outcome
of any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position. See Notes 10 and 24 of Notes to Consolidated Financial Statements.
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
14
Islands, is brought on behalf of a purported class consisting of the Saipan
factory workers (the "Federal Action"). The Federal Action alleges claims under
the civil RICO statute and the Alien Tort Claims Act, premised on supposed
violations of the federal anti-peonage and indentured servitude statutes, as
well as other violations of Saipan and international law, and seeks equitable
relief and unspecified damages, including treble and punitive damages, interest
and an award of attorney's fees. A third action, brought in Federal Court in
Saipan solely against the garment factory defendants on behalf of a putative
class of their workers, alleges violations of federal and Saipanese wage and
employment laws (the "FLSA Action").
The Company sources products in Saipan but was not named as a defendant in
the actions. The Company and certain other apparel companies not named as
defendants were advised in writing, however, that they would be added as parties
if a consensual resolution of the complaint claims could not be reached. In the
wake of that notice, which was accompanied by a draft complaint, the Company
entered into settlement negotiations and subsequently entered into an agreement
to settle all claims that were or could have been asserted in the Federal or
State Court Actions. Eighteen other apparel companies also settled these claims
at that time. As part of the settlement, the Company was 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"), currently
pending in the United States District Court for the District of the Northern
Mariana Islands. The Brylane Action mirrors portions of the larger Federal
Action but does not include RICO and certain of the other claims alleged in that
case.
After the transfer of the Federal Action and the Brylane Action to Saipan,
the Court ruled on and denied in most material respects the non-settling
defendants' motion to dismiss the Federal Action. 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 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 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
15
Executive Officers of the Registrant.
- ------------------------------------
Information as to the executive officers of the Company, as of March 2,
2004, is set forth below:
Name Age Position(s)
Paul R. Charron 61 Chairman of the Board and Chief Executive Officer
Angela Ahrendts 43 Executive Vice President
Lawrence D. McClure 55 Senior Vice President - Human Resources
Michael Scarpa 48 Senior Vice President and Chief Financial Officer
Frank S. Sowinski 47 Executive Vice President
Trudy F. Sullivan 54 Executive Vice President
Robert J. Zane 64 Senior Vice President - Manufacturing, Sourcing,
Distribution and Logistics
Executive officers serve at the discretion of the Board of Directors.
Mr. Charron joined the Company as Vice Chairman and Chief Operating
Officer, and became a Director, in 1994. In 1995, Mr. Charron became President
(a position he held until October 1996) and Chief Executive Officer of the
Company. In 1996, Mr. Charron became Chairman of the Board of the Company. Prior
to joining the Company, Mr. Charron served in various executive capacities at VF
Corporation, an apparel manufacturer, including Group Vice President and
Executive Vice President, from 1988. Mr. Charron also serves on the Board of
Directors of Campbell Soup Company and on a number of not-for-profit company
boards, including the National Retail Federation; the American Apparel &
Footwear Association; the Fair Labor Association; Vital Voices Global
Partnership; and the Partnership for New York.
Ms. Ahrendts joined the Company in 1998 as Vice President - Corporate
Merchandising and Design. In March 2001, Ms. Ahrendts was promoted to Senior
Vice President Corporate Merchandising and Group President, and became Executive
Vice President in March, 2002. Prior to joining the Company, Ms. Ahrendts served
as Executive Vice President of Henri Bendel, a division of the Limited, an
apparel specialty store retailer, from 1996 to 1998.
Mr. McClure joined the Company in 2000 as Senior Vice President - Human
Resources. Prior to joining the Company, Mr. McClure served as Vice President,
Human Resources of Dexter Corporation, a specialty materials company, from 1995.
Mr. Scarpa joined the Company in 1983 as budget manager and served in
various management positions thereafter. In 1991, Mr. Scarpa was promoted to
Vice President - Divisional Controller and in 1995, he was promoted to Vice
President - Financial Planning and Operations. Effective July 2000, he became
Vice President - Chief Financial Officer, and in July 2002 he became Senior Vice
President-Chief Financial Officer.
Mr. Sowinski joined the Company in January 2004 as Executive Vice
President. Prior to joining the Company, Mr. Sowinski served as Chief Financial
Officer, and was also responsible for administrative functions, of
PricewaterhouseCoopers Consulting, a systems integrator company, during 2002.
Prior to that, he spent 17 years with the Dun & Bradstreet Corporation in a
series of high-level operating and corporate positions including President of
the D&B Operating Company, Chief Financial Officer of the Dun & Bradstreet
Corporation and Executive Vice President of Global Marketing and Analytical
Services of D&B Information Services. Mr. Sowinski serves on the Board of
Directors of Buckeye Pipe Line Company, a refined petroleum transporter,
terminaller and storage company.
Ms. Sullivan joined the Company in 2001 as Group President for the
Company's Casual, Collection and Elisabeth businesses, and became Executive Vice
President in March 2002. Prior to joining the Company, Ms. Sullivan was
President of J. Crew Group, Inc., a vertical retail and catalog apparel company,
from 1997 to 2001.
Mr. Zane joined the Company in 1995 and served from 1995 to 2000 as Senior
Vice President - Manufacturing and Sourcing. In 2000, Mr. Zane became Senior
Vice President - Manufacturing, Sourcing, Distribution and Logistics. Prior to
joining the Company, Mr. Zane owned and operated Medallion Tekstil, a private
label manufacturing company he founded in 1989.
16
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
MARKET INFORMATION
Our Common Stock trades on the New York Stock Exchange ("NYSE") under the
symbol LIZ. The table below sets forth the high and low closing sale prices of
the Common Stock (based on the NYSE composite tape) for the periods indicated.
On December 19, 2001, we declared a two-for-one stock split in the form of a
stock dividend payable on January 16, 2002 to stockholders of record on December
31, 2001. All share price data, including historical data, has been adjusted to
reflect the stock split.
Calendar Period High Low
--------------- ---- ---
2003:
1st Quarter $31.61 $26.31
2nd Quarter 36.40 30.61
3rd Quarter 36.84 33.10
4th Quarter 38.82 34.06
2002:
1st Quarter $30.31 $24.88
2nd Quarter 32.17 27.68
3rd Quarter 31.14 24.70
4th Quarter 32.65 24.22
RECORD HOLDERS
On March 2, 2004, the closing sale price of our Common Stock was $37.03. As
of March 2, 2004, the approximate number of record holders of Common Stock was
6,358.
DIVIDENDS
We have paid regular quarterly cash dividends since May 1984. Quarterly
dividends for the last two fiscal years were paid as follows:
Calendar Period Dividends Paid per Common Share
2003:
1st Quarter $0.05625
2nd Quarter 0.05625
3rd Quarter 0.05625
4th Quarter 0.05625
2002:
1st Quarter $0.05625
2nd Quarter 0.05625
3rd Quarter 0.05625
4th Quarter 0.05625
17
We currently plan to continue paying quarterly cash dividends on our Common
Stock. The amount of any such dividend will depend on our earnings, financial
position, capital requirements and other relevant factors.
In December 1989, our Board of Directors first authorized the repurchase,
as market and business conditions warranted, of our Common Stock for cash in
open market purchases and privately negotiated transactions. From time to time
thereafter, the Board has authorized additional repurchases. As of March 2,
2004, we had expended an aggregate of $1.457 billion of the $1.675 billion
authorized under our stock repurchase program, covering approximately 84.8
million shares. No stock repurchases occurred during 2003.
Item 6. Selected Financial Data.
-----------------------
The following table sets forth certain information regarding our operating
results and financial position and is qualified in its entirety by the
consolidated financial statements and notes thereto which appear elsewhere
herein:
(All dollar amounts in thousands except per common share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net Sales $4,241,115 $3,717,503 $3,448,522 $3,104,141 $2,806,548
Gross Profit 1,889,791 1,619,635 1,427,250 1,233,872 1,097,582
Operating Income 470,790 389,888 331,717 303,689 299,753
Net Income 279,693** 231,165** 192,057** 184,595** 192,442
Working capital 821,759 618,490 638,281 535,811 483,967
Total assets 2,606,999 2,268,357 1,951,255 1,512,159 1,411,801
Long term obligations 448,677 384,137 402,345 284,219 131,085
Stockholders' equity 1,577,971 1,286,361 1,056,161 834,285 902,169
Per common share data*:
Basic earnings 2.60** 2.19** 1.85** 1.73** 1.56
Diluted earnings 2.55** 2.16** 1.83** 1.72** 1.56
Book value at year end 14.40 12.02 10.04 8.15 7.95
Dividends paid .23 .23 .23 .23 .23
Weighted average common
shares outstanding* 107,451,157 105,592,062 103,993,824 106,813,198 123,046,930
Weighted average common
shares and share
equivalents outstanding* 109,619,241 107,195,872 105,051,035 107,494,886 123,439,182
* Adjusted for a two-for-one stock split of our common stock, payable in the
form of a 100% stock dividend to shareholders of record as of the close of
business on December 31, 2001. The 100% stock dividend was paid on January
16, 2002.
** Includes the after tax effect of a restructuring gain of $429 ($672 pretax)
or $.00 per share in 2003, a restructuring charge of $4,547 ($7,130 pretax)
or $.04 per common share in 2002, a restructuring charge of $9,632 ($15,050
pretax) or $.09 per common share in 2001, and restructuring charges of
$13,466 ($21,041 pretax) or $.13 per common share and a special investment
gain of $5,606 ($8,760 pretax) or $.05 per common share in 2000.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Business/Segments
- -----------------
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
businesses in our core LIZ CLAIBORNE brand along with our better specialty
apparel (INTUITIONS, SIGRID OLSEN and REALITIES), bridge priced (DANA
BUCHMAN and ELLEN TRACY), men's (CLAIBORNE), moderate-priced special
markets (AXCESS, CRAZY HORSE, EMMA JAMES, FIRST ISSUE, VILLAGER and J.H.
COLLECTIBLES), premium denim (LUCKY BRAND DUNGAREES) and contemporary
sportswear and dress (LAUNDRY, JUICY COUTURE, JANE STREET, ENYCE and SWE)
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 our 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 263 outlet
stores, 235 specialty retail stores and 553 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, SIGRID OLSEN 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 domestic Specialty Retail stores (see Note 13 of Notes to
Consolidated Financial Statements).
The Company, as licensor, also licenses to third parties the right to produce
and market products bearing certain Company-owned trademarks. The resulting
royalty income is not allocated to any of the specified operating segments, but
is rather included in the line "Sales from external customers" under the caption
"Corporate/Eliminations" in Note 20 of Notes to Consolidated Financial
Statements.
Competitive Profile
- -------------------
We operate in global fashion markets that are highly competitive. Our ability to
continuously evaluate and respond to changing consumer demands and tastes,
across multiple market segments, distribution channels and geographies, is
critical to our success. Although our brand portfolio approach is aimed at
diversifying our risks in this regard, misjudging shifts in consumer preferences
could have a negative effect. Other key aspects of competition include quality,
brand image, distribution methods, price, customer service and intellectual
property protection. Our size and global operating strategies help us to
successfully compete by positioning us to take advantage of synergies in product
design, development, sourcing and distributing of our products throughout the
world. We believe we owe much of our recent success to our having successfully
leveraged our competencies in technology and supply chain management for the
benefit of existing and new (both acquired and internally developed) businesses.
Our success in the future will depend on our ability to continue to design
products that are acceptable to the marketplaces that we serve and to source the
manufacture of our products on a competitive basis, particularly in light of the
impact of the elimination of quota for apparel products scheduled for 2005. We
expect that the anticipated elimination of quota will result in a general
reduction in the cost of sourcing and manufacturing apparel products; however,
there can be no assurances that the cost savings will be directly reflected in
the Company's gross profit rate. In addition, the change to a quota-free
environment may present operational challenges to the Company and other apparel
companies as the transition is made to the new quota regime.
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 under "Statement Regarding Forward-Looking
Disclosure" below and in our 2003 Annual Report on Form 10-K, including, without
limitation, those set forth under the heading "Business-Competition; Certain
Risks."
19
2003 Overall Results
- --------------------
Over the past five fiscal years, the Company's revenues have grown to a record
$4.241 billion in 2003 from $2.807 billion in 1999. This growth has been largely
a result of our brand portfolio strategy, under which we strive to offer
consumers apparel and non-apparel products across a range of styles, price
points and channels of distribution. In implementing this strategy, we have
acquired a number of businesses, most of which have experienced notable growth
post-acquisition. Our revenue growth over the period also reflects the growth of
our moderate-priced Special Markets business, which sells products at prices
lower than our core better-priced offerings, and our non-apparel businesses.
With our acquisitions and the growth in our moderate and non-apparel businesses,
we have diversified our business by channels of distribution and target
consumer, as well as geographically. Over the five-year period, our gross profit
rate has improved from 39.1% in 1999 to 44.6% in 2003. This rate improvement
reflects our efforts to better manage our inventories and a reduction in our
manufacturing costs as result of a consolidation in our supplier base. In
addition, our gross profit rate results reflect the acquisitions of MEXX Europe
and MEXX Canada, MONET, Ellen Tracy and JUICY COUTURE, all of which operate at
rates higher than the Company's core better-priced businesses (see "Recent
Acquisitions" below). As a result, operating income has grown 57% to $470.8
million in 2003 from $299.8 million in 1999, and diluted EPS increased 63% to
$2.55 in 2003 from $1.56 in 1999.
Net Sales
- ---------
Net sales in 2003 were a record $4.241 billion, an increase of $523.6 million,
or 14.1%, over 2002 net sales. Approximately $252.9 (or 48.3%) of the sales
increase was due to the inclusion of a full year's sales for our MEXX Canada and
ELLEN TRACY businesses (each acquired in 2002) and the impact of the 2003
acquisitions of the JUICY COUTURE and ENYCE businesses. Approximately $226.2
million (or 43.2%) of the sales increase was due to increased net sales reported
by our comparable international businesses; of this sales increase, $145.2
million (representing 27.7% of our overall sales increase) was due to the impact
of foreign currency exchange rates, primarily as a result of the strengthening
Euro on the reported results of our international businesses. These results were
achieved notwithstanding a further sales decrease in our core LIZ CLAIBORNE
better-priced department store business. This business has been, and will
continue to be, challenged by increased competition in the department store
channel as a result of the introduction of new offerings by our competitors and
the growth in department store private label brands and increasingly
conservative buying patterns of our retail store customers as they focus on
inventory productivity and seek to differentiate their offerings from those of
their competitors. In addition, the department store channel has been challenged
by the migration of consumers away from malls to national chains and off-price
retailers, as well as a general decline in prices for non-luxury apparel
products. Accordingly, we are planning our 2004 core LIZ CLAIBORNE business down
in the mid-teens on a percentage basis. In addition, our moderate businesses are
expected to face similar challenges in 2004, and as a result we are also
planning sales for this component of our business to be down in the mid-teens on
a percentage basis. We believe these expected declines will be more than offset
with increases in other brands within our portfolio, including MEXX, as well as
our recently-acquired JUICY COUTURE and ENYCE brands, which will include a full
year's sales in 2004. In addition, we expect to continue to pursue our
acquisition strategy, seeking out opportunities that are on strategy,
financially attractive and involve manageable execution risks. We note that our
2003 fiscal year was comprised of 53 weeks, as compared to 52 weeks in 2002;
however, we do not believe that this extra week had a material impact on our
overall results.
Gross Profit and Net Income
- ---------------------------
Our gross profit improved in 2003 reflecting continued focus on inventory
management and lower sourcing costs, offsetting gross margin pressure resulting
from a highly promotional retail environment. Our gross profit also benefited
from the acquisition of JUICY COUTURE, the growth of our MEXX Europe business
and the inclusion of a full year's activity for our ELLEN TRACY business, as
each of these businesses run at gross profit rates higher than the Company
average. Overall net income increased to $279.7 million in 2003 from $231.2
million in 2002, reflecting the benefit received from our sales and gross profit
rate improvements.
Balance Sheet
- -------------
Our financial position continues to be strong. Although our cash flow from
operations decreased by $1.8 million, our cash on hand increased by $81.9
million. Although our net sales and net income increased 14.1% and 21.0%,
respectively, accounts receivable and inventory increased only 5.5% and 5.2%,
respectively. We were able to finance nearly all of our 2003 cash requirements
with cash flow from operations.
20
International Operations
- ------------------------
Revenues for the last five years are presented on a geographic basis as follows:
In thousands 2003 2002 2001 2000 1999
- ------------ ---- ---- ---- ---- ----
Domestic $3,304,614 $3,037,325 $3,031,318 $2,984,927 $2,701,272
International 936,501 680,178 417,204 119,214 105,276
Total Company $4,241,115 $3,717,503 $3,448,522 $3,104,141 $2,806,548
In 2003, sales from our international segment represented 22.1% of our overall
sales, as opposed to 3.8% in 1999, primarily due to our acquisitions of MEXX
Europe and MEXX Canada and, to a lesser extent, MONET. We expect our
international sales to continue to represent an increasingly higher percentage
of our overall sales volume as a result of further anticipated growth in our
MEXX Europe business and the planned launch of a number of our brands in Europe
utilizing the MEXX corporate platform, including ELLEN TRACY and LUCKY BRAND
DUNGAREES. Accordingly, our overall results can be greatly impacted by changes
in foreign currency exchange rates. For example, the impact of foreign currency
exchange rates represented $145.2 million, or 56.6%, of the increase of
international sales from 2002 to 2003. Over the past few years, the Euro and the
Canadian dollar have strengthened against the US dollar. While this trend has
benefited our sales results in light of the growth of our MEXX Europe and MEXX
Canada businesses, these businesses' inventory, accounts receivable and debt
balances have likewise increased. Although we use foreign currency forward
contracts and options to hedge against our exposure to exchange rate
fluctuations affecting the actual cash flows associated with our international
operations, unanticipated shifts in exchange rates could have an impact on our
financial results.
Recent Acquisitions
- -------------------
In connection with the May 2001 acquisition of Mexx Group B.V. ("MEXX Europe"),
we agreed to make a contingent payment to be determined as a multiple of MEXX's
earnings and cash flow performance for the year ended 2003, 2004 or 2005. The
selection of the measurement year is at either party's option. We estimate that
if the 2003 measurement year were selected, the contingent payment would be in
the range of approximately 144 - 148 million Euros ($181 - 186 million based on
the exchange rate as of January 3, 2004).
In July 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 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. We estimate that if the 2004
measurement year is selected the payment would be in the range of 38 - 42
million Canadian dollars (or $30 - 33 million based on the exchange rate in
effect at January 3, 2004). Unaudited pro forma information related to this
acquisition is not included, as the impact of this transaction is not material
to our consolidated results.
In September 2002, we acquired 100 percent of the equity interest of Ellen
Tracy, Inc., a privately held fashion apparel company, and related companies
(collectively "Ellen Tracy") for a purchase price of approximately $177.0
million, including the assumption of debt and fees. Ellen Tracy designs,
wholesales and markets women's sportswear. Founded in 1949 and 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.
On April 7, 2003, we acquired 100 percent of the equity interest of Juicy
Couture, Inc. (formerly, Travis Jeans Inc.) ("JUICY COUTURE"), a privately held
fashion apparel company. Founded in 1994 and 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 and price points. JUICY COUTURE had sales of approximately $47 million in
2002. The total purchase price consisted of (a) a payment, including the
assumption of debt and fees, of approximately $53.1 million, and (b) a
contingent payment 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.
21
We estimate that if the 2005 measurement year is selected, the contingent
payment would be in the range of $72 - 76 million.
On December 1, 2003, we acquired 100 percent of the equity interest of ENYCE
HOLDING LLC ("ENYCE"), a privately held fashion apparel company, for a purchase
price of approximately $121.9 million, including fees and the retirement of debt
at closing. Founded in 1996 by FILA USA and based in New York City, ENYCE is a
designer, marketer and wholesaler of fashion forward streetwear, denim-based
lifestyle products, outerwear, athletic-inspired apparel, casual tops and
knitwear for men and women through its ENYCE(R) and Lady ENYCE(R) brands. ENYCE
sells its products primarily through specialty store chains, better specialty
stores and select department stores, as well as through international
distributors (where arrangements are under review) in Germany, Canada and Japan.
Currently, men's products account for approximately 84% of net sales, while
women's products account for the balance.
RESULTS OF OPERATIONS
- ---------------------
We present our results based on the three business segments discussed in the
Overview section, as well as 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 Europe and MEXX Canada.
All data and discussion with respect to our specific segments included within
this "Management's Discussion and Analysis" is presented after applicable
intercompany eliminations. This presentation reflects a change instituted
effective with the first quarter of Fiscal 2003, from our prior practice of
presenting specific segment information prior to intercompany eliminations.
Fiscal 2002 and 2001 data presented in this "Management's Discussion and
Analysis" have been restated to conform to the presentation methodology used for
Fiscal 2003.
2003 VS. 2002
The following table sets forth our operating results for the year ended January
3, 2004 compared to the year ended December 28, 2002:
Year ended Variance
------------------------------------------------------------------
Dollars in millions January 3, December 28,
2004 2002 $ %
- -------------------------------------------------------------------------------------------------------
Net Sales $ 4,241.1 $ 3,717.5 $ 523.6 14.1%
Gross Profit 1,889.8 1,619.6 270.2 16.7%
Selling, general & administrative
expenses 1,419.7 1,222.6 197.1 16.1%
Restructuring (gain) charge (0.7) 7.1 (7.8) (109.9)%
Operating Income 470.8 389.9 80.9 20.7%
Other (expense) - net (1.9) (2.3) (0.4) (17.4)%
Interest (expense) - net (30.5) (25.1) 5.4 21.5%
Provision for income taxes 158.7 131.3 27.4 20.9%
Net Income $ 279.7 $ 231.2 $ 48.5 21.0%
Net Sales
- ---------
Net sales for 2003 were a record $4.241 billion, an increase of $523.6 million,
or 14.1%, over net sales for 2002. The acquisitions of JUICY COUTURE and ENYCE
and the inclusion of a full year's sales for our recently acquired MEXX Canada
and ELLEN TRACY businesses added approximately $252.9 million in net sales for
the year. Approximately $145.2 million of the year-over-year increase was due to
the impact of foreign currency exchange rates, primarily as a result of the
strengthening of the Euro. While fiscal year 2003 was comprised of 53 weeks, as
compared to 52 weeks in fiscal year 2002, we do not believe this extra week had
a material impact on our overall sales results for the year. Net sales results
for our business segments are provided below:
22
o Wholesale Apparel net sales increased $342.4 million, or 13.7%, to $2.834
------------------
billion. This result reflected the following:
- The addition of $217.9 million of sales from our recently acquired
JUICY COUTURE and ENYCE businesses as well as the inclusion of a full
year's sales of our ELLEN TRACY and MEXX Canada businesses;
- An $84.1 million increase resulting from the impact of foreign
currency exchange rates in our international businesses;
- A $78.6 million sales increase in our MEXX Europe business (excluding
the impact of foreign currency exchange rates) as a result of
increased comparable sales and expansion of wholesale distribution
into new geographic markets;
- A $38.2 million net decrease primarily reflecting an approximate 12.2%
decrease in our core LIZ CLAIBORNE business for the reasons discussed
in the Overview section above, partially offset by increases in our
Special Markets businesses, primarily as a result of the introduction
of new products as well as increases in our DKNY(R) Jeans Men's and
SIGRID OLSEN businesses due in each case to the addition of new retail
customers and increased sales to existing retail customers.
o Wholesale Non-Apparel net sales were up $51.8 million, or 10.7%, to $538.0
----------------------
million. The increase was primarily due to:
- A $5.2 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- A $46.6 million net increase primarily due to increases in our LIZ
CLAIBORNE and MONET jewelry businesses and our Handbags businesses and
new products representing the extension of a number of our apparel
brands into the non-apparel segment, as well as the addition of
products under our KENNETH COLE jewelry license, which launched in
Spring 2003.
o Retail net sales increased $119.8 million, or 16.7%, to $838.4 million. The
------
increase reflected:
- The addition of $35.0 million representing the inclusion of a full
year's sales from our recently acquired MEXX Canada and ELLEN TRACY
businesses;
- A $55.9 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- A $28.9 million increase primarily due to the addition of new stores,
partially offset by the decreases related to the domestic LIZ
CLAIBORNE Specialty Retail stores, which were closed by the end of the
second quarter of 2003. On a net basis, we opened 13 new Outlet
stores, primarily MEXX Europe and MEXX Canada Outlets, and 2 new
Specialty Retail stores, as the closure of the 22 domestic LIZ
CLAIBORNE stores partially offset new store openings in our SIGRID
OLSEN, LUCKY BRAND and MEXX Europe businesses. We also opened 71 new
international concession stores in Europe over the last twelve months.
Comparable store sales decreased 0.8% in our Specialty Retail business and
decreased 2.3% in our Outlet stores, due in each case to lower volume
related to reduced consumer traffic (excluding the extra week in 2003,
comparable store sales were down 2.1% for Specialty Retail, and down 3.4%
for Outlet stores).
o Corporate net sales, consisting of licensing revenue, increased $9.6
---------
million to $30.5 million as a result of revenues from new licenses as well
as growth in our existing licenses portfolio.
Viewed on a geographic basis, Domestic net sales increased by $267.3 million, or
--------
8.8%, to $3.305 billion, predominantly reflecting the contribution of new and
recent acquisitions. International net sales increased $256.3 million, or 37.7%,
-------------
to $936.5 million. The international increase reflected the results of our MEXX
Europe business and the inclusion of a full year's sales of our MEXX Canada
business; approximately $145.2 million of this increase was due to the impact of
currency exchange rates.
Gross Profit
- ------------
Gross profit increased $270.2 million, or 16.7%, to $1.890 billion in 2003 over
2002. Gross profit as a percent of net sales increased to 44.6% in 2003 from
43.6% in 2002. Approximately $74.6 million of the increase was due to the impact
of foreign currency exchange rates, primarily as a result of the strengthening
of the Euro. The increased gross profit rate reflected a continued focus on
inventory management and lower sourcing costs. The rate increase was also the
result of the acquisition of JUICY COUTURE, the inclusion of a full year's
activity for ELLEN TRACY and MEXX Canada and growth in our MEXX Europe business,
as these businesses run at higher gross profit rates than the Company average,
as well as higher gross profit rates in our Outlet business due to improved
inventory management and reduced markdowns. The gross profit rate increase was
moderated by rate decreases in our core LIZ CLAIBORNE and Special Markets
businesses and by reduced gross profit rates in our domestic
23
specialty store businesses, reflecting the difficult retail environment
resulting from reduced consumer traffic and increased competition.
Selling, General & Administrative Expenses
- ------------------------------------------
Selling, general & administrative expenses ("SG&A") increased $197.1 million, or
16.1%, to $1.420 billion in 2003 and as a percent of net sales increased to
33.5% in 2003 from 32.9% in 2002. SG&A increased for the following reasons:
o A $95.6 million increase resulting from the acquisitions of JUICY COUTURE
and ENYCE, the start up of our MEXX USA and SIGRID OLSEN Specialty Retail
businesses and the inclusion of a full year's expenses for MEXX Canada and
ELLEN TRACY;
o A $61.7 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
o A $39.8 million increase resulting from volume-related growth and cost
increases.
Our core LIZ CLAIBORNE business generally runs at a lower SG&A rate than the
Company average. Given that fixed costs represent a large percentage of this
business's SG&A expenditures, as the sales of this business have declined, its
SG&A rate has increased. Moreover, as this business represents a lower
proportion of overall Company sales, the Company's overall SG&A rate increases.
In addition, an increased proportion of our expenses are represented by our MEXX
Europe business, which runs at a higher SG&A rate than the Company average. The
2003 increase in the overall SG&A rate was moderated by the inclusion of ELLEN
TRACY and JUICY COUTURE, which run at SG&A rates lower than the Company average.
Restructuring (Gain) Charge
- ---------------------------
In 2003, we recorded a pretax restructuring gain of $0.7 million ($0.4 million
after tax), representing the reversal of the portion of the $7.1 million pretax
($4.5 million after tax) 2002 restructuring reserve (established to cover the
costs associated with the closure of all 22 domestic Specialty Retail stores
operating under the LIZ CLAIBORNE brand name) that was no longer required due to
the completion of the activities associated with the reserve.
Operating Income
- ----------------
Operating income for 2003 was $470.8 million, an increase of $80.9 million, or
20.7%, over last year. Operating income as a percent of net sales increased to
11.1% in 2003 compared to 10.5% in 2002 primarily as a result of increased net
sales and the improved gross profit rate discussed earlier. Approximately $12.9
million of the increase was due to the impact of foreign currency exchange
rates, primarily as a result of the strengthening of the Euro. Operating income
by business segment is provided below:
o Wholesale Apparel operating income increased $18.6 million to $302.4
------------------
million (10.7% of net sales) in 2003 compared to $283.8 million (11.4% of
net sales) in 2002, principally reflecting the inclusion of a full year of
our ELLEN TRACY and MEXX Canada businesses and the inclusion of our JUICY
COUTURE and ENYCE businesses and increased profits in our SIGRID OLSEN and
MEXX Europe businesses as well as in our Men's complex, partially offset by
reduced profits in our core LIZ CLAIBORNE business for the reasons
previously discussed.
o Wholesale Non-Apparel operating income increased $22.8 million to $56.9
----------------------
million (10.6% of net sales) in 2003 compared to $34.1 million (7.0% of net
sales) in 2002, principally due to increases in all of our Non-Apparel
businesses.
o Retail operating income increased $30.1 million to $90.8 million (10.8% of
------
net sales) in 2003 compared to $60.7 million (8.4% of net sales) in 2002,
principally reflecting an increase in profits from our Outlet and LUCKY
BRAND DUNGAREES and MEXX Europe Retail stores, partially offset by startup
costs associated with the opening of our new MEXX USA and SIGRID OLSEN
stores and losses in our ELISABETH stores as well as losses in our now
discontinued domestic LIZ CLAIBORNE Specialty Retail store operation.
o Corporate operating income, primarily consisting of licensing operating
---------
income, increased $9.4 million to $20.7 million.
Viewed on a geographic basis, Domestic operating profit increased by $46.5
--------
million, or 13.8%, to $382.5 million, predominantly reflecting the contribution
of new and recent acquisitions. International operating profit increased $34.4
-------------
million, or 63.9% to $88.2 million. The international increase reflected the
results of our MEXX business and the favorable impact of foreign exchange rates
of $12.9 million.
Net Other Expense
- -----------------
Net other expense in 2003 was $1.9 million compared to $2.3 million in 2002. In
2003 net other expense was principally comprised of $2.4 million of minority
interest expense (which relates to the 15% minority interest in Lucky Brand
Dungarees, Inc. and the 2.5% minority interest in Segrets, Inc.) partially
offset by other non-operating income primarily related to foreign exchange
gains. In 2002, net other expense was principally comprised of $3.8
24
million of minority interest expense partially offset by other non-operating
income primarily related to foreign exchange gains.
Net Interest Expense
- --------------------
Net interest expense in 2003 was $30.5 million, compared to $25.1 million in
2002, both of which were principally related to borrowings incurred to finance
our strategic initiatives, including acquisitions. The impact of foreign
currency exchange rates accounted for $4.3 million of the increase.
Provision for Income Taxes
- --------------------------
The income tax rate in 2003 remained unchanged from the prior year at 36.2%.
Net Income
- ----------
Net income increased in 2003 to $279.7 million, or 6.6% of net sales, from
$231.2 million in 2002, or 6.2% of net sales. Diluted earnings per common share
("EPS") increased 18.1% to $2.55 in 2003, up from $2.16 in 2002. Our average
diluted shares outstanding increased by 2.4 million shares in 2003 on a
year-over-year basis, to 109.6 million, as a result of the exercise of stock
options and the effect of dilutive securities.
2002 VS. 2001
- -------------
The following table sets forth our operating results for the year ended December
28, 2002 compared to the year ended December 29, 2001:
Year ended Variance
------------------------------------------------------------------
Dollars in millions December 28, December 29,
2002 2001 $ %
- -------------------------------------------------------------------------------------------------------
Net Sales $ 3,717.5 $ 3,448.5 $ 269.0 7.8%
Gross Profit 1,619.6 1,427.3 192.3 13.5%
Selling, general & administrative
expenses 1,222.6 1,080.5 142.1 13.2%
Restructuring charge 7.1 15.1 (8.0) (52.6)%
Operating Income 389.9 331.7 58.2 17.5%
Other (expense) - net (2.3) (3.5) (1.2) (34.0)%
Interest (expense) - net (25.1) (28.1) (3.0) (10.6)%
Provision for income taxes 131.3 108.0 23.3 21.5%
Net Income $ 231.2 $ 192.1 $ 39.1 20.4%
Net Sales
- ---------
Net sales for 2002 were $3.718 billion, an increase of $269 million, or 7.8%,
over net sales for 2001. This overall increase was primarily due to a $200.9
million increase in sales of our European MEXX operation reflecting the
inclusion of a full year of sales as well as growth, an aggregate of $61.8
million in increases resulting from the inclusion of our recently acquired ELLEN
TRACY and MEXX Canada businesses, and gains in our Special Markets, LUCKY BRAND
DUNGAREES, SIGRID OLSEN branded businesses and non-apparel Jewelry and Handbags
businesses. Approximately $31.2 million of the year-over-year increase was due
to the impact of foreign currency exchange rates, primarily the strengthening of
the Euro. These increases were offset primarily by planned decreases with
respect to our core LIZ CLAIBORNE apparel business, in light of anticipated
conservative buying patterns of our retail customers resulting from, among other
things, the impact of September 11, 2001 on consumer spending in the first half
of the year, as well as the prior year's higher sales levels reflecting the
impact of our aggressive liquidation of excess inventories in the latter half of
2001. Net sales results for our business segments as well as a geographic
breakout are provided below:
25
o Wholesale Apparel net sales increased $149.2 million, or 6.4%, to $2.492
------------------
billion. The increase principally reflected the following:
- $126.4 million of additional net sales reflecting the inclusion of a
full year's sales of MEXX (acquired in May 2001) as well as continued
growth in MEXX's business;
- The inclusion of an aggregate of $39.5 million of sales of our
recently acquired ELLEN TRACY and MEXX Canada businesses;
- A $17.7 million increase resulting from the impact of foreign currency
exchange rates in our international businesses.
- These increases were partially offset by a $97.0 million decrease in
our core domestic LIZ CLAIBORNE business. Approximately half of this
decrease reflected planned unit decreases in light of anticipated
conservative buying patterns of our retailer customers in the first
half of the year and the remainder was due to the prior year's higher
sales levels as a result of our aggressive liquidation of excess
inventory in the latter half of 2001.
- The remainder of our Wholesale Apparel businesses experienced, in the
aggregate, a net increase of approximately $62.6 million. This change
resulted from sales increases in our Special Markets and SIGRID OLSEN
businesses, due in each case to higher unit volume partially offset by
lower average unit selling prices due to the inclusion of more
lower-priced items in the product offerings; and in our LUCKY BRAND
DUNGAREES and Men's DKNY(R) Jeans and Active businesses, due in each
case to higher unit volume and higher average unit selling prices
reflecting stronger demand. These increases were partially offset by
decreases in our DANA BUCHMAN and Men's Sportswear and Furnishings
businesses, reflecting overall planned unit decreases in light of
anticipated conservative buying patterns of our retailer customers in
the first half of the year, as well as last year's aforementioned
aggressive excess inventory liquidation.
o Wholesale Non-Apparel increased $12.6 million, or 2.7%, to $486.2 million.
---------------------
- The increase reflected a total gain of $17.6 million in our LIZ
CLAIBORNE Jewelry and Handbags businesses, due in each case to higher
unit volume.
- Increases resulting from the impact of foreign currency exchange rates
were not material in this segment.
- These increases were offset by decreases in our Cosmetics business,
due to lower promotional sales, partially offset by year-over-year
sales increases in our MAMBO fragrance (launched in August 2001) and
the introduction of our BORA BORA fragrance in August 2002.
o Retail net sales increased $102.9 million, or 16.7%, to $718.6 million. The
------
increase principally reflected the following:
- $74.5 million of sales increases in our MEXX stores, reflecting the
inclusion of a full year's sales as well as the net addition of 7 new
stores;
- The inclusion of an aggregate of $22.4 million of sales from the
addition of 37 new MEXX Canada stores (acquired in July 2002) and 15
new ELLEN TRACY Outlet stores (acquired in September 2002); and
- A $12.3 million increase resulting from the impact of foreign currency
exchange rates in our international businesses.
The above increases were partially offset by the following comparable store
sales decreases due to a general decline in traffic and lower inventories
at the store level resulting from conservative planning reflecting the
challenging retail environment: an approximate 6% decline in our Outlet
stores and an approximate 7% decline in our Specialty Retail stores, offset
by the addition of 14 new LUCKY BRAND DUNGAREES Specialty Retail stores.
o Corporate net sales, primarily consisting of licensing revenues, increased
---------
$4.2 million to $20.9 million as a result of the inclusion of revenues from
new licenses as well as growth in revenue from existing licenses.
International net sales increased $263.0 million, or 63.0% (to $680.2 million),
- -------------
due principally to a $200.9 million increase in MEXX sales, reflecting the
inclusion of a full year's sales as well as growth in Europe in both MEXX's
Wholesale and Retail operations, and, to a lesser extent, the inclusion of $23.8
million of sales from our recently acquired MEXX Canada business. As previously
stated, approximately $31.2 million of the increase was due to the impact of
foreign currency exchange rates. Domestic net sales increased $6.0 million, or
--------
0.2% (to $3.037 billion), due principally to the recent acquisition of ELLEN
TRACY, partially offset by conservative planning in the domestic portion of our
Wholesale Apparel segment.
Gross Profit
- ------------
Gross profit dollars increased $192.3 million, or 13.5%, in 2002 over 2001.
Gross profit as a percent of net sales increased to 43.6% in 2002 from 41.4% in
2001. The increase in gross profit rate reflected improved company-wide
inventory management (including continued improvement in the matching of our
production orders with our
26
customer orders through the use of new systems and revamped business processes),
improved product performance at retail and continued lower unit sourcing costs
as a result of the continued consolidation and optimization of our worldwide
supplier base, in combination with current favorable market conditions as a
result of ongoing excess offshore sourcing capacity. The gross profit rate also
benefited from a higher proportion of full-priced sales in our Jewelry,
Handbags, Special Markets, LUCKY BRAND DUNGAREES Wholesale, LAUNDRY and Men's
DKNY(R) Jeans and Active businesses, as well as the inclusion of a full year's
results of MEXX, which runs at a higher gross margin rate than the Company
average, reflecting its larger retail component. These increases were partially
offset by lower gross margins in our Specialty Retail stores, Cosmetics, LIZ
CLAIBORNE, Fashion Accessories, CLAIBORNE Men's and Women's DKNY(R) Jeans and
Active and CITY DKNY(R) businesses and, in the fourth quarter, additional
expenses related to the West Coast dock strike and slightly higher promotional
activity at retail.
SG&A
- ----
SG&A increased $142.1 million, or 13.2%, in 2002 over 2001. These expenses as a
percent of net sales increased to 32.9% in 2002 from 31.3% in 2001. These SG&A
dollar and rate increases were principally due to the inclusion of a full year
of the results of MEXX, which has a relatively higher SG&A rate than the Company
average due to the fact that MEXX operates a geographically diverse and
relatively large retail business, which is generally more expensive to operate
than a wholesale business. The increase also reflected the lower proportion of
sales derived from our relatively lower-cost core LIZ CLAIBORNE business, as
well as the opening of new LUCKY BRAND DUNGAREES Specialty Retail and Outlet
stores. We also incurred higher SG&A costs and rates in our Women's DKNY(R)
Jeans and Active and CITY DKNY(R) businesses as well as through the inclusion of
the newly acquired MEXX Canada and ELLEN TRACY businesses, which each run at a
higher SG&A rate than the Company average. The increase in SG&A was partially
mitigated by ongoing Company-wide expense management and cost reduction
initiatives and reduced goodwill amortization as a result of the implementation
of SFAS No. 142, "Accounting for Goodwill and Other Intangibles," as well as
lower SG&A costs and rates in our CLAIBORNE Men's, Special Markets, LAUNDRY and
KENNETH COLE NEW YORK Women's businesses.
Restructuring Charge
- --------------------
We recorded a $7.1 million pretax ($4.5 million after tax) net restructuring
charge in the fourth quarter of 2002. The charge covered costs associated with
the closure of all 22 LIZ CLAIBORNE Specialty Retail stores. The determination
to close the stores was intended to eliminate redundancy between this retail
format and the wide department store base in which our products are available.
The $9.9 million charge included costs associated with lease obligations ($5.4
million), asset write-offs ($3.3 million) and other store closing costs ($1.2
million), offset by $2.8 million deemed no longer necessary of our previous
restructuring liability originally recorded in December 2001.
Operating Income
- ----------------
As a result of the factors described above, operating income increased $58.2
million, or 17.5%, to $389.9 million in 2002 over 2001. Operating income as a
percent of net sales increased to 10.5% in 2002 compared to 9.6% in 2001.
Operating income by business segment as well as a geographic breakout is
provided below:
o Wholesale Apparel operating profit increased $45.4 million to $283.8
------------------
million (11.4% of net sales) in 2002 compared to $238.4 million (10.2% of
net sales) in 2001. Our domestic LIZ CLAIBORNE business produced increased
profits despite lower sales and gross margins primarily due to expense
management and cost reduction initiatives. Operating income also benefited
from a higher proportion of sales in our Special Markets and SIGRID OLSEN
businesses, partially offset by reduced profits in our Women's DKNY(R)
Jeans and Active and CITY DKNY(R) and CLAIBORNE Men's businesses.
o Wholesale Non-Apparel operating profit increased $0.5 million to $34.1
----------------------
million (7.0% of net sales) in 2002 compared to $33.6 million (7.1% of net
sales) in 2001, principally due to increases in our Jewelry business,
partially offset by reduced profit dollars in our Cosmetics business.
o Retail operating profit decreased $8.6 million to $60.7 million (8.4% of
------
net sales) in 2002 compared to $69.3 million (11.3% of net sales) in 2001,
principally reflecting the $7.1 million restructuring charge in 2002,
reduced comparable store sales and increased operating expenses from the
additional store base in our Outlet stores and LUCKY BRAND DUNGAREES
Specialty Retail stores, as well as operating losses in our LIZ CLAIBORNE
and ELISABETH Specialty Retail stores, partially offset by the inclusion of
a full year's profits from the MEXX Retail stores.
o Corporate operating income, consisting primarily of licensing income,
---------
increased $20.9 million to $11.3 million.
o Domestic operating profit increased by $45.7 million, or 15.7%, to $336.1
--------
million, due to the gross profit improvements discussed above.
International operating profit increased $12.5 million, or 30.2% (to $53.8
-------------
million) due to the inclusion of profits from our recently acquired MEXX
and MEXX Canada businesses.
27
Net Other Expense
- -----------------
Net other expense in fiscal 2002 was $2.3 million, principally comprised of $3.8
million of minority interest expense (which relates to the 15% minority interest
in Lucky Brand Dungarees, Inc. and the 2.5% minority interest in Segrets, Inc.),
partially offset by other non-operating income, primarily comprised of net
foreign exchange gains, compared to $3.5 million in 2001, comprised of $3.6
million of minority interest expense, partially offset by other non-operating
income.
Net Interest Expense
- --------------------
Net interest expense in fiscal 2002 was $25.1 million, principally comprised of
interest expense on the Eurobond offering incurred to finance our acquisition of
MEXX, compared to $28.1 million in 2001, representing interest expense on
commercial paper borrowings, incurred to finance our strategic initiatives
including costs associated with our acquisitions and capital expenditures, and
the Eurobond offering.
Provision for Income Taxes
- --------------------------
Our tax provision for 2002 was $131.3 million, or 36.2% of pretax income, as
compared to $108.0 million, or 36.0% of pretax income in 2001. The higher rate
resulted primarily from increased taxes associated with foreign operations.
Net Income
- ----------
Net income increased in 2002 to $231.2 million from $192.1 million in 2001 and
increased as a percent of net sales to 6.2% in 2002 from 5.6% in 2001, due to
the factors described above. Diluted earnings per common share increased 18.0%
to $2.16 in 2002 from $1.83 in 2001. Our average diluted shares outstanding
increased by 2.1 million shares in 2002, to 107.2 million, as a result of the
exercise of stock options and the effect of dilutive securities.
FORWARD OUTLOOK
- ---------------
For fiscal 2004, we forecast a net sales increase of 6 - 8% (including a 1%
sales increase due to the impact of foreign currency exchange rates), an
operating margin in the range of 11.1 - 11.3% and EPS in the range of $2.70 -
2.77.
o In our Wholesale Apparel segment, we expect fiscal 2004 net sales to
increase in the range of 3 - 5% (including a 1% sales increase due to the
impact of foreign currency exchange rates), primarily driven by the
inclusion of a full year's sales in our JUICY COUTURE and ENYCE businesses,
the launches of our REALITIES and INTUITIONS brands and increases in our
MEXX Europe, SIGRID OLSEN, LUCKY BRAND and licensed DKNY(R) Jeans
businesses, offset by mid-teens decreases in our core LIZ CLAIBORNE and
Special Markets businesses.
o In our Wholesale Non-Apparel segment, we expect fiscal 2004 net sales to
increase in the range of 4 - 6%, primarily driven by the introduction of
new products.
o In our Retail segment, we expect fiscal 2004 net sales to increase in the
range of 15 - 18% (including a 2% sales increase due to the impact of
foreign currency exchange rates), primarily driven by increases in our
LUCKY BRAND and MEXX Europe businesses as well as the conservative rollout
of the MEXX USA and SIGRID OLSEN formats which were introduced in the
second half of fiscal 2003, partially offset by decreases related to the
fiscal 2003 closure of our domestic LIZ CLAIBORNE Specialty Retail stores.
o In our Corporate segment, we expect fiscal 2004 licensing revenue to
increase by 20% over 2003.
o We are projecting cash flows from operations will be in the $400 million
range.
o Gross profit and SG&A rates are expected to increase by 130 - 170 basis
points.
o Interest expense is expected to be in the $30 - 32 million range; the upper
end of this range reflects the interest estimated on the projected
borrowings that would be required to fund the additional payments that may
come due in 2004 in connection with the acquisition of MEXX Europe. See
"Financial Position, Capital Resources and Liquidity-Commitments and
Capital Expenditures" below and Note 2 of Notes to the Consolidated
Financial Statements.
o Other expenses are projected at approximately $5 million, with no
additional stock buyback, diluted shares are projected at 112.5 million,
and our projected 2004 tax rate is 35.2%, which is down from the 36.2% rate
in 2003 as a result of the integration of our LIZ CLAIBORNE Europe and MEXX
operations.
o Projected 2004 capital expenditures are approximately $125 million,
reflecting planned new product launches and the opening of additional
Specialty Retail stores.
o For 2004, depreciation and amortization expense is projected at $114
million.
28
For the first quarter of 2004, we forecast a net sales increase of 2 - 5%, an
operating margin in the range of 10.0 - 10.2% and EPS in the range of $0.60 -
0.62. We are projecting that the impact of foreign currency exchange rates will
account for approximately 2% of the planned sales increase.
o In our Wholesale Apparel segment, we expect first quarter 2004 net sales to
increase in the range of 1 - 4%, primarily driven by the acquisitions of
JUICY COUTURE and ENYCE and increases in our MEXX Europe, LUCKY BRAND,
licensed DKNY(R) Jeans and SIGRID OLSEN businesses, offset by decreases in
our core LIZ CLAIBORNE and Special Markets businesses.
o In our Wholesale Non-Apparel segment, we expect first quarter 2004 net
sales to increase in the range of 2 - 5%, primarily driven by the
introduction of new products.
o In our Retail segment, we expect first quarter 2004 net sales to increase
in the range of the 8 - 12%, primarily driven by increases in our LUCKY
BRAND and MEXX Europe businesses as well as the conservative rollout of the
MEXX USA and SIGRID OLSEN formats which were introduced in the second half
of fiscal 2003, partially offset by decreases related to the fiscal 2003
closure of our domestic LIZ CLAIBORNE Specialty Retail stores.
o In our Corporate segment, we expect first quarter 2004 licensing revenue to
increase by 20%.
o Gross profit and SG&A rates are expected to increase by 180 - 220 basis
points for the quarter.
o Interest expense for the quarter is projected at $7.5 million and other
expense is projected at $1 million; and diluted shares outstanding are
projected at 111.5 million.
All of these forward-looking statements exclude the impact of any future
acquisitions or stock repurchases. The foregoing forward-looking statements are
qualified in their entirety by reference to the risks and uncertainties set
forth under the heading "STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE" below.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
Cash Requirements. Our primary ongoing cash requirements are to fund growth in
- -------------------
working capital (primarily accounts receivable and inventory) to support
projected sales increases, 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. We also require cash to fund our acquisition program.
Sources of Cash. Our historical sources of liquidity to fund ongoing cash
- ----------------
requirements include cash flows from operations, cash and cash equivalents and
securities on hand, as well as borrowings through our commercial paper program
and bank lines of credit (which include revolving and trade letter of credit
facilities); in 2001, we issued Euro-denominated bonds (the "Eurobonds") to fund
the initial payment in connection with our acquisition of MEXX Europe. These
bonds are designated as a hedge of our net investment in MEXX (see Note 2 of
Notes to Consolidated Financial Statements). We anticipate that cash flows from
operations, our commercial paper program and bank and letter of credit
facilities will be sufficient to fund our next twelve months' liquidity
requirements and that we will be able to adjust the amounts available under
these facilities if necessary (see "Commitments and Capital Expenditures" for
more information on future requirements). Such sufficiency and availability may
be adversely affected by a variety of factors, including, without limitation,
retailer and consumer acceptance of our products, which may impact our financial
performance, maintenance of our investment-grade credit rating, as well as
interest rate and exchange rate fluctuations.
2003 vs. 2002
- --------------
Cash and Debt Balances. We ended 2003 with $343.9 million in cash and marketable
- -----------------------
securities, compared to $248.4 million at year-end 2002, and with $459.2 million
of debt outstanding, compared to $399.7 million at year-end 2002. This $36.0
million decrease in our net debt position is primarily attributable to cash
flows from operations for the full year of $392.1 million partially offset by
the payments made to acquire JUICY COUTURE and ENYCE, additional payments made
in connection with the acquisitions of Lucky Brand Dungarees and MEXX Canada and
the effect of foreign currency translation on our Eurobond, which added $75.1
million to our debt balance. We ended 2003 with a record $1.578 billion in
stockholders' equity, giving us a total debt to total capital ratio of 22.5%,
compared to $1.286 billion in stockholder's equity and a total debt to total
capital ratio of 23.7% in 2002.
Accounts receivable increased $20.3 million, or 5.5%, at year-end 2003 compared
- -------------------
to year-end 2002, primarily due to our acquisitions of JUICY COUTURE and ENYCE
and the impact of foreign currency exchange rates of $22.0 million, primarily
related to the strengthening of the Euro, partially offset by decreases in
receivables in our core LIZ CLAIBORNE apparel business due to the reasons
discussed above.
29
Inventories increased $24.0 million, or 5.2%, at year-end 2003 compared to
- -----------
year-end 2002. The acquisitions of JUICY COUTURE and ENYCE as well as new
product initiatives were responsible for $27.6 million of the increase.
Inventories in our comparable domestic businesses declined by $70.6 million
while our international inventories grew by $67.0 million. The early receipt of
Spring product in our Mexx Europe business accounted for $24.5 million of the
international increase while approximately $30.3 million of the increase is
related to the impact of currency exchange rates, primarily related to the
strengthening of the Euro. Our average inventory turnover rate for 2003 was
unchanged at 4.7 times compared to 2002. We continue to take a conservative
approach to inventory management in 2004.
Borrowings under our revolving credit facility and other credit facilities
- ----------
peaked at $136 million during 2003; at year-end 2003, our borrowings under these
facilities were $18.9 million.
Net cash provided by operating activities was $392.1 million in 2003, compared
- ------------------------------------------
to $393.9 million provided in 2002. This $1.8 million change in cash flows was
primarily due to a $20.9 million use of cash for working capital in 2003
compared to $58.0 million provided by working capital in 2002, driven primarily
by year-over-year changes in the accounts receivable and inventory balances
(discussed above), partially offset by the increase in net income of $48.5
million in 2003 from 2002.
Net cash used in investing activities was $337.3 million in 2003, compared to
- --------------------------------------
$306.8 million in 2002. Net cash used in 2003 primarily reflected $222.3 million
in acquisition-related payments for the purchase of JUICY COUTURE and ENYCE, as
well as approximately $46.4 million of additional payments made in connection
with the acquisitions of LUCKY BRAND DUNGAREES and MEXX Canada. We also spent
$107.2 million for capital and in-store expenditures. Net cash used in 2002
primarily reflected $88.9 million in capital and in-store expenditures and
$206.3 million for the purchases of MEXX Canada and Ellen Tracy.
Net cash provided by financing activities was $7.0 million in 2003, compared to
- ------------------------------------------
$39.2 million used in 2002. The $46.2 million year-over-year increase primarily
reflected reduced payments on commercial paper due to reduced issuances in 2003
and an increase in proceeds received from the exercise of stock options.
2002 vs. 2001
- -------------
Cash and Debt Balances. We ended 2002 with $248.4 million in cash and marketable
- -----------------------
securities, compared to $160.6 million at December 29, 2001, and with $399.7
million of debt outstanding compared to $387.3 million. This $75.4 million
improvement in our debt net of cash position over the last twelve months is
primarily attributable to the differences in working capital due to the factors
discussed below, partially offset by approximately $206.3 million in purchase
price payments connected with our acquisitions of Ellen Tracy and MEXX Canada.
The foreign currency exchange translation on our Eurobond added approximately
$55.5 million to our debt balance at December 28, 2002 compared to December 29,
2001, as a result of the strengthening of the Euro.
Accounts receivable increased $8.3 million, or 2.3%, at December 28, 2002
- --------------------
compared to December 29, 2001 due to the assumption of the accounts receivable
of our recently acquired Ellen Tracy and MEXX Canada businesses, which accounted
for approximately 85% of the increase. The impact of foreign currency exchange
rates, primarily the strengthening of the Euro, contributed an approximate $13.5
million increase in accounts receivable which was largely offset by accounts
receivable decreases in our domestic operations.
Inventories decreased $26.8 million, or 5.5%, at the end of 2002 compared to the
- -----------
end of 2001. These decreases reflect conservative planning and improved
processes and procedures implemented during the second half of 2001 to help
adjust the flow of replenishment product and seasonal essential programs into
our warehouses, as well as supply and demand balancing aided by technology.
These decreases were partially offset by an increase in inventories of $21.4
million resulting from our acquisitions of Ellen Tracy and MEXX Canada and a
$14.1 million increase in inventory resulting from the impact of foreign
currency exchange rates, primarily the strengthening of the Euro. Our average
inventory turnover rate increased to 4.7 times for the year ended December 28,
2002 from 4.0 times for the 12-month period ended December 29, 2001.
Borrowings under our commercial paper and revolving credit facilities peaked at
- ----------
$114.9 million during 2002; at December 28, 2002, borrowings under these
facilities were $12.6 million.
Net cash provided by operating activities was $393.9 million during 2002,
- --------------------------------------------
compared to $329.2 million in 2001. This $64.7 million change in cash flows was
primarily due to $58.0 million of cash provided by working capital in 2002
compared to a $4.8 million use of cash in 2001, driven primarily by
year-over-year changes in the accounts
30
receivable, accrued expense, accounts payable and inventory balances, as well as
the increase in net income of $39.1 million from 2001.
Net cash used in investing activities was $306.8 million in fiscal 2002,
- ---------------------------------------
compared to $384.7 million in fiscal 2001. The 2002 net cash used primarily
reflected capital and in-store merchandise shop expenditures of $88.9 million
and $206.3 million for the purchase of MEXX Canada and Ellen Tracy; 2001 net
cash used primarily reflected $274.1 million in connection with the acquisition
of our MEXX business, along with capital and in-store merchandise shop
expenditures of $107.0 million.
Net cash used in financing activities was $39.2 million in fiscal 2002, compared
- -------------------------------------
to $131.1 million provided by financing activities in fiscal 2001. The $170.3
million year-over-year decrease primarily reflected the issuance of $309.6
million of Eurobonds in 2001 to finance the May 2001 acquisition of MEXX and a
decrease of $6.6 million in net proceeds from the exercise of stock options,
partially offset by the assumption of $17.2 million of short term debt in 2002
and a $126.3 million year-over-year decrease in the repayment of the commercial
paper program.
Commitments and Capital Expenditures
- ------------------------------------
We may be required to make additional payments in 2004 and 2005 in connection
with our acquisitions of the MEXX, LUCKY BRAND DUNGAREES, Segrets, MEXX Canada
and JUICY COUTURE businesses (see Note 2 of Notes to Consolidated Financial
Statements). These payments become due when triggered by us or the seller,
pursuant to provisions in the MEXX, MEXX Canada and JUICY COUTURE acquisition
agreements that call for contingent purchase price payments, as well as
provisions contained in the LUCKY BRAND DUNGAREES and Segrets acquisition
agreements which could require us to purchase the minority interest shares in
these businesses. We estimate that if these 2004-eligible payments are triggered
in 2004, they would fall (based on exchange rates in effect at January 3, 2004)
in the range of $181 - 186 million for MEXX, $32 - 45 million for LUCKY BRAND
DUNGAREES, and $2 - 4 million for Segrets. These payments will be made in either
cash or shares of our common stock at the option of either the Company or, with
respect to LUCKY BRAND DUNGAREES and Segrets, the seller, and will be financed
with net cash provided by operating activities and our revolving credit, trade
letter of credit and other credit facilities. In addition, we are currently
evaluating numerous alternatives, including the issuance of debt as well as the
use of our operating cash flows to assist us in funding these payments.
Our anticipated capital expenditures for 2004 are expected to approximate $125
million. These expenditures will consist 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 retail stores and in-store merchandise shops. 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.
The following table summarizes as of January 3, 2004 our contractual cash
obligations by future period (see Notes 2, 3, 10 and 11 of Notes to Consolidated
Financial Statements):
Payments due by period
-------------------------------------------------------------------------
Contractual cash obligations Less than 1-3 years 4-5 years After Total
(In thousands) 1 year 5 years
- ------------------------------------------------------------------------------------------------------------------
Operating leases $ 141,542 $ 247,590 $ 203,605 $ 363,172 $ 955,909
Inventory purchase commitments 614,840 -- -- -- 614,840
Eurobonds -- 440,475 -- -- 440,475
Guaranteed minimum licensing royalties 25,762 32,000 26,000 52,000 135,762
Short-term borrowings 18,915 -- -- -- 18,915
Synthetic lease 3,508 71,283 -- -- 74,791
Additional acquisition purchase price
payments 223,500 104,500 -- -- 328,000
Financing Arrangements
- ----------------------
On August 7, 2001, we issued 350 million Euros (or $307.2 million based on the
exchange rate in effect on such date) of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. Interest on the Eurobonds is being paid on an annual basis
until maturity.
31
On October 21, 2002, we received a $375 million, 364-day unsecured financing
commitment under a bank revolving credit facility, replacing a $500 million,
364-day unsecured credit facility scheduled to mature in November 2002, and a
$375 million, three-year bank revolving credit facility, replacing an 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 us to borrow in U.S. dollars, Canadian dollars and Euros. At
December 28, 2002, we had no commercial paper outstanding and $12.6 million of
borrowings denominated in Euro at an interest rate of 3.6%. The carrying amount
of our borrowings under the commercial paper program approximates fair value
because the interest rates are based on floating rates, which are determined by
prevailing market rates.
On October 17, 2003, we received a $375 million, 364-day unsecured financing
commitment under a bank revolving credit facility, replacing the existing $375
million, 364-day unsecured credit facility scheduled to mature in October 2003,
and on October 21, 2002, we received a $375 million, three-year bank revolving
credit facility (collectively, the "Agreement"). The aforementioned bank
facility replaced an existing $750 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 us 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
our long-term credit rating. The Agreement contains certain customary covenants,
including financial covenants requiring us to maintain specified debt leverage
and fixed charge coverage ratios, and covenants restricting our ability to,
among other things, incur indebtedness, grant liens, make investments and
acquisitions, and sell assets. We believe we are in compliance with such
covenants. The Agreement may be directly drawn upon, or used, to support our
$750 million commercial paper program, which is used from time to time to fund
working capital and other general corporate requirements. Our ability to obtain
funding through its commercial paper program is subject to, among other things,
the Company maintaining an investment-grade credit rating. At January 3, 2004,
we had no debt outstanding under the Agreement.
As of January 3, 2004 and December 28, 2002, we had lines of credit aggregating
$487 million and $469 million, respectively, which were primarily available to
cover trade letters of credit. At January 3, 2004 and December 28, 2002, we had
outstanding trade letters of credit of $254 million and $291 million,
respectively. These letters of credit, which have terms ranging from one to ten
months, primarily collateralize our obligations to third parties for the
purchase of inventory. The fair value of these letters of credit approximates
contract values.
Our Canadian and European subsidiaries also have unsecured lines of credit
totaling approximately $76.1 million (based on the exchange rates as of January
3, 2004). As of January 3, 2004, a total of $18.9 million of borrowings
denominated in foreign currencies was outstanding at an average interest rate of
2.8%. These lines of credit bear interest at rates based on indices specified in
the contracts plus a margin. The lines of credit are in effect for less than one
year and mature at various dates in 2004. These lines are guaranteed by the
Company. With the exception of the Eurobonds, which mature in 2006,
substantially all of our debt will mature in 2004 and will be refinanced under
existing credit lines.
Off-Balance Sheet Arrangements
- ------------------------------
On May 22, 2001, we 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. The leases
expire on November 22, 2006 with renewal subject to the consent of the lessor.
The lessor under the operating lease arrangements is an independent third-party
limited liability company, which has contributed equity of 5.75% of the $63.7
million project costs. The leases include guarantees by us 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 we decline 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. We selected this financing arrangement to take advantage of
the favorable financing rates such an arrangement afforded as opposed to the
rates available under alternative real estate financing options. The lessor
financed the acquisition of the facilities through funding provided by
third-party financial institutions. The lessor has no affiliation or
relationship with the Company or any of its employees, directors or affiliates,
and the Company's transactions with the lessor are limited to the operating
lease agreements and the associated rent expense that will be included in
Selling, general & administrative expense in the Consolidated Statements of
Income.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51)", which was revised
in December 2003 ("FIN 46") (see Note 22 of Notes to Consolidated Financial
Statements). The third party lessor does not meet the definition of a variable
interest entity under FIN 46, and therefore consolidation by the Company is not
required.
32
Hedging Activities
- ------------------
At year-end 2003, we had various Euro currency collars outstanding with a net
notional amount of $42 million, maturing through July 2004 and with values
ranging between 1.05 and 1.14 U.S. dollar per Euro as compared to $80.0 million
in Euro currency collars and average rate options at year-end 2002. At year-end
2003, we also had forward contracts maturing through December 2004 to sell 58
million Euro for $64 million and 16 million Canadian dollars for $12 million.
The notional value of the foreign exchange forward contracts was approximately
$76 million at year-end 2003, as compared with approximately $61 million at
year-end 2002. Unrealized losses for outstanding foreign exchange forward
contracts and currency options were approximately $11.8 million at year-end 2003
and approximately $5.2 million at year-end 2002. The ineffective portion of
these contracts was not material and was expensed in 2003.
In connection with the variable rate financing under the synthetic lease
agreement, we have 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%. We have 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 year ended January 3, 2004.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, are presented in the Notes to Consolidated Financial
Statements in this Annual Report on Form 10-K.
Use of Estimates
Estimates by their nature are based on judgments and available information. The
estimates that we make are based upon historical factors, current circumstances
and the experience and judgment of our management. We evaluate our assumptions
and estimates on an ongoing basis and may employ outside experts to assist in
our evaluations. Therefore, actual results could materially differ from those
estimates under different assumptions and conditions.
Critical Accounting Policies are those that are most important to the portrayal
of our 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. Our most critical accounting policies, discussed below, pertain to
revenue recognition, income taxes, accounts receivable - trade, net,
inventories, net, the valuation of goodwill and intangible assets with
indefinite lives, 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.
For accounts receivable, we estimate the net collectibility, considering both
historical and anticipated trends as well as an evaluation of economic
conditions and the financial positions of our customers. For inventory, we
review the aging and salability of our inventory and estimate the amount of
inventory that we will not be able to sell in the normal course of business.
This distressed inventory is written down to the expected recovery value to be
realized through off-price channels. If we incorrectly anticipate these trends
or unexpected events occur, our results of operations could be materially
affected. We use independent third-party appraisals to estimate the fair values
of both our goodwill and intangible assets with indefinite lives. These
appraisals are based on projected cash flows, interest rates and other
competitive market data. Should any of the assumptions used in these projections
differ significantly from actual results, material impairment losses could
result where the estimated fair values of these assets become less than their
carrying amounts. For accrued expenses related to items such as employee
insurance, workers' compensation and similar items, accruals are assessed based
on outstanding obligations, claims experience and statistical trends; should
these trends change significantly, actual results would likely be impacted.
Derivative instruments in the form of forward contracts and options are used to
hedge the exposure to variability in probable future cash flows associated with
inventory purchases and sales collections primarily associated with our European
and Canadian entities. If fluctuations in the relative value of the currencies
involved in the hedging activities were to move dramatically, such movement
could have a significant impact on our results. Changes in such estimates, based
on more accurate information, may affect amounts reported in future periods. We
are not aware of any
33
reasonably likely events or circumstances which would result in different
amounts being reported that would materially affect our financial condition or
results of operations.
Revenue Recognition
Revenue within our wholesale operations is recognized at the time title passes
and risk of loss is transferred to customers. 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. We review
and refine these estimates on a monthly basis based on current experience,
trends and retailer performance. Our historical estimates of these costs have
not differed materially from actual results. Retail store revenues are
recognized net of estimated returns at the time of sale to consumers. Retail
revenues are recorded net of returns. Licensing revenues are recorded based upon
contractually guaranteed minimum levels and adjusted as actual sales data is
received from licensees.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." In accordance with this
statement, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as measured by enacted tax rates that are expected to be in effect in the
periods when the deferred tax assets and liabilities are expected to be settled
or realized. Significant judgment is required in determining the worldwide
provisions for income taxes. In the ordinary course of a global business, there
are many transactions for which the ultimate tax outcome is uncertain. It is our
policy to establish provisions for taxes that may become payable in future years
as a result of an examination by tax authorities. We establish the provisions
based upon management's assessment of exposure associated with permanent tax
differences, tax credits and interest expense applied to temporary difference
adjustments. The tax provisions are analyzed periodically (at least annually)
and adjustments are made as events occur that warrant adjustments to those
provisions.
Accounts Receivable - Trade, Net
In the normal course of business, we extend credit to customers that satisfy
pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown on the
Consolidated Balance Sheets, is net of allowances and anticipated discounts. An
allowance for doubtful accounts is determined through analysis of the aging of
accounts receivable at the date of the financial statements, assessments of
collectibility based on an evaluation of historic and anticipated trends, the
financial condition of our customers, 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 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 seasonal negotiations with our customers as well as historic deduction
trends net of expected recoveries and the evaluation of current market
conditions. Should circumstances change or economic or distribution channel
conditions deteriorate significantly, we may need to increase its provisions.
Our 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. We continually evaluate the composition of our inventories assessing
slow-turning, ongoing product as well as prior seasons' fashion product. Market
value of distressed inventory is determined based on historical sales trends for
the category of inventory involved, 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. We review our inventory position on a monthly
basis and adjust our estimates based on revised projections and current market
conditions. If economic conditions worsen, we incorrectly anticipate trends or
unexpected events occur, our estimates could be proven overly optimistic, and
required adjustments could materially adversely affect future results of
operations. Our historical estimates of these costs and our provisions have not
differed materially from actual results.
Goodwill And Other Intangibles
On December 30, 2001, the first day of fiscal year 2002, we adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and intangible assets with indefinite lives no longer be
amortized, but rather be tested at least annually for impairment. This
pronouncement also requires that intangible assets with finite lives 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." A two-step impairment test is
performed on goodwill. In the first step, we compare the fair value of
34
each reporting unit to its carrying value. Our reporting units are consistent
with the reportable segments identified in Note 20 of the Consolidated Financial
Statements. We determine the fair value of our reporting units using the market
approach as is typically used for companies providing products where the value
of such a company is more dependent on the ability to generate earnings than the
value of the assets used in the production process. Under this approach we
estimate the fair value based on market multiples of revenues and earnings for
comparable companies. If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, goodwill is not impaired
and we are not required to perform further testing. If the carrying value of the
net assets assigned to the reporting unit exceeds the fair value of the
reporting unit, then we must perform the second step in order to determine the
implied fair value of the reporting unit's goodwill and compare it to the
carrying value of the reporting unit's goodwill. The activities in the second
step include valuing the tangible and intangible assets of the impaired
reporting unit, determining the fair value of the impaired reporting unit's
goodwill based upon the residual of the summed identified tangible and
intangible assets and the fair value of the enterprise as determined in the
first step, and determining the magnitude of the goodwill impairment based upon
a comparison of the fair value residual goodwill and the carrying value of
goodwill of the reporting unit. If the carrying value of the reporting unit's
goodwill exceeds the implied fair value, then we must record an impairment loss
equal to the difference. SFAS No. 142 also requires that the fair value of the
purchased intangible assets, primarily trademarks and trade names, with
indefinite lives be estimated and compared to the carrying value. We estimate
the fair value of these intangible assets using independent third parties who
apply the income approach using the relief-from-royalty method, based on the
assumption that in lieu of ownership, a firm would be willing to pay a royalty
in order to exploit the related benefits of these types of assets. This approach
is dependent on a number of factors including estimates of future growth and
trends, estimated royalty rates in the category of intellectual property,
discounted rates and other variables. We base our fair value estimates on
assumptions we believe to be reasonable, but which are unpredictable and
inherently uncertain. Actual future results may differ from those estimates. We
recognize an impairment loss when the estimated fair value of the intangible
asset is less than the carrying value. Owned trademarks that have been
determined to have indefinite lives are not subject to amortization and are
reviewed at least annually for potential value impairment as mentioned above.
Trademarks that are licensed by the Company from third parties are amortized
over the individual terms of the respective license agreements, which range from
5 to 15 years. Intangible merchandising rights are amortized over a period of
four years.
The recoverability of the carrying values of all long-lived assets with definite
lives is reevaluated when changes in circumstances indicate the assets' value
may be impaired. Impairment testing is based on a review of forecasted operating
cash flows and the profitability of the related business. For the three-year
period ended January 3, 2004, 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. If these trends change significantly, then actual results would
likely be impacted. Our historical estimates of these costs and our provisions
have not differed materially from actual results.
Derivative Instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted, requires that each derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability and 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
whether the derivative qualifies for hedge accounting treatment.
We use foreign currency forward contracts and options for the specific purpose
of hedging the exposure to variability in forecasted cash flows associated
primarily with inventory purchases mainly 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, to the extent the hedges are highly effective, the 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 recorded in Accumulated Other Comprehensive
Income (Loss) are reflected in current-period earnings when the hedged
transaction affects earnings. If fluctuations in the relative value of the
currencies involved in the hedging activities were to move dramatically, such
movement could have a significant impact on our results of operations. We are
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.
35
Hedge accounting requires that at the beginning of each hedge period, we justify
an expectation that the hedge will be highly effective. This effectiveness
assessment involves an estimation of the probability of the occurrence of
transactions for cash flow hedges. The use of different assumptions and changing
market conditions may impact the results of the effectiveness assessment and
ultimately the timing of when changes in derivative fair values and underlying
hedged items are recorded in earnings.
We hedge our net investment position in Euro functional subsidiaries by
borrowing directly in foreign currency and designating 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, a component of Accumulated Other Comprehensive Income (Loss), to
offset the change in the value of the net investment being hedged.
Occasionally, we purchase short-term foreign currency contracts and options
outside of the cash flow hedging program to neutralize quarter-end balance sheet
and other expected exposures. These derivative instruments do not qualify as
cash flow hedges under SFAS No. 133 and are recorded at fair value with all
gains or losses, which have not been significant, recognized in current period
earnings immediately.
Inflation
- ---------
The rate of inflation over the past few years has not had a significant impact
on our sales or profitability.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and for interim periods beginning after June 15, 2003. The adoption
of SFAS No. 150 did not have a material impact on our results of operations and
financial position.
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. We adopted SFAS No. 149 on June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on our results of operations and
financial position.
In December 2003, the FASB issued a revised version of FIN 46, which addresses
consolidation by business enterprises of certain variable interest entities,
commonly referred to as special purpose entities. The third party lessor in our
synthetic lease agreement does not meet the definition of a variable interest
entity under FIN 46, and therefore consolidation by the Company is not required
(see "Off-Balance Sheet Arrangements" above).
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 adoption of FIN 45
did not have a material impact on our financial statements.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
- ----------------------------------------------
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases,
and in oral statements made by, or with the approval of, authorized personnel
that relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations or
level of business for fiscal 2004, any fiscal quarter of 2004 or any other
future period, including those herein under the heading "Forward Outlook" or
otherwise, are forward-looking statements within the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such
36
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, and a continuation of the deflationary trend for
apparel products;
o The Company's ability to effectively anticipate, gauge and respond to
changing consumer demands and tastes, across multiple product lines,
shopping channels and geographies;
o The Company's ability to translate market trends into appropriate, saleable
product offerings relatively far in advance, while minimizing excess
inventory positions, including the Company's ability to correctly balance
the level of its fabric and/or merchandise commitments with actual customer
orders;
o Consumer and customer demand for, and acceptance and support of, Company
products (especially by the Company's largest customers) which are in turn
dependent, among other things, on product design, quality, value and
service;
o The ability of the Company, especially through its sourcing, logistics and
technology functions, to operate within substantial production and delivery
constraints, including risks associated with the possible failure of the
Company's unaffiliated manufacturers to manufacture and deliver products in
a timely manner, to meet quality standards or to comply with the Company's
policies regarding labor practices or applicable laws or regulations;
o The financial condition of, and consolidations, restructurings and other
ownership changes in, the apparel (and related products) industry and the
retail industry;
o Risks associated with the Company's dependence on sales to a limited number
of large department store customers, including risks related to customer
requirements for vendor margin support, and those related to extending
credit to customers, risks relating to retailers' buying patterns and
purchase commitments for apparel products in general and the Company's
products specifically;
o The Company's ability to respond to the strategic and operational
initiatives of its largest customers, as well as to the introduction of new
products or pricing changes by its competitors; and
o The Company's ability to obtain sufficient retail floor space and to
effectively present products at retail.
Economic, Social and Political Factors
- --------------------------------------
Also impacting the Company and its operations are a variety of economic, social
and political factors, including the following:
o Risks associated with war, the threat of war, and terrorist activities,
including reduced shopping activity as a result of public safety concerns
and disruption in the receipt and delivery of merchandise;
o Changes in national and global microeconomic and macroeconomic conditions
in the markets where the Company sells or sources its products, including
the levels of consumer confidence and discretionary spending, consumer
income growth, personal debt levels, rising energy costs and energy
shortages, and fluctuations in foreign currency exchange rates, interest
rates and stock market volatility, and currency devaluations in countries
in which we source product;
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 or by the
Company's union employees;
o The impact of the anticipated elimination of quota for apparel products in
2005;
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 the January 1,
2005 elimination of quota, which may significantly impact sourcing
patterns; 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.
37
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.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate volatility primarily relating to interest rate
changes applicable to our revolving credit facility and other credit facilities.
These loans bear interest at rates which vary with changes in prevailing market
rates.
We do not speculate on the future direction of interest rates. As of January 3,
2004 and December 28, 2002 our exposure to changing market rates was as follows:
Dollars in millions January 3, 2004 December 28, 2002
- -------------------------- --------------------- -----------------------
Variable rate debt $18.9 $34.6
Average interest rate 2.8% 3.8%
A ten percent change in the average rate would have resulted in a $0.5 million
change in interest expense during 2003.
We finance our capital needs through available cash and marketable securities,
operating cash flows, letters of credit, synthetic lease and bank revolving
credit facilities, other credit facilities and commercial paper issuances. Our
floating rate bank revolving credit facility, bank lines and commercial paper
program expose us to market risk for changes in interest rates. As of January 3,
2004, we have not employed interest rate hedging to mitigate such risks with
respect to our floating rate facilities. We believe that our Eurobond offering,
which is a fixed rate obligation, partially mitigates the risks with respect to
our variable rate financing.
The acquisition of MEXX, which transacts business in multiple currencies, has
increased our exposure to exchange rate fluctuations. We mitigate the risks
associated with changes in foreign currency rates through foreign exchange
forward contracts and collars to hedge transactions denominated in foreign
currencies for periods of generally less than one year and to hedge expected
payment of intercompany transactions with our non-U.S. subsidiaries, which now
include MEXX. Gains and losses on contracts, which hedge specific foreign
currency denominated commitments, are recognized in the period in which the
transaction is completed.
38
At January 3, 2004 and December 28, 2002, we had outstanding foreign currency
collars with net notional amounts aggregating to $42 million and $80 million,
respectively. We had forward contracts aggregating to $76 million at January 3,
2004 and $61 million at December 28, 2002. Unrealized losses for outstanding
foreign currency options and foreign exchange forward contracts were
approximately $11.8 million at January 3, 2004 and $5.2 million at December 28,
2002. A sensitivity analysis to changes in the foreign currencies when measured
against the U.S. dollar indicates if the U.S. dollar uniformly weakened by 10%
against all of the hedged currency exposures, the fair value of instruments
would decrease by $9.9 million. Conversely, if the U.S. dollar uniformly
strengthened by 10% against all of the hedged currency exposures, the fair value
of these instruments would increase by $9.8 million. Any resulting changes in
the fair value would be offset by changes in the underlying balance sheet
positions. The sensitivity analysis assumes a parallel shift in foreign currency
exchange rates. The assumption that exchange rates change in a parallel fashion
may overstate the impact of changing exchange rates on assets and liabilities
denominated in foreign currency. We do not hedge all transactions denominated in
foreign currency.
The table below presents the amount of contracts outstanding, the contract rate
and unrealized gain or (loss), as of January 3, 2004:
U.S. Dollar Contract Unrealized
Currency in thousands Amount Rate Gain (Loss)
- ---------------------------------------- ---------------- ------------------- -------------------
Forward Contracts:
Euros $64,000 1.0670 to 1.1450 $ (6,715)
Canadian Dollars 12,066 0.7254 to 0.7622 (298)
Foreign Exchange Collar Contracts:
Euros $42,000 1.0500 to 1.1400 $ (4,793)
The table below presents the amount of contracts outstanding, the contract rate
and unrealized gain or (loss), as of December 28, 2002:
U.S. Dollar Contract Unrealized
Currency in thousands Amount Rate Gain (Loss)
- ---------------------------------------- ---------------- ------------------- -------------------
Forward Contracts:
Euros $61,000 0.9360 to 0.9800 $ (5,304)
Average Rate Collar Contracts:
Euros $80,000 0.9800 to 1.1000 $ 88
39
Item 8. Financial Statements and Supplementary Data.
See the "Index to Consolidated Financial Statements and Schedules" appearing at
the end of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Our management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, have evaluated our disclosure
controls and procedures as of January 3, 2004, and have concluded that our
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
them in a timely fashion. There was no change in our internal control over
financial reporting during the fourth quarter of fiscal 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant.
With respect to our Executive Officers, see Part I of this Annual Report on Form
10-K.
Information regarding Section 16 (a) compliance, the Audit Committee (including
membership and Audit Committee Financial Experts but excluding the "Audit
Committee Report"), our code of ethics and background of our Directors appearing
under the captions "Section 16 (a) Beneficial Ownership Reporting Compliance",
"Corporate Governance", "Additional Information-Company Code of Ethics and
Business Practices" and "Election of Directors" in our Proxy Statement for the
2004 Annual Meeting of Shareholders (the "2004 Proxy Statement") is hereby
incorporated by reference.
Item 11. Executive Compensation.
Information called for by this Item 11 is incorporated by reference to the
information set forth under the heading "Executive Compensation" (other than the
Board Compensation Committee Report on Executive Compensation) in the 2004 Proxy
Statement.
40
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
EQUITY COMPENSATION
The following table summarizes information about The Liz Claiborne, Inc.
Outside Directors' 1991 Stock Ownership Plan (the "Outside Directors' Plan");
The Liz Claiborne, Inc. 1992 Stock Incentive Plan; The Liz Claiborne, Inc. 2000
Stock Incentive Plan (the "2000 Plan"); and The Liz Claiborne, Inc. 2002 Stock
Incentive Plan (the "2002 Plan"), which together comprise all of our existing
equity compensation plans, as of January 3, 2004. Our stockholders have approved
all of these plans.
(a) (b) (c)
Number of Securities
Remaining Available for
Number of Securities Weighted Average Future Issuance Under
to be Issued Upon Exercise Price of Equity Compensation
Exercise of Outstanding Plans (Excluding
Outstanding Options, Options, Warrants Securities Reflected in
Plan Category Warrants and Rights and Rights Column (a))
------------- ------------------- ---------- -----------
Equity Compensation
Plans Approved by
Stockholders...... 9,633,273 (1)(2) $25.55 (3) 9,195,904 (4)
- ----------------------- ---------------------- ------------------- --------------------------
Equity Compensation
Plans Not Approved by
Stockholders...... 0 N/A 0
- ----------------------- ---------------------- ------------------- --------------------------
TOTAL............. 9,633,273 (1)(2) $25.55 (3) 9,195,904 (4)
- ----------------------- ---------------------- ------------------- --------------------------
- -----------------------
(1) Includes 44,603 shares of Common Stock issuable under the Outside
Directors' Plan pursuant to participants' elections thereunder to defer
certain director compensation. These shares are not included in calculating
the Weighted Average Exercise Price in Column (b).
(2) Includes 405,288 shares (the "Performance Shares") which may be issued to
Paul R. Charron upon satisfaction of certain performance criteria as set
forth in Mr. Charron's Amended and Restated Employment Agreement, dated
November 3, 2003 and Performance Share Agreement, dated November 3, 2003,
each of which were filed as exhibits to our November 5, 2003 Current Report
on Form 8-K filing with the Securities and Exchange Commission. The actual
number of Performance Shares which will be issued to Mr. Charron depend on
the extent of the achievement of the performance criteria. Performance
Shares are not included in calculating the Weighted Average Exercise Price
in Column (b.
(3) Performance Shares and shares issuable under the Outside Directors' Plan
were not included in calculating the Weighted Average Exercise Price.
(4) In addition to options, warrants and rights, the 2000 Plan and the 2002
Plan authorize the issuance of restricted stock, unrestricted stock and
performance stock. Each of the 2000 and the 2002 Plans contains a sub-limit
on the aggregate number of shares of restricted Common Stock which may be
issued; the sub-limits are set at 1,000,000 shares under the 2000 Plan and
1,800,000 shares under the 2002 Plan.
41
Security ownership information of certain beneficial owners and management as
called for by this Item 12 is incorporated by reference to the information set
forth under the headings "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Management" in the 2004 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors" and "Executive
Compensation-Employment Arrangements" in the 2004 Proxy Statement.
Item 14. Principal Accountant Fees and Services.
Information called for by this Item 14 is incorporated by reference to the
information set forth under the heading "Ratification of the Appointment of the
Independent Auditors" in the 2004 Proxy Statement.
42
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
----------------------------------------------------------------
(a) 1. Financial Statements. PAGE REFERENCE
2003 FORM 10-K
MANAGEMENT'S REPORT AND
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 to F-4
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
January 3, 2004 and December 28, 2002 F-5
Consolidated Statements of Income for the
Three Fiscal Years Ended January 3, 2004 F-6
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended January 3, 2004 F-7 to F-8
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended January 3, 2004 F-9
Notes to Consolidated Financial Statements F-10 to F-36
2. Schedules.
SCHEDULE II - Valuation and Qualifying Accounts F-37
NOTE: Schedules other than those referred to above and parent company
condensed financial statements have been omitted as inapplicable or not required
under the instructions contained in Regulation S-X or the information is
included elsewhere in the financial statements or the notes thereto.
43
3. Exhibits.
Exhibit
No. Description
- --- -----------
2(a) - Share Purchase Agreement, dated as of May 15, 2001, among Liz
Claiborne, Inc., Liz Claiborne 2 B.V., LCI Acquisition U.S., and
the other parties signatory thereto (incorporated herein by
reference from Exhibit 2.1 to Registrant's Form 8-K dated May
23, 2001 and amended on July 20, 2001).
3(a) - Restated Certificate of Incorporation of Registrant
(incorporated herein by reference from Exhibit 3(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
June 26, 1993).
3(b) - By-laws of Registrant, as amended (incorporated herein by
reference from Exhibit 3(b) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1992 [the "1992
Annual Report"]).
4(a) - Specimen certificate for Registrant's Common Stock, par value
$1.00 per share (incorporated herein by reference from Exhibit
4(a) to the 1992 Annual Report).
4(b) - Rights Agreement, dated as of December 4, 1998, between
Registrant and First Chicago Trust Company of New York
(incorporated herein by reference from Exhibit 1 to Registrant's
Form 8-A dated as of December 4, 1998).
4(b)(i) - Amendment to the Rights Agreement, dated November 11, 2001,
between Registrant and The Bank of New York, appointing The Bank
of New York as Rights Agent (incorporated herein by reference
from Exhibit 1 to Registrant's Form 8-A12B/A dated as of January
30, 2002).
4(c) - Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and
Dexia Banque Internationale A. Luxembourg (incorporated herein
by reference from Exhibit 10 to Registrant's Form 10-Q for the
period ended June 30, 2001).
10(a) - Reference is made to Exhibit 4(b) filed hereunder, which is
incorporated herein by this reference.
10(b) - Lease, dated as of January 1, 1990 (the "1441 Lease"), for
premises located at 1441 Broadway, New York, New York between
Registrant and Lechar Realty Corp. (incorporated herein by
reference from Exhibit 10(n) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990).
10(b)(i) - First Amendment: Lease Extension and Modification Agreement,
dated as of January 1, 1998, to the 1441 Lease (incorporated
herein by reference from Exhibit 10(k) (i) to the 1999 Annual
Report).
10(b)(ii) - Second Amendment to Lease, dated as of September 19, 1998, to
the 1441 Lease (incorporated herein by reference from Exhibit
10(k) (i) to the 1999 Annual Report).
10(b)(iii) - Third Amendment to Lease, dated as of September 24, 1999, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(b)(iv) - Fourth Amendment to Lease, effective as of July 1, 2000, to the
1441 Lease (incorporated herein by reference from Exhibit
10(j)(iv) to the 2002 Annual Report).
44
Exhibit
No. Description
- --- -----------
10(b)(v)* - Fifth Amendment to Lease.
10(c)+* - National Collective Bargaining Agreement, made and entered into
as of June 1, 2003, by and between Liz Claiborne, Inc. and the
Union of Needletrades, Industrial and Textile Employees (UNITE)
for the period June 1, 2003 through May 31, 2006.
10(d)+* - Description of Liz Claiborne, Inc. 2003 Salaried Employee
Incentive Bonus Plan.
10(e)+ - The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as
amended and restated (incorporated herein by reference from
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002).
10(e)(i)+* - First Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(e)(ii)+* - Second Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(e)(iii)+* - Third Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(e)(iv)+* - Trust Agreement dated as of October 1, 2003 between Liz
Claiborne, Inc. and Fidelity Management Trust Company.
10(f)+ - Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991
Stock Ownership Plan (the "Outside Directors' 1991 Plan")
(incorporated herein by reference from Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995 [the "1995 Annual Report"]).
10(f)(i)+* - Amendment to the Outside Directors' 1991 Plan, effective as of
December 18, 2003.
10(f)(ii)+ - Form of Option Agreement under the Outside Directors' 1991 Plan
(incorporated herein by reference from Exhibit 10(m)(i) to the
1996 Annual Report).
10(g)+ - Liz Claiborne, Inc. 1992 Stock Incentive Plan (the "1992 Plan")
(incorporated herein by reference from Exhibit 10(p) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 28, 1991.
10(g)(i)+ - Form of Restricted Career Share Agreement under the 1992 Plan
(incorporated herein by reference from Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995).
10(g)(ii)+ - Form of Restricted Transformation Share Agreement under the 1992
Plan (incorporated herein by reference from Exhibit 10(s) to the
1997 Annual Report).
10(h)+ - Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan")
(incorporated herein by reference from Exhibit 4(e) to
Registrant's Form S-8 dated as of January 25, 2001).
10(h)(i)+* - Amendment 1 to the 2000 Plan.
10(h)(ii)+ - Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit 10(z)(i) to the
2000 Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
45
Exhibit
No. Description
- --- -----------
10(h)(iii)+ - Form of Executive Team Leadership Restricted Share Agreement
under the Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
"2000 Plan")(incorporated herein by reference from Exhibit 10(a)
to Registrant's Form 10-Q for the period ended September 29,
2001 [the "3rd Quarter 2001 10-Q"]).
10(h)(iv)+ - Form of Restricted Key Associates Performance Shares Agreement
under the 2000 Plan (incorporated herein by reference from
Exhibit 10(b) to the 3rd Quarter 2001 10-Q).
10(i)+ - Liz Claiborne, Inc. 2002 Stock Incentive Plan (the "2002 Plan")
(incorporated herein by reference from Exhibit 10(y)(i) to
Registrant's Form 10-Q for the period ended June 29, 2002 [the
"2nd Quarter 2002 10-Q"]).
10(i)(i)+ - Amendment No. 1 to the 2002 Plan (incorporated herein by
reference from Exhibit 10(y)(iii) to the 2nd Quarter 2002 10-Q).
10(i)(ii)+* - Amendment 2 to the 2002 Plan.
10(i)(iii)+* - Amendment 3 to the 2002 Plan.
10(i)(iv)+ - Form of Option Grant Certificate under the 2002 Plan
(incorporated herein by reference from Exhibit 10(y)(ii) to the
2nd Quarter 2002 10-Q).
10(i)(v)+* - Form of Restricted Share Agreement for "Growth" Shares program
under the 2002 Plan.
10(j)+ - Description of Supplemental Life Insurance Plans (incorporated
herein by reference from Exhibit 10(q) to the 2000 Annual
Report).
10(k)+ - Amended and Restated Liz Claiborne ss.162(m) Cash Bonus Plan
(incorporated herein by reference from Exhibit 10.1 to
Registrant's Form 10Q filed August 15, 2003).
10(l)+ - Liz Claiborne, Inc. Supplemental Executive Retirement Plan
effective as of January 1, 2002, constituting an amendment,
restatement and consolidation of the Liz Claiborne, Inc.
Supplemental Executive Retirement Plan and the Liz Claiborne,
Inc. Bonus Deferral Plan.
10(l)(i)+ - Trust Agreement dated as of January 1, 2002, between Liz
Claiborne, Inc. and Wilmington Trust Company (incorporated
herein by reference from Exhibit 10(t)(i) to the 2002 Annual
Report).
10(m)+ - Employment Agreement dated as of November 3, 2003, between
Registrant and Paul R. Charron (the "Charron Agreement")
(incorporated herein by reference from Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated November 5, 2003
[the "November 5, 2003 Form 8-K"]).
10(m)(i)+ - The Liz Claiborne Retirement Income Accumulation Plan for the
benefit of Mr. Charron [the "Accumulation Plan"]), dated as of
September 19, 1996 (incorporated herein by reference from
Exhibit 10(y)(ii) to the 1996 Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
46
Exhibit
No. Description
- --- -----------
10(m)(ii)+ - Amendment to the Accumulation Plan, dated January 3, 2002
(incorporated herein by reference from Exhibit 10(u)(iii) to the
2002 Annual Report).
10(m)(iii)+ - Amendment No. 2 to the Accumulation Plan, effective as of
November 3, 2003 (incorporated herein by reference from Exhibit
10.2 to the November 5, 2003 Form 8-K ).
10(m)(iv)+ - Change of Control Agreement, between Registrant and Paul R.
Charron (incorporated herein by reference from Exhibit (v)(iii)
to the 2000 Annual Report).
10(m)(v)+ - First Amendment to the Executive Termination Benefits Agreement
(Change of Control Agreement) between Registrant and Paul R.
Charron, effective as of November 3, 2003 (incorporated herein
by reference from Exhibit 10.3 to the November 5, 2003 Form
8-K).
10(m)(vi)+ - Stock Option Certificate, dated November 3, 2003 issued to Paul
R. Charron under Registrant's 2002 Stock Incentive Plan
(incorporated herein by reference from Exhibit 10.4 to the
November 5, 2003 Form 8-K).
10(m)(vii)+ - Restricted Share Agreement under the 2000 Plan, dated as of
November 3, 2003, between Registrant and Paul R. Charron
(incorporated herein by reference from Exhibit 10.4 to the
November 5, 2003 Form 8-K).
10(m)(viii)+ - Performance Share Agreement under the 2002 Plan, dated as of
November 3, 2003, between Registrant and Paul R. Charron
(incorporated herein by reference from Exhibit 10.6 to the
November 5, 2003 Form 8-K).
10(n)+ - Change of Control Agreement, between Registrant and Angela J.
Ahrendts.
10(o)+ - Change of Control Agreement, between Registrant and Trudy F.
Sullivan.
10(p) - Three Year Revolving Credit Agreement, dated as of October 21,
2002, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent) (incorporated herein by
reference from Exhibit 10(z)(i) to Registrant's October 21, 2002
Quarterly Report on Form 10-Q for the period ended September 28,
2002 [the "3rd Quarter 2002 10-Q"]).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
47
Exhibit
No. Description
- --- -----------
10(q)* - 364-Day Revolving Credit Agreement, dated as of October 17,
2003, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent).
21* - List of Registrant's Subsidiaries.
23* - Consent of Independent Public Accountants.
31(a)* - Rule 13a-14(a) Certification of Chief Executive Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002.
31(b)* - Rule 13a-14(a) Certification of Chief Financial Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002.
32(a)*# - Certification of Chief Executive Officer of the Company in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)*# - Certification of Chief Financial Officer of the Company in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
99* - Undertakings.
(b) - Reports on Form 8-K.
(i) On October 30, 2003, the Company filed a current report on Form 8-K
pursuant to Item 5 thereof, relating to the results of operations for the three
and nine-month periods ended October 4, 2003.
(ii) On November 5, 2003, the Company filed a current report on Form 8-K
pursuant to Item 5 thereof, relating to the Employment Agreement entered into on
November 3, 2003 with Paul R. Charron, as Chairman and Chief Executive Officer
of the Company.
(iii) On November 12, 2003, the Company filed a current report on Form 8-K
pursuant to Item 5 thereof, relating to the agreement to purchase Enyce Holdings
LLC.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
# A signed original of this written statement required by Section 906 has
been provided by the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 11, 2004.
LIZ CLAIBORNE, INC. LIZ CLAIBORNE, INC.
/s/ Michael Scarpa /s/ Elaine H. Goodell
- ----------------------------- -------------------------------------
By: Michael Scarpa, By: Elaine H. Goodell,
Senior Vice President and Vice President-Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(principal financial officer) (principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on March 11, 2004.
Signature Title
/s/ Paul R. Charron Chairman of the Board, Chief Executive Officer
- -------------------------
Paul R. Charron and Director (principal executive officer)
/s/ Bernard W. Aronson Director
- -------------------------
Bernard W. Aronson
/s/ Raul J. Fernandez Director
- -------------------------
Raul J. Fernandez
/s/ Nancy J. Karch Director
- -------------------------
Nancy J. Karch
/s/ Kenneth P. Kopelman Director
- -------------------------
Kenneth P. Kopelman
/s/ Kay Koplovitz Director
- -------------------------
Kay Koplovitz
/s/ Arthur C. Martinez Director
- -------------------------
Arthur C. Martinez
/s/ Oliver R. Sockwell Director
- -------------------------
Oliver R. Sockwell
/s/ Howard Socol Director
- -------------------------
Howard Socol
/s/ Paul E. Tierney, Jr. Director
- -------------------------
Paul E. Tierney, Jr.
49
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
--------------------------------------------------------
Page
Number
------
MANAGEMENT'S REPORT AND
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 to F-4
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
January 3, 2004 and December 28, 2002 F-5
Consolidated Statements of Income for the
Three Fiscal Years Ended January 3, 2004 F-6
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended January 3, 2004 F-7 to F-8
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended January 3, 2004 F-9
Notes to Consolidated Financial Statements F-10 to F-36
2. Schedules.
SCHEDULE II - Valuation and Qualifying Accounts F-37
NOTE: Schedules other than those referred to above and parent company
condensed financial statements have been omitted as inapplicable or not required
under the instructions contained in Regulation S-X or the information is
included elsewhere in the financial statements or the notes thereto.
F-1
MANAGEMENT'S REPORT
-------------------
The management of Liz Claiborne, Inc. is responsible for the preparation,
objectivity and integrity of the consolidated financial statements and other
information contained in this Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and include some amounts that are based on
management's informed judgments and best estimates.
To help assure that financial information is reliable and assets are
safeguarded, management maintains a system of internal controls and procedures
which we believe is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.
The independent public accountants have audited our consolidated financial
statements as described in their reports. In the course of their audits, the
independent public accountants have developed an overall understanding of the
Company's accounting and financial controls and have conducted other tests as
they considered necessary to support their opinions on the financial statements.
The independent public accountants report their findings and recommendations to
management and the Audit Committee of the Board of Directors. Control procedures
are implemented or revised as appropriate to respond to these recommendations.
There have not been any material control weaknesses brought to the attention of
management or the Audit Committee during the periods covered by the reports of
the independent public accountants. However, in as much as the independent
public accountants' audits consisted of selected tests of control policies and
procedures and did not cover the entire system of internal control, they would
not necessarily disclose all weaknesses which might exist.
The Audit Committee, which consists solely of non-management directors, meets
with the independent public accountants, internal auditors and management
periodically to review their respective activities and the discharge of their
respective responsibilities. Both the independent public accountants and the
internal auditors have unrestricted access to the Audit Committee, with or
without management, to discuss the scope and results of their audits and any
recommendations regarding the system of internal controls.
/s/ Paul R. Charron /s/ Michael Scarpa
- --------------------------- --------------------------
Paul R. Charron Michael Scarpa
Chairman of the Board Senior Vice President and
and Chief Executive Officer Chief Financial Officer
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited the accompanying consolidated balance sheets of Liz Claiborne,
Inc. and subsidiaries (the "Company") as of January 3, 2004 and December 28,
2002 and the related consolidated statements of income, stockholders' equity,
and cash flows for the years then ended. Our audits also included the financial
statement schedule for the years ended January 3, 2004 and December 28, 2002,
listed in the Index at Item 15(a)2. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The Company's financial statements for the year ended December 29,
2001 and the financial statement schedule as of and for the year then ended were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements and stated that such 2001
financial statement schedule, when considered in relation to the 2001 basic
financial statements taken as a whole, presented fairly, in all material
respects, the information set forth therein, in their report dated February 19,
2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 3, 2004
and December 28, 2002, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, such financial statement
schedule for the years ended January 3, 2004 and December 28, 2002, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Notes 1 and 7 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142.
/s/ Deloitte & Touche LLP
New York, New York
February 26, 2004
F-3
Reports of Independent Public Accountants
The following report is a copy of a previously issued Report of Independent
Public Accountants. This report relates to prior years financial statements.
This report has not been reissued by Arthur Andersen LLP.
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited the accompanying consolidated balance sheets of Liz Claiborne,
Inc. (a Delaware corporation) and subsidiaries as of December 29, 2001 and
December 30, 2000, and the related consolidated statements of income, retained
earnings, comprehensive income and changes in capital accounts and cash flows
for each of the three fiscal years in the period ended December 29, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liz Claiborne, Inc.
and subsidiaries as of December 29, 2001 and December 30, 2000, and the results
its operations and its cash flows for each of the three fiscal years ended
December 29, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial statements and, in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
February 19, 2002
F-4
CONSOLIDATED BALANCE SHEETS
Liz Claiborne, Inc. and Subsidiaries
All amounts in thousands except share data January 3, 2004 December 28, 2002
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 293,503 $ 211,563
Marketable securities 50,414 36,808
Accounts receivable - trade, net 390,802 370,468
Inventories, net 485,182 461,154
Deferred income taxes 45,756 45,877
Other current assets 82,744 49,340
----------- -----------
Total current assets 1,348,401 1,175,210
Property and Equipment - Net 410,741 378,303
Goodwill - Net 596,436 478,869
Intangibles - Net 244,168 226,577
Other Assets 7,253 9,398
----------- -----------
$ 2,606,999 $ 2,268,357
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Short term borrowings $ 18,915 $ 21,989
Accounts payable 227,125 225,032
Accrued expenses 251,286 283,458
Income taxes payable 29,316 26,241
----------- -----------
Total current liabilities 526,642 556,720
Long-Term Debt 440,303 377,725
Other Non-Current Liabilities 8,374 6,412
Deferred Income Taxes 43,861 33,709
Commitments and Contingencies (Note 10)
Minority Interest 9,848 7,430
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- --
Common stock, $1 par value, authorized shares - 250,000,000,
issued shares - 176,437,234 176,437 176,437
Capital in excess of par value 124,823 95,708
Retained earnings 2,539,742 2,283,692
Unearned compensation expense (21,593) (10,185)
Accumulated other comprehensive loss (50,207) (28,317)
----------- -----------
2,769,202 2,517,335
Common stock in treasury, at cost - 66,865,854 shares in
2003 and 69,401,831 shares in 2002 (1,191,231) (1,230,974)
----------- -----------
Total stockholders' equity 1,577,971 1,286,361
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,606,999 $ 2,268,357
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
CONSOLIDATED STATEMENTS OF INCOME
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
-------------------------------------------------------------------
All dollar amounts in thousands except per common share data January 3, 2004 December 28, 2002 December 29, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 4,241,115 $ 3,717,503 $ 3,448,522
Cost of goods sold 2,351,324 2,097,868 2,021,272
----------- ----------- -----------
Gross Profit 1,889,791 1,619,635 1,427,250
Selling, general & administrative expenses 1,419,673 1,222,617 1,080,483
Restructuring gain (charge) 672 (7,130) (15,050)
----------- ----------- -----------
Operating Income 470,790 389,888 331,717
Other expense - net (1,890) (2,318) (3,511)
Interest expense - net (30,509) (25,124) (28,117)
----------- ----------- -----------
Income Before Provision for Income Taxes 438,391 362,446 300,089
Provision for income taxes 158,698 131,281 108,032
----------- ----------- -----------
Net Income $ 279,693 $ 231,165 $ 192,057
=========== =========== ===========
Net Income per Common Share:
Basic $ 2.60 $ 2.19 $ 1.85
=========== =========== ===========
Diluted $ 2.55 $ 2.16 $ 1.83
=========== =========== ===========
Dividends Paid per Common Share $ .23 $ .23 $ .23
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
Accumula-
COMMON STOCK Capital ted Other TREASURY SHARES
------------------ in Excess Comprehen- Unearned -----------------------
Number of of Par Retained sive In- Compen- Number of
All dollar amounts in thousands Shares Amount Value Earnings come (Loss) sation Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 30, 2000 176,437,234 $176,437 $83,808 $1,904,508 $ (7,656) (7,635) 74,018,800 $(1,315,177) $ 834,285
Net income -- -- -- 192,057 -- -- -- -- 192,057
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- 4,928 -- -- -- 4,928
Gains (losses) on cash flow hedging
derivatives -- -- -- -- (250) -- -- -- (250)
Adjustment to unrealized (losses)
on available-for-sale securities -- -- -- -- (2,368) -- -- -- (2,368)
-----------
Total comprehensive income 194,367
Exercise of stock options and
related tax benefits -- -- 5,458 -- -- -- (2,363,076) 38,561 44,019
Cash dividends declared -- -- -- (23,317) -- -- -- -- (23,317)
Purchase of common stock -- -- -- -- -- -- 155,000 (2,854) (2,854)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- -- 4,489 -- (9,069) (598,414) 14,241 9,661
----------- -------- ------- ---------- -------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 29, 2001 176,437,234 $176,437 $89,266 $2,077,737 $ (5,346) $(16,704) 71,212,310 $(1,265,229) $1,056,161
=========== ======== ======= ========== ======== ======== ========== =========== ==========
Net income -- -- -- 231,165 -- -- -- -- 231,165
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- (19,496) -- -- -- (19,496)
Gains (losses) on cash flow hedging
derivatives -- -- -- -- (5,859) -- -- -- (5,859)
Adjustment to unrealized (losses)
on available-for-sale securities -- -- -- -- 2,384 -- -- -- 2,384
----------
Total comprehensive income 208,194
Exercise of stock options and
related tax benefits -- -- 6,258 (1,211) -- -- (1,784,524) 33,781 38,828
Cash dividends declared -- -- -- (23,802) -- -- -- -- (23,802)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- 184 (197) -- 6,519 (25,955) 474 6,980
----------- -------- ------- ---------- -------- -------- ---------- ----------- ---------
BALANCE, DECEMBER 28, 2002 176,437,234 $176,437 $95,708 $2,283,692 $(28,317) $(10,185) 69,401,831 $(1,230,974) $1,286,361
=========== ======== ======= ========== ======== ======== ========== =========== ==========
F-7
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS (continued)
Liz Claiborne, Inc. and Subsidiaries
Accumula-
COMMON STOCK Capital ted Other TREASURY SHARES
------------------ in Excess Comprehen- Unearned -----------------------
Number of of Par Retained sive In- Compen- Number of
All dollar amounts in thousands Shares Amount Value Earnings come (Loss) sation Shares Amount Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 2002 176,437,234 $176,437 $ 95,708 $2,283,692 $(28,317) $(10,185) 69,401,831 $(1,230,974) $1,286,361
Net income -- -- -- 279,693 -- -- -- -- 279,693
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- (26,548) -- -- -- (26,548)
Gains (losses) on cash flow hedging
derivatives -- -- -- -- (3,962) -- -- -- (3,962)
Adjustment to unrealized gains on
available-for-sale securities -- -- -- -- 8,620 -- -- -- 8,620
----------
Total comprehensive income 257,803
Exercise of stock options and
related tax benefits -- -- 21,641 -- -- -- (2,283,668) 36,993 58,634
Cash dividends declared -- -- -- (23,643) -- -- -- -- (23,643)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- 7,474 -- -- (11,408) (252,309) 2,750 (1,184)
----------- -------- -------- ---------- -------- -------- ---------- ----------- ----------
BALANCE, JANUARY 3, 2004 176,437,234 $176,437 $124,823 $2,539,742 $(50,207) $(21,593) 66,865,854 $(1,191,231) $1,577,971
=========== ======== ======== ========== ======== ======== ========== =========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
-----------------------------------------------------------
All dollar amounts in thousands January 3, 2004 December 28, 2002 December 29, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 279,693 $ 231,165 $ 192,057
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 104,981 96,395 101,491
Deferred income taxes 5,847 (9,209) 11,925
Non cash portion of restructuring charge -- 3,266 15,050
Other - net 22,447 14,210 13,442
Changes in current assets and liabilities, exclusive of acquisitions:
Decrease (increase) in accounts receivable - trade, net 10,971 (1,126) (44,957)
(Increase) decrease in inventories (6,444) 49,120 37,535
(Increase) decrease in other current assets (28,259) (10,636) 10,813
(Decrease) increase in accounts payable (3,061) (17,355) 13,249
Increase (decrease) in accrued expenses 2,822 24,976 (23,335)
Increase in income taxes payable 3,075 13,066 1,943
----------- ----------- -----------
Net cash provided by operating activities 392,072 393,872 329,213
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of investment instruments (96) (90) (83)
Purchases of property and equipment (96,675) (80,020) (82,236)
Payments for acquisitions, net of cash acquired (222,335) (206,264) (274,142)
Payments for in-store merchandise shops (10,538) (8,851) (24,718)
Other - net (7,658) (11,573) (3,496)
----------- ----------- -----------
Net cash used in investing activities (337,302) (306,798) (384,675)
----------- ----------- -----------
Cash Flows from Financing Activities:
Short term borrowings (3,074) 17,199 --
Proceeds from Eurobond issue -- -- 309,619
Revolving credit facility - net (12,564) (65,162) (191,492)
Proceeds from exercise of common stock options 46,250 32,570 39,193
Dividends paid (23,643) (23,802) (23,317)
Purchase of common stock, net of put warrant premiums -- -- (2,854)
----------- ----------- -----------
Net cash provided by (used in) financing activities 6,969 (39,195) 131,149
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash 20,201 36,049 4,928
----------- ----------- -----------
Net Change in Cash and Cash Equivalents 81,940 83,928 80,615
Cash and Cash Equivalents at Beginning of Year 211,563 127,635 47,020
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 293,503 $ 211,563 $ 127,635
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31. The 2003
fiscal year reflected a 53-week period, as compared to the 2002 and 2001 fiscal
years, which each reflected a 52-week period.
NATURE OF OPERATIONS
Liz Claiborne, Inc. is engaged primarily in the design and marketing of a broad
range of apparel, accessories and fragrances.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Liz Claiborne,
Inc. and its wholly-owned and majority-owned subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses. Estimates by their nature are based on
judgments and available information. Therefore, actual results could materially
differ from those estimates under different assumptions and conditions.
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, income taxes, accounts receivable - trade, net,
inventories, net, the valuation of goodwill and intangible assets with
indefinite lives, 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.
Revenue Recognition
Revenue within the Company's wholesale operations is recognized at the time
title passes and risk of loss is transferred to customers. 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 reviews and refines these estimates on a monthly basis based on
current experience, trends and retailer performance. The Company's historical
estimates of these costs have not differed materially from actual results.
Retail store revenues are recognized net of estimated returns at the time of
sale to consumers. Retail revenues are recorded net of returns. Licensing
revenues are recorded based upon contractually guaranteed minimum levels and
adjusted as actual sales data is received from licensees.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." In accordance with SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as measured by enacted tax rates that are expected to be in effect in the
periods when the deferred tax assets and liabilities are expected to be settled
or realized. Significant judgment is required in determining the worldwide
provisions for income taxes. In the ordinary course of a global business, there
are many transactions for which the ultimate tax outcome is uncertain. It is the
Company's policy to establish provisions for taxes that may become payable in
future years as a result of an examination by tax authorities. The Company
establishes the provisions based upon
F-10
management's assessment of exposure associated with permanent tax differences,
tax credits and interest expense applied to temporary difference adjustments.
The tax provisions are analyzed periodically (at least annually) and adjustments
are made as events occur that warrant adjustments to those provisions.
Accounts Receivable - Trade, Net
In the normal course of business, the Company extends credit to customers that
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Consolidated Balance Sheets, is net of allowances and anticipated
discounts. An allowance for doubtful accounts is determined through analysis of
the aging of accounts receivable at the date of the financial statements,
assessments of collectibility based on an evaluation of historic and anticipated
trends, the financial condition of the Company's customers, 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 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 seasonal negotiations with the Company's customers 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 and its provisions have not
differed materially from actual results.
Goodwill And Other Intangibles
On December 30, 2001, the first day of fiscal year 2002, the Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and intangible assets with indefinite lives no longer be
amortized, but rather be tested at least annually for impairment. This
pronouncement also requires that intangible assets with finite lives 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." A two-step impairment test is
performed on goodwill. In the first step, the Company compares the fair value of
each reporting unit to its carrying value. The Company's reporting units are
consistent with the reportable segments identified in Note 20 of Notes to
Consolidated Financial Statements. The Company determines the fair value of its
reporting units using the market approach as is typically used for companies
providing products where the value of such a company is more dependent on the
ability to generate earnings than the value of the assets used in the production
process. Under this approach the Company estimates the fair value based on
market multiples of revenues and earnings for comparable companies. If the fair
value of the reporting unit exceeds the carrying value of the net assets
assigned to that unit, goodwill is not impaired and the Company is not required
to perform further testing. If the carrying value of the net assets assigned to
the reporting unit exceeds the fair value of the reporting unit, then the
Company must perform the second step in order to determine the implied fair
value of the reporting unit's goodwill and compare it to the carrying value of
the reporting unit's goodwill. The activities in the second step include valuing
the tangible and intangible assets of the impaired reporting unit, determining
the fair value of the impaired reporting unit's goodwill based upon the residual
of the summed identified tangible and intangible assets and the fair value of
the enterprise as determined in the first step, and determining the magnitude of
the goodwill impairment based upon a comparison of the fair value residual
goodwill and the carrying value of goodwill of the reporting unit. If the
carrying value of the reporting unit's goodwill exceeds the implied fair value,
then the Company must record an impairment loss equal to the difference. SFAS
No. 142 also requires that the fair value of the purchased intangible assets,
primarily trademarks and trade names, with indefinite lives be estimated and
compared to the carrying value. The Company estimates the fair value of these
intangible assets using independent third parties who apply the income approach
using the relief-from-royalty method, based on the assumption that, in lieu of
ownership, a firm would be willing to pay a royalty in order to exploit the
related benefits of these types of assets. This approach is dependent on a
number of factors including estimates of future growth and trends, estimated
royalty rates in the category of intellectual property, discounted rates and
other variables. The Company bases its fair value estimates on assumptions it
believes to be reasonable, but which are unpredictable and inherently uncertain.
Actual future results may differ from those estimates. The Company recognizes an
impairment loss when the estimated fair value of the intangible asset is less
than the carrying value. Owned trademarks that have been determined to have
indefinite lives are not
F-11
subject to amortization and are reviewed at least annually for potential value
impairment as mentioned above. Trademarks that are licensed by the Company from
third parties are amortized over the individual terms of the respective license
agreements, which range from 5 to 15 years. Intangible merchandising rights are
amortized over a period of four years.
The recoverability of the carrying values of all long-lived assets with definite
lives is reevaluated when changes in circumstances indicate the assets' value
may be impaired. Impairment testing is based on a review of forecasted operating
cash flows and the profitability of the related business. For the three-year
period ended January 3, 2004, 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. If these trends change significantly, then actual results would
likely be impacted.
Derivative Instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted, requires that each derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability and 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
whether the derivative qualifies for hedge accounting treatment.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in forecasted cash flows
associated primarily with inventory purchases mainly 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, to the extent the hedges are highly effective, the 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 recorded in Accumulated Other
Comprehensive Income (Loss) are reflected in current-period earnings when the
hedged transaction affects earnings. If fluctuations in the relative value of
the currencies involved in the hedging activities were to move dramatically,
such movement could have a significant impact on the Company's results of
operations.
Hedge accounting requires that at the beginning of each hedge period, the
Company justifies an expectation that the hedge will be highly effective. This
effectiveness assessment involves an estimation of the probability of the
occurrence of transactions for cash flow hedges. The use of different
assumptions and changing market conditions may impact the results of the
effectiveness assessment and ultimately the timing of when changes in derivative
fair values and underlying hedged items are recorded in earnings.
The Company hedges its net investment position in Euro functional subsidiaries
by borrowing directly in foreign currency and designating 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, a component of Accumulated Other Comprehensive Income (Loss), to
offset the change in the value of the net investment being hedged.
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize quarter-end
balance sheet and other expected exposures. These derivative instruments do not
qualify as cash flow hedges under SFAS No. 133 and are recorded at fair value
with all gains or losses, which have not been significant, recognized in current
period earnings immediately.
F-12
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. Fair values for derivatives are either obtained from counter parties
or developed using dealer quotes or cash flow models.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less
at the date of purchase are classified as cash equivalents.
Marketable Securities
Investments are stated at market. The estimated fair value of the marketable
securities is based on quoted prices in an active market. Gains and losses on
investment transactions are determined using the specific identification method
and are recognized in income based on settlement dates. Unrealized gains and
losses on securities held for sale are included in Accumulated Other
Comprehensive Income (Loss) until realized. Interest is recognized when earned.
All marketable securities are considered available-for-sale.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Buildings and building improvements are depreciated using the
straight-line method over their estimated useful lives of 20 to 39 years.
Machinery and equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives of three to seven years.
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful lives of the assets.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries have been translated at year-end
exchange rates. Revenues and expenses have been translated at average rates of
exchange in effect during the year. Resulting translation adjustments have been
included in Accumulated Other Comprehensive Income (Loss). Gains and losses on
translation of intercompany loans with foreign subsidiaries of a long-term
investment nature are also included in this component of stockholders' equity.
Cost of Goods Sold
Cost of goods sold includes the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs and
provisions for shrinkage.
Advertising, Promotion and Marketing
All costs associated with advertising, promoting and marketing of Company
products are expensed during the periods when the activities take place. Costs
associated with cooperative advertising programs are expensed when the
advertising is run. Advertising and promotion expenses were $131.0 million in
2003, $119.8 million in 2002 and $115.2 million in 2001. Marketing expenses,
including in-store and other Company-sponsored activities, were $44.7 million in
2003, $41.9 million in 2002 and $40.5 million in 2001.
Shipping and Handling Costs
Shipping and handling costs are included as a component of Selling, general &
administrative expenses in the Consolidated Statements of Income. In fiscal
years 2003, 2002 and 2001 shipping and handling costs approximated $194.0
million, $177.4 million and $170.4 million, respectively.
F-13
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option grants. Had compensation costs for the
Company's stock option grants been determined based on the fair value at the
grant dates for awards under these plans in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts as follows:
Fiscal Year Ended
-------------------------------------------------------------------
In thousands except per share data January 3, 2004 December 28, 2002 December 29, 2001
- ------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 279,693 $ 231,165 $ 192,057
Total stock-based employee
compensation expense determined
under fair value based method for
all awards*, net of tax 19,945 16,786 13,336
----------- ----------- -----------
Pro forma $ 259,748 $ 214,379 $ 178,721
=========== =========== ===========
Basic earnings per share:
As reported $2.60 $2.19 $1.85
Pro forma $2.44 $2.03 $1.72
Diluted earnings per share:
As reported $2.55 $2.16 $1.83
Pro forma $2.39 $2.02 $1.72
* "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, 2002 and 2001,
respectively: dividend yield of 0.7%, 0.8% and 0.9%, expected volatility of 39%,
39% and 46%, risk free interest rates of 2.7%, 2.7% and 4.4%, and expected lives
of five years for all periods.
Cash Dividend and Common Stock Repurchase
On January 22, 2004, the Company's Board of Directors declared a quarterly cash
dividend on the Company's common stock at the rate of $0.05625 per share, to be
paid on March 15, 2004 to stockholders of record at the close of business on
February 23, 2004. As of January 3, 2004, the Company has $218.3 million
remaining in buyback authorization under its share repurchase program.
Prior Years' Reclassification
Certain items previously reported in specific captions in the accompanying
financial statements and notes have been reclassified to conform to the current
year's classifications.
F-14
NOTE 2: ACQUISITIONS
On December 1, 2003, the Company acquired 100 percent of the equity interest of
ENYCE HOLDING LLC ("ENYCE"), a privately held fashion apparel company, for a
purchase price of approximately $121.9 million, including fees and the
retirement of debt at closing. Founded in 1996 by FILA USA and based in New York
City, ENYCE is a designer, marketer and wholesaler of fashion forward
streetwear, denim-based lifestyle products, outerwear, athletic-inspired
apparel, casual tops and knitwear for men and women through its ENYCE(R) and
Lady ENYCE(R) brands. ENYCE sells its products primarily through specialty store
chains, better specialty stores and select department stores, as well as through
international distributors in Germany, Canada and Japan. Currently, men's
products account for approximately 84% of net sales, while women's products
account for the balance. Based upon a preliminary independent third-party
valuation of the tangible and intangible assets acquired from ENYCE, it is
estimated that the value of the ENYCE trademarks and trade names will be in the
range of $25-28 million. The Company expects that the valuation of the ENYCE
business will be completed by the end of March 2004. Unaudited pro forma
information related to this acquisition is not included, as the impact of this
transaction is not material to the consolidated results of the Company.
On 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 consisted of (a) a payment, including the assumption of debt and fees, of
$53.1 million, and (b) a contingent payment 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 estimates that, if the 2005 measurement year is
selected, the contingent payment would be in the range of approximately $72 - 76
million. Based upon an independent third-party valuation of the tangible and
intangible assets acquired from Juicy Couture, approximately $27 million of
purchase price has been allocated to the value of trademarks and trade names
associated with the business. The trademarks and trade names have been
classified as having indefinite lives and will be subject to an annual test for
impairment as required by SFAS No. 142. 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 September 30, 2002, the Company acquired 100 percent of the equity interest
of Ellen Tracy Inc., a fashion apparel company, and its related companies
(collectively, "Ellen Tracy") for a cash purchase price of $177.0 million,
including the assumption of debt and fees. Based upon an independent third-party
valuation of the tangible and intangible assets acquired from Ellen Tracy,
approximately $60 million of purchase price has been allocated to the value of
the trademarks and trade names associated with the business. The trademarks and
trade names have been classified as having indefinite lives and are subject to
annual impairment testing. The fair market value of assets acquired was $90.4
million (including $60.3 million of trademarks) and liabilities assumed were
$44.1 million resulting in goodwill of approximately $129.3 million. Unaudited
pro forma information related to this acquisition is not included, as the impact
of this transaction is not material to the consolidated results of the Company.
On July 9, 2002, the Company acquired 100 percent of the equity interest of Mexx
Canada, Inc., a privately held fashion apparel and accessories company ("Mexx
Canada"). 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 to be determined as a multiple of Mexx Canada's earnings and cash flow
performance for the year ended 2004 or 2005. The selection of the measurement
year for the contingent payment is at either party's option. The Company
estimates that if the 2004 measurement year is selected, this payment will be in
the range of 38 - 42 million Canadian dollars (or $30 - 33 million based on the
exchange rate as of January 3, 2004). The fair market value of assets acquired
was $20.5 million and liabilities assumed were $17.7 million resulting in
Goodwill of $29.6 million. Unaudited pro forma information related to this
acquisition is not included, as the impact of this transaction is not material
to the consolidated results of the Company.
On May 23, 2001, the Company acquired 100 percent of the equity interest of Mexx
Group B.V. ("Mexx"), a privately held fashion apparel company incorporated and
existing under the laws of The Netherlands, for a purchase price consisting of:
(a) 295 million Euros (or $255.1 million based on the exchange rate in effect on
such date), in cash at closing (including the assumption of debt), and (b) a
contingent payment to be determined as a multiple of Mexx's earnings and cash
flow
F-15
performance for the year ended 2003, 2004 or 2005. The selection of the
measurement year for the contingent payment is at either party's option. The
Company estimates that if the 2003 measurement year is selected, the contingent
payment would be in the range of approximately 144 - 148 million Euros (or $181
- - 186 million based on the exchange rate as of January 3, 2004). The acquisition
of Mexx, included in operating results from the acquisition date, was accounted
for using the purchase method of accounting. The excess purchase price over fair
market value of the underlying net assets acquired was $199.7 million. Based
upon an independent third-party valuation of the tangible and intangible assets
acquired from Mexx, approximately $60.6 million of purchase price has been
allocated to the value of the trademarks and trade names associated with the
business. The trademarks and trade names have been classified as having
indefinite lives and are subject to annual impairment testing. The purchase
price includes an adjustment for transaction fees associated with the
acquisition and the expenses associated with the closure of certain
under-performing retail stores as well as the elimination of certain other
duplicate support functions within the Mexx enterprise, which were decided prior
to the consummation of the transaction. The aggregate of the above items amounts
to $32.6 million. The fair market value of assets acquired was $179.2 million
(including $60.6 million of trademarks) and liabilities assumed were $91.2
million.
The following unaudited pro forma information assumes the Mexx acquisition had
occurred on December 31, 2000. The pro forma information, as presented below, is
not indicative of the results that would have been obtained had the transaction
occurred on December 31, 2000, nor is it indicative of the Company's future
results.
Fiscal Year Ended
------------------------------------------
January 3, December 28, December 29,
2004 2002 2001
In thousands except per share data Actual Actual Pro forma
- -----------------------------------------------------------------------------
Net sales $ 4,241,155 $ 3,717,503 $ 3,591,273
Net income 279,693 231,165 180,297
Basic earnings per share $2.60 $2.19 $1.73
Diluted earnings per share $2.55 $2.16 $1.72
The above pro forma amounts reflect adjustments for interest expense from
additional borrowings necessary to finance the acquisition and income tax effect
based upon a pro forma effective tax rate of 36% in 2001. The unaudited pro
forma information gives effect only to adjustments described above and does not
reflect management's estimate of any anticipated cost savings or other benefits
as a result of the acquisition.
On June 8, 1999, the Company acquired 85.0 percent of the equity interest of
Lucky Brand Dungarees, Inc. ("Lucky Brand"), whose core business consists of the
Lucky Brand line of women's and men's denim-based sportswear. The acquisition
was accounted for using the purchase method of accounting. The total purchase
price consisted of a cash payment made at the closing date of approximately $85
million and a payment made in April 2003 of $28.5 million. An additional payment
of $12.7 million was made in 2000 for tax-related purchase price adjustments.
Commencing in June 2004, the Company may elect to, or be required to, purchase
the remaining equity interest of Lucky Brand at an amount equal to its then fair
market value, or under certain circumstances at a 20% premium on such value. The
Company estimates this payment would be in the range of approximately $32 - 45
million if the purchase occurs in 2004.
On February 12, 1999, the Company acquired 84.5 percent of the equity interest
of Segrets, Inc., whose core business consists of the Sigrid Olsen women's
apparel lines. In the fourth quarter of 1999, the Company purchased an
approximately 3.0 percent additional equity interest. In November 2000, the
Company increased its equity interest to 97.5 percent. Commencing in February
2004, the Company may elect to, or be required to, purchase the remaining equity
interest at an amount equal to its then fair market value. The Company estimates
this payment would be in the range of approximately $2 - 4 million if the
purchase occurs in 2004.
The contingent payments related to the Juicy Couture, Lucky Brand, Mexx, Mexx
Canada and Segrets acquisitions will be accounted for as additional purchase
price.
F-16
NOTE 3: LICENSING COMMITMENTS
In June 2002, the Company consummated an exclusive license agreement with
Kellwood Company ("Kellwood") under which Kellwood was granted the license to
design, manufacture, market, sell and distribute men's dress shirts under the
Claiborne label in North America commencing with the Spring 2003 selling season.
The line, which is being produced by Kellwood's subsidiary, Smart Shirts Ltd., a
global manufacturer of men's shirts, was previously produced and sold by the
Company's Claiborne Men's division. Under the agreement, Kellwood is obligated
to pay a royalty equal to a percentage of net sales of the Claiborne products.
The initial term of the license runs through December 31, 2005; the licensee has
options to renew for two additional 3-year periods if certain sales thresholds
are met.
In August 1999, the Company consummated exclusive license agreements with
Kenneth Cole Productions, Inc. ("KCP") to manufacture, design, market and
distribute women's apparel products in North America under the trademarks
"Kenneth Cole New York," "Reaction Kenneth Cole" and "Unlisted.com." The term of
the license agreement is scheduled to expire on December 31, 2004.
In December 2002, the Company consummated an exclusive license agreement with
KCP to design, manufacture, market and distribute women's jewelry in the United
States under the trademarks "Kenneth Cole New York" and "Reaction Kenneth Cole."
The initial term of the license agreement runs through December 31, 2006. The
Company has an option to renew for an additional two-year period if certain
thresholds are met. Under each of these agreements, the Company is obligated to
pay a royalty equal to a percentage of net sales of licensed products.
In July 1998, the Company consummated an exclusive license agreement with
Candie's, Inc. to manufacture, market, distribute and sell a line of fragrances
for men and women using "Candie's" marks and logos. Under the agreement, the
Company is obligated to pay royalty equal to a percentage of net sales of the
"Candie's(R)" products. The initial term of the license agreement runs through
January 31, 2006, with an option to renew for an additional 10-year period if
certain sales thresholds are met.
The Company has an exclusive license agreement with an affiliate of Donna Karan
International, Inc. to design, produce, market and sell men's and women's
sportswear, jeanswear and activewear products in the Western Hemisphere under
the "DKNY(R) Jeans" and "DKNY(R) Active" marks and logos. Under the agreement,
the Company is obligated to pay a royalty equal to a percentage of net sales of
the "DKNY(R) Jeans" and "DKNY(R) Active" products. The initial term of the
license agreement runs through December 31, 2012; the Company has an option to
renew for an additional 15-year period if certain sales thresholds are met.
The Company also has an additional exclusive license agreement to design,
produce, market and sell in the Western Hemisphere a line of women's career and
casual sportswear for the "better" market under the trademark City DKNY(R).
Under the agreement, the Company is obligated to pay a royalty equal to a
percentage of net sales of the licensed products. The initial term of the
license agreement runs through December 31, 2005; the Company does not expect to
extend the license upon the expiration of its initial term.
Certain of the above licenses are subject to minimum guarantees totaling $135.8
million and running through 2012; there is no maximum limit on the license fees.
NOTE 4: MARKETABLE SECURITIES
In August 1999, the Company, in conjunction with the consummation of a license
agreement with Kenneth Cole Productions, Inc. purchased one million shares of
Kenneth Cole Productions, Inc. Class A stock for $29.0 million. In March 2000, a
three-for-two stock split increased the number of shares owned by the Company to
1.5 million shares. In accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as of January 3, 2004 and December
28, 2002, the marketable securities are considered available-for-sale and are
recorded at fair market value with unrealized losses net of taxes reported as a
component of Accumulated Other Comprehensive Income (Loss).
F-17
The following is a summary of available-for-sale marketable securities at
January 3, 2004 and December 28, 2002:
Gross Unrealized Estimated
-------------------------------
January 3, 2004 (in thousands) Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
Equity securities $ 29,000 $ 14,725 $ -- $ 43,725
Other holdings 8,785 -- 2,096 6,689
------------ ------------ ----------- ------------
Total $ 37,785 $ 14,725 $ 2,096 $ 50,414
============ ============ =========== ============
Gross Unrealized Estimated
-------------------------------
December 28, 2002 (in thousands) Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
Equity securities $ 29,000 $ 2,590 $ -- $ 31,590
Other holdings 8,689 -- 3,471 5,218
------------ ------------ ----------- ------------
Total $ 37,689 $ 2,590 $ 3,471 $ 36,808
============ ============ =========== ============
For 2003, 2002 and 2001, there were no gross realized gains on sales of
available-for-sale securities.
NOTE 5: INVENTORIES, NET
Inventories are summarized as follows:
In thousands January 3, 2004 December 28, 2002
- --------------------------------------------------------------------------------
Raw materials $ 25,922 $ 26,069
Work in process 6,085 5,824
Finished goods 453,175 429,261
----------- -----------
$ 485,182 $ 461,154
=========== ===========
NOTE 6: PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
In thousands January 3, 2004 December 28, 2002
- --------------------------------------------------------------------------------
Land and buildings $ 140,198 $ 140,311
Machinery and equipment 328,525 313,161
Furniture and fixtures 145,423 122,815
Leasehold improvements 282,373 235,859
----------- -----------
896,519 812,146
Less: Accumulated depreciation
and amortization 485,778 433,843
----------- -----------
$ 410,741 $ 378,303
=========== ===========
Depreciation and amortization expense of property and equipment was $81.4
million, $70.6 million and $61.9 million for fiscal years 2003, 2002 and 2001,
respectively.
F-18
NOTE 7: GOODWILL AND INTANGIBLES, NET
The Company adopted the provisions of SFAS No. 142 effective December 30, 2001.
As required under SFAS No. 142, the Company completed its transitional
impairment tests as of December 29, 2001 and its annual impairment tests as of
the first day of the third quarters of each of fiscal 2003 and fiscal 2002. No
impairment was recognized at either date.
The following tables disclose the carrying value of all the intangible assets:
Estimated
Dollars in thousands Lives January 3, 2004 December 28, 2002
- --------------------------------------------------------------------------------
Amortized intangible assets:
Gross Carrying Amount:
Licensed trademarks 5-15 years $ 42,849 $ 42,849
Merchandising rights 4 years 71,138 73,920
----------- -----------
Subtotal $ 113,987 $ 116,769
----------- -----------
Accumulated Amortization:
Licensed trademarks $ (13,963) $ (10,184)
Merchandising rights (45,212) (42,064)
----------- -----------
Subtotal $ (59,175) $ (52,248)
----------- -----------
Net:
Licensed trademarks $ 28,886 $ 32,665
Merchandising rights 25,926 31,856
----------- -----------
Total amortized intangible
assets, net $ 54,812 $ 64,521
----------- -----------
Unamortized intangible assets:
Owned trademarks $ 189,356 $ 162,056
----------- -----------
Total intangible assets $ 244,168 $ 226,577
=========== ===========
Intangible amortization expense for 2003, 2002 and 2001 amounted to $20.3
million, $22.8 million and $20.8 million, respectively.
The estimated intangible amortization expense for the next five years is as
follows:
(In millions)
Fiscal Year Amortization Expense
- ----------------------------------------------------------------
2004 $17.0
2005 10.5
2006 6.0
2007 4.4
2008 2.8
F-19
The changes in carrying amount of goodwill for the twelve months ended January
3, 2004 are as follows:
Wholesale Wholesale
In thousands Apparel Non-Apparel Total
- ----------------------------------------------------------------------------------------------------
Balance December 28, 2002 $ 469,050 $ 9,819 $ 478,869
Acquisition of Juicy Couture* 6,729 -- 6,729
Acquisition of Enyce* 102,089 -- 102,089
Acquisition of Mexx Austria 91 -- 91
Reversal of unused purchase accounting reserves (3,894) (224) (4,118)
Translation difference 6,507 -- 6,507
Finalization of preliminary purchase price
allocation of Ellen Tracy 2,769 -- 2,769
Additional purchase price of Lucky Brand
Dungarees 3,500 -- 3,500
------------ ------------ ------------
Balance January 3, 2004 $ 586,841 $ 9,595 $ 596,436
============ ============ ============
* Pending finalization of purchase price allocation.
There is no goodwill related to the Company's retail segment.
The following pro forma information presents the impact on net income and
earnings per share had SFAS No. 142 been effective for the twelve months ended
December 29, 2001:
Fiscal Year Ended
-----------------------------------------------
January 3, December 28, December 29,
2004 2002 2001
In thousands except per share data Actual Actual Pro forma
- ----------------------------------------------------------------------------------------------------
Net income, as reported $ 279,693 $ 231,165 $ 192,057
Discontinued amortization of goodwill and
intangibles, net of tax -- -- 10,503
--------- --------- ---------
Net income, adjusted $ 279,693 $ 231,165 $ 202,560
========= ========= =========
Basic earnings per share, as reported $ 2.60 $ 2.19 $ 1.85
Discontinued amortization of goodwill and
intangibles, net of tax -- -- 0.10
--------- --------- ---------
Basic earnings per share, adjusted $ 2.60 $ 2.19 $ 1.95
========= ========= =========
Diluted earnings per share, as reported $ 2.55 $ 2.16 $ 1.83
Discontinued amortization of goodwill and
intangibles, net of tax -- -- 0.10
--------- --------- ---------
Diluted earnings per share, adjusted $ 2.55 $ 2.16 $ 1.93
========= ========= =========
F-20
NOTE 8: ACCRUED EXPENSES
Accrued expenses consisted of the following:
In thousands January 3, 2004 December 28, 2002
- --------------------------------------------------------------------------------
Payroll and bonuses $ 43,233 $ 64,018
Taxes, other than taxes on income 5,643 12,210
Employee benefits 56,223 45,296
Advertising 28,561 25,049
Restructuring reserve 1,969 11,377
Accrued interest 11,551 9,582
Mark-to-market liability 14,973 4,369
Deferred royalty income 4,869 --
Additional purchase price payments -- 42,214
Other 84,264 69,343
----------- -----------
$ 251,286 $ 283,458
=========== ===========
NOTE 9: INCOME TAXES
The provisions for income taxes are as follows:
Fiscal Year Ended
--------------------------------------------------------------------------
In thousands January 3, 2004 December 28, 2002 December 29, 2001
- ---------------------------------------------- --------------------------------------------------------------------------
Current:
Federal $ 104,102 $ 107,157 $ 89,237
Foreign 27,940 18,663 10,131
State & local 15,345 15,600 10,800
----------- ----------- -----------
Total Current $ 147,387 $ 141,420 $ 110,168
Deferred:
Federal $ 16,064 $ (7,644) $ 10,899
Foreign (7,760) (4,304) (14,155)
State & local 3,007 1,809 1,120
----------- ----------- -----------
Total Deferred 11,311 (10,139) (2,136)
----------- ----------- -----------
$ 158,698 $ 131,281 $ 108,032
=========== =========== ===========
Liz Claiborne, Inc. and its U.S. subsidiaries file a consolidated federal income
tax return. Deferred income tax benefits and deferred income taxes represent the
tax effects of revenues, costs and expenses which are recognized for tax
purposes in different periods from those used for financial statement purposes.
The current income tax provisions exclude approximately $8,610,000 in 2003,
$5,916,000 in 2002 and $4,511,000 in 2001 arising from the tax benefits related
to the exercise of nonqualified stock options. These amounts have been credited
to capital in excess of par value. In addition, the current income tax provision
does not reflect the deferred tax liability from the Company's acquisition of
Mexx of approximately $475,000 and the valuation allowance against the net
operating loss carryforwards acquired as part of the acquisition of Mexx for the
year ended December 29, 2001.
F-21
The effective income tax rate differs from the statutory federal income tax rate
as follows:
Fiscal Year Ended
--------------------- ---------------------- ----------------------
January 3, 2004 December 28, 2002 December 29, 2001
- ---------------------------------------------- --------------------- ---------------------- ----------------------
Federal tax provision at statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal
benefit 2.3 2.8 2.3
Other-net (1.1) (1.6) (1.3)
------ ------ ------
36.2% 36.2% 36.0%
====== ====== ======
The components of net deferred taxes arising from temporary differences as of
January 3, 2004 and December 28, 2002 are as follows:
January 3, 2004 December 28, 2002
-------------------------------------------------------------------------
In thousands Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Asset Liability Asset Liability
- -------------------------------------------------------------------------------------------------------------
Inventory valuation $ 4,050 $ -- $ 8,356 $ --
Restructuring charge 7,411 -- 10,854 --
Deferred compensation -- (13,442) -- (10,414)
Nondeductible accruals 9,051 -- 13,110 --
Amortization of intangibles -- 22,410 -- 8,576
Unrealized investment losses 6,332 5,331 4,545 933
Net operating loss carryforwards 17,984 -- 16,924 --
Valuation allowance (9,930) -- (7,153) --
Depreciation -- 23,941 -- 34,293
Other-net 10,858 5,621 (759) 321
--------- --------- --------- ---------
$ 45,756 $ 43,861 $ 45,877 $ 33,709
========= ========= ========= =========
As of January 3, 2004, Mexx had net operating loss carryforwards of
approximately $48,160,000 (that begins to expire in 2005), available to reduce
future foreign taxable income. A deferred tax asset has been established;
however, a valuation allowance of $8,802,000 has reduced the deferred tax assets
because it is more likely than not that certain of these assets will not be used
to reduce future tax payments. The valuation allowance increased $2.8 million
from the prior year, as management now believes that it is more likely than not
that certain deferred tax assets will not be used to reduce future tax payments.
As of December 28, 2002, Mexx had net operating loss carryforwards of
approximately $45,162,000 (that begins to expire in 2005), available to reduce
future foreign taxable income. A deferred tax asset had been established;
however, a valuation allowance of $6,035,000 had reduced the deferred tax assets
because it was more likely than not that certain of these assets would not be
used to reduce future tax payments. The valuation allowance increased $0.2
million from the prior year, as management believed that it was more likely than
not that certain deferred tax assets would not be used to reduce future tax
payments.
As of January 3, 2004, a state net operating loss was recorded and a full
valuation allowance was established in the amount of $1,128,000. For December
28, 2002, the corresponding amount was $1,116,000.
The Company has provided Federal income taxes on unremitted earnings from its
international subsidiaries that may be remitted back to the United States.
Federal income taxes were not provided on unremitted earnings expected to be
permanently reinvested internationally of approximately $11.2 million.
F-22
NOTE 10: COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company leases office, showroom, warehouse/distribution and retail space and
computers and other equipment under various noncancelable operating lease
agreements which expire through 2023. Rental expense for 2003, 2002 and 2001 was
approximately $146,348,000, $124,610,000 and $100,748,000, respectively. The
above rental expense amounts exclude associated costs such as real estate taxes
and common area maintenance.
At January 3, 2004, the minimum aggregate rental commitments are as follows:
(In thousands) (In thousands)
Fiscal Year Operating Leases Fiscal Year Operating Leases
- -------------------------------------------------------------------------------
2004 $141,542 2007 $105,535
2005 129,122 2008 98,070
2006 118,468 Thereafter 363,172
Certain rental commitments have renewal options extending through the fiscal
year 2031. Some of these renewals are subject to adjustments in future periods.
Many of the leases call for additional charges, some of which are based upon
various escalations, and, in the case of retail leases, the gross sales of the
individual stores above base levels.
At January 3, 2004 and December 28, 2002, the Company had entered into
short-term commitments for the purchase of raw materials and for the production
of finished goods totaling approximately $614,840,000 and $594,024,000,
respectively.
In the normal course of business, the Company extends credit, on open account,
to its retail customers, after a credit analysis is performed based on a number
of financial and other criteria. Federated Department Stores, May Department
Stores and Dillard's Department Stores accounted for approximately 15%, 10% and
9%, respectively, of wholesale net sales in 2003; 16%, 12% and 11%,
respectively, of wholesale net sales in 2002; and 17%, 13% and 11%,
respectively, of wholesale net sales in 2001. The Company does not believe that
this concentration of sales and credit risk represents a material risk of loss
with respect to its financial position as of January 3, 2004.
In the United States and Canada, the Company is bound by collective bargaining
agreements with the Union of Needletrades, Industrial and Textile Employees
(UNITE) and agreements with various related locals which expire at various dates
through the period December 2004 through May 2006. These agreements cover
approximately 1,550 of the Company's full-time employees. Most of the
UNITE-represented employees are employed in warehouse and distribution
facilities the Company operates in California, New Jersey, Ohio, Pennsylvania
and Rhode Island. In addition, the Company is bound by an agreement with the
Industrial Professional & Technical Workers International Union, covering
approximately 235 of its full-time employees at its Santa Fe Springs, California
facility and expiring on May 14, 2005.
The Company considers its relations with its employees to be satisfactory and to
date has not experienced any interruption of its operations due to labor
disputes. While relations with the union have historically been amicable, the
Company cannot conclusively eliminate the likelihood of a labor dispute at one
or more of its facilities during negotiations of its collective bargaining
agreements with UNITE and its related locals. While the Company does not foresee
the likelihood of a prolonged labor dispute, any substantial labor disruption
could adversely affect its operations.
On May 22, 2001, the Company entered into an off-balance sheet financing
arrangement (commonly referred to as a "synthetic lease") to acquire various
land and equipment and construct buildings and real property improvements
associated with warehouse and distribution facilities in Ohio and Rhode Island.
The leases expire on November 22, 2006, with renewal subject to the consent of
the lessor. The lessor under the operating lease arrangements is an independent
third-party limited liability company, which has contributed equity of 5.75% of
the $63.7 million project costs. The leases include guarantees by the Company
for a substantial portion
F-23
of the financing and options to purchase the facilities at original cost; the
maximum guarantee is approximately $54 million. The guarantee becomes effective
if the Company declines to purchase the facilities at the end of the lease and
the lessor is unable to sell the property at a price equal to or greater than
the original cost. The Company selected this financing arrangement to take
advantage of the favorable financing rates such an arrangement afforded as
opposed to the rates available under alternative real estate financing options.
The lessor financed the acquisition of the facilities through funding provided
by third-party financial institutions. The lessor has no affiliation or
relationship with the Company or any of its employees, directors or affiliates,
and the Company's transactions with the lessor are limited to the operating
lease agreements and the associated rent expense that will be included in
Selling, general & administrative expense in the Consolidated Statements of
Income. In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities (an
interpretation of ARB No. 51)", which was revised in December 2003 ("FIN 46")
(see Note 22 of Notes to Consolidated Financial Statements). The third-party
lessor does not meet the definition of a variable interest entity under FIN 46,
and therefore consolidation by the Company is not required.
See Note 2 of Notes to Consolidated Financial Statements for information
regarding contingent payments related to acquisitions made by the Company.
The Company is a party to several pending legal proceedings and claims. Although
the outcome of such actions cannot be determined with certainty, management is
of the opinion that the final outcome should not have a material adverse effect
on the Company's results of operations or financial position (see Note 24 of
Notes to Consolidated Financial Statements).
NOTE 11: DEBT AND LINES OF CREDIT
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date) of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. Interest on the Eurobonds is being paid on an annual basis
until maturity. These bonds are designated as a hedge of the Company's net
investment in Mexx (see Note 2 of Notes to Consolidated Financial Statements).
On October 21, 2002, the Company entered into a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing a $500
million, 364-day unsecured credit facility scheduled to mature in November 2002,
and a $375 million, three-year bank revolving credit facility, replacing an
existing $250 million bank facility which was scheduled to mature in November
2003. The three-year facility includes a $75 million multi-currency revolving
credit line which permits the Company to borrow in U.S. dollars, Canadian
dollars and Euros. At December 28, 2002, the Company had no commercial paper
outstanding and $12.6 million of borrowings denominated in Euro at an interest
rate of 3.6%. The carrying amount of the Company's borrowings under the
commercial paper program approximate fair value because the interest rates are
based on floating rates, which are determined by prevailing market rates.
On October 17, 2003, the Company entered into a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
existing $375 million, 364-day unsecured credit facility scheduled to mature in
October 2003, and on October 21, 2002, the Company received a $375 million,
three-year bank revolving credit facility (collectively, the "Agreement"). The
aforementioned bank facility replaced an existing $750 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 January 3,
2004, the Company had no debt outstanding under the Agreement.
F-24
As of January 3, 2004 and December 28, 2002, the Company had lines of credit
aggregating $487 million and $469 million, respectively, which were primarily
available to cover trade letters of credit. At January 3, 2004 and December 28,
2002, the Company had outstanding trade letters of credit of $254 million and
$291 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.
The Company's Canadian and European subsidiaries also have unsecured lines of
credit totaling approximately $76.1 million (based on the exchange rates as of
January 3, 2004). As of January 3, 2004, a total of $18.9 million of borrowings
denominated in foreign currencies was outstanding at an average interest rate of
2.8%. These lines of credit bear interest at rates based on indices specified in
the contracts plus a margin. The lines of credit are in effect for less than one
year and mature at various dates in 2004. These lines are guaranteed by the
Company. With the exception of the Eurobonds, which mature in 2006,
substantially all of the Company's debt will mature in 2004 and will be
refinanced under existing credit lines.
NOTE 12: DERIVATIVE INSTRUMENTS
At January 3, 2004, the Company had various Euro currency collars outstanding
with a net notional amount of $42 million, maturing through July 2004 with
values ranging between 1.05 and 1.14 U.S. dollar per Euro as compared to $80
million in collars and average rate options at December 28, 2002. The Company
also had forward contracts maturing through December 2004 to sell 58 million
Euro for $64 million and 16 million Canadian dollars for $12 million. The
notional value of the foreign exchange forward contracts was approximately $76
million at January 3, 2004, as compared with approximately $61 million at
December 28, 2002. Unrealized losses for outstanding foreign exchange forward
contracts and currency options were approximately $11.8 million at January 3,
2004 and approximately $5.2 million at December 28, 2002. The ineffective
portion of these contracts was not material and was expensed in the current
year.
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
hedge 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 year ended January 3, 2004.
NOTE 13: RESTRUCTURING CHARGES
In December 2002, the Company recorded a net pretax restructuring charge of $7.1
million, 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 were no longer required. This determination to close the
stores was 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 included costs associated with lease obligations ($5.4
million), asset write-offs ($3.3 million) and other store closing costs ($1.2
million). In December 2003, the company recorded a net pretax restructuring gain
of $672,000, representing the reversal of amounts provided in December 2002 no
longer required. The remaining balance of the 2002 restructuring liability as of
January 3, 2004 was $2.0 million related to remaining lease obligations, all of
which is expected to be paid out in cash.
In December 2001, the Company recorded a net pretax restructuring charge of
$15.1 million, representing a charge of $19.0 million, which consisted of
approximately $4.6 million for the closure of seven Specialty Retail stores, due
to a shift to a vertical format for one of the Company's brands which requires
positioning in different locations and the elimination of its large "world"
store concept, and five Outlet stores, due to the elimination of two of its
branded store formats; $3.5 million for the closure of four of its division
offices; $3.3 million associated with the strategic closure of two specific
facilities and $7.6 million in severance related costs associated with the
elimination of approximately 600 jobs, offset by the $3.9 million deemed no
longer necessary of the Company's previous
F-25
restructuring liability originally recorded in December 2000. The remaining
balance of the restructuring liability as of December 29, 2001 was $15.7
million. These activities were substantially complete as of December 28, 2002.
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating and Occupancy Costs
Store Closure Administrative and Asset Write
In millions Costs Exit Costs Downs Total
- ---------------------------------------------------------------------------------------------------------------
Balance at December 30, 2000 $ 5.5 $ 11.4 $ 2.6 $ 19.5
2001 provision 4.6 7.6 6.8 19.0
2001 spending (2.1) (9.7) (7.1) (18.9)
2001 reserve reduction (2.4) (1.5) -- (3.9)
------ ------ ------ ------
Balance at December 29, 2001 $ 5.6 $ 7.8 $ 2.3 $ 15.7
------ ------ ------ ------
2002 provision 9.9 -- -- 9.9
Reclassification (2.1) -- 2.1 --
2002 spending (3.5) (6.3) (1.6) (11.4)
2002 reserve reduction (2.1) (0.4) (0.3) (2.8)
------ ------ ------ ------
Balance at December 28, 2002 $ 7.8 $ 1.1 $ 2.5 $ 11.4
------ ------ ------ ------
2003 spending (5.3) (0.9) (2.5) (8.7)
2003 reserve reduction (0.7) -- -- (0.7)
------ ------ ------ ------
Balance at January 3, 2004 $ 1.8 $ 0.2 $ 0.0 $ 2.0
====== ====== ====== ======
NOTE 14: OTHER (EXPENSE) - NET
Other (expense) - net consists of the following:
Fiscal Year Ended
----------------- ------------------- -------------------
In thousands January 3, 2004 December 28, 2002 December 29, 2001
- ---------------------- ----------------- ------------------- -------------------
Minority interest $ (2,418) $ (3,789) $ (3,645)
Other 528 1,471 134
-------- -------- --------
$ (1,890) $ (2,318) $ (3,511)
======== ======== ========
F-26
NOTE 15: STOCK PLANS
In March 1992, March 2000 and March 2002, the Company adopted the "1992 Plan,"
the "2000 Plan" and the "2002 Plan," respectively, under which nonqualified
options to acquire shares of common stock may be granted to officers, other key
employees, consultants and, in the case of the 1992 and 2000 plans, outside
directors selected by the Company's Compensation Committee ("the committee").
Payment by option holders upon exercise of an option may be made in cash or,
with the consent of the committee, by delivering previously acquired shares of
Company common stock or any other method approved by the committee. Stock
appreciation rights may be granted in connection with all or any part of any
option granted under the plans, and may also be granted without a grant of a
stock option. The grantee of a stock appreciation right has the right, with the
consent of the committee, to receive either in cash or in shares of common
stock, an amount equal to the appreciation in the fair market value of the
covered shares from the date of grant to the date of exercise. Options and
rights are exercisable over a period of time designated by the committee and are
subject to such other terms and conditions as the committee determines. Vesting
schedules will be accelerated upon a change of control of the Company. Options
and rights may generally not be transferred during the lifetime of a holder.
Awards under the 2000 and 2002 Plans may also be made in the form of incentive
stock options, dividend equivalent rights, restricted stock, unrestricted stock
and performance shares. Exercise prices for awards under the 2000 and 2002 Plans
are determined by the committee; to date, all stock options have been granted at
an exercise price not less than the quoted market value of the underlying shares
on the date of grant.
The 2000 Plan provides for the issuance of up to 10,000,000 shares of common
stock with respect to options, stock appreciation rights and other awards
granted under the 2000 Plan. At January 3, 2004, there were available for future
grant 1,731,000 shares under the 2000 Plan. No incentive stock options may be
granted under the 2000 Plan after March 9, 2010. Upon shareholder approval of
the 2000 Plan in May 2000, the Company ceased issuing grants under the 1992
Plan; awards made thereunder prior to its termination remain in effect in
accordance with their terms.
The 2002 Plan provides for the issuance of up to 9,000,000 shares of common
stock with respect to options, stock appreciation rights and other awards
granted under the 2002 Plan. As of January 3, 2004 there were available for
future grant 6,981,069 shares under the 2002 Plan. The 2002 plan expires in
2012.
Since January 1990, the Company has delivered treasury shares upon the exercise
of stock options. The difference between the cost of the treasury shares, on a
first-in, first-out basis, and the exercise price of the options has been
reflected in stockholders' equity. If the exercise price of the options is
higher than the cost of the treasury shares, the amount is reflected in capital
in excess of par value. If the exercise price of the options is lower than the
cost of the treasury shares, the amount is reflected in retained earnings.
Changes in common shares under option for the three fiscal years in the period
ended January 3, 2004 are summarized as follows:
2003 2002 2001
----------------------------- ----------------------------- --------------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
Exercise Price Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of year 8,707,357 $ 23.00 7,584,482 $ 20.10 7,228,550 $ 18.23
Granted 3,364,981 28.56 3,266,175 26.21 3,851,000 22.08
Exercised (2,283,668) 20.28 (1,784,524) 18.25 (2,363,076) 18.20
Cancelled (605,288) 25.45 (358,776) 22.25 (1,131,992) 18.90
----------- ------- ----------- ------- ----------- -------
End of year 9,183,382 $ 25.55 8,707,357 $ 23.00 7,584,482 $ 20.10
=========== ======= =========== ======= =========== =======
Exercisable at end of year 2,291,063 $ 22.18 1,657,582 $ 19.95 1,179,594 $ 18.73
=========== ======= =========== ======= =========== =======
Weighted average fair value of
options granted during the year $ 10.44 $ 9.50 $ 9.49
F-27
The following table summarizes information about options outstanding at January
3, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------ -------------------------------------------
Range of Outstanding at Weighted Average Weighted Average Exercisable at Weighted Average
Remaining Contractual
Exercise Prices Jan. 3, 2004 Life Exercise Price Jan. 3, 2004 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
$13.44 - $ 22.50 2,969,340 6.4 years $ 21.31 1,606,690 $ 20.39
22.51 - 27.50 2,772,811 8.0 years 25.90 615,248 25.79
27.51 - 37.15 3,441,231 9.1 years 28.94 69,125 31.60
$13.44 - $ 37.15 9,183,382 7.9 years $ 25.55 2,291,063 $ 22.18
In January 2001, May 2001 and March 2003, the committee granted a total of
116,966 shares of restricted stock issued under the 2000 Plan. As of January 3,
2004, 104,966 of these shares remained outstanding. In January 2004, the
committee granted an additional 54,000 shares under the 2000 Plan. These shares
are subject to restrictions on transfer and risk of forfeiture until earned by
continued service and vest as follows: 20% on each of the third, fourth and
fifth grant date anniversary, and the remaining 40% on the sixth grant date
anniversary, with acceleration of vesting upon the achievement of certain
financial and non-financial goals. The unearned compensation is being amortized
over a period equal to the anticipated vesting period.
In January 2001, the committee authorized the grant of 1,034,000 shares of
common stock to a group of key executives. Given that the total return on the
Company's common stock exceeded that of a predetermined group of competitors for
the period of January 1, 2001 through December 31, 2003, the expiration of the
restrictions on 100% of such shares was accelerated as of December 31, 2003.
During 2003, the Company recorded a charge to operating income of approximately
$4 million as compensation expense to reflect such accelerations.
In 1998, the committee granted 733,300 shares of common stock to a group of key
executives. As of January 3, 2004, 67,012 of these shares remained outstanding.
These shares are subject to restrictions on transfer and subject to risk of
forfeiture until earned by continued employment. The restrictions expire on July
6, 2007. Given that the total return on the Company's common stock exceeded that
of a predetermined group of competitors for the period of January 1, 1998
through March 1, 2001, the expiration of the restrictions on 80% of such shares
was accelerated as of March 1, 2001. During the first quarter of 2001, the
Company recorded a charge to operating income of approximately $5 million as
compensation expense to reflect such accelerations. The shares that did not vest
on an accelerated basis remain restricted; the expiration of restrictions may be
accelerated if the total return of the Company's common stock exceeds that of a
predetermined group of competitors or upon the occurrence of certain other
events. The unearned compensation on such unvested shares is being amortized
over a period equal to the anticipated vesting period.
In November 2003, pursuant to the terms of his amended employment agreement, the
Company issued to the CEO (a) 48,892 restricted shares, which shares vest in
full on the first anniversary of grant, (b) performance shares with a three year
performance cycle of 2003-2005 and with the actual number of shares to be paid
out at the end of such cycle based upon the Company's achievement against EPS
and total shareholder return targets for such period, with potential payouts
ranging from 0 shares to 405,288 shares; and (c) options to acquire 33,481
shares of Common Stock.
The Company's outside directors' stock ownership plan provides non-employee
directors, as part of their annual retainer, shares of common stock with a value
of $15,000 on the first business day of each fiscal year. Effective January
2004, the Company's outside directors' stock ownership plan will provide
non-employee directors, as part of their annual retainer, shares of common stock
with a value of $75,000 on January 10 of each fiscal year. The shares so issued
are nontransferable for a period of three years following the grant date,
subject to certain exceptions. In 2003, 4,219 shares of common stock were issued
under this plan. This plan also provides each non-employee director a grant of
options to purchase 2,000 shares of common stock on the first business day of
each fiscal year; effective January 2004, such options will no longer be granted
to non-employee directors. Not more than one half of one percent (0.50%) of the
shares of common stock outstanding from time to time may be issued under the
plan, which will expire in 2006. Additionally, effective July 2000, each
non-employee director is entitled to receive on the
F-28
first business day of each fiscal year a grant of options to purchase 4,000
shares under the 2000 Plan; effective January 2004, such options will no longer
be granted to non-employee directors.
In January 2004, the committee authorized the grant of 710,000 shares of common
stock to a group of key executives. These shares are subject to restrictions on
transfer and subject to risk of forfeiture until earned by continued employment.
The restrictions expire in January 2010. The expiration of restrictions may be
accelerated if the total return on the Company's common stock exceeds that of a
predetermined group of competitors or upon the occurrence of certain other
events. The unearned compensation is being amortized over a period equal to the
anticipated vesting period.
NOTE 16: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains a qualified defined contribution plan (the "401(k)/Profit
Sharing Plan") for eligible U.S. employees of the Company and adopting
affiliates, which has two component parts: a cash or deferred arrangement under
section 401(k) of the Internal Revenue Code and a profit sharing portion. To be
eligible to participate in either portion of the 401(k)/Profit Sharing Plan,
employees must be at least age 21 and not covered by a collective bargaining
agreement; there are additional eligibility and vesting rules for each of the
401(k)/Profit Sharing Plan components. As of January 1, 2002, full-time
employees may begin to make pre-tax contributions and receive employer matching
contributions to the 401(k) portion of the 401(k)/Profit Sharing Plan after six
months of employment with the Company, while part-time employees must complete a
12-month period in which they are credited with 1,000 hours of service. To be
eligible for the profit sharing component, an employee must have 12 months and
1,000 hours of service and a participant must be credited with 1,000 hours of
service during, and be employed by the Company or one of its affiliates on the
last day of, the calendar year to share in the profit sharing contribution for
that year.
Company 401(k) matching contributions vest (i.e., become non-forfeitable) on a
schedule of 20% for the first two years of elapsed service with the Company and
its affiliates and 20% for each year of service thereafter. Profit sharing
contributions, if any, are made annually at the discretion of the Board of
Directors, and vest 100% after five years of elapsed service.
Under the 401(k) portion of the 401(k)/Profit Sharing Plan, participants may,
subject to applicable IRS limitations, contribute from 1% to 15% (effective
January 1, 2003, 1% to 50%) of their salaries on a pretax basis; the
401(k)/Profit Sharing Plan provides for automatic enrollment at a contribution
rate of 3% when an eligible employee first becomes entitled to participate in
the 401(k) portion of the 401(k)/Profit Sharing Plan, unless the employee elects
otherwise. Participants' pretax contributions are matched at the rate of $0.50
for each dollar contributed by the participant that does not exceed 6% of
eligible compensation.
The Company's aggregate 401(k)/Profit Sharing Plan contribution expense for
2003, 2002 and 2001, which is included in Selling, general & administrative
expenses, was approximately $9,106,000, $9,789,000 and $7,731,000, respectively.
The Company has a non-qualified supplemental retirement plan for certain highly
compensated employees whose benefits under the 401(k)/Profit Sharing Plan are
expected to be constrained by the operation of certain Internal Revenue Code
limitations. The supplemental plan provides a benefit equal to the difference
between the contribution that would be made for an executive under the
tax-qualified plan absent such limitations and the actual contribution under
that plan. The supplemental plan also allows certain highly compensated
employees to defer up to 15% (effective January 1, 2003, up to 50%) of their
base salary and up to 100% of their annual bonus. Supplemental benefits
attributable to participant deferrals are fully vested at all times and the
balance of a participant's benefits vests on the same basis as the matching
contribution under the 401(k)/Profit Sharing Plan. This supplemental plan is not
funded. As of January 1, 2002, the Company established an irrevocable "rabbi"
trust to which the Company plans to make contributions to provide a source of
funds to assist in meeting its obligations under the plan. The principal of the
trust, and earnings thereon, are to be used exclusively for the participants
under the plan, subject to the claims of the Company's general creditors. The
Company's expenses related to these plans, which are included in Selling,
general & administrative expenses, were approximately $36,000, $502,000 and
$13,000 in 2003, 2002 and 2001, respectively.
F-29
The Company has established for a senior executive an unfunded deferred
compensation arrangement which accrues over a ten-year period as of the first
day of each fiscal year beginning in 1996, based on an amount equal to 15% of
the sum of the senior executive's base salary and bonus. The then accrued amount
plus earnings will become fully vested at the end of the 2004 fiscal year.
Amounts credited in 2005 and 2006 become fully vested on December 31, 2006,
provided the senior executive is the Chairman of the Board and Chief Executive
Officer of the Company on such date. This arrangement also provides for the
deferral of an amount equal to the portion of the executive's base salary that
exceeds $1 million. The deferred amount plus earnings will be fully vested at
all times.
NOTE 17: STOCKHOLDER RIGHTS PLAN
In December 1998, the Company adopted a new Stockholder Rights Plan to replace
the then expiring plan originally adopted in December 1988. Under the new Plan,
one preferred stock purchase right is attached to each share of common stock
outstanding. The rights are nominally exercisable under certain circumstances,
to buy 1/100 share of a newly created Series A Junior Participating Preferred
Stock for $150. If any person or group (referred to as an "Acquiring Person")
becomes the beneficial owner of 15% or more of the Company's common stock (20%
or more in the case of certain acquisitions by institutional investors), each
right, other than rights held by the Acquiring Person which become void, will
become exercisable for common stock having a market value of twice the exercise
price of the right. If anyone becomes an Acquiring Person and afterwards the
Company or 50% or more of its assets is acquired in a merger, sale or other
business combination, each right (other than voided rights) will become
exercisable for common stock of the acquirer having a market value of twice the
exercise price of the right. The rights, which expire on December 21, 2008, and
do not have voting rights, may be amended by the Company's Board of Directors
and redeemed by the Company at $0.01 per right at any time before any person or
group becomes an Acquiring Person.
NOTE 18: EARNINGS PER COMMON SHARE
The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with SFAS No. 128, "Earnings per Share."
Fiscal Year Ended
--------------------- --------------------- ---------------------
In thousands January 3, 2004 December 28, 2002 December 29, 2001
- ------------------------------------------------------- --------------------- --------------------- ---------------------
Net income $ 279,693 $ 231,165 $ 192,057
Weighted average common shares outstanding 107,451 105,592 103,994
Effect of dilutive securities:
Stock options and restricted stock grants 2,168 1,604 1,057
Weighted average common shares and common share
equivalents 109,619 107,196 105,051
NOTE 19: CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During fiscal 2003, 2002 and 2001, the Company made income tax payments of
approximately $153,683,000, $109,536,000 and $83,851,000, respectively. The
Company made interest payments of approximately $27,808,000, $23,939,000 and
$15,093,000 in 2003, 2002 and 2001, respectively. There were no other non-cash
activities in the twelve months ended January 3, 2004. Other non-cash activities
in the twelve months ended December 28, 2002 include the reclassification of
$15.0 million from Other Non-Current Liabilities to Accrued expenses and a $27.2
million liability included in Accrued expenses associated with a future payment
related to the Lucky Brand and Mexx Canada acquisitions.
F-30
NOTE 20: SEGMENT REPORTING
The Company operates the following business segments: Wholesale Apparel,
Wholesale Non-Apparel and Retail. The Wholesale Apparel segment consists of
women's and men's apparel designed and marketed worldwide under various
trademarks owned by the Company or licensed by the Company from third-party
owners, including wholesale sales of women's, men's and children's apparel
designed and marketed in Europe, Canada, the Asia-Pacific Region and the Middle
East under the Mexx brand names. The Wholesale Non-Apparel segment consists of
accessories, jewelry and cosmetics designed and marketed worldwide under certain
owned or licensed trademarks. The Retail segment consists of the Company's
worldwide retail operations that sell most of these apparel and non-apparel
products to the public through the Company's specialty retail stores, outlet
stores, and concession stores. As a result of the Company's 2001 acquisition of
Mexx, the Company also presents its results on a geographic basis between
Domestic (wholesale customers and Company specialty retail and outlet stores
located in the United States) and International (wholesale customers and Company
specialty retail, outlet and concession stores located outside of the United
States). The Company, as licensor, also licenses to third parties the right to
produce and market products bearing certain Company-owned trademarks; the
resultant royalty income is not allocated to any of the specified operating
segments, but is rather included in the line "Sales from external customers"
under the caption "Corporate/ Eliminations."
The Company evaluates performance and allocates resources based on operating
profits or losses. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies in its
2003 Annual Report on Form 10-K. Intersegment sales are recorded at cost. There
is no intercompany profit or loss on intersegment sales, however, the wholesale
segments are credited with their proportionate share of the operating profit
generated by the Retail segment. The profit credited to the wholesale segments
from the Retail segment is eliminated in consolidation.
The Company's segments are business units that offer either different products
or distribute similar products through different distribution channels. The
segments are each managed separately because they either manufacture and
distribute distinct products with different production processes or distribute
similar products through different distribution channels.
January 3, 2004
-----------------------------------------------------------------------------------------
Wholesale Wholesale Corporate/
In thousands Apparel Non-Apparel Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Total net sales $ 2,985,497 $ 558,642 $ 838,395 $ (141,419) $ 4,241,115
Intercompany sales (151,238) (20,669) -- 171,907 --
------------ ------------ ------------ ------------ ------------
Sales from external customers $ 2,834,259 $ 537,973 $ 838,395 $ 30,488 $ 4,241,115
============ ============ ============ ============ ============
Depreciation and amortization expense $ 69,324 $ 6,369 $ 28,028 $ 1,260 $ 104,981
OPERATING INCOME:
Total operating income (loss) $ 349,137 $ 68,884 $ 90,829 $ (38,060) $ 470,790
Intercompany segment operating
(income) loss (46,699) (12,015) -- 58,714 --
------------ ------------ ------------ ------------ ------------
Segment operating income from
external customers $ 302,438 $ 56,869 $ 90,829 $ 20,654 $ 470,790
============ ============ ============ ============ ============
Segment assets $ 2,006,673 $ 170,315 $ 524,721 $ 186,390 $ 2,888,099
Expenditures for long-lived assets 183,053 2,243 46,948 -- 232,244
F-31
December 28, 2002
-----------------------------------------------------------------------------------------
Wholesale Wholesale Corporate/
In thousands Apparel Non-Apparel Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Total net sales $ 2,660,287 $ 511,622 $ 718,642 $ (173,048) $ 3,717,503
Intercompany sales (168,452) (25,450) -- 193,902 --
------------ ------------ ------------ ------------ ------------
Sales from external customers $ 2,491,835 $ 486,172 $ 718,642 $ 20,854 $ 3,717,503
============ ============ ============ ============ ============
Depreciation and amortization expense $ 68,526 $ 5,745 $ 20,757 $ 1,367 $ 96,395
OPERATING INCOME:
Total operating income (loss) $ 323,179 $ 47,148 $ 60,680 $ (41,119) $ 389,888
Intercompany segment operating
(income) loss (39,331) (13,041) -- 52,372 --
------------ ------------ ------------ ------------ ------------
Segment operating income from
external customers $ 283,848 $ 34,107 $ 60,680 $ 11,253 $ 389,888
============ ============ ============ ============ ============
Segment assets $ 1,477,053 $ 176,728 $ 430,201 $ 460,605 $ 2,544,587
Expenditures for long-lived assets 238,687 960 51,268 -- 290,915
December 29, 2001
-----------------------------------------------------------------------------------------
Wholesale Wholesale Corporate/
In thousands Apparel Non-Apparel Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Total net sales $ 2,532,927 $ 496,080 $ 615,714 $ (196,199) $ 3,448,522
Intercompany sales (190,310) (22,518) -- 212,828 --
------------ ------------ ------------ ------------ ------------
Sales from external customers $ 2,342,617 $ 473,562 $ 615,714 $ 16,629 $ 3,448,522
============ ============ ============ ============ ============
Depreciation and amortization expense $ 70,318 $ 6,795 $ 20,476 $ 3,902 $ 101,491
OPERATING INCOME:
Total operating income (loss) $ 287,760 $ 46,150 $ 69,284 $ (71,477) $ 331,717
Intercompany segment operating
(income) loss (49,347) (12,526) -- 61,873 --
------------ ------------ ------------ ------------ ------------
Segment operating income (loss) from
external customers $ 238,413 $ 33,624 $ 69,284 $ (9,604) $ 331,717
============ ============ ============ ============ ============
Segment assets $ 1,512,923 $ 166,721 $ 358,677 $ 189,339 $ 2,227,660
Expenditures for long-lived assets 144,998 3,473 126,484 -- 274,955
F-32
In the "Corporate/Eliminations" column of each period presented, the segment
assets consist primarily of corporate buildings, machinery and equipment and
licenses and trademarks purchased by the Company. The segment operating loss
consists primarily of the elimination of the profit transfer from the Retail
segment to the wholesale segments, and, in 2001, $15,050,000 of restructuring
charges.
January 3, 2004 December 28, 2002 December 29, 2001
---------------------------------------------------------------------------------------------
In thousands Domestic International Domestic International Domestic International
- ------------------------------------------------------------------------------------------------------------------------------------
Sales from external customers $ 3,304,614 $ 936,501 $ 3,037,325 $ 680,178 $ 3,031,318 $ 417,204
Depreciation and amortization expense 82,486 22,495 82,629 13,766 87,498 13,993
Segment operating income 382,542 88,248 336,056 53,832 290,357 41,360
Segment assets 2,102,806 785,293 1,925,216 647,332 1,746,660 481,000
Expenditures for long-lived assets 186,743 45,501 235,827 55,088 46,420 228,535
A reconciliation to adjust segment assets to consolidated assets follows:
In thousands January 3, 2004 December 28, 2002 December 29, 2001
- ---------------------------------------------- --------------------- ---------------------- ----------------------
Total segment assets $ 2,888,099 $ 2,544,587 $ 2,227,660
Intercompany receivables (25,004) (16,067) (18,200)
Investments in wholly-owned subsidiaries (249,473) (249,473) (298,128)
Other (6,623) (10,690) 39,923
----------- ----------- -----------
Total consolidated assets $ 2,606,999 $ 2,268,357 $ 1,951,255
=========== =========== ===========
NOTE 21: OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss is comprised the effects of foreign
currency translation and changes in unrealized gains and losses on securities as
detailed below:
In thousands January 3, 2004 December 28, 2002
- ------------------------------------------ ----------------- -------------------
Foreign currency translation (loss) $ (48,192) $ (21,644)
(Losses) on cash flow hedging derivatives (10,071) (6,109)
Unrealized gains (losses) on securities 8,056 (564)
----------- -----------
Accumulated other comprehensive (loss),
net of tax $ (50,207) $ (28,317)
=========== ===========
The losses on cash flow hedging derivatives are reclassified to current year
gain or loss each year due to the short lives of these instruments.
The following table contains the components of the adjustment to unrealized
(losses) on available-for-sale securities included in the Consolidated
Statements of Retained Earnings, Comprehensive Income and Changes in Capital
Accounts.
In thousands January 3, 2004 December 28, 2002 December 29, 2001
- ---------------------------------------------- --------------------- ---------------------- ----------------------
Unrealized holding gain (loss) on $ 8,620 $ 2,384 $ (2,368)
available-for-sale securities, net of tax
F-33
NOTE 22: RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings or describe their applicability
under changed conditions. The Company adopted the provisions of SFAS No. 145
upon its effective date.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company adopted the
provisions of SFAS No. 146 effective December 29, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has
implemented the disclosure provisions of FIN 45 in its December 28, 2002
financial statements. The adoption of FIN 45 did not have a material impact on
the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities (an interpretation of ARB No. 51)," which was revised
in December 2003 ("FIN 46"). FIN 46 addresses consolidation by business
enterprises of certain variable interest entities, commonly referred to as
special purpose entities. The counterparty to the synthetic lease does not meet
the definition of a variable interest entity in FIN 46, therefore, the adoption
of FIN 46 did not have a material impact on the Company's financial statements.
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 adopted SFAS No. 149 on June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the Company's results
of operations and financial position.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and for interim periods beginning after June 15, 2003. The adoption
of SFAS No. 150 did not have a material impact on the Company's results of
operations and financial position.
F-34
NOTE 23: RELATED PARTY TRANSACTIONS
During 2003, the Company shipped goods to the specialty retailer Barneys New
York, Inc. ("Barneys"), of which Howard Socol (a Director of the Company) is the
Chairman, President and CEO. The net sales to Barneys in 2003 amounted to
approximately $1.2 million. The amount represents approximately 0.3% of such
company's 2003 revenue.
During 2003, 2002 and 2001, the Company paid the law firm, Kramer, Levin,
Naftalis & Frankel LLP, of which Kenneth P. Kopelman (a Director of the Company)
is a partner, approximately $2.35 million, $1.52 million and $872,000,
respectively, for fees incurred in connection with legal services provided to
the Company. The 2003 amount represents approximately 1% of such firm's 2003 fee
revenue.
The foregoing transactions between the Company and these entities were effected
on an arm's-length basis, with services provided at fair market value.
During 2003, 2002 and 2001, the Company leased a certain office facility from
Amex Property B.V. ("Amex"), a company whose principal owner is Rattan Chadha,
President and Chief Executive Officer of Mexx, under a 20-year lease agreement.
The space houses the principal headquarters of Mexx Group B.V. in Voorschoten,
Netherlands. The rental paid to Amex during fiscal years 2003 and 2002 and for
the period of May 23, 2001 through December 29, 2001 was 614,000, 628,000 and
365,000 Euros, respectively (or $696,000, $594,000 and $324,000, respectively,
based on the exchange rates in effect during such periods).
During 2003 and 2002, the Company leased a factory outlet and warehouse as well
as an office and inventory liquidation center from RAKOTTA HOLDINGS Inc.
("RAKOTTA"), a company whose principal owner is Joseph Nezri, President of MEXX
Canada Inc., under two lease agreements expiring January 30, 2006. The rent paid
to RAKOTTA during fiscal year 2003 and for the period July 9, 2002 through
December 28, 2002 was approximately 762,000 and 452,000 Canadian dollars,
respectively (or $544,000 and $289,000, respectively, based on the exchange
rates in effect during such periods).
The Company believes that each of the transactions described above was effected
on terms no less favorable to the Company than those that would have been
realized in transactions with unaffiliated entities or individuals.
NOTE 24: LEGAL PROCEEDINGS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position.
In January 1999, two actions were filed in California naming as defendants more
than a dozen United States-based apparel companies that source garments from
Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationship with the factories, have violated various federal and state laws.
One action, filed in California Superior Court in San Francisco by a union and
three public interest groups, alleges unfair competition and false advertising
(the "State Court Action"). The State Court Action seeks equitable relief,
unspecified amounts for restitution and disgorgement of profits, interest and an
award of attorney's fees. The second, filed in the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges claims under the civil RICO statute and the Alien Tort Claims
Act, premised on supposed violations of the federal anti-peonage and indentured
servitude statutes, as well as other violations of Saipan and international law,
and seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory defendants
on behalf of a putative class of their workers, alleges violations of federal
and Saipanese wage and employment laws (the "FLSA Action").
F-35
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. Eighteen other apparel companies also settled these claims at
that time. As part of the settlement, the Company was 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"), currently
pending in the United States District Court for the District of the Northern
Mariana Islands. The Brylane Action mirrors portions of the larger Federal
Action but does not include RICO and certain of the other claims alleged in that
case.
After the transfer of the Federal Action and the Brylane Action to Saipan, the
Court ruled on and denied in most material respects the non-settling defendants'
motion to dismiss the Federal Action. 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 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.
NOTE 25: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2003 and 2002 is set forth in the
table below:
In thousands except March June September December
--------------------------------------------------------------------------------------------------
per share data 2003 2002 2003 2002 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $1,075,599 $ 892,893 $ 959,417 $ 789,517 $1,174,192 $1,041,200 $1,031,907 $ 993,893
Gross profit 455,769 366,098 425,775 352,631 519,889 457,642 488,358 443,264
Net income 64,132 50,913 44,616 38,804 97,879 83,490 73,066 (1) 57,958 (2)
Basic earnings per share $ .60 $ .49 $ .42 $ .37 $ .91 $ .79 $ .67 (1) $ .55 (2)
Diluted earnings per share $ .59 $ .48 $ .41 $ .36 $ .89 $ .78 $ .66 (1) $ .54 (2)
Dividends paid per common share $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06
(1) Includes the after tax effect of a restructuring gain of $429 ($672 pretax)
or $.004 per share.
(2) Includes the after tax effect of a restructuring charge of $4,547 ($7,130
pretax) or $.04 per share.
F-36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
Column A Column B Column C Column D Column E
Additions
--------------------------------------
(In thousands) Balance at (1) Charged (2) Charged to
Beginning to Costs and Other Accounts - Deductions - Balance at
Description of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 3, 2004
Accounts Receivable - allowance for
doubtful accounts $ 3,777 $ 150 $ -- $ 1,074 (A) $ 2,853
--------- --------- --------- --------- ---------
Restructuring Reserve $ 11,377 $ -- $ (672)(C) $ 8,736 (B) $ 1,969
--------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 28, 2002
Accounts Receivable - allowance for
doubtful accounts $ 4,173 $ 917 $ -- $ 1,313 (A) $ 3,777
--------- --------- --------- --------- ---------
Restructuring Reserve $15,748 $ 9,942 $ (2,812)(C) $ 11,501 (B) $ 11,377
------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 29, 2001
Accounts Receivable - allowance for
doubtful accounts $ 2,695 $ 2,391 $ -- $ 913 (A) $ 4,173
--------- --------- --------- --------- ---------
Restructuring Reserve $ 19,438 $ 18,950 $ (3,900)(C) $ 18,740 (B) $ 15,748
--------- --------- --------- --------- ---------
Notes:
(A) Uncollectible accounts written off, less recoveries.
(B) Charges to the restructuring reserve are for the purposes for which the
reserve was created.
(C) This amount of the restructuring reserve was deemed to no longer be
necessary. As a result, this amount was taken as a reduction to the
restructuring charge through earnings for the applicable fiscal year.
F-37
INDEX TO EXHIBITS
Exhibit
No. Description
- --- -----------
2(a) - Share Purchase Agreement, dated as of May 15, 2001, among Liz
Claiborne, Inc., Liz Claiborne 2 B.V., LCI Acquisition U.S., and
the other parties signatory thereto (incorporated herein by
reference from Exhibit 2.1 to Registrant's Form 8-K dated May
23, 2001 and amended on July 20, 2001).
3(a) - Restated Certificate of Incorporation of Registrant
(incorporated herein by reference from Exhibit 3(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
June 26, 1993).
3(b) - By-laws of Registrant, as amended (incorporated herein by
reference from Exhibit 3(b) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1992 [the "1992
Annual Report"]).
4(a) - Specimen certificate for Registrant's Common Stock, par value
$1.00 per share (incorporated herein by reference from Exhibit
4(a) to the 1992 Annual Report).
4(b) - Rights Agreement, dated as of December 4, 1998, between
Registrant and First Chicago Trust Company of New York
(incorporated herein by reference from Exhibit 1 to Registrant's
Form 8-A dated as of December 4, 1998).
4(b)(i) - Amendment to the Rights Agreement, dated November 11, 2001,
between Registrant and The Bank of New York, appointing The Bank
of New York as Rights Agent (incorporated herein by reference
from Exhibit 1 to Registrant's Form 8-A12B/A dated as of January
30, 2002).
4(c) - Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and
Dexia Banque Internationale A. Luxembourg (incorporated herein
by reference from Exhibit 10 to Registrant's Form 10-Q for the
period ended June 30, 2001).
10(a) - Reference is made to Exhibit 4(b) filed hereunder, which is
incorporated herein by this reference.
10(b) - Lease, dated as of January 1, 1990 (the "1441 Lease"), for
premises located at 1441 Broadway, New York, New York between
Registrant and Lechar Realty Corp. (incorporated herein by
reference from Exhibit 10(n) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990).
10(b)(i) - First Amendment: Lease Extension and Modification Agreement,
dated as of January 1, 1998, to the 1441 Lease (incorporated
herein by reference from Exhibit 10(k) (i) to the 1999 Annual
Report).
10(b)(ii) - Second Amendment to Lease, dated as of September 19, 1998, to
the 1441 Lease (incorporated herein by reference from Exhibit
10(k) (i) to the 1999 Annual Report).
10(b)(iii) - Third Amendment to Lease, dated as of September 24, 1999, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(b)(iv) - Fourth Amendment to Lease, effective as of July 1, 2000, to the
1441 Lease (incorporated herein by reference from Exhibit
10(j)(iv) to the 2002 Annual Report).
Exhibit
No. Description
- --- -----------
10(b)(v)* - Fifth Amendment to Lease.
10(c)+* - National Collective Bargaining Agreement, made and entered into
as of June 1, 2003, by and between Liz Claiborne, Inc. and the
Union of Needletrades, Industrial and Textile Employees (UNITE)
for the period June 1, 2003 through May 31, 2006.
10(d)+* - Description of Liz Claiborne, Inc. 2003 Salaried Employee
Incentive Bonus Plan.
10(e)+ - The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as
amended and restated (incorporated herein by reference from
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002).
10(e)(i)+* - First Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(e)(ii)+* - Second Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(e)(iii)+* - Third Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(e)(iv)+* - Trust Agreement dated as of October 1, 2003 between Liz
Claiborne, Inc. and Fidelity Management Trust Company.
10(f)+ - Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991
Stock Ownership Plan (the "Outside Directors' 1991 Plan")
(incorporated herein by reference from Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995 [the "1995 Annual Report"]).
10(f)(i)+* - Amendment to the Outside Directors' 1991 Plan, effective as of
December 18, 2003.
10(f)(ii)+ - Form of Option Agreement under the Outside Directors' 1991 Plan
(incorporated herein by reference from Exhibit 10(m)(i) to the
1996 Annual Report).
10(g)+ - Liz Claiborne, Inc. 1992 Stock Incentive Plan (the "1992 Plan")
(incorporated herein by reference from Exhibit 10(p) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 28, 1991.
10(g)(i)+ - Form of Restricted Career Share Agreement under the 1992 Plan
(incorporated herein by reference from Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995).
10(g)(ii)+ - Form of Restricted Transformation Share Agreement under the 1992
Plan (incorporated herein by reference from Exhibit 10(s) to the
1997 Annual Report).
10(h)+ - Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan")
(incorporated herein by reference from Exhibit 4(e) to
Registrant's Form S-8 dated as of January 25, 2001).
10(h)(i)+* - Amendment 1 to the 2000 Plan.
10(h)(ii)+ - Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit 10(z)(i) to the
2000 Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
- --- -----------
10(h)(iii)+ - Form of Executive Team Leadership Restricted Share Agreement
under the Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
"2000 Plan")(incorporated herein by reference from Exhibit 10(a)
to Registrant's Form 10-Q for the period ended September 29,
2001 [the "3rd Quarter 2001 10-Q"]).
10(h)(iv)+ - Form of Restricted Key Associates Performance Shares Agreement
under the 2000 Plan (incorporated herein by reference from
Exhibit 10(b) to the 3rd Quarter 2001 10-Q).
10(i)+ - Liz Claiborne, Inc. 2002 Stock Incentive Plan (the "2002 Plan")
(incorporated herein by reference from Exhibit 10(y)(i) to
Registrant's Form 10-Q for the period ended June 29, 2002 [the
"2nd Quarter 2002 10-Q"]).
10(i)(i)+ - Amendment No. 1 to the 2002 Plan (incorporated herein by
reference from Exhibit 10(y)(iii) to the 2nd Quarter 2002 10-Q).
10(i)(ii)+* - Amendment 2 to the 2002 Plan.
10(i)(iii)+* - Amendment 3 to the 2002 Plan.
10(i)(iv)+ - Form of Option Grant Certificate under the 2002 Plan
(incorporated herein by reference from Exhibit 10(y)(ii) to the
2nd Quarter 2002 10-Q).
10(i)(v)+* - Form of Restricted Share Agreement for "Growth" Shares program
under the 2002 Plan.
10(j)+ - Description of Supplemental Life Insurance Plans (incorporated
herein by reference from Exhibit 10(q) to the 2000 Annual
Report).
10(k)+ - Amended and Restated Liz Claiborne ss.162(m) Cash Bonus Plan
(incorporated herein by reference from Exhibit 10.1 to
Registrant's Form 10Q filed August 15, 2003).
10(l)+ - Liz Claiborne, Inc. Supplemental Executive Retirement Plan
effective as of January 1, 2002, constituting an amendment,
restatement and consolidation of the Liz Claiborne, Inc.
Supplemental Executive Retirement Plan and the Liz Claiborne,
Inc. Bonus Deferral Plan.
10(l)(i)+ - Trust Agreement dated as of January 1, 2002, between Liz
Claiborne, Inc. and Wilmington Trust Company (incorporated
herein by reference from Exhibit 10(t)(i) to the 2002 Annual
Report).
10(m)+ - Employment Agreement dated as of November 3, 2003, between
Registrant and Paul R. Charron (the "Charron Agreement")
(incorporated herein by reference from Exhibit 10.1 to
Registrant's Current Report on Form 8-K dated November 5, 2003
[the "November 5, 2003 Form 8-K"]).
10(m)(i)+ - The Liz Claiborne Retirement Income Accumulation Plan for the
benefit of Mr. Charron [the "Accumulation Plan"]), dated as of
September 19, 1996 (incorporated herein by reference from
Exhibit 10(y)(ii) to the 1996 Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
- --- -----------
10(m)(ii)+ - Amendment to the Accumulation Plan, dated January 3, 2002
(incorporated herein by reference from Exhibit 10(u)(iii) to the
2002 Annual Report).
10(m)(iii)+ - Amendment No. 2 to the Accumulation Plan, effective as of
November 3, 2003 (incorporated herein by reference from Exhibit
10.2 to the November 5, 2003 Form 8-K ).
10(m)(iv)+ - Change of Control Agreement, between Registrant and Paul R.
Charron (incorporated herein by reference from Exhibit (v)(iii)
to the 2000 Annual Report).
10(m)(v)+ - First Amendment to the Executive Termination Benefits Agreement
(Change of Control Agreement) between Registrant and Paul R.
Charron, effective as of November 3, 2003 (incorporated herein
by reference from Exhibit 10.3 to the November 5, 2003 Form
8-K).
10(m)(vi)+ - Stock Option Certificate, dated November 3, 2003 issued to Paul
R. Charron under Registrant's 2002 Stock Incentive Plan
(incorporated herein by reference from Exhibit 10.4 to the
November 5, 2003 Form 8-K).
10(m)(vii)+ - Restricted Share Agreement under the 2000 Plan, dated as of
November 3, 2003, between Registrant and Paul R. Charron
(incorporated herein by reference from Exhibit 10.4 to the
November 5, 2003 Form 8-K).
10(m)(viii)+ - Performance Share Agreement under the 2002 Plan, dated as of
November 3, 2003, between Registrant and Paul R. Charron
(incorporated herein by reference from Exhibit 10.6 to the
November 5, 2003 Form 8-K).
10(n)+ - Change of Control Agreement, between Registrant and Angela J.
Ahrendts.
10(o)+ - Change of Control Agreement, between Registrant and Trudy F.
Sullivan.
10(p) - Three Year Revolving Credit Agreement, dated as of October 21,
2002, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent) (incorporated herein by
reference from Exhibit 10(z)(i) to Registrant's October 21, 2002
Quarterly Report on Form 10-Q for the period ended September 28,
2002 [the "3rd Quarter 2002 10-Q"]).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
- --- -----------
10(q)* - 364-Day Revolving Credit Agreement, dated as of October 17,
2003, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent).
21* - List of Registrant's Subsidiaries.
23* - Consent of Independent Public Accountants.
31(a)* - Rule 13a-14(a) Certification of Chief Executive Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002.
31(b)* - Rule 13a-14(a) Certification of Chief Financial Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002.
32(a)*# - Certification of Chief Executive Officer of the Company in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)*# - Certification of Chief Financial Officer of the Company in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
99* - Undertakings.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
# A signed original of this written statement required by Section 906 has
been provided by the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon
request.