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 1, 2005
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Commission File Number 1-10689
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LIZ CLAIBORNE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2842791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1441 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
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Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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Based upon the closing sale price on the New York Stock Exchange composite
tape on July 2, 2004, the last business day of the registrant's most recently
completed second fiscal quarter, which quarter ended July 3, 2004, 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
$3,811,125,745.70. 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 February 25, 2005: 109,009,840 shares.
Documents Incorporated by Reference:
Registrant's Proxy Statement relating to its Annual Meeting of Stockholders
to be held on May 19, 2005-Part III.
PART I
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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.
We believe that we are one of the largest suppliers of women's branded
apparel and accessories in the United States. Under our multi-brand,
multi-channel, multi-geography 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 E-commerce sites. 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,
C&C CALIFORNIA, 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, LIZ CLAIBORNE, LUCKY BRAND,
MAMBO, MARVELLA, MEXX, MONET, MONET 2, REALITIES, SIGRID OLSEN, SPARK, SWC,
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,
jewelry products under the KENNETH COLE NEW YORK and REACTION KENNETH COLE
trademarks, and fragrance, cosmetic and beauty products under the CANDIE'S
trademark.
Acquisitions have played an important role in our growth over the past five
years, including the subsequent growth of the acquired businesses. During this
period we acquired Lucky Brand Dungarees (in 1999), Laundry by Shelli Segal (in
1999), Sigrid Olsen (in 1999), MONET (in 2000), MEXX Europe (in 2001), MEXX
Canada (in 2002) Ellen Tracy (in 2002), Juicy Couture (in 2003) and Enyce (in
2003). On January 6, 2005, we purchased C&C California, Inc. ("C&C California"),
a privately held fashion apparel company. C&C California offers a line of casual
apparel with an emphasis on classy comfort, premium fabrics, simple detailing
and vibrant colors, under the C&C CALIFORNIA trademark. C&C California products
are sold primarily 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. We expect to
continue to pursue our acquisition strategy, seeking out opportunities that are
financially attractive and involve manageable execution risks. For a discussion
of our recent acquisitions, see Note 3 of Notes to Consolidated Financial
Statements.
Our principal executive offices are located in New York City, although we
maintain sales operations on a global basis, including in Los Angeles, The
Netherlands and Canada. International sales have come to represent an
increasingly larger part of our total sales; over the past five years,
international sales as a percentage of our total sales have been as follows:
3.8% in 2000, 12.1% in 2001, 18.3% in 2002, 22.1% in 2003 and 24.4% in 2004. The
growth in our international business has primarily been the result of our
acquisitions of MEXX Europe and MEXX Canada and, to a lesser extent, MONET, and
the subsequent growth of these acquired businesses and the impact of currency
fluctuation. We have recently announced changes in our European operations
intended to centralize strategic decision-making and facilitate our management
of our multi-brand platform in Europe. For a discussion of these changes and
their financial impact, see Note 14 to Notes to Consolidated Financial
Statements.
We operate in global fashion markets that are intensely 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
may 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 compete
successfully by positioning us to take advantage of synergies in product design,
development, sourcing and distribution of our products throughout the world. We
believe we owe much of our recent success to our ability to identify strategic
acquisitions, our ability to grow our existing businesses, to our product
designs and 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
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are acceptable to the marketplaces that we serve, to source the manufacture of
our products on a competitive basis, particularly in light of the impact of the
recent elimination of quota for apparel products, to leverage our technological
competencies, and to continue to provide products that offer consumers an
attractive price/value proposition. For a discussion of certain risks relating
to our business, see "Business-Competition; Certain Risks" below. For a
discussion of certain risks that may arise in connection with the elimination of
quota, see "Business - Imports and Import Restrictions" below.
As used herein, the terms "Company", "we", "us" and "our" refer to Liz
Claiborne, Inc., a Delaware corporation, together with its consolidated
subsidiaries.
Business Segments
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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 21 of
Notes to Consolidated Financial Statements and "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We present our results based on our three business segments indicated
above, as well as on the following geographic basis based on selling location:
o Domestic: wholesale customers, our specialty retail and outlet stores
located in the United States and our e-commerce sites; and
o International: wholesale customers and our specialty retail and outlet
stores and concession stores located outside of the United States,
primarily in our MEXX Europe and MEXX Canada operations.
Wholesale Apparel. This segment consists of women's, men's and children's
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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. Products in the
Wholesale Apparel segment are offered in a wide range of apparel markets,
including the "better" priced, "bridge" (which includes the market between
"better" priced and "designer" priced"), "contemporary", "denim/streetwear", and
the moderate department store brands and mid-tier markets (which comprise what
we previously referred to as our Special Markets business). This segment
includes the following businesses, each of which presented four seasonal
collections during 2004, (except our DANA BUCHMAN and ELLEN TRACY businesses,
each of which presented three collections, our LAUNDRY and JUICY COUTURE
businesses, each of which presented five collections, and our INTUITIONS
business, which presented six collections).
Better:
Our LIZ CLAIBORNE business offers women's career and casual sportswear, in
misses and petite sizes, including knitwear, twill and denim products, for sale
at department and specialty stores, our own outlet stores and online. See Retail
below. Commencing with the Spring 2004 season, products previously offered under
our COLLECTION, LIZSPORT, LIZWEAR JEANS and LIZ & CO. trademarks are offered
under our LIZ CLAIBORNE trademark. This business also offers a line of women's
performance wear under the LIZ GOLF trademark.
Our LIZ CLAIBORNE WOMAN business offers classic careerwear, weekend casual
and wardrobe basics in large sizes (including petite proportions), for sale at
department and specialty stores.
Our LIZ business (distinct from LIZ CLAIBORNE) offers refined,
sophisticated sportswear in misses sizes, for sale exclusively at Dillard's and
Marshall Field's department stores. Shipping of the LIZ line commenced in August
2004.
Our CITY DKNY(R) business offers women's career and casual sportswear for
sale through department and specialty stores in the United States, pursuant to
the exclusive license we hold to design, produce, market and sell these
products. See Note 4 of Notes to Consolidated Financial Statements.
Our CLAIBORNE business offers men's business-casual and sportswear, for
sale at department and specialty stores, our own outlet stores and online. See
Retail below. We license the right to design, manufacture and distribute a line
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of men's dress shirts under the CLAIBORNE trademark to Kellwood Company.
3
Our INTUITIONS business offers vintage inspired women's sportswear for sale
exclusively at Dillard's department stores. Shipping of the INTUITIONS line
commenced in January 2004.
Our SIGRID OLSEN business, which we own by virtue of our ownership of 98.2%
of Segrets, Inc ("Segrets"), offers a range of women's sportswear in misses,
large and petite sizes under several of our trademarks, including SIGRID OLSEN
COLLECTION (classic, refined sportswear with a contemporary influence), SIGRID
OLSEN SPORT (casual sportswear with a novelty inspiration), and SO BLUE BY
SIGRID OLSEN (casual sportswear with a jeanswear influence). We commenced
shipping a line of dresses under the SIGRID OLSEN trademark in January 2005.
SIGRID OLSEN products are primarily sold through upscale department stores and
specialty stores and through our own retail and outlet stores. See Retail below.
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Bridge:
Our DANA BUCHMAN business offers elegant and sophisticated women's
sportswear, in misses, large and petite sizes, for sale at upscale department
stores, specialty stores and through our own retail and outlet stores. See
Retail below.
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Our ELLEN TRACY business offers elegant and sophisticated women's
sportswear under several of our trademarks, including ELLEN TRACY, LINDA ALLARD
ELLEN TRACY and COMPANY ELLEN TRACY, for sale at upscale department stores,
specialty stores and through our own retail and outlet stores. See Retail below.
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For a discussion of our acquisition of Ellen Tracy, Inc., see Note 3 of Notes to
Consolidated Financial Statements.
Contemporary:
Our recently purchased C&C CALIFORNIA business offers women's, men's and
children's casual apparel, predominately women's fashion t-shirts, for sale
primarily 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 for a
discussion our acquisition of C&C CALIFORNIA.
Our JUICY COUTURE business offers upscale women's, men's and children's
contemporary apparel under various JUICY COUTURE trademarks. JUICY COUTURE
products are sold predominately through select upscale specialty stores and
department stores throughout the United States, through distributors in Asia,
Canada and Europe and through one of our own retail stores. See Retail below.
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For a discussion of our acquisition of JUICY COUTURE, see Note 3 of Notes to
Consolidated Financial Statements.
Our LAUNDRY business offers women's sportswear and dresses under the
LAUNDRY BY SHELLI SEGAL trademark, for sale at department and specialty stores
and through our own retail stores. See Retail below. In January 2004, this
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business introduced a line of dresses under our JANE STREET trademark, sold
primarily through department and specialty stores. Shipping of the JANE STREET
line commenced in May 2004.
Denim/Streetwear:
Our DKNY(R) JEANS and DKNY(R) ACTIVE business offers junior's, men's and
women's sportswear, jeanswear and activewear under the DKNY(R) JEANS and DKNY(R)
ACTIVE trademarks and logos for sale at department and specialty stores and
through our own outlet stores (see Retail below) in the Western Hemisphere,
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pursuant to the exclusive license we hold to design, produce, market and sell
these products. See Note 4 of Notes to Consolidated Financial Statements.
Our ENYCE business offers men's and women's fashion forward streetwear
under our ENYCE and LADY ENYCE 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 3 of Notes to Consolidated Financial Statements for a
discussion of the acquisition of ENYCE.
Our LUCKY BRAND business offers women's and men's denim-based casual
sportswear under various LUCKY BRAND trademarks, for sale at select department
and better specialty stores, through our own retail and outlet stores and
online. See Retail below. For a discussion of our acquisition of Lucky Brand
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Dungarees, Inc., see Note 3 of Notes to Consolidated Financial Statements.
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MEXX
Our MEXX business, which is headquartered in The Netherlands, offers a wide
range of men's, women's and children's fashion apparel under several trademarks
including MEXX (men's and women's fashion sportswear), MEXX SPORT (performance
sportswear), and XX BY MEXX (coordinated contemporary separates), for sale
outside of the United States, principally in Europe and Canada. See Note 3 of
Notes to Consolidated Financial Statements for a discussion of our acquisition
of MEXX. In the United States, MEXX products are sold in specialty retail stores
operated under the MEXX tradename. See Retail below. In addition, MEXX Europe
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offers several of our U.S. brands for sale in Europe, including ELLEN TRACY,
ENYCE, LIZ CLAIBORNE and LUCKY BRAND.
Mid-tier:
Our Mid-tier business offers products for sale at J.C. Penney's, Kohl's,
Mervyn's and Sears' stores, including AXCESS (fashion-forward men's and women's
apparel, sold principally in Mervyn's and Kohl's department stores); CRAZY HORSE
(men's and women's casual separates, sold principally in J.C. Penney stores);
FIRST ISSUE (casual career and everyday wear, sold principally in Sears
department stores); and VILLAGER (relaxed separates for soft career and weekend
dressing, sold principally in Kohl's department stores).
Moderate:
Our Moderate business offers women's apparel under our EMMA JAMES (casual
workplace apparel, sold principally in department stores), and J.H. COLLECTIBLES
(relaxed feminine apparel, sold principally in department stores) trademarks.
During 2004, we also offered a line of women's sportswear under the KENNETH
COLE NEW YORK label and a line of women's status denim and sportswear under the
REACTION KENNETH COLE label, pursuant to a licensing arrangement which by its
terms expired in December 2004. See Note 4 of Notes to Consolidated Financial
Statements.
Wholesale Non-Apparel. This segment consists of accessories, jewelry and
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cosmetics designed, marketed, produced and sold worldwide under various
trademarks we own or license from third-party owners. The offerings of our
Accessories and Jewelry businesses mirror major fashion trends and are intended
to complement many of our apparel lines.
Accessories:
Our Accessories business offers an array of accessories for sale in various
market channels, including: handbags, small leather goods and fashion
accessories in the Better market under our INTUITIONS (which first shipped in
February 2004), LIZ CLAIBORNE, REALITIES (which first shipped in May 2004) and
SIGRID OLSEN trademarks, in the Bridge market under our ELLEN TRACY trademark
and in the Contemporary market under our JUICY COUTURE (which first shipped in
February 2004), LUCKY BRAND and MEXX trademarks; and handbags and fashion
accessories in the Mid-tier market under our AXCESS, CRAZY HORSE and VILLAGER
trademarks.
Jewelry:
Our Jewelry business offers selections of jewelry for sale in various market
channels, including: the "better" market under our INTUITIONS (which first
shipped in February 2004), LIZ CLAIBORNE, MONET and REALITIES (which first
shipped in September 2004) trademarks; the Bridge market under our ELLEN TRACY
trademark; the Contemporary market under our JUICY COUTURE (which first shipped
in February 2004), LUCKY BRAND and MEXX trademarks; and the Mid-tier market
under our AXCESS, CRAZY HORSE, MARVELLA, MONET2, TRIFARI and VILLAGER
trademarks. The Jewelry business also offers a line of jewelry for sale in the
Contemporary market under the KENNETH COLE and REACTION KENNETH COLE trademarks,
pursuant to the license we hold to manufacture, design, market and distribute
women's jewelry under these trademarks. See Note 4 of Notes to Consolidated
Financial Statements.
Cosmetics:
Our Cosmetics business offers fragrance and bath and body-care products
under the following Company owned trademarks: for women under LIZ CLAIBORNE and
LIZSPORT, for men under CLAIBORNE SPORT, and for men and women under BORA BORA,
CURVE, CURVE CRUSH, LUCKY YOU LUCKY BRAND, MAMBO and SPARK. We also offer
fragrances, cosmetics and beauty products (for women and men) under the CANDIE'S
trademark, which we license
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from Candie's, Inc. We commenced shipping lines of fragrance and bath and
body-care products (for women and men) under our REALITIES trademark in July and
under our SPARK SEDUCTION trademark in August, 2004.
Retail. This segment consists of our worldwide retail operations from which
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we sell our apparel and non-apparel products directly 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). We anticipate adding locations to each of these formats in 2005. In
addition, this segment includes certain branded e-commerce sites which sell our
products direct to consumers.
During 2003, we completed the closing of our LIZ CLAIBORNE specialty retail
store format in the United States. See Note 14 of Notes to Consolidated
Financial Statements.
Specialty Retail Stores. As of January 1, 2005, we operated a total of 269
specialty retail stores under various Company trademarks, comprised of 158
retail stores within the United States and 111 retail stores outside of the
United States (primarily in Western Europe and Canada).
The following table sets forth information, as of January 1, 2005, with
respect to our specialty retail stores:
U.S. RETAIL SPECIALTY STORES
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Approximate Average Store
Specialty Store Format Number of Stores Size (Square Feet)
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LUCKY BRAND DUNGAREES 86 2,300
ELISABETH 30 3,000
SIGRID OLSEN 25 2,300
MEXX 7 10,100
DANA BUCHMAN 4 4,800
LAUNDRY BY SHELLI SEGAL 4 1,700
ELLEN TRACY 1 5,300
JUICY COUTURE 1 2,200
FOREIGN RETAIL SPECIALTY STORES
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Approximate Average Store
Specialty Store Format Number of Stores Size (Square Feet)
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MEXX 82 4,500
MEXX Canada 28 5,200
LIZ CLAIBORNE 1 3,000
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Outlet Stores. As of January 1, 2005, we operated a total of 285 outlet
stores under various Company owned and licensed trademarks, comprised of 193
outlet stores within the United States and 92 outlet stores outside of the
United States (primarily in Western Europe and Canada).
The following table sets forth information, as of January 1, 2005, with
respect to our outlet stores:
U.S. OUTLET STORES
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Approximate Average Store
Format Number of Stores Size by Square Footage
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LIZ CLAIBORNE * 125 10,700
LIZ CLAIBORNE WOMAN ** 18 3,500
DKNY(R) JEANS 14 2,900
DANA BUCHMAN 11 2,300
ELLEN TRACY/DANA BUCHMAN HYBRID 11 3,400
ELLEN TRACY 6 3,400
LUCKY BRAND DUNGAREES 4 2,500
CLAIBORNE 3 2,600
SPECIAL BRANDS 1 2,500
FOREIGN OUTLET STORES
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Format Number of Stores Approximate Average Store
Size by Square Footage
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MEXX 35 3,100
LIZ CLAIBORNE 30 3,000
MEXX Canada 27 5,700
* Includes three stores operated under the Liz Claiborne Company Store
tradename.
** Includes outlet stores formerly operated under the ELISABETH tradename.
Concession Stores. Outside of North America, we operate concession stores
in select retail stores, which are either owned or leased by a third-party
department store or specialty store retailer. As of January 1, 2005, the Company
operated a total of 622 concession stores in Europe.
The following table sets forth information, as of January 1, 2005, with
respect to our concession stores:
FOREIGN CONCESSIONS
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Concession Store Format Number of Stores
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LIZ CLAIBORNE Apparel 145
MEXX 259
MONET Jewelry 218
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E-Commerce. Our products are sold on a number of branded websites. In
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addition, we operate several websites which only provide information about our
merchandise but do not sell directly to customers. The following table sets
forth select information concerning our branded websites:
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Information and Direct to
Website Information Only Consumer Sales
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www.claiborne.com X
www.curvefragrances.com X
www.danabuchman.com X
www.elisabeth.com (1) X
www.ellentracy.com X
www.enyce.com X
www.juicycouture.com X
www.laundrybyshellisegal.com X
www.lizclaiborne.com (2) X
www.lizclaiborneinc.com (3) X
www.luckybrandjeans.com X
www.mexx.com (4) X
www.realities.com X
www.sigridolsen.com X
www.sparkseduction.com X
(1) This website offers consumers Plus size apparel under our ELISABETH, ELLEN
TRACY, EMMA JAMES, LIZ CLAIBORNE WOMAN and SIGRID OLSEN labels.
(2) This website offers LIZ CLAIBORNE branded apparel, accessories and
merchandise for the home.
(3) This website also offers investors information concerning the Company.
(4) The www.mexx.com website only sells MEXX branded apparel and accessories in
Germany but is anticipated to commence selling MEXX branded merchandise in The
Netherlands during the first quarter of fiscal 2005. This website is currently
part of a joint-venture arrangement with Otto Versand (GmbH & Co.) which also
sells MEXX branded merchandise in Germany through exclusive mail order catalogs.
The arrangement with Otto Versand will be dissolved during the first quarter of
fiscal 2005. As a result, MEXX Europe will operate the website business directly
and catalog sales will no longer be made after the Spring 2005 catalog edition.
Licensing. We license many of our brands to third parties with expertise in
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certain specialized products and/or market segments, thereby extending each
licensed brand's market presence. We currently have forty-three 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 2025. 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 included in "Sales from external
customers" under "Corporate/Eliminations." See Note 21 of Notes to Consolidated
Financial Statements.
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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, DANA BUCHMAN,
ELLEN TRACY, LAUNDRY BY SHELLI SEGAL, LIZSPORT,
ELISABETH, STUDIO BY LIZ CLAIBORNE
Women's and Men's slippers LIZ CLAIBORNE, CLAIBORNE
Women's and Men's belts CLAIBORNE, ELLEN TRACY, AXCESS
Women's and Men's footwear LIZ CLAIBORNE, LIZSPORT, AXCESS, CLAIBORNE,
COMPANY ELLEN TRACY, ELLEN TRACY, MEXX, VILLAGER,
LAUNDRY BY SHELLI SEGAL, FIRST ISSUE
Women's intimate apparel LIZ CLAIBORNE, MEXX
Women's legwear ELLEN TRACY, MEXX
Women's neckwear ELLEN TRACY
Women's sleepwear/loungewear LIZ CLAIBORNE, LIZWEAR, AXCESS, VILLAGER,
ELISABETH, FIRST ISSUE, MEXX
Women's swimwear LIZ CLAIBORNE, LIZSPORT, LUCKY BRAND, MEXX,
ELISABETH, JUICY COUTURE
Women's and Men's watches MEXX
Women's accessories LUCKY BRAND
Women's dresses and suits LIZ CLAIBORNE, FIRST ISSUE
Women's Bridesmaid Dresses LAUNDRY BY SHELLI SEGAL
Men's accessories AXCESS, CLAIBORNE, LUCKY BRAND
Men's and Boy's neckwear AXCESS, CLAIBORNE, CRAZY HORSE
Men's dress shirts CLAIBORNE
Men's pants CLAIBORNE
Men's sleepwear/loungewear
/underwear AXCESS, CLAIBORNE, LUCKY BRAND
Men's socks CLAIBORNE, MEXX, AXCESS
Men's tailored clothing CLAIBORNE, AXCESS
Children's apparel LIZ CLAIBORNE, LIZWEAR, CLAIBORNE
Bed and Bath LIZ CLAIBORNE, MEXX, VILLAGER, SIGRID OLSEN
Children's legwear and socks MEXX
Children's shoes MEXX
Children's swimwear MEXX
Jewelry MEXX
Cosmetics and Fragrances MEXX
Decorative fabrics LIZ CLAIBORNE
Blankets & Throws LIZ CLAIBORNE
Flooring LIZ CLAIBORNE
Furniture LIZ CLAIBORNE
Games and Toys JUICY COUTURE
Home storage LIZ CLAIBORNE
Luggage LIZ CLAIBORNE, CLAIBORNE
Optic Products LIZ CLAIBORNE, CLAIBORNE, FIRST ISSUE, MEXX,
LIZWEAR, LUCKY BRAND, VILLAGER
Tabletop Products LIZ CLAIBORNE, VILLAGER, SIGRID OLSEN
SALES AND MARKETING
Domestic sales accounted for approximately 75.6% of our 2004, and 77.9% of
our 2003, net sales. Our domestic wholesale sales are made primarily to
department store chains and specialty store customers. Retail sales are made
through our own
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retail and outlet stores. Wholesale sales are also made to international
customers, military exchanges and to other channels of distribution.
International sales accounted for approximately 24.4% of our 2004 net
sales, as compared to 22.1% in 2003. In Europe, wholesale sales are made
primarily to department store and specialty store customers, while retail sales
are made through concession stores within department store locations, as well as
our own retail and outlet stores. In Canada, 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.
Wholesale sales (before allowances) of apparel and non-apparel products to
our 100 largest customers accounted for approximately 83% of 2004 wholesale
sales (or 65% of total sales), as compared with approximately 85% of 2003
wholesale sales (or 69% of total sales). Except for Dillard's Department Stores,
Inc., which accounted for approximately 9% of 2004 and 2003 wholesale sales (or
7% of 2004 and 2003 total sales), no single customer accounted for more than 5%
of 2004 wholesale sales or 6% of 2003 wholesale sales (or 4% of 2004 and 5% of
2003 total sales). However, certain of our customers are under common ownership;
when considered together as a group under common ownership, sales to the eleven
department store customers which were owned at year-end 2004 by Federated
Department Stores, Inc. accounted for approximately 14% of 2004 wholesale sales
and approximately 15% of 2003 wholesale sales (or 11% of 2004 and 12% of 2003
total sales), and wholesale sales to the nine department store customers which
were owned at year-end 2004 by The May Department Stores Company accounted for
approximately 12% of 2004 wholesale sales and approximately 10% of 2003
wholesale sales (or 9% of 2004 and 8% of 2003 total sales). See Note 11 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 21 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 2004, 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 and CITY DKNY(R) businesses.
In 2004, 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, LAUNDRY
BY SHELLI SEGAL, LIZ CLAIBORNE, LIZ, LUCKY BRAND, MEXX, SIGRID OLSEN, AXCESS and
VILLAGER. Our Accessories business also offers an in-store shop program.
In 2004, we installed, in the aggregate, 1,262 in-store shops, and, in
2005, we plan to install, in the aggregate, approximately 1,500 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."
10
We spent approximately $176 million on advertising, marketing and promotion
for all of our brands in 2004, including approximately $45 million on national
advertising, compared with aggregate advertising, marketing and promotion
expenditures in 2003 of approximately $175 million, including approximately $45
million on national advertising.
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 Asia represent a substantial majority of the Company's
sales. We also source product in the United States and other regions. During
2004, several hundred suppliers manufactured our products; such products were
manufactured by suppliers located in approximately 60 countries, including
China, Saipan, Indonesia, Turkey, Hong Kong, Jordan, Philippines, Sri Lanka,
Taiwan and Mexico. We continually seek additional qualified suppliers throughout
the world for our sourcing needs. Our largest supplier of finished products
manufactured approximately 5% of our purchases of finished products during 2004.
In each of 2004, 2003 and 2002, our ten largest suppliers for the year
manufactured in aggregate approximately 33%, 35% and 35%, respectively, of our
purchases of finished products. We expect that the percentage of production
represented by our largest suppliers will increase in 2005 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. Please see "Business - 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 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
11
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.
IMPORTS AND IMPORT RESTRICTIONS
Virtually all of our merchandise imported into the United States, Canada,
and Europe is subject to duties. Until January 1, 2005, our apparel merchandise
was also subject to 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 the Agreement on Textiles and Clothing, quota on textile and apparel
products was eliminated for World Trade Organization (the "WTO") member
countries, including the United States, Canada and European countries, on
January 1, 2005. Notwithstanding quota elimination, China's accession agreement
for membership in the WTO provides that WTO member countries (including the
United States, 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 provisions"). The United
States may also unilaterally impose additional duties in response to a
particular product being imported (from China or other countries) in such
increased quantities as to cause (or threaten) serious damage to the relevant
domestic industry (generally known as "anti-dumping" actions). In addition,
China has imposed an export tax on all textile products manufactured in China;
we do not believe this tax will have a material impact on our business.
In addition, each of the countries in which our products are sold has laws
and regulations covering imports. Because the United States and the other
countries in which our products are manufactured and sold may, from time to
time, impose new duties, tariffs, surcharges or other import controls or
restrictions, including the imposition of "safeguard quota", or adjust presently
prevailing duty or tariff rates or levels, we maintain a program of intensive
monitoring of import restrictions and opportunities. We seek continually to
minimize our potential exposure to import related risks through, among other
measures, 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 changes in sourcing patterns resulting from the
elimination of quota could adversely affect our operations. Although we
generally expect that the recent elimination of quota will result, over the long
term, in an overall reduction in the cost of apparel produced abroad, the
implementation of any "safeguard quota provisions" or any "anti-dumping" actions
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 a substantial portion 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 February 24, 2005, our order book reflected unfilled customer orders for
approximately $980 million of merchandise, as compared to approximately $1.099
billion at March 2, 2004. 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 2005 fiscal year. We
note that the amount of order backlog at any given date is materially affected
by a number of factors, including seasonal factors, the mix of product, the
timing of the receipt and processing of customer orders, and scheduling of the
manufacture and shipping of the product, which in some instances is dependent on
the desires of the customer. Accordingly, order book data should not be taken as
providing meaningful period-to-period comparisons.
TRADEMARKS
We own most of the trademarks used in connection with our businesses and
products. We also act as licensee of certain trademarks owned by third parties.
12
The following table summarizes the principal trademarks we own and/or use
in connection with our businesses and products:
AXCESS LUCKY BRAND
AXCESS/MEN LUCKY BRAND BABY
BELONGINGS LUCKY BRAND DUNGAREES
BORA BORA LUCKY BRAND DUNGAREES OF AMERICA TOO TOUGH TO DIE
C&C CALIFORNIA LUCKY BRAND KIDS
CHOOSE JUICY LUCKY SOUL
CLAIBORNE LUCKYVILLE
CLAIBORNE BOYS LUCKY YOU
CLAIBORNE SPORT LUCKY YOU LUCKY BRAND
CRAZY HORSE MADE IN THE GLAMOROUS U.S.A.
CURVE MAMBO
CURVE CRUSH MARVELLA
DANA BUCHMAN METRO CONCEPTS
DANA BUCHMAN WOMAN MEXX
COMPANY ELLEN TRACY MEXX KIDS
ELLEN TRACY MEXX SPORT
ELISABETH MINI MEXX
EMMA JAMES MONET
ENYCE MONET 2
FIRST ISSUE REALITIES
INTUITIONS RN#80318
JANE STREET RUSS
J.H. COLLECTIBLES RUSS WOMAN
JUICY SIGRID OLSEN
JUICY BABY SIGRID OLSEN SPORT
JUICY COUTURE SIGRID OLSEN COLLECTION
JUICY GIRL SIGRID OLSEN PETITES
JUICY JEANS SIGRID OLSEN WOMAN
LADY ENYCE SO BLUE
LAUNDRY BY SHELLI SEGAL SPARK
LINDA ALLARD ELLEN TRACY SPARK SEDUCTION
LIZ SWC
LIZ & CO. TAPEMEASURE
LIZ CLAIBORNE TINT
LIZ CLAIBORNE BABY TRIFARI
LIZ CLAIBORNE COLLECTION TRIPLE XXX DUNGAREES
LIZ CLAIBORNE KIDS VILLAGER
LIZ CLAIBORNE WOMAN VIVID
LIZGOLF WOMEN'S WORK
LIZSPORT XX BY MEXX
LIZWEAR YZZA
LOVE P&G
Licensed Trademarks
CANDIE'S DKNY(R) JEANS
CITY DKNY(R) KENNETH COLE NEW YORK
DKNY(R) ACTIVE REACTION KENNETH COLE
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, the JUICY COUTURE crest trademark, JM
logomarks, and the C&C CALIFORNIA SUN logomark.
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 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.
13
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 continuing 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 Our ability to adapt to and compete effectively in the new quota
environment, including changes in sourcing patterns resulting from the
elimination of quota on apparel products, as well as lowered barriers to
entry;
o Risks associated with our dependence on sales to a limited number of large
United States department store customers, including risks related to our
ability to respond effectively to:
- these customers' buying patterns, including their purchase and retail
floor space commitments for apparel in general (compared with other
product categories they sell), and our products specifically (compared
with products offered by our competitors, including with respect to
customer and consumer acceptance, pricing, and new product
introductions);
- these customers' strategic and operational initiatives, including
their continued focus on further development of their "private label"
initiatives;
- these customers' desire to have us provide them with exclusive and/or
differentiated designs and product mixes;
- these customers' requirements for vendor margin support;
- any credit risks presented by these customers, especially given the
significant proportion of our accounts receivable they represent; and
- the effect that any potential consolidation among one or more of these
larger customers (such as the proposed merger of Federated Department
Stores, Inc. and The May Department Store Company) might have on the
foregoing and/or other risks;
o Maintaining and enhancing favorable brand recognition, which may be
affected by consumer attitudes towards the desirability of fashion products
bearing a "mega brand" label and which are widely available at a broad
range of retail stores; and
o Risks associated with the operation and expansion of our own retail
business, including our ability to successfully find appropriate sites,
negotiate favorable leases, design and create appealing merchandise,
appropriately manage inventory levels, install and operate effective retail
systems, apply appropriate pricing strategies, and integrate such stores
into our overall business mix.
14
Management and Employee Risks
- -----------------------------
o Our ability to attract and retain talented, highly qualified executives and
other key personnel in our design, merchandising, sales, marketing,
production, systems and other functions;
o Our ability to hire and train qualified retail management and associates;
o Risks associated with any significant disruptions in our relationship with
our employees, including our union employees, and any work stoppages by our
employees, including our union employees; and
o Risks associated with providing for the succession of senior management.
Economic, Social and Political Risks
- ------------------------------------
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,
including as a result of the elimination of quota on apparel products;
o Any significant disruption in our relationships with our suppliers and
manufacturers, as well as work stoppages by any of our suppliers or service
providers;
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 on apparel products, 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 Ability to identify appropriate acquisition candidates and negotiate
favorable financial and other terms, against the background of increasing
market competition (from both strategic and financial buyers) for the types
of acquisitions we have been making;
o Risks that new product lines or market activities may require methods of
operations and marketing and financial strategies different from those
employed in our other businesses, including risks associated with
acquisitions with significant foreign operations. In addition, these
businesses may involve buyers, store customers and/or competitors different
from our historical buyers, store 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;
o Certain new businesses may be lower margin businesses and may require us to
achieve significant cost efficiencies; 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.
15
EMPLOYEES
At January 1, 2005, we had approximately 14,500 full-time employees
worldwide, as compared with approximately 13,000 full-time employees at January
3, 2004.
In the United States and Canada, we are bound by collective bargaining
agreements with the Union of Needletrades, Industrial and Textile Employees
(which upon merger with the Hotel Employees and Restaurant Employees
International Union, is now known as UNITE-HERE), and agreements with related
locals which expire at various dates through May 2006. These agreements cover
approximately 1,580 of our full-time employees. Most of the UNITE-HERE
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 227 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. No
information contained on any of our websites is intended to be included as part
of, or incorporated by reference into, this Annual Report on Form 10-K.
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 11 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 the 1441 Broadway 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:
16
Key Properties:
- -----------------------------------------------------------------------------------------------------
Approximate
Location(1) Primary Use Square Footage Leased/Owned
- -----------------------------------------------------------------------------------------------------
Mt. Pocono, Pennsylvania(2) Apparel Distribution Center 1,230,000 Owned
North Bergen, New Jersey Offices/Apparel Distribution Center 620,000 Owned
Santa Fe Springs, California Apparel Distribution Center 600,000 Leased
West Chester, Ohio Apparel Distribution Center 600,000 Leased
Voorschoten, The Netherlands(3) Offices/Apparel Distribution Center 295,000 Leased
Dayton, New Jersey Non-Apparel Distribution Center 226,000 Leased
Mississauga, Canada Offices/Apparel Distribution Center 183,000 Leased
Dayton, New Jersey Non-Apparel Distribution Center 179,000 Leased
Secaucus, New Jersey Apparel Distribution Center 164,000 Leased
Amsterdam, The Netherlands(3) Offices 160,000 Leased
Mt. Pocono, Pennsylvania Apparel Distribution Center 150,000 Leased
Vernon, California Offices/Apparel Distribution Center 123,000 Leased
Lincoln, Rhode Island Non-Apparel Distribution Center 115,000 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 for our European operations.
On December 14, 2004, we announced changes to our product distribution
network, including the addition of a new distribution center in Allentown,
Pennsylvania and the closure of our Secaucus, New Jersey apparel distribution
center. See Note 14 to Notes to Consolidated Financial Statements. We anticipate
opening the Allentown facility during the first quarter of 2005 and completing
the Secaucus facility's closure during the second quarter of 2005.
During the second quarter of 2005 we anticipate completing the
consolidation of our Canadian wholesale sales and support operations into our
Montreal, Canada offices. This will result in the closure of our offices located
in our Mississauga, Canada distribution center; we will, however, continue to
distribute merchandise out of this facility.
Pursuant to financing obtained through an off-balance sheet arrangement
commonly referred to as a synthetic lease, we have constructed the West Chester,
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 11 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.
-----------------
The Company is a party to various legal actions. 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 11 and 25 of Notes to Consolidated Financial Statements.
During 2004, our Augusta, Georgia facility, which is no longer operational,
became listed on the State of Georgia's Hazardous Site Inventory of
environmentally impacted sites due to the detection of certain chemicals at the
site. To date, we have not been required to take any action regarding this
matter, however we are continuing to monitor this situation.
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.
17
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 62 Chairman of the Board and Chief Executive Officer
Angela Ahrendts 44 Executive Vice President
Lawrence D. McClure 56 Senior Vice President - Human Resources
Michael Scarpa 49 Senior Vice President and Chief Financial Officer
Trudy F. Sullivan 55 Executive Vice President
Robert J. Zane 65 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.
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.
18
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
--------------- ---- ---
2004:
----
1st Quarter $37.83 $35.00
2nd Quarter 38.41 33.20
3rd Quarter 39.59 33.70
4th Quarter 42.21 37.47
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
RECORD HOLDERS
On February 25, 2005, the closing sale price of our Common Stock was
$42.50. As of February 25, 2005, the approximate number of record holders of
Common Stock was 6,078.
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
--------------- -------------------------------
2004:
----
1st Quarter $0.05625
2nd Quarter 0.05625
3rd Quarter 0.05625
4th Quarter 0.05625
2003:
----
1st Quarter $0.05625
2nd Quarter 0.05625
3rd Quarter 0.05625
4th Quarter 0.05625
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.
19
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information about our purchases during the year
ended January 1, 2005 of equity securities that are registered by the Company
pursuant to Section 12 of the Exchange Act:
(d) Maximum Approximate
(a) Total (c) Total Number of Dollar Value of Shares
Number of Shares Purchased as that May Yet Be
Shares (b) Average Part of Publicly Purchased Under the
Purchased Price Paid Per Announced Plans or Plans or Programs
Period (in thousands) Share Programs (in thousands) (2)
- ------------------------------------------------------------------------------------------------------------------------
January 4, 2004 - January 31, 2004 5.7 (1) $ 34.97 -- $ 218,334
February 1, 2004 - March 6, 2004 -- -- -- $ 218,334
March 7, 2004 - April 3, 2004 67.1 (1) $ 36.48 -- $ 218,334
April 4, 2004 - May 1, 2004 -- -- -- $ 218,334
May 2, 2004 - June 5, 2004 1,963.8 $ 33.78 1,963,800 $ 151,995
June 6, 2004 - July 3, 2004 1,447.7 $ 34.87 1,447,700 $ 101,516
July 4, 2004 - July 31, 2004 -- -- -- $ 101,516
August 1, 2004 - September 4, 2004 -- -- -- $ 101,516
September 5, 2004 - October 2, 2004 -- -- -- $ 101,516
October 3, 2004 - October 30,2004 -- -- -- $ 101,516
October 31, 2004 - December 4, 2004 22.4 (1) 40.79 -- $ 101,516
December 5, 2004 - January 1, 2005 1.5 (1) 42.21 -- $ 101,516
Total year 3,508.2 $ 34.33 3,411,500 $ 101,516
(1) Represents shares withheld to cover tax-withholding requirements relating
to the vesting of restricted stock issued to employees pursuant to our
shareholder-approved stock incentive plans. Excludes the forfeiture of an
aggregate of 5,000 restricted shares.
(2) 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. Since its
inception, our Board of Directors has authorized the expenditure under the
program of an aggregate of $1.675 billion. As of February 25, 2005, we had
expended an aggregate of approximately $1.573 billion of the $1.675 billion
authorized, covering approximately 88.2 million shares, and had
approximately $101.5 million remaining in buyback authorization under the
program.
20
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)
2004 2003 2002 2001*** 2000***
---- ---- ---- ---- ----
Net Sales $4,632,828 $4,241,115 $3,717,503 $3,448,522 $3,104,141
Gross Profit 2,142,562 1,889,791 1,619,635 1,427,250 1,233,872
Operating Income 502,746 470,790 389,888 331,717 303,689
Net Income 313,569** 279,693** 231,165** 192,057** 184,595**
Working capital 871,540 836,911 618,490 638,281 535,811
Total assets 3,029,752 2,606,999 2,268,357 1,951,255 1,512,159
Long term obligations 484,516 440,303 384,137 402,345 284,219
Stockholders' equity 1,811,789 1,577,971 1,286,361 1,056,161 834,285
Per common share data*:
Basic earnings 2.90** 2.60** 2.19** 1.85** 1.73**
Diluted earnings 2.85** 2.55** 2.16** 1.83** 1.72**
Book value at year end 16.66 14.40 12.02 10.04 8.15
Dividends paid 0.23 0.23 0.23 0.23 0.23
Weighted average common
shares outstanding* 108,128,172 107,451,157 105,592,062 103,993,824 106,813,198
Weighted average common
shares and share
equivalents outstanding* 109,886,352 109,619,241 107,195,872 105,051,035 107,494,886
* 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 net restructuring charge of $6,472
($9,694 pretax) or $0.06 per share and a one time gain on sale of an equity
investment of $7,965 ($11,934 pretax) or $0.07 per common share in 2004, a
restructuring gain of $429 ($672 pretax) or $0.004 per share in 2003, a
restructuring charge of $4,547 ($7,130 pretax) or $0.04 per common share in
2002, a restructuring charge of $9,632 ($15,050 pretax) or $0.09 per common
share in 2001, and restructuring charges of $13,466 ($21,041 pretax) or
$0.13 per common share and a special investment gain of $5,606 ($8,760
pretax) or $0.05 per common share in 2000.
*** On May 23, 2001, the Company acquired 100% of the equity interest in MEXX
Group BV. The following unaudited pro forma information assumes the
acquisition occurred on January 2, 2000: for 2001 and 2000 respectively,
net sales of $3,591,273 and $3,456,863, net income of $180,297 and
$177,063, basic earnings per share of $1.73 and $1.66, and diluted earnings
per share of $1.72 and $1.65. The pro forma information presented is not
indicative of actual or future results.
21
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 LIZ CLAIBORNE and LIZ brands along with our better
apparel (CLAIBORNE (men's), INTUITIONS, REALITIES, SIGRID OLSEN and SWE),
bridge priced (DANA BUCHMAN and ELLEN TRACY), Special Markets (which is
comprised of our mid-tier brands (AXCESS, CRAZY HORSE, FIRST ISSUE and
VILLAGER) and moderate department store brands (EMMA JAMES and J.H.
COLLECTIBLES)), denim/street wear (ENYCE and LUCKY BRAND DUNGAREES) and
contemporary sportswear (JUICY COUTURE and LAUNDRY BY SHELLI SEGAL)
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 (as previously announced, our KENNETH COLE apparel
license expired at the end of 2004). 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 handbags, small leather goods, fashion
----------------------
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 285 outlet
stores, 269 specialty retail stores and 622 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), and our e-commerce sites. This segment includes specialty
retail and outlet stores operating under the following formats: MEXX, LUCKY
BRAND DUNGAREES, LIZ CLAIBORNE, ELISABETH, DKNY(R) JEANS, DANA BUCHMAN,
ELLEN TRACY, SIGRID OLSEN, MONET and JUICY COUTURE, as well as our Special
Brands Outlets which include products from our Special Markets divisions.
In the first half of 2003, we completed the closure of our 22 LIZ CLAIBORNE
domestic Specialty Retail stores (see Note 14 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 21 of Notes to Consolidated Financial
Statements.
Competitive Profile
- -------------------
We operate in global fashion markets that are intensely 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 compete
successfully by positioning us to take advantage of synergies in product design,
development, sourcing and distribution of our products throughout the world. We
believe we owe much of our recent success to our ability to identify strategic
acquisitions, our ability to grow our existing businesses, to our product
designs and 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, to source the manufacture of our products on a
competitive basis, particularly in light of the impact of the recent elimination
of quota for apparel products, and to leverage our technology competencies.
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 2004 Annual Report on Form 10-K, including, without
limitation, those set forth under the heading "Business-Competition; Certain
Risks."
22
Operating Highlights
- --------------------
Within the past five fiscal years, the Company's revenues have grown to a record
$4.633 billion in 2004 from $3.104 billion in 2000. This growth has been largely
a result of our acquisitions made as part of our multi-brand, multi-channel,
multi-geography diversification 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 five-year period also reflects the
growth of our Special Markets business, which sells products at prices lower
than our better-priced offerings, and our non-apparel businesses. With our
acquisitions and the growth in our bridge-priced, contemporary, moderate and
non-apparel businesses, we have diversified our business by channels of
distribution, price point and target consumer, as well as geographically. Within
the five-year period, our gross profit rate has improved from 39.7% in 2000 to
46.2% in 2004. This rate improvement reflects the acquisitions of MEXX Europe
and MEXX Canada, MONET, ELLEN TRACY, LUCKY BRAND DUNGAREES and JUICY COUTURE,
all of which operate at rates higher than the Company's better-priced businesses
(see "Recent Acquisitions" below), as well as our efforts to better manage our
inventories and a reduction in our manufacturing costs as a result of a
consolidation in our supplier base. As a result, operating income has grown 66%
to $502.7 million in 2004 from $303.7 million in 2000, and diluted EPS increased
66% to $2.85 in 2004 from $1.72 in 2000.
2004 Overall Results
- --------------------
Net Sales
- ---------
Net sales in 2004 were a record $4.633 billion, an increase of $391.7 million,
or 9.2%, over 2003 net sales.
The sales result reflects the inclusion of $209.8 million of additional sales
from our recently acquired ENYCE (acquired December 1, 2003) and JUICY COUTURE
(acquired April 7, 2003) businesses. Approximately $95.4 million of the 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. We also experienced sales increases in our MEXX Europe, DKNY(R)
Jeans, LUCKY BRAND DUNGAREES, SIGRID OLSEN, and Cosmetics businesses.
These increases more than offset expected sales decreases in our LIZ CLAIBORNE
better-priced department store business and our Special Markets businesses. Our
LIZ CLAIBORNE business has been challenged by increasingly conservative buying
patterns of our retail store customers as they continue to focus on inventory
productivity and seek to differentiate their offerings from those of their
competitors, the growth in department store private label brands and increased
competition in the department store channel as a result of the introduction of
new offerings by our competitors. In addition, the department store channel has
been challenged by migration of consumers away from malls to national chains and
off-priced retailers, as well as a general decline in prices for non-luxury
apparel products.
Looking forward, we expect that our retail customers will continue a
conservative approach to planning inventory levels, with continued focus on
inventory productivity and an increasing emphasis on reorder (quick turn)
business. Our technological capabilities, coupled with modern business models
and an evolving supply chain, enable us to partner with our customers to quickly
identify and replenish those items that are trending well with consumers. We
have diversified geographically, with our international operations representing
nearly 25% of our sales in 2004 as compared to 22% in 2003. We continue to view
international as an important area of growth and are working to build the
capability to launch brands from our domestic portfolio in markets outside the
United States while continuing to evaluate growth opportunities available
through business development efforts outside the United States. Also, as we
discussed above, through our acquisitions and internal growth, we have
diversified our business by channels of distribution, price point and target
customer. We note that our 2004 fiscal year was comprised of 52 weeks, as
compared to 53 weeks in 2003; however, we do not believe that this extra week
had a material impact on our 2003 overall results.
Gross Profit and Net Income
- ---------------------------
Our gross profit improved in 2004 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 inclusion of a full year's activity for our JUICY COUTURE business and
growth in our MEXX Europe business, as each of these businesses run at gross
profit rates higher than the Company average. Overall net income increased to
$313.6 million in 2004 from $279.7 million in 2003, reflecting the benefit
received from our sales and gross profit rate improvements.
23
Balance Sheet
- -------------
Our financial position continues to be strong. We ended 2004 with a net debt
position of $147.2 million as compared to $115.3 million at 2003 year-end. We
generated $457.3 million in cash from operations during fiscal 2004, which
enabled us to fund our $116.8 million share repurchase in the second quarter,
the final payment of $192.4 million (160 million euro) for MEXX Europe and our
capital expenditures of $146.4 million, while increasing our net debt position
by only $31.9 million. The increase in net debt was primarily due to the foreign
currency exchange translation on our Eurobond, which added $33.9 million to our
debt balance.
International Operations
- ------------------------
Revenues for the last five years are presented on a geographic basis as follows:
In thousands 2004 2003 2002 2001 2000
- ------------ ---- ---- ---- ---- ----
Domestic $3,502,565 $3,304,614 $3,037,325 $3,031,318 $2,984,927
International 1,130,263 936,501 680,178 417,204 119,214
Total Company $4,632,828 $4,241,115 $3,717,503 $3,448,522 $3,104,141
In 2004, sales from our international segment represented 24.4% of our overall
sales, as opposed to 3.8% in 2000, 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 from the recent launch of a number of our current
domestic brands in Europe utilizing the MEXX corporate platform, including
ENYCE, LIZ CLAIBORNE, MONET and LUCKY BRAND DUNGAREES as well as the
introduction of our ELLEN TRACY brand in Europe. 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 $95.4
million, or 49.2%, of the increase in international sales from 2003 to 2004.
Over the past few years, the euro and the Canadian dollar have strengthened
against the U.S. 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
- -------------------
On January 6, 2005, we acquired all of the equity interest of C & C California,
Inc. ("C & C"). Based in California and founded in 2002, C & C is a designer,
marketer and wholesaler of premium apparel for women, men and children through
its C & C CALIFORNIA brand. C & C sells its products primarily through select
specialty stores as well as through international distributors in Canada, Europe
and Asia. The purchase price consisted of an initial payment of $29.5 million,
including fees, plus contingent payments in fiscal years 2007, 2008 and 2009
that will be based upon a multiple of C & C's earnings in each year. C & C
generated net sales of approximately $21 million in fiscal 2004. An independent
third party valuation of the trademarks, trade names and customer relationships
of C & C is currently in process. We estimate that the aggregate of the
contingent payments will be in the range of approximately $50-60 million. The
contingent payments will be accounted for as additional purchase price.
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 at closing of approximately $121.9 million, including fees and the
retirement of debt at closing, and an additional $9.7 million for certain
post-closing adjustments and assumptions of liabilities that were accounted for
as additional purchase price. Based upon an independent third-party valuation of
the tangible and intangible assets acquired from Enyce, $27.0 million of
purchase price has been allocated to the value of trademarks and trade names
associated with the business, and $17.5 million has been allocated to the value
of customer relationships. 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. The value of customer relationships is being
amortized over periods ranging from 9 to 25 years.
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. 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. We estimate that,
if the 2005 measurement year is selected, the contingent payment would be in the
range of approximately $99-103 million. The contingent payment will be accounted
for as additional purchase price. Based upon an independent third-party
valuation of the tangible and intangible assets acquired from Juicy Couture,
$27.3 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.
24
On July 9, 2002, we acquired 100 percent of the equity interest of Mexx Canada,
Inc., a privately held fashion apparel and accessories company ("Mexx Canada").
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. In December 2004, the 2004 measurement year was
selected by the seller for the calculation of the contingent payment. This
payment will be made in cash during the first half of 2005; we estimate that the
payment will be in the range of 42-44 million Canadian dollars (or $35-37
million based on the exchange rate as of January 1, 2005). The contingent
payment will be accounted for as additional purchase price.
On May 23, 2001, we 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 euro (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 performance for the year ended 2003, 2004 or 2005. The 2003 measurement
year was selected by the sellers for the calculation of the contingent payment,
and on August 16, 2004, the Company made the required final payment of 160
million euro (or $192.4 million based on the exchange rate on such date). The
contingent payment was accounted for as additional purchase price.
On June 8, 1999, we acquired 85.0 percent of the equity interest of Lucky Brand
Dungarees, Inc. ("Lucky Brand"), whose core business consists of the LUCKY BRAND
DUNGAREES 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. On
January 28, 2005, we purchased an additional 8.25 percent of the equity interest
of Lucky Brand for $35.0 million. The remaining 6.75 percent will be purchased
as follows: 1.9% in January 2006, 1.5% in January 2007, 1.1% in January 2008 and
2.25% in June 2008. The final payment will be equal to the value of the Lucky
Brand shares held by the sellers based on a multiple of Lucky Brand's 2007
earnings. We estimate that the aggregate of the contingent payments will be
$50-54 million.
On February 12, 1999, we 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, we purchased an approximately 3.0 percent
additional equity interest. In November 2000, we purchased approximately 10.0
percent additional equity interest. In December 2004 we increased our equity
interest from 97.5 percent to 98.2 percent. We may elect to, or be required to,
purchase the remaining equity interest at an amount equal to its then fair
market value. We estimate this payment would be in the range of approximately $2
- - 4 million if the purchase occurs in 2005.
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 based on selling
location:
o Domestic: wholesale customers and Company specialty retail and outlet
--------
stores located in the United States, and our e-commerce sites; and
o International: wholesale customers and Company specialty retail and outlet
-------------
stores and concession stores located outside of the United States,
primarily in our MEXX Europe and MEXX Canada operations.
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 data presented in this "Management's Discussion and Analysis" has
been presented on a basis consistent with the presentation methodology used for
Fiscal 2004 and 2003.
25
2004 VS. 2003
- -------------
The following table sets forth our operating results for the year ended January
1, 2005 (52 weeks), compared to the year ended January 3, 2004 (53 weeks):
Year ended Variance
--------------------------------------------
January 1, January 3, $ %
Dollars in millions 2005 2004
- --------------------------------------------------------------------------------
Net Sales $ 4,632.8 $ 4,241.1 $ 391.7 9.2%
Gross Profit 2,142.6 1,889.8 252.8 13.4%
Selling, general & administrative
expenses 1,630.1 1,419.7 210.4 14.8%
Restructuring charge (gain) 9.7 (0.7) 10.4 1,485.7%
Operating Income 502.7 470.8 32.0 6.8%
Other income (expense) - net 9.6 (1.9) 11.5 605.3%
Interest (expense) - net (32.2) (30.5) 1.7 5.6%
Provision for income taxes 166.6 158.7 7.9 5.0%
Net Income $ 313.6 $ 279.7 $ 33.9 12.1%
Net Sales
- ---------
Net sales for 2004 were a record $4.633 billion, an increase of $391.7 million,
or 9.2%, over net sales for 2003. The inclusion of a full year of our JUICY
COUTURE business (acquired April 7, 2003) and our ENYCE business (acquired
December 1, 2003) added approximately $209.8 million in net sales during the
year. The impact of foreign currency exchange rates, primarily as a result of
the strengthening of the euro, in our international businesses added
approximately $95.4 million in sales during the year. Net sales results for our
business segments are provided below:
o Wholesale Apparel net sales increased $149.3 million, or 5.3% to $2.966
------------------
billion. This result reflected the following:
- A $180.8 million increase resulting from the inclusion of a full year
of sales of the acquired JUICY COUTURE and ENYCE businesses;
- A $52.0 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- An $83.5 million net decrease across our other wholesale apparel
businesses, primarily reflecting an 18.7% decrease in our LIZ
CLAIBORNE business (a 16.9% sales decrease excluding the impact of
lower shipments to the off-price channel) and a 6.0% decrease in our
Special Markets business (due to the challenging retail environment
and conservative inventory management of retailers in this sector),
partially offset by increases in our licensed DKNY(R) Men's and
Women's Jeans (due to volume increases resulting from additional store
locations within existing accounts), SIGRID OLSEN (due to volume
growth resulting from new accounts in the better department store
channel) and LUCKY BRAND DUNGAREES (due to increased volumes at both
better department stores and specialty retailers). The decrease in our
LIZ CLAIBORNE business resulted primarily from lower volume due to a
continued focus by our retail customers on inventory productivity and
conservative planning, the upward migration of certain retailers to
exclusive and differentiated product offerings, growth in department
store private label brands and the introduction of new competitive
offerings.
o Wholesale Non-Apparel net sales increased by $56.8 million, or 11.2%, to
----------------------
$564.9 million. The increase primarily reflected the addition of our
recently launched JUICY COUTURE accessories business, increases in our
MONET Jewelry, licensed KENNETH COLE, LUCKY BRAND DUNGAREES and ELLEN TRACY
businesses as well as increases in our Cosmetics business driven primarily
by the re-launch of our REALITIES women's fragrance and continued growth in
our CURVE fragrances. The impact of foreign currency exchange rates in our
international businesses was not material in this segment.
26
o Retail net sales increased $179.5 million, or 20.3%, to $1.066 billion. The
------
increase reflected the following:
- A $42.3 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- A $137.1 million net increase primarily driven by higher comparable
store sales in our Specialty Retail business (including an 18.2%
comparable store sales increase in our LUCKY BRAND DUNGAREES business)
as well as net store openings and new concessions. On a net basis, we
opened 22 new Outlet stores, primarily MEXX Europe and MEXX Canada
Outlets, and 34 new Specialty Retail stores, primarily in our SIGRID
OLSEN and LUCKY BRAND DUNGAREES businesses. We also opened 69 new
international concession stores in Europe during 2004.
Comparable store sales in our Company-operated stores increased by 3.0%
overall, driven by a 10.5% increase in our Specialty Retail business,
partially offset by a 1.6% decrease in our Outlet business. Excluding the
extra week in 2003, comparable store sales in our Company-operated stores
increased by 4.9% overall, driven by a 12.4% increase in our Specialty
Retail business, while Outlet comparable store sales increased 0.2%.
Comparable store sales are calculated as sales from existing stores, plus
new stores, less closed stores as follows: new stores become comparable
after 15 full months of being open. Closed stores become non-comparable one
month before they close. If a store undergoes renovations and increases or
decreases substantially in size as the result of renovations, it becomes
non-comparable. If a store is relocated, stays the same size, and has no
interruption of selling, then the store remains comparable. If, however, a
location change causes a significant increase or decrease in size, then the
location becomes non-comparable. Stores that are acquired are not
considered comparable until they have been reflected in our results for a
period of 12 months. Comparable store sales do not include concession
sales.
o Corporate net sales, consisting of licensing revenue, increased $6.1
---------
million to $36.6 million as a result of revenues from new licenses,
primarily home products, as well as growth in our existing license
portfolio.
Viewed on a geographic basis, Domestic net sales increased by $198.0 million, or
--------
6.0%, to $3.503 billion, reflecting the contributions of new product launches
and recent acquisitions, partially offset by declines in our LIZ CLAIBORNE and
Special Markets businesses. International net sales increased $193.8 million, or
-------------
20.7%, to $1.130 billion, reflecting the results of our MEXX Europe and MEXX
Canada businesses; approximately $95.4 million of this increase was due to the
impact of foreign currency exchange rates.
Gross Profit
- ------------
Gross profit increased $252.8 million, or 13.4%, to $2.143 billion in 2004 over
2003. Approximately $52.4 million of the increase was due to the impact of
foreign currency exchange rates, primarily as a result of the strengthening of
the euro. Gross profit as a percent of net sales increased to 46.2% in 2004 from
44.6% in 2003. The increased gross profit rate reflects a continued focus on
inventory management and lower sourcing costs. The increased gross profit rate
also reflected a change in our sales mix, reflecting a decrease in sales in our
LIZ CLAIBORNE and Special Markets business which run at lower gross profit rates
than the Company average and continued sales growth in our MEXX Europe and JUICY
COUTURE businesses, as each of these businesses run at a higher gross profit
rate than the Company average. Warehousing activities including receiving,
storing, picking, packing and general warehousing charges are included in
Selling, general & administrative expenses ("SG&A"); accordingly, our gross
profit may not be comparable to others who may include these expenses as a
component of cost of goods sold.
Selling, General & Administrative Expenses
- ------------------------------------------
SG&A increased $210.4 million, or 14.8% to $1.630 billion in 2004 and as a
percent of net sales increased to 35.2% in 2004 from 33.5% in 2003. The SG&A
increase reflected the following:
o A $66.8 million increase resulting from the inclusion of a full year of
expenses from our JUICY COUTURE and ENYCE business, as well as expenses
incurred in connected with the start-up of new businesses, primarily our
MEXX USA and SIGRID OLSEN Specialty Retail businesses;
o A $45.7 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
o A $97.9 million increase primarily resulting from the expansion of our
domestic and international retail businesses and higher volume-related
expenses.
SG&A as a percent of sales increased due to reduced expense leverage resulting
from the sales decreases in our LIZ CLAIBORNE and Special Markets businesses and
the increased proportion of expenses related to our MEXX Europe business, which
runs at a higher SG&A rate than the Company average, partially offset by the
favorable impact of Company-wide expense control initiatives.
27
Restructuring Charge (Gain)
- ---------------------------
In December 2004, we recorded a net pretax restructuring charge of $9.8 million
($6.5 million after tax) that was recorded as an operating expense.
Substantially all of the restructuring charge is expected to be a cash charge.
The Company projects that the majority of the charge will be paid and all
associated activities will be completed in the first quarter of fiscal 2005. The
charge is comprised of the following:
o $5.7 million of the charge (the majority of which relates to employee
severance costs) is associated with the restructuring of our European
operations aimed at centralizing strategic decision-making and facilitating
the management of a multi-brand platform as well as the closure of our Mexx
Europe catalog business.
o $4.1 million of the charge is attributable to employee severance costs
associated with the closure of our Secaucus, New Jersey distribution
center. Products currently distributed through the Secaucus facility will
be distributed through existing facilities as well as a new leased facility
in Allentown, Pennsylvania.
In 2004 and 2003 we recorded pretax restructuring gains of $105,000 ($68,000
after tax), and $672,000 ($429,000 after tax) respectively, 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 2004 was $502.7 million, an increase of $32.0 million, or
6.8%, over 2003. Operating income as a percent of net sales declined to 10.9 %
from 11.1% in 2003 primarily due to costs associated with the above mentioned
restructuring, as well as expenses related to the start-up of new businesses and
retail expansion. The rate was positively impacted by increased sales, lower
sourcing costs and improved inventory management. Approximately $6.7 million of
the increase was due to the impact of foreign currency exchange rates, primarily
as a result of the strengthening of the euro in our international businesses.
Operating income by business segment is provided below:
o Wholesale Apparel operating income increased $9.2 million to $323.4 million
-----------------
(10.9% of net sales) in 2004 compared to $314.2 million (11.2% of net
sales) in 2003, principally reflecting the inclusion of a full year of
sales from our JUICY COUTURE and ENYCE businesses and increased profits in
our licensed DKNY(R) Jeans, LUCKY BRAND DUNGAREES and SIGRID OLSEN
businesses as well as profits resulting from the addition of our INTUITIONS
business, partially offset by reduced profits in our domestic LIZ CLAIBORNE
business as a result of the lower sales volume discussed above and the $9.8
million restructuring charge discussed above.
o Wholesale Non-Apparel operating income increased $18.0 million to $78.8
----------------------
million (13.9% of net sales) in 2004 compared to $60.8 million (12.0% of
net sales) in 2003, reflecting increases in our Jewelry and department
store Fashion Accessories businesses and the addition of our recently
launched JUICY COUTURE accessories business, increases in our Cosmetics
business as well as increases in our Jewelry and Fashion Accessories
businesses.
o Retail operating income decreased slightly by $2.0 million to $73.1 million
------
(6.9% of net sales) in 2004 compared to $75.1 million (8.5% of net sales)
in 2003, principally reflecting losses in our LIZ CLAIBORNE Europe
concession business as well as costs associated with our direct-to-consumer
start-ups (namely, the MEXX USA and SIGRID OLSEN Specialty Retail formats
and our LIZCLAIBORNE.COM website), partially offset by an increase in
profits from our LUCKY BRAND DUNGAREES, MEXX Europe and MEXX Canada
businesses and the impact of the closure of our domestic LIZ CLAIBORNE
Specialty Retail stores in 2003.
o Corporate operating income, primarily consisting of licensing operating
---------
income, increased $6.7 million to $27.4 million in 2004 compared to $20.7
million in 2003.
Viewed on a geographic basis, Domestic operating income increased by $47.2
--------
million, or 12.5%, to $426.0 million, predominantly reflecting the contribution
of new businesses and recent acquisitions, partially offset by restructuring
costs of $4.1 million relating to the closure of our Secaucus, New Jersey
distribution center. International operating income decreased $15.3 million, or
-------------
16.6% to $76.8 million. The international decrease reflects the results of
losses in our LIZ CLAIBORNE Europe business, the incremental costs associated
with the creation of a multi-brand platform in Europe and the restructuring
costs of $5.7 million relating to European operations discussed above, partially
offset by the favorable impact of foreign exchange rates of $6.7 million.
28
Other Income (Expense) - Net
- ---------------------------
Net other income (expense) in 2004 was $9.6 million of income, compared to an
expense of $1.9 million in 2003. The change consisted primarily of:
o On December 14, 2004, we sold all 1.5 million shares of Class A stock of
Kenneth Cole Productions, Inc. ("KCP"). In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," a
pre-tax gain of $11.9 million ($8.0 million after tax) was recorded. These
shares were initially acquired in August 1999, in conjunction with our
consummation of a license agreement with KCP. The shares were considered
available-for-sale and were recorded at fair market value with unrealized
gains/losses net of taxes reported as a component of Accumulated other
comprehensive income (loss). The unrealized gains have been reclassified
from Accumulated other comprehensive income (loss) to Other income
(expense)-net, upon sale of the securities.
o Net other expense was principally comprised of $3.7 million of minority
interest expense (which relates to the 15% minority interest in Lucky Brand
Dungarees, Inc. and the 1.8% minority interest in Segrets, Inc.) partially
offset by other non-operating income primarily related to foreign exchange
gains. 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.
Net Interest Expense
- --------------------
Net interest expense in 2004 was $32.2 million, compared to $30.5 million in
2003, both of which were principally related to borrowings incurred to finance
our strategic initiatives, including acquisitions. The increase in net interest
expense was primarily due to the impact of foreign currency exchange
fluctuations in our international businesses, which accounted for $2.6 million.
Provision for Income Taxes
- --------------------------
The income tax rate in 2004 decreased to 34.7% from 36.2% in 2003 as a result of
changes to the European organization structure and the integration of our LIZ
CLAIBORNE Europe and MEXX operations and a release of tax reserves due to
favorable settlements of foreign tax audits, partially offset by the impact of a
shift in pretax income between the Company's domestic and international
operations.
Net Income
- ----------
Net income increased in 2004 to $313.6 million, or 6.8% of net sales, from
$279.7 million in 2003, or 6.6% of net sales. Diluted earnings per common share
("EPS") increased 11.8% to $2.85 in 2004, up from $2.55 in 2003. Our average
diluted shares outstanding increased by 0.3 million shares in 2004 on a
year-over-year basis, to 109.9 million, as a result of the exercise of stock
options and the effect of dilutive securities mostly offset by the repurchase of
common shares in the second quarter of 2004.
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
--------------------------------------------
January 3, December 28,
Dollars in millions 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%
29
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:
o Wholesale Apparel net sales increased $331.9 million, or 13.4%, to $2.816
------------------
billion. This result reflected the following:
- The addition of $210.2 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 $81.1 million increase resulting from the impact of foreign
currency exchange rates in our international businesses;
- A $49.5 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; and
- An $8.9 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 $43.7 million, or 9.4%, to $508.1
----------------------
million. The increase was primarily due to:
- A $43.1 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.
- The impact of foreign currency exchange rates in our international
businesses was immaterial.
o Retail net sales increased $138.4 million, or 18.5%, to $886.3 million. The
------
increase reflected:
- The addition of $42.7 million representing the inclusion of a full
year's sales from our recently acquired MEXX Canada and ELLEN TRACY
businesses;
- A $63.0 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- A $32.7 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 DUNGAREES 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 $79.5 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
30
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
Specialty Retail store businesses, reflecting the difficult retail environment
resulting from reduced consumer traffic and increased competition.
Selling, General & Administrative Expenses
- ------------------------------------------
Selling, general & administrative expenses 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 $65.9 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
o A $35.6 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 $13.6
million of the increase was due to the impact of foreign currency exchange
rates, primarily as a result of the strengthening of the euro. Operating income
by business segment is provided below:
o Wholesale Apparel operating income increased $27.7 million to $314.2
------------------
million (11.2% of net sales) in 2003 compared to $286.5 million (11.5% 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 $26.7 million to $60.8
----------------------
million (12.0% of net sales) in 2003 compared to $34.1 million (7.3% of net
sales) in 2002, principally due to increases in all of our Non-Apparel
businesses.
o Retail operating income increased $17.1 million to $75.1 million (8.5% of
------
net sales) in 2003 compared to $58.0 million (7.8% 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 start-up
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 $42.1
--------
million, or 12.5%, to $378.7 million, predominantly reflecting the contribution
of new and recent acquisitions. International operating profit increased $38.8
-------------
million, or 72.7% to $92.1 million. The international increase reflected the
results of our MEXX business and the favorable impact of foreign exchange rates
of $13.6 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 million of
minority interest expense partially offset by other non-operating income
primarily related to foreign exchange gains.
31
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.
FORWARD OUTLOOK
- ---------------
For the full year 2005, we are forecasting a net sales increase of 6 - 8%, an
operating margin in the range of 10.9% - 11.1% and EPS in the range of $2.96 -
$3.02, including the impact, which we estimate will be $0.10 - $0.12, of the
planned adoption in the third quarter of 2005 of SFAS No. 123R ("Share-Based
Payment") and a shift in the Company's long-term equity compensation plan toward
restricted stock and away from stock options. The shift toward restricted stock
should ultimately reduce dilution as we expect that fewer shares will be used
for equity compensation purposes than in prior years. We do not expect foreign
currency exchange rates in our international businesses to have a material
impact on full year 2005 results.
o In our Wholesale Apparel segment, we expect fiscal 2005 net sales to
increase in the range of 4 - 5%, primarily driven by the acquisition of C&C
California in addition to increases in our MEXX EUROPE, moderate department
store, mid-tier (Special Markets), JUICY COUTURE, LUCKY BRAND DUNGAREES,
licensed DKNY(R) Jeans and SIGRID OLSEN businesses, partially offset by the
impact of the discontinuation of our KENNETH COLE womenswear license. We
expect net sales in our domestic LIZ CLAIBORNE business to decrease mid to
high single digits year over year.
o In our Wholesale Non-Apparel segment, we expect fiscal 2005 net sales to
increase in the range of 6 - 8%, primarily driven by increases in our
Cosmetics, JUICY COUTURE accessories, Handbags and Jewelry businesses.
o In our Retail segment, we expect fiscal 2005 net sales to increase in the
range of 13 - 15%, primarily driven by increases in our LUCKY BRAND
DUNGAREES, MEXX EUROPE, SIGRID OLSEN, LIZ CLAIBORNE Canada, MEXX Canada and
MEXX USA businesses. We project comparable store sales to be flat to up low
single digits over fiscal 2004.
o We expect fiscal 2005 licensing revenue to increase by 15% over fiscal
2004.
For the first quarter of 2005, we forecast a net sales increase of 7 - 9%
(including an approximate 1% sales increase due to the projected impact of
foreign currency exchange rates), an operating margin in the range of 9.8% -
10.1% and EPS in the range of $0.63 - $0.66.
o In our Wholesale Apparel segment, we expect first quarter 2005 net sales to
increase in the range of 4 - 6%, primarily driven by the acquisition of C&C
California as well as increases in our MEXX EUROPE, licensed DKNY(R) Jeans
and JUICY COUTURE businesses, partially offset by the impact of the
discontinuation of our licensed KENNETH COLE womenswear business.
o In our Wholesale Non-Apparel segment, we expect first quarter 2005 net
sales to increase in the range of 10 - 12%, primarily driven by increases
in our JUICY COUTURE accessories and MONET Jewelry businesses.
o In our Retail segment, we expect first quarter 2005 net sales to increase
in the range of 15 - 18%, primarily driven by increases in our LUCKY BRAND
DUNGAREES, MEXX Europe and SIGRID OLSEN businesses.
o We expect first quarter 2005 licensing revenue to increase by 10%.
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.
32
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. In addition,
we will require cash to fund any repurchase of Company stock under our
previously announced share repurchase program; as of February 25, 2005, the
Company had $101.5 million remaining in buyback authorization under the 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 3 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.
2004 vs. 2003
- -------------
Cash and Debt Balances. We ended 2004 with $393.4 million in cash and marketable
- -----------------------
securities, compared to $343.9 million at year-end 2003, and with $540.6 million
of debt outstanding, compared to $459.2 million at year-end 2003. This $31.9
million increase in our net debt position on a year-over-year basis is primarily
attributable to the 160 million euro (or $192.4 million based on the exchange
rate in effect on the payment date) required final contingent payment to
complete the purchase of MEXX Europe, $116.8 million in share repurchases,
$146.4 million for capital and in-store expenditures and the effect of foreign
currency translation on our Eurobond, which added $33.9 million to our debt
balance, partially offset by cash flow from operations for the year of $457.3
million. We ended the year with $1.811 billion in stockholders' equity, giving
us a total debt to total capital ratio of 23.0% compared to $1.578 billion in
stockholders' equity at the 2003 year-end with a total debt to total capital
ratio of 22.5%. As of the end of 2004, we had approximately $101.5 million
remaining on our share repurchase authorization.
Accounts receivable increased $41.3 million, or 10.6%, at year-end 2004 compared
- -------------------
to year-end 2003, primarily due to growth in our domestic wholesale businesses.
The impact of foreign currency exchange rates increased international accounts
receivable balances by $10.2 million, primarily related to the strengthening of
the euro.
Inventories increased $56.0 million, or 11.5%, at year-end 2004 compared to
- -----------
year-end 2003. New business initiatives and expansion of our retail business
were responsible for $31.7 million of the increase, while approximately $12.6
million of the increase is related to the impact of foreign currency exchange
rates, primarily related to the strengthening of the euro. The remaining
increase is primarily due to growth in our on-going and replenishment programs.
Our average inventory turnover rate for 2004 was 4.5 times compared to 4.7 times
in 2003. We continue to take a conservative approach to inventory management in
2005.
Borrowings under our revolving credit facility and other credit facilities
- ----------
peaked at $203.3 million during 2004; at year-end 2004, our borrowings under
these facilities were $56.1 million.
Net cash provided by operating activities was $457.3 million in 2004, compared
- ------------------------------------------
to $418.8 million provided in 2003. This $38.5 million increase was primarily
due to an increase in net income of $33.9 million in 2004 from 2003.
Net cash used in investing activities was $319.7 million in 2004, compared to
- --------------------------------------
$337.3 million in 2003. Net cash used in 2004 was primarily attributable to the
$192.4 million (160 million euro) required final contingent payment to complete
the purchase of MEXX Europe. We also spent $146.4 million for capital and
in-store expenditures. 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 and Mexx Canada. We also spent $107.2
million for capital and in-store expenditures.
Net cash used in financing activities was $50.6 million in 2004, compared to
- --------------------------------------
$7.0 million provided in 2003. The $57.6 million year-over-year increase was
primarily due to purchases of common stock partially offset by an increase in
short-term borrowings.
33
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 $418.8 million partially offset by
the payments made to acquire Juicy Couture and Enyce, additional payments made
in connection with the acquisitions of Lucky Brand 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.
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 $418.8 million in 2003, compared
- ------------------------------------------
to $410.5 million provided in 2002. This $8.3 million change in cash flows was
primarily due to 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 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.
Commitments and Capital Expenditures
- ------------------------------------
We may be required to make additional payments in connection with our
acquisitions. If paid in cash, these payments will be funded with net cash
provided by operating activities, our revolving credit and other credit
facilities and/or the issuance of debt:
o On January 28, 2005, we purchased an additional 8.25 percent of the equity
interest of Lucky Brand for $35.0 million. The remaining 6.75 percent will
be purchased as follows: 1.9% in January 2006, 1.5% in January 2007, 1.1%
in January 2008 and 2.25% in June 2008. The final payment will be equal to
the value of the sellers' Lucky Brand shares based on a multiple of Lucky
Brand's 2007 earnings. We estimate that the aggregate of the contingent
payment will be $50-54 million.
o Under the Segrets acquisition agreement, we may elect, or be required, to
purchase the minority interest shares in Segrets. We estimate that if the
eligible payment for Segrets is triggered in 2005, it would fall in the
range of $2 - 4 million, and the payment will be made in either cash or
shares of our common stock at the option of either the Company or the
seller.
o The Mexx Canada acquisition agreement provides for 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 was at the option of the Company or the seller. In
December 2004, the seller selected the 2004 measurement
34
year for the calculation of the contingent payment. This payment will be
made in cash during the first half of 2005; we estimate the payment will be
in the range of 42-44 million Canadian dollars (or $35-37 million based on
the exchange rate as of January 1, 2005). The contingent payment will be
accounted for as additional purchase price.
o The Juicy Couture acquisition agreement provides for a contingent payment
to be determined as a multiple of Juicy Couture's earnings for one of the
years ended 2005, 2006 or 2007. We estimate that if the 2005 measurement
year were selected, the Juicy Couture contingent payment in 2006 would be
in the range of $99-103 million. This payment will be made in either cash
or shares of our common stock at the option of the Company.
o The C & C acquisition agreement provides for contingent payments in fiscal
years 2007, 2008 and 2009 that will be based upon a multiple of C & C's
earnings in each year. Contingent payments in aggregate are estimated by
the Company to be in the range of approximately $50-60 million. The
contingent payments will be accounted for as additional purchase price.
We note that with respect to the Mexx Europe acquisition, the sellers selected
the 2003 measurement year for the calculation of the contingent payment provided
for under the Mexx Europe acquisition agreement. On August 16, 2004, we made the
required final payment of 160 million euro (or $192.4 million based on the
exchange rate in effect on such date).
We lease all our retail stores under leases with terms that are typically five
or ten years. We amortize leasehold improvements, as well as rental abatements,
construction allowances and other rental concessions classified as deferred
rent, on a straight-line basis over the initial term of the lease or estimated
useful lives of the assets, whichever is less. The initial lease term can
include one renewal under limited circumstances if the renewal is reasonably
assured, based on consideration of all of the following factors: (i) a written
renewal at the Company's option or an automatic renewal, (ii) there is no
minimum sales requirement that could impair our ability to renew, (iii) failure
to renew would subject us to a substantial penalty, and (iv) there is an
established history of renewals in the format or location.
Our anticipated capital expenditures for 2005 are expected to approximate
$155-160 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 and other credit
facilities.
The following table summarizes as of January 1, 2005 our contractual cash
obligations by future period (see Notes 3, 4, 11 and 12 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
- --------------------------------------------------------------------------------------------------------------------
Leases commitments $155,904 $270,373 $227,424 $365,216 $1,018,917
Capital lease obligation 1,887 6,058 -- -- 7,945
Deferred compensation -- 19,000 -- -- 19,000
Inventory purchase commitments 675,644 -- -- -- 675,644
Eurobonds -- 474,340 -- -- 474,340
Eurobond interest * 31,428 31,428 -- -- 62,856
Guaranteed minimum licensing royalties 19,651 26,385 26,000 39,000 111,036
Short-term borrowings ** 56,118 -- -- -- 56,118
Synthetic lease 3,133 67,612 -- -- 70,745
Rent hedge - Synthetic Lease *** 702 334 -- -- 1,036
Additional acquisition purchase price
payments 73,405 136,700 76,900 -- 287,005
* Interest on the Eurobond is fixed at 6.625% per annum and assumes an exchange
rate of 1.355 dollars per euro.
** Interest on short-term borrowing is estimated at a rate of 2.7% or
approximately $1.5 million.
*** In connection with the variable rates under the synthetic lease agreement,
we have entered into 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 1, 2005.
35
On August 7, 2001, we issued 350 million euro (or $307.2 million based on the
exchange rate in effect on such date) of 6.625% notes due on August 7, 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 our net investment in
Mexx (see Note 3 of Notes to Consolidated Financial Statements).
On October 17, 2003, we 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, we received a $375 million, three-year bank revolving
credit facility. The aforementioned bank facilities replaced an existing $750
million bank facility which was scheduled to mature in November 2003. The
three-year facility included a $75 million multi-currency revolving credit line,
which permitted us to borrow in U.S. dollars, Canadian dollars and euro. At
January 3, 2004, we had no debt outstanding under these facilities. 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 13, 2004, we entered into a $750 million, five-year revolving credit
agreement (the "Agreement"), replacing the $375 million, 364-day unsecured
credit facility scheduled to mature in October 2004 and the existing $375
million bank revolving credit facility which was scheduled to mature in October
2005. A portion of the funds available under the Agreement not in excess of $250
million is available for the issuance of letters of credit. Additionally, at the
request of the Company, the amount of funds available under the Agreement may be
increased at any time or from time to time by an aggregate principal amount of
up to $250 million with only the consent of the lenders (which may include new
lenders) participating in such increase. The Agreement includes a $150 million
multi-currency revolving credit line, which permits the Company to borrow in
U.S. dollars, Canadian dollars and euro. 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 funds available under
the Agreement may be used to refinance existing debt, provide working capital
and for general corporate purposes of the Company, including, without
limitation, the repurchase of capital stock and the support of the Company's
$750 million commercial paper program. Our ability to obtain funding through our
commercial paper program is subject to, among other things, the Company
maintaining an investment-grade credit rating. At January 1, 2005, the Company
had no debt outstanding under the Agreement. 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.
As of January 1, 2005 and January 3, 2004, we had lines of credit aggregating
$551 million and $487 million, respectively, which were primarily available to
cover trade letters of credit. At January 1, 2005 and January 3, 2004, we had
outstanding trade letters of credit of $310 million and $254 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 $126.1 million (based on the exchange rates as of January
1, 2005). As of January 1, 2005, a total of $56.1 million of borrowings
denominated in foreign currencies was outstanding at an average interest rate of
2.7%. 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 2005. The Company guarantees these lines.
With the exception of the Eurobonds, which mature in 2006, most of our debt will
mature in 2005 and will be refinanced under existing credit lines. The capital
lease obligations in Europe expire in 2007 and 2008.
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, wholly owned by a publicly traded corporation. That
public corporation consolidates the financial statements of the lessor in its
financial statements. The lessor has other leasing activities and 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 $56 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
36
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 estatefinancing 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 our 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 December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN
46R"), which amends the same titled FIN 46 that was issued in January 2003. FIN
46R addresses how to identify variable interest entities and the criteria that
requires the consolidation of such entities. The third party lessor does not
meet the definition of a variable interest entity under FIN 46R, and therefore
consolidation by the Company is not required.
Hedging Activities
- ------------------
At year-end 2004, we had various euro currency collars outstanding with a net
notional amount of $53 million, maturing through December 2005 and with values
ranging between 1.20 and 1.38 U.S. dollar per euro and various Canadian currency
collars outstanding with a net notional amount of $27 million, maturing through
October 2005 and with values ranging between 1.18 and 1.25 Canadian dollar per
U.S. dollar, as compared to $42.0 million in euro currency collars at year-end
2003. At year-end 2004, we also had forward contracts maturing through December
2005 to sell 34 million euro for $43 million and 2.0 million Canadian dollars
for $1.7 million. The notional value of the foreign exchange forward contracts
was approximately $45 million at year-end 2004, as compared with approximately
$76 million at year-end 2003. Unrealized losses for outstanding foreign exchange
forward contracts and currency options were approximately $6.2 million at
year-end 2004 and approximately $11.8 million at year-end 2003. The ineffective
portion of these contracts was not material and was expensed in 2004.
Approximately $6.4 million relating to cash flow hedges in Accumulated other
comprehensive income (loss) will be reclassified into earnings in 2005.
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 these arrangements 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 1, 2005.
Approximately $0.7 million relating to cash flow hedges in Accumulated other
comprehensive income (loss) will be reclassified into earnings in 2005.
We hedge our net investment position in euro functional subsidiaries by
designating the 350 million Eurobonds as a hedge of net investments. The change
in the Eurobonds due to changes in currency rates is recorded to Currency
translation adjustment, a component of Accumulated other comprehensive income
(loss). The loss recorded to Currency translation adjustment was $33.9 million
in 2004 and $75.1 million in 2003.
On February 11, 2004, we entered into interest rate swap agreements for the
notional amount of 175 million euro in connection with our 350 million Eurobonds
maturing August 7, 2006. This converted a portion of the fixed rate Eurobonds
interest expense to floating rate at a spread over six month EURIBOR. The first
interest rate setting occurred on August 7, 2004 and will be reset each
six-month period thereafter until maturity. This is designated as a fair value
hedge. The favorable interest accrual was not material for the year ended
January 1, 2005.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect the reported amounts of
revenues and expenses. 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
37
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 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. 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 No.
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 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
38
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 our 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 valued based on historical sales trends for
this category of inventory of our individual product lines, the impact of market
trends and economic conditions, and the value of current orders in-house
relating to the future sales of this type of inventory. Estimates may differ
from actual results due to quantity, quality and mix of products in inventory,
consumer and retailer preferences and market conditions. 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
SFAS No. 142, "Goodwill and Other Intangible Assets," 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 each reporting unit to its carrying value. Our
reporting units are consistent with the reportable segments identified in Note
21 of Notes to 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. Customer relationships are amortized assuming gradual attritition
over time. Existing relationships are being amortized over periods ranging from
9 to 25 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 1, 2005, there were no material adjustments to the carrying
values of any long-lived assets resulting from these evaluations.
39
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.
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 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 effective
portion of 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 as a component of Cost of goods sold 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 our financial
condition or results of operations.
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.
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. The change in the borrowings due to
changes in currency rates is recorded to Currency translation adjustment, a
component of Accumulated other comprehensive income (loss). The Company uses a
derivative instrument to hedge the changes in the fair value of the debt due to
interest rates, and the change in fair value is recognized currently in interest
expense together with the change in fair value of the hedged item due to
interest rates.
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 as a
component of Selling, general & administrative expenses 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 March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
recognition and measurement guidance previously discussed under EITF 03-01. The
consensus clarifies the meaning of "other-than-temporary impairment" and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and investments accounted for under the cost method or
the equity method. In September 2004 the FASB issued a final FASB Staff
Position, FSP EITF Issue 03-01-1, delaying the effective date for the
measurement and recognition guidance of EITF 03-01, however the disclosure
requirements remain effective and
40
the applicable ones have been adopted for our fiscal year ended January 1, 2005.
The implementation of EITF 03-01 is not expected to have a material impact on
our results of operations or financial condition.
In September 2004, the EITF reached a consensus on applying Paragraph 19 of SFAS
No. 131 in EITF Issue No. 04-10, "Determining Whether to Aggregate Operating
Segments That Do Not Meet the Quantitative Thresholds." The consensus states
that operating segments that do not meet the quantitative thresholds can be
aggregated only if aggregation is consistent with the objective and basic
principles of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," the segments have similar economic characteristics, and
the segments share a majority of the aggregation criteria (a)-(e) listed in
paragraph 17 of SFAS No. 131. The effective date of the consensus in this Issue
is for fiscal years ending after October 13, 2004. Adoption of the EITF has not
affected the Company's segment classifications.
In November 2004, the EITF reached a consensus on EITF Issue No. 03-13,
"Applying the Conditions in Paragraph 42 of FASB Statement No.144 in Determining
Whether to Report Discontinued Operations." The consensus requires an evaluation
of whether the operations and cash flows of a disposed component have been or
will be substantially eliminated from the ongoing operations of the entity or
will migrate or continue. This consensus should be applied to a component of an
enterprise that is either disposed of or classified as held for sale in fiscal
periods beginning after December 15, 2004. Adoption of the EITF in the first
quarter of fiscal 2005 should not have a material affect on our results of
operations and financial position.
In December 2004, the FASB released revised SFAS No. 123R, "Share-Based
Payment". The pronouncement requires public companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award--the requisite service period (typically the vesting period). SFAS No.
123R is effective as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. We are planning on shifting the
composition of our equity compensation plan towards restricted stock and away
from stock options. This shift towards restricted stock will ultimately reduce
dilution, as fewer shares will be used for equity compensation purposes. The
adoption of SFAS No. 123R utilizing the modified prospective basis, inclusive of
the shift towards restricted stock, will reduce 2005 fully diluted earnings per
share by an estimated $0.10 -$0.12.
On December 21, 2004, the FASB issued Staff Position ("FSP") No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision Within the American Jobs Creation Act of 2004." FSP No. 109-2 allows
for additional time to assess the effect of repatriating foreign earnings, which
under SFAS No. 109, "Accounting for Income Taxes," would typically be required
to be recorded in the period of enactment. The American Jobs Creation Act of
2004 creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad. We are currently analyzing the potential
impact of utilizing the incentive.
In December 2004, the FASB decided to postpone the issuance of their final
standard on earnings per share ("EPS") entitled "Earnings per Share - an
Amendment to FASB Statement No. 128." The final standard is expected to be
issued in the first quarter of 2005. The proposed amendment would require
changes to the treasury stock method of computing fully diluted EPS. The impact
of the proposed standard on the financial results is not expected to be
material.
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 2005, any fiscal quarter of 2005 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 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:
41
Risks Associated with Competition and the Marketplace
- -----------------------------------------------------
Our ability to compete successfully within the marketplace depends on a variety
of factors, including:
o The continuing 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 Our ability to adapt to and compete effectively in the new quota
environment, including changes in sourcing patterns resulting from the
elimination of quota on apparel products, as well as lowered barriers to
entry;
o Risks associated with our dependence on sales to a limited number of large
United States department store customers, including risks related to our
ability to respond effectively to:
- these customers' buying patterns, including their purchase and retail
floor space commitments for apparel in general (compared with other
product categories they sell), and our products specifically (compared
with products offered by our competitors, including with respect to
customer and consumer acceptance, pricing, and new product
introductions);
- these customers' strategic and operational initiatives, including
their continued focus on further development of their "private label"
initiatives;
- these customers' desire to have us provide them with exclusive and/or
differentiated designs and product mixes;
- these customers' requirements for vendor margin support;
- any credit risks presented by these customers, especially given the
significant proportion of our accounts receivable they represent; and
- the effect that any potential consolidation among one or more of these
larger customers, such as the proposed merger between Federated
Department Stores, Inc. and The May Department Store Company, might
have on the foregoing and/or other risks;
o Maintaining and enhancing favorable brand recognition, which may be
affected by consumer attitudes towards the desirability of fashion products
bearing a "mega brand" label and which are widely available at a broad
range of retail stores; and
o Risks associated with the operation and expansion of our own retail
business, including our ability to successfully find appropriate sites,
negotiate favorable leases, design and create appealing merchandise,
appropriately manage inventory levels, install and operate effective retail
systems, apply appropriate pricing strategies, and integrate such stores
into our overall business mix.
Management and Employee Risks
- -----------------------------
o Our ability to attract and retain talented, highly qualified executives and
other key personnel in our design, merchandising, sales, marketing,
production, systems and other functions;
o Our ability to hire and train qualified retail management and associates;
o Risks associated with any significant disruptions in our relationship with
our employees, including our union employees, and any work stoppages by our
employees, including our union employees; and
o Risks associated with providing for the succession of senior management.
Economic, Social and Political Risks
- ------------------------------------
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,
42
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,
including as a result of the elimination of quota on apparel products;
o Any significant disruption in our relationships with our suppliers and
manufacturers, as well as work stoppages by any of our suppliers or service
providers;
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 on apparel products, 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 Ability to identify appropriate acquisition candidates and negotiate
favorable financial and other terms, against the background of increasing
market competition (from both strategic and financial buyers) for the types
of acquisitions we have been making;
o Risks that new product lines or market activities may require methods of
operations and marketing and financial strategies different from those
employed in our other businesses, including risks associated with
acquisitions with significant foreign operations. In addition, these
businesses may involve buyers, store customers and/or competitors different
from our historical buyers, store 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;
o Certain new businesses may be lower margin businesses and may require us to
achieve significant cost efficiencies; 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.
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, other credit facilities and
our 175 million euro fixed rate to floating rate swap associated with our 350
million Eurobonds. These loans bear interest at rates which vary with changes in
prevailing market rates.
43
We do not speculate on the future direction of interest rates. As of January 1,
2005 and January 3, 2004 our exposure to changing market rates was as follows:
Dollars in millions January 1, 2005 January 3, 2004
- -------------------------------------------------------------------------------
Variable rate debt $56.1 $18.9
Average interest rate 2.7% 2.8%
Notional amount of interest rate swap $237.2 --
Current implied interest rate 5.68% --
A ten percent change in the average rate would have resulted in a $1.4 million
change in interest expense during 2004.
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 1,
2005, 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.
At January 1, 2005 and January 3, 2004, we had outstanding foreign currency
collars with net notional amounts aggregating to $80 million and $42 million,
respectively. We had forward contracts aggregating to $45 million at January 1,
2005 and $76 million at January 3, 2004. Unrealized losses for outstanding
foreign currency options and foreign exchange forward contracts were
approximately $6.2 million at January 1, 2005 and $11.8 million at January 3,
2004. 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 $10.3 million. Conversely, if the U.S. dollar uniformly
strengthened by 10% against all of the hedged currency exposures, the fair value
of these instruments would increase by $12.0 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 1, 2005:
U.S. Dollar Contract Unrealized
Currency in thousands Amount Rate Gain (Loss)
- --------------------------------------------------------------------------------
Forward Contracts:
Euro $43,000 1.2197 to 1.3234 $(3,758)
Canadian Dollars 1,664 0.8310 to 0.8314 2
Foreign Exchange Collar Contracts:
Euro $53,000 1.2000 to 1.3753 $(2,123)
Canadian Dollars 26,625 0.8000 to 0.8484 (337)
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:
Euro $64,000 1.0670 to 1.1450 $(6,715)
Canadian Dollars 12,066 0.7254 to 0.7622 (298)
Foreign Exchange Collar Contracts:
Euro $42,000 1.0500 to 1.1400 $(4,793)
44
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 for information required under this
Item 8.
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 1, 2005, 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 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
See "Index to Consolidated Financial Statements and Schedules" appearing at the
end of this Annual Report on Form 10-K for Management's Report on Internal
Control Over Financial Reporting.
Item 9B. Other Information.
None.
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
2005 Annual Meeting of Shareholders (the "2005 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 2005 Proxy
Statement.
45
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
EQUITY COMPENSATION
The following table summarizes information about the stockholder approved
Liz Claiborne, Inc. Outside Directors' 1991 Stock Ownership Plan (the "Outside
Directors' Plan"); Liz Claiborne, Inc. 1992 Stock Incentive Plan; Liz Claiborne,
Inc. 2000 Stock Incentive Plan (the "2000 Plan"); and Liz Claiborne, Inc. 2002
Stock Incentive Plan (the "2002 Plan"), which together comprise all of our
existing equity compensation plans, as of January 1, 2005.
(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...... 9,903,124 (1)(2) $29.40 (3) 5,219,423 (4)
- ----------------------- ---------------------- ------------------- --------------------------
Equity Compensation
Plans Not Approved by
Stockholders...... 0 N/A 0
- ----------------------- ---------------------- ------------------- --------------------------
TOTAL............. 9,903,124 (1)(2) $29.40 (3) 5,219,423 (4)
- ----------------------- ---------------------- ------------------- --------------------------
- -----------------------
(1) Includes 75,283 shares of Common Stock issuable under the Outside
Directors' Plan pursuant to participants' elections thereunder to defer
certain director compensation.
(2) Includes an aggregate of 815,108 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 the Performance Share Agreement,
dated November 3, 2003 ("the November 2003 Agreement") and the Performance
Share Agreement dated March 4, 2004 (the "March 2004 Agreement"). Of the
total which may be issued, 405,288 may be issued under the terms of the
November 2003 Agreement and 409,820 may be issued under the March 2004
Agreement. The actual number of Performance Shares which will be issued to
Mr. Charron depends on the extent of the achievement of the performance
criteria.
(3) Performance Shares and shares issuable under the Outside Directors' Plan
pursuant to participants' election thereunder to defer certain director
compensation 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-limit under the 2000 Plan is set at 1,000,000 shares and
the sub-limit under the 2002 Plan is set at 1,800,000 shares.
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 2005 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 2005 Proxy Statement.
46
Item 14. Principal Accounting 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 Registered Public Accounting Firm" in the 2005 Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements. PAGE REFERENCE
2004 FORM 10-K
MANAGEMENT'S REPORTS AND
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 to F-5
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
January 1, 2005 and January 3, 2004 F-6
Consolidated Statements of Income for the
Three Fiscal Years Ended January 1, 2005 F-7
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended January 1, 2005 F-8 to F-9
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended January 1, 2005 F-10
Notes to Consolidated Financial Statements F-11 to F-38
2. Schedules.
SCHEDULE II - Valuation and Qualifying Accounts F-39
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.
47
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)
(ii) 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)
(iii) 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 Registrant's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002 [the "2002 Annual Report"]).
48
Exhibit
No. Description
- --- -----------
10(b)(v) - Fifth Amendment to Lease (incorporated herein by reference from
Schedule 10(b)(v) to Registrant's Annual Report on Form 10-K for
the fiscal year ended January 3, 2004 (the "2003 Annual
Report")).
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 (now
known as UNITE-HERE) for the period June 1, 2003 through May 31,
2006 (incorporated herein by reference from Exhibit 10(c) to the
2003 Annual Report).
10(d)+* - Description of Liz Claiborne, Inc. 2004 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 (incorporated herein by reference from Exhibit
10(e)(i) to the 2003 Annual Report).
10(e)(ii)+ - Second Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan (incorporated herein by reference from Exhibit
10(e)(ii) to the 2003 Annual Report).
10(e)(iii)+ - Third Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan (incorporated herein by reference from Exhibit
10(e)(iii) to the 2003 Annual Report).
10(e)(iv)+ - Trust Agreement (the "401(k) Trust Agreement") dated as of
October 1, 2003 between Liz Claiborne, Inc. and Fidelity
Management Trust Company (incorporated herein by reference from
Exhibit 10(e)(iv) to the 2003 Annual Report).
10(e)(v)+* - First Amendment to the 401(k) Trust Agreement.
10(e)(vi)+* - Second Amendment to the 401(k) Trust Agreement.
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 (incorporated herein by reference from Exhibit
10(f)(i) to the 2003 Annual Report).
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).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
49
Exhibit
No. Description
- --- -----------
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 (incorporated herein by reference
from Exhibit 10(h)(i) to the 2003 Annual Report).
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).
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 (incorporated herein by reference
from Exhibit 10(i)(ii) to the 2003 Annual Report).
10(i)(iii)+ - Amendment 3 to the 2002 Plan (incorporated herein by reference
from Exhibit 10(i)(iii) to the 2003 Annual Report).
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 Registrant's "Growth
Shares" program under the 2002 Plan (incorporated herein by
reference from Exhibit 10(i)(v) to the 2003 Annual Report).
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).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
50
Exhibit
No. Description
- --- -----------
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 (incorporated herein by reference from
Exhibit 10(t)(i) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001).
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).
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)+ - Executive Termination Benefits Agreement, between Registrant and
Paul R. Charron (incorporated herein by reference from Exhibit 10
(v)(iii) to the 2000 Annual Report).
10(m)(v)+ - First Amendment to the Executive Termination Benefits 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 10.5 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(m)(ix) - Stock Option Certificate, dated March 4, 2004, issued to Paul R.
Charron, under Registrant's 2002 Stock Incentive Plan (the "2002
Plan") (incorporated herein by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
April 3, 2004 [the "1st Quarter 2004 10-Q"]).
10(m)(x) - Restricted Share Agreement under the 2002 Plan, dated as of March
4, 2004, between Registrant and Paul R. Charron (incorporated
herein by reference to Exhibit 10(b) to the 1st Quarter 2004
10-Q).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
51
Exhibit
No. Description
- --- -----------
10(m)(xi) - Performance Share Agreement under the 2002 Plan, dated as of
March 4, 2004, between Registrant and Paul R. Charron
(incorporated herein by reference to Exhibit 10(c) to the 1st
Quarter 2004 10-Q).
10(n)+ - Change of Control Agreement, between Registrant and Angela J.
Ahrendts (incorporated herein by reference from Exhibit 10(v) to
the 2002 Annual Report).
10(o)+ - Change of Control Agreement, between Registrant and Trudy F.
Sullivan (incorporated herein by reference from Exhibit 10(w) to
the 2002 Annual Report).
10(p) - Five-Year Credit Agreement, dated as of October 13, 2004, among
Liz Claiborne, Inc., the Lenders party thereto, Bank of America,
N.A., Citibank, N.A., SunTrust Bank and Wachovia Bank, National
Association, as Syndication Agents, and JPMorgan Chase Bank, as
Administrative Agent (incorporated herein by reference to Exhibit
10.1 to Registrant's Current Report on Form 8-K dated October 13,
2004).
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.
52
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 15, 2005.
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 15, 2005.
Signature Title
/s/ Paul R. Charron Chairman of the Board, Chief Executive Officer and
- -------------------
Paul R. Charron Director (principal executive officer)
/s/ Bernard W. Aronson Director
- ----------------------
Bernard W. Aronson
/s/ Raul J. Fernandez Director
- ---------------------
Raul J. Fernandez
/s/ Mary Kay Haben Director
- ------------------
Mary Kay Haben
/s/ Nancy J. Karch Director
- ------------------
Nancy J. Karch
/s/ Kenneth P. Kopelman Director
- -----------------------
Kenneth P. Kopelman
/s/ Kay Koplovitz Director
- -----------------
Kay Koplovitz
/s/ Arthur C. Martinez Director
- ----------------------
Arthur C. Martinez
/s/ Oliver R. Sockwell Director
- ----------------------
Oliver R. Sockwell
/s/ Paul E. Tierney, Jr Director
- -----------------------
Paul E. Tierney, Jr.
53
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
--------------------------------------------------------
Page
Number
------
MANAGEMENT'S REPORTS AND
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 to F-5
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
January 1, 2005 and January 3, 2004 F-6
Consolidated Statements of Income for the
Three Fiscal Years Ended January 1, 2005 F-7
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended January 1, 2005 F-8 to F-9
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended January 1, 2005 F-10
Notes to Consolidated Financial Statements F-11 to F-38
SCHEDULE II - Valuation and Qualifying Accounts F-39
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a - 15(f) under the
Securities and Exchange Act of 1934. Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States. The Company's system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the financial
statements.
Management has evaluated the effectiveness of the Company's internal control
over financial reporting as of January 1, 2005 based upon criteria for effective
internal control over financial reporting described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). Based on our evaluation, management determined
that the Company's internal control over financial reporting was effective as of
January 1, 2005 based on the criteria in Internal Control-Integrated Framework
issued by COSO.
Our management's assessment of the effectiveness of the Company's internal
control over financial reporting as of January 1, 2005 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their attestation report which appears herein.
Dated March 11, 2005
F-2
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
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.
Deloitte & Touche LLP, an independent registered public accounting firm, has
audited these consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States) and have
expressed herein their unqualified opinion on those financial statements.
The Audit Committee of the Board of Directors, which oversees all of the
Company's financial reporting process on behalf of the Board of Directors,
consists solely of independent directors, meets with the independent registered
accountants, internal auditors and management periodically to review their
respective activities and the discharge of their respective responsibilities.
Both the independent registered 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 Chief Executive Officer and Chief Financial Officer
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited management's assessment, included in the accompanying
management's report on internal control over financial reporting that Liz
Claiborne, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of January 1, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of January 1, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of January 1, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the fiscal year ended
January 1, 2005 of the Company and our report dated March 14, 2005 expressed an
unqualified opinion on those financial statements and financial statement
schedule.
/s/ Deloitte & Touche, LLP
New York, New York
March 14, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 1, 2005 and January 3, 2004,
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 January 1, 2005. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)2.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Liz Claiborne, Inc. and
subsidiaries as of January 1, 2005 and January 3, 2004, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended January 1, 2005, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of January 1, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 14, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ Deloitte & Touche LLP
New York, New York
March 14, 2005
F-5
CONSOLIDATED BALANCE SHEETS
Liz Claiborne, Inc. and Subsidiaries
All amounts in thousands except share data January 1, 2005 January 3, 2004
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 385,637 $ 293,503
Marketable securities 7,797 50,414
Accounts receivable - trade, net 432,065 390,802
Inventories, net 541,139 485,182
Deferred income taxes 51,117 45,756
Other current assets 91,386 82,744
----------- -----------
Total current assets 1,509,141 1,348,401
Property and Equipment - Net 474,573 410,741
Goodwill - Net 755,655 596,436
Intangibles - Net 280,986 244,168
Other Assets 9,397 7,253
----------- -----------
$ 3,029,752 $ 2,606,999
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Short term borrowings $ 56,118 $ 18,915
Accounts payable 259,965 227,125
Accrued expenses 288,490 236,134
Income taxes payable 33,028 29,316
----------- -----------
Total current liabilities 637,601 511,490
Long-Term Debt 476,571 440,303
Obligations Under Capital Leases 7,945 --
Other Non-Current Liabilities 32,836 23,526
Deferred Income Taxes 49,490 43,861
Commitments and Contingencies (Note 11)
Minority Interest 13,520 9,848
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 176,182 124,823
Retained earnings 2,828,968 2,539,742
Unearned compensation expense (36,793) (21,593)
Accumulated other comprehensive loss (63,650) (50,207)
----------- -----------
3,081,144 2,769,202
Common stock in treasury, at cost - 67,703,065 shares in
2004 and 66,865,854 shares in 2003 (1,269,355) (1,191,231)
----------- -----------
Total stockholders' equity 1,811,789 1,577,971
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,029,752 $ 2,606,999
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
CONSOLIDATED STATEMENTS OF INCOME
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
------------------------------------------------------------
All dollar amounts in thousands except per common share data January 1, 2005 January 3, 2004 December 28, 2002
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 4,632,828 $ 4,241,115 $ 3,717,503
Cost of goods sold 2,490,266 2,351,324 2,097,868
----------- ----------- -----------
Gross Profit 2,142,562 1,889,791 1,619,635
Selling, general & administrative expenses 1,630,122 1,419,673 1,222,617
Restructuring charge (gain) 9,694 (672) 7,130
----------- ----------- -----------
Operating Income 502,746 470,790 389,888
Other income (expense) - net 9,602 (1,890) (2,318)
Interest expense - net (32,151) (30,509) (25,124)
----------- ----------- -----------
Income Before Provision for Income Taxes 480,197 438,391 362,446
Provision for income taxes 166,628 158,698 131,281
----------- ----------- -----------
Net Income $ 313,569 $ 279,693 $ 231,165
=========== =========== ===========
Net Income per Common Share:
Basic $ 2.90 $ 2.60 $ 2.19
=========== =========== ===========
Diluted $ 2.85 $ 2.55 $ 2.16
=========== =========== ===========
Dividends Paid per Common Share $ .23 $ .23 $ .23
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
COMMON STOCK Capital Accumulated Un- TREASURY SHARES
-------------------- in Excess Other Compre- earned ----------------------
All dollar amounts in thousands Number of Amount of Par Retained hensive In- Compen- Number of Amount Total
Shares Value Earnings come (Loss) sation Shares
- ------------------------------------------------------------------------------------------------------------------------------------
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, net of
income tax provision of $3,324 -- -- -- -- (5,859) -- -- -- (5,859)
Adjustment to unrealized (losses)
on available-for-sale
securities, net of income tax
provision of $1,341 -- -- -- -- 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
=========== ======== ======== ========== ======== ======== ========== =========== ==========
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, net of
income tax provision of $2,248 -- -- -- -- (3,962) -- -- -- (3,962)
Adjustment to unrealized gains on
available-for-sale securities,
net of income tax provision of
$4,890 -- -- -- -- 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
=========== ======== ======== ========== ======== ======== ========== =========== ==========
F-8
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS (continued)
Liz Claiborne, Inc. and Subsidiaries
COMMON STOCK Capital Accumulated Un- TREASURY SHARES
-------------------- in Excess Other Compre- earned ----------------------
All dollar amounts in thousands Number of Amount of Par Retained hensive In- Compen- Number of Amount Total
Shares Value Earnings come (Loss) sation Shares
- ------------------------------------------------------------------------------------------------------------------------------------
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
Net income -- -- -- 313,569 -- -- -- -- 313,569
Other comprehensive income (loss),
net of tax:
Translation adjustment -- -- -- -- (6,325) -- -- -- (6,325)
Gains (losses) on cash flow
hedging derivatives, net of
income tax provision of $1,335 -- -- -- -- 1,933 -- -- -- 1,933
Realized gains on available-for
sale securities, net of income
tax provision of $(2,372) -- -- -- -- (4,201) -- -- -- (4,201)
Adjustment to unrealized gains on
available-for-sale securities,
net of income tax benefit of
$(2,739) -- -- -- -- (4,850) -- -- -- (4,850)
----------
Total comprehensive income 300,126
Exercise of stock options and
related tax benefits -- -- 36,456 -- -- -- (2,359,171) 30,091 66,547
Cash dividends declared -- -- -- (24,343) -- -- -- -- (24,343)
Purchase of common stock -- -- -- -- -- -- 3,411,500 (116,817) (116,817)
Issuance of common stock under
restricted stock and employment
agreements, net -- -- 14,903 -- -- (15,200) (215,118) 8,602 8,305
----------- -------- -------- ---------- --------- -------- ---------- ----------- ----------
BALANCE, JANUARY 1, 2005 176,437,234 $176,437 $176,182 $2,828,968 $ (63,650)$(36,793) 67,703,065 $(1,269,355) $1,811,789
=========== ======== ======== ========== ========= ======== ========== =========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
-----------------------------------------------------------
All dollar amounts in thousands January 1, 2005 January 3, 2004 December 28, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 313,569 $ 279,693 $ 231,165
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 115,634 104,981 96,395
Deferred income taxes 4,424 9,796 (6,471)
Gain on sale of securities (11,934) -- --
Accrued portion of restructuring charge 9,694 -- 3,266
Other - net 23,126 22,447 14,210
Changes in current assets and liabilities, exclusive of acquisitions:
(Increase) decrease in accounts receivable - trade, net (32,510) 31,695 11,653
(Increase) decrease in inventories (47,274) 20,383 62,567
(Increase) in other current assets (2,440) (23,811) (7,645)
Increase (decrease) in accounts payable 28,373 (13,458) (23,507)
Increase (decrease) in accrued expenses 55,833 (12,916) 17,582
Increase (decrease) in income taxes payable 769 (14) 11,331
----------- ----------- -----------
Net cash provided by operating activities 457,264 418,796 410,546
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of investment instruments (134) (96) (90)
Proceeds from sales of securities 40,934 -- --
Purchases of property and equipment excluding capital leases (134,320) (96,675) (80,020)
Payments for acquisitions, net of cash acquired (197,221) (222,335) (206,264)
Payments for in-store merchandise shops (12,107) (10,538) (8,851)
Other - net (7,146) (7,658) (11,573)
----------- ----------- -----------
Net cash used in investing activities (309,994) (337,302) (306,798)
----------- ----------- -----------
Cash Flows from Financing Activities:
Short term borrowings 37,203 (3,074) 17,199
Revolving credit facility - net -- (12,564) (65,162)
Principal payments under capital lease obligations (1,805) -- --
Proceeds from exercise of common stock options 55,150 46,250 32,570
Purchase of common stock (116,817) -- --
Dividends paid (24,343) (23,643) (23,802)
----------- ----------- -----------
Net cash (used in) provided by financing activities (50,612) 6,969 (39,195)
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash (4,524) (6,523) 19,375
----------- ----------- -----------
Net Change in Cash and Cash Equivalents 92,134 81,940 83,928
Cash and Cash Equivalents at Beginning of Year 293,503 211,563 127,635
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 385,637 $ 293,503 $ 211,563
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-10
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 2004 and 2002 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. 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 No.
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-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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
SFAS No. 142, "Goodwill and Other Intangible Assets," 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 21 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 subject to amortization and are reviewed at least annually for
potential value impairment as mentioned above. Trademarks
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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. Customer relationships are amortized assuming gradual attrition over
time. Existing relationships are being amortized over periods ranging from 9 to
25 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 1, 2005, 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 effective
portion of 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 as a component of Cost of goods sold 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. The change in the borrowings due to
changes in currency rates is recorded to Currency translation adjustment, a
component of Accumulated other comprehensive income (loss). The Company uses a
derivative instrument to hedge the changes in the fair value of the debt due to
interest rates, and the change in fair value is recognized currently in interest
expense together with the change in fair value of the hedged item due to
interest rates.
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 as a
component of Selling, general & administrative expenses in current period
earnings immediately.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, receivables and accounts payable
approximates their carrying value due to their short-term maturities. The fair
value of long-term debt instruments approximates the carrying value and is
estimated based on the current rates offered to the Company for debt of similar
maturities. 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. Management
evaluates securities held with unrealized losses for other- than-temporary
impairment at least on a quarterly basis. Consideration is given to (a) the
length of time and the extent to which the fair value has been less than cost,
(b) the financial condition and near-term prospects of the issuer, and (c) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
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. Leased property meeting
certain capital lease criteria is capitalized and the present value of the
related lease payments is recorded as a liability. Amortization of capitalized
leased assets is computed on the straight-line method over the shorter of the
estimated useful life or the initial lease term.
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 for wholesale operations include the expenses incurred to
acquire and produce inventory for sale, including product costs, freight-in,
import costs, third-party inspection activities, buying agent commissions and
provisions for shrinkage. For retail operations, in-bound freight from the
Company's warehouse to its own retail stores is also included. Warehousing
activities including receiving, storing, picking, packing and general
warehousing charges are included in Selling, general & administrative expenses
("SG&A") and, as such, the Company's gross margins may not be comparable to
others who may include these expenses as a component of cost of goods sold.
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 involving agreements with
customers, whereby they are required to provide documentary evidence of specific
performance, are charged to SG&A when the amount of consideration paid by the
Company for these services are at or below fair value. Costs associated with
customer cooperative advertising allowances without specific performance
guidelines are reflected as a reduction of sales revenue. Cooperative
advertising expenses with
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
specific agreements with customers were $36.7 million in 2004, $39.3 million in
2003 and $38.9 million in 2002. Advertising and promotion expenses were $130.3
million in 2004, $131.0 million in 2003 and $119.8 million in 2002. Marketing
expenses, including in-store and other Company-sponsored activities, were $46.1
million in 2004, $44.7 million in 2003 and $41.9 million in 2002.
Shipping and Handling Costs
Shipping and handling costs, which are mostly comprised of warehousing
activities, are included as a component of SG&A in the Consolidated Statements
of Income. In fiscal years 2004, 2003 and 2002 shipping and handling costs
approximated $209.7 million, $194.0 million and $177.4 million, respectively.
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. Compensation expense for
restricted stock awards is measured at fair value on the date of grant based on
the number of shares granted and the quoted market price of the Company's common
stock. Such value is recognized as expense over the vesting period of the award.
To the extent that restricted stock awards are forfeited prior to vesting, the
previously recognized expense is reversed to stock-based compensation expense.
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 1, 2005 January 3, 2004 December 28, 2002
- ---------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 313,569 $ 279,693 $ 231,165
Add: Stock-based employee compensation expense
included in reported net income, net of taxes
of $4,104, $3,643 and $2,533 for fiscal years
2004, 2003 and 2002, respectively. 7,722 6,420 4,465
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards*, net of tax (29,271) (26,365) (21,251)
----------- ----------- -----------
Pro forma $ 292,020 $ 259,748 $ 214,379
=========== =========== ===========
Basic earnings per share:
As reported $2.90 $2.60 $2.19
Pro forma $2.72 $2.44 $2.03
Diluted earnings per share:
As reported $2.85 $2.55 $2.16
Pro forma $2.67 $2.39 $2.02
* "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, net of tax
($15,555, $14,960 and $12,066 for fiscal years 2004, 2003 and 2002,
respectively).
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 2004, 2003 and 2002,
respectively: dividend yield of 0.6%, 0.7% and 0.8%, expected volatility of 34%,
39% and 39%, risk free interest rates of 3.1%, 2.7% and 2.7%, and expected lives
of five years for all periods.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Cash Dividend and Common Stock Repurchase
On January 20, 2005, 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, 2005 to stockholders of record at the close of business on
February 24, 2005. As of January 1, 2005, the Company has $101.5 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. None of the reclassifications, which include a
reclassification of cash flows from operating activities, were material.
NOTE 2: SUBSEQUENT EVENTS
On January 6, 2005, the Company acquired all of the equity interest of C & C
California, Inc. ("C & C"). Based in California and founded in 2002, C & C is a
designer, marketer and wholesaler of premium apparel for women, men and children
through its C & C California brand. C & C sells its products primarily through
select specialty stores as well as through international distributors in Canada,
Europe and Asia. The purchase price consisted of an initial payment of $29.5
million, including fees, plus contingent payments in fiscal years 2007, 2008 and
2009 that will be based upon a multiple of C & C's earnings in each year. C & C
generated net sales of approximately $21 million in fiscal 2004. An independent
third party valuation of the trademarks, trade names and customer relationships
of C & C is currently in process. The Company estimates that the aggregate of
the contingent payments will be in the range of approximately $50-60 million.
The contingent payments will be accounted for as additional purchase price.
On January 28, 2005, the Company purchased an additional 8.25 percent of the
equity interest of Lucky Brand Dungarees, Inc. ("Lucky Brand") for $35.0
million. The remaining 6.75 percent will be purchased as follows: 1.9% in
January 2006, 1.5% in January 2007, 1.1% in January 2008 and 2.25% in June 2008.
The final payment will be equal to the value of the sellers' Lucky Brand shares
based on a multiple of Lucky Brand's 2007 earnings. The Company estimates that
the aggregate of the contingent payments will be $50-54 million.
NOTE 3: 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 at closing of approximately $121.9 million, including fees and
the retirement of debt at closing, and an additional $9.7 million for certain
post-closing adjustments and assumption of liabilities that were accounted for
as additional purchase price. Based upon an independent third-party valuation of
the tangible and intangible assets acquired from Enyce, $27.0 million of
purchase price has been allocated to the value of trademarks and trade names
associated with the business, and $17.5 million has been allocated to the value
of customer relationships. 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. The value of customer relationships is being
amortized over periods ranging from 9 to 25 years. 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"), a
privately held fashion apparel company. 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 $99 - 103 million. The contingent
payment will be accounted for as additional purchase price. Based upon an
independent third-party valuation of the tangible and intangible assets acquired
from Juicy Couture, $27.3 million of purchase price has been allocated to the
value of trademarks and trade names
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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 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 fair market value of assets
acquired was $20.5 million and liabilities assumed were $17.7 million resulting
in Goodwill of $29.6 million. In December 2004, the 2004 measurement year was
selected by the seller for the calculation of the contingent payment. This
payment will be made in cash during the first half of 2005; the Company
estimates the payment will be in the range of 42-44 million Canadian dollars (or
$35-37 million based on the exchange rate as of January 1, 2005). The contingent
payment will be accounted for as additional purchase price. 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 euro (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 performance for the year ended 2003, 2004 or 2005. The 2003 measurement
year was selected by the sellers for the calculation of the contingent payment,
and on August 16, 2004, the Company made the required final payment of 160
million euro (or $192.4 million based on the exchange rate on such date). The
contingent payment was accounted for as additional purchase price.
On June 8, 1999, the Company acquired 85.0 percent of the equity interest of
Lucky Brand, whose core business consists of the Lucky Brand Dungarees 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. On January 28, 2005,
the Company purchased an additional 8.25 percent of the equity for $35.0
million. The remaining 6.75 percent will be purchased as follows: 1.9% in
January 2006, 1.5% in January 2007, 1.1% in January 2008 and 2.25% in June 2008.
The final payment will be equal to the value of the Lucky Brand shares held by
the sellers based on a multiple of Lucky Brand's 2007 earnings. The Company
estimates that the aggregate of the contingent payment will be $50-54 million.
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 purchased approximately 10.0 percent additional equity interest. In
December 2004, the Company increased its equity interest from 97.5 percent to
98.2 percent. 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 2005.
NOTE 4: LICENSING COMMITMENTS
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 license
agreement expired by its terms on December 31, 2004.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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 a 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.
Certain of the above licenses are subject to minimum guarantees totaling $111.0
million and running through 2012; there is no maximum limit on the license fees.
NOTE 5: MARKETABLE SECURITIES
On December 14, 2004, the Company sold all 1.5 million shares of the Class A
stock of Kenneth Cole Productions, Inc. In accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", a pre-tax
gain of $11.9 million was recorded. These shares were initially acquired in
August 1999, in conjunction with the Company's consummation of a license
agreement with KCP. The shares were considered available-for-sale and were
recorded at fair market value with unrealized gains/losses net of taxes reported
as a component of Accumulated other comprehensive income (loss). The unrealized
gains have been reclassified from Accumulated other comprehensive income (loss)
to Other income (expense)-net, upon sale of the securities.
In June 2000, the Company purchased an equity index mutual fund as a long-term
investment for $8.5 million. The investment has been impaired since 2000
reflective of general stock market conditions over that period and has been
evaluated under EITF 03-01 to determine if the impairment is
other-than-temporary. This equity index mutual fund has historically provided
moderate growth and has recovered $2.6 million in value from its low of $4.8
million over the past two and a half years. The severity of the impairment is
currently 16% of the carrying value. The Company is forecasting continued
recovery for this investment. Based on that evaluation and the Company's ability
and intent to hold this investment for a reasonable period of time sufficient
for a forecasted recovery of fair value, the Company does not consider this
investment to be other-than-temporarily impaired at January 1, 2005.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The following table shows the investments' gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at January 1,
2005:
In thousands Less than 12 Months 12 Months or Longer Total
--------------------------------------------------------------------------------------------
Description of Securities Estimated Gross Unrealized Estimated Gross Unrealized Estimated Gross Unrealized
Fair Value Gains (Losses) Fair Value Gains (Losses) Fair Value Gains (Losses)
- ------------------------------------------------------------------------------------------------------------------------
Equity investments $ -- $ -- $ 7,436 $ (1,483) $ 7,436 $ (1,483)
Other investments -- -- 361 (50) 361 (50)
----------- -------------- ----------- -------------- ----------- --------------
Total $ -- $ -- $ 7,797 $ (1,533) $ 7,797 $ (1,533)
=========== ============== =========== ============== =========== ==============
The following is a summary of available-for-sale marketable securities at
January 1, 2005 and January 3, 2004:
Gross Unrealized
January 1, 2005 (in thousands) Cost Gains (Losses) Estimated Fair Value
- --------------------------------------------------------------------------------
Equity investments $ 8,919 $ (1,483) $ 7,436
Other investments 411 (50) 361
------------ ------------ ------------
Total $ 9,330 $ (1,533) $ 7,797
============ ============ ============
Gross Unrealized
January 3, 2004 (in thousands) Cost Gains (Losses) Estimated Fair Value
- --------------------------------------------------------------------------------
Equity securities $ 29,000 $ 14,725 $ 43,725
Equity investments 8,785 (2,096) 6,689
------------ ------------ ------------
Total $ 37,785 $ 12,629 $ 50,414
============ ============ ============
Gross realized gains on sales of available-for-sale securities were $11,934, $0
and $0 in 2004, 2003 and 2002, respectively. The net adjustments to unrealized
holding gains and losses on available-for-sale securities for the years ended
January 1, 2005 and January 3, 2004 were a loss of $9,051,000 (net of $5,111,000
in taxes) and a gain of $8,620,000 (net of $4,890,000 in taxes), respectively,
which were included in Accumulated other comprehensive income (loss).
NOTE 6: INVENTORIES, NET
Inventories are summarized as follows:
In thousands January 1, 2005 January 3, 2004
- ------------------------------------------------------------------------
Raw materials $ 30,916 $ 25,922
Work in process 5,172 6,085
Finished goods 505,051 453,175
----------- -----------
$ 541,139 $ 485,182
=========== ===========
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 7: PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
In thousands January 1, 2005 January 3, 2004
- -------------------------------------------------------------------------------
Land and buildings $ 139,993 $ 140,198
Machinery and equipment 345,179 328,525
Furniture and fixtures 192,097 145,423
Leasehold improvements 357,194 282,373
----------- -----------
1,034,463 896,519
Less: Accumulated depreciation and amortization 559,890 485,778
----------- -----------
$ 474,573 $ 410,741
=========== ===========
Depreciation and amortization expense of property and equipment including
property under capital leases was $92.5 million, $81.4 million and $70.6 million
for fiscal years 2004, 2003 and 2002, respectively.
NOTE 8: GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all the intangible assets:
Estimated
Dollars in thousands Lives January 1, 2005 January 3, 2004
- --------------------------------------------------------------------------------
Amortized intangible assets:
Gross Carrying Amount:
Licensed trademarks 5-15 years $ 42,849 $ 42,849
Customer relationships 5-25 years 17,500 --
Merchandising rights 4 years 52,625 71,138
----------- -----------
Subtotal $ 112,974 $ 113,987
----------- -----------
Accumulated Amortization:
Licensed trademarks $ (18,187) $ (13,963)
Customer relationships (933) --
Merchandising rights (29,224) (45,212)
----------- -----------
Subtotal $ (48,344) $ (59,175)
----------- -----------
Net:
Licensed trademarks $ 24,662 $ 28,886
Customer relationships 16,567 --
Merchandising rights 23,401 25,926
----------- -----------
Total amortized intangible assets, net $ 64,630 $ 54,812
----------- -----------
Unamortized intangible assets:
Owned trademarks $ 216,356 $ 189,356
----------- -----------
Total intangible assets $ 280,986 $ 244,168
=========== ===========
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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 2004 and fiscal 2003. No
impairment was recognized at either date. Intangible amortization expense for
2004, 2003 and 2002 amounted to $19.8 million, $20.3 million and $22.8 million,
respectively.
The estimated intangible amortization expense for the next five years is as
follows:
(In millions)
Fiscal Year Amortization Expense
- ----------------------------------------------------------------
2005 $13.0
2006 9.9
2007 8.3
2008 5.8
2009 4.0
The changes in carrying amount of goodwill for the twelve months ended January
1, 2005 are as follows:
Wholesale Wholesale
In thousands Apparel Non-Apparel Total
- ----------------------------------------------------------------------------------------------------
Balance January 3, 2004 $ 586,841 $ 9,595 $ 596,436
Enyce:
Reclassification for trademarks (27,000) -- (27,000)
Reclassification for customer relationships (17,500) -- (17,500)
Additional purchase price 9,770 -- 9,770
Mexx additional purchase price 192,378 -- 192,378
Translation difference 2,806 -- 2,806
Other (1,235) -- (1,235)
------------ ------------ ------------
Balance January 1, 2005 $ 746,060 $ 9,595 $ 755,655
============ ============ ============
There is no goodwill related to the Company's retail segment.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 9: ACCRUED EXPENSES
Accrued expenses consisted of the following:
In thousands January 1, 2005 January 3, 2004
- -----------------------------------------------------------------------------
Payroll and bonuses $ 61,027 $ 43,233
Taxes, other than taxes on income 19,408 5,643
Employee benefits 67,906 56,223
Advertising 31,739 28,561
Restructuring reserve 9,866 1,969
Accrued interest 12,440 11,551
Mark-to-market liability 7,510 14,973
Deferred royalty income 6,491 4,869
Other 72,103 69,112
----------- -----------
$ 288,490 $ 236,134
=========== ===========
NOTE 10: INCOME TAXES
The provisions for income taxes are as follows:
Fiscal Year Ended
------------------------------------------------------
In thousands January 1, 2005 January 3, 2004 December 28, 2002
- -------------------------------------------------------------------------------
Current:
Federal $ 118,425 $ 104,102 $ 107,157
Foreign 23,671 27,940 18,663
State & local 20,488 15,345 15,600
----------- ----------- -----------
Total Current $ 162,584 $ 147,387 $ 141,420
Deferred:
Federal $ 8,904 $ 16,064 $ (7,644)
Foreign (5,652) (7,760) (4,304)
State & local 792 3,007 1,809
----------- ----------- -----------
Total Deferred 4,044 11,311 (10,139)
----------- ----------- -----------
$ 166,628 $ 158,698 $ 131,281
=========== =========== ===========
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 $10,980,000 in 2004,
$8,610,000 in 2003 and $5,916,000 in 2002 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 28, 2002. On October 22, 2004, President Bush signed the
American Jobs Creation Act of 2004. The American Jobs Creation Act of 2004
creates a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad. The Company will review by the end its fiscal second
quarter of 2005 whether to repatriate unremitted earnings from its international
subsidiaries.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The effective income tax rate differs from the statutory federal income tax rate
as follows:
Fiscal Year Ended
-----------------------------------------------------------
January 1, 2005 January 3, 2004 December 28, 2002
- --------------------------------------------------------------------------------------------------------
Federal tax provision at statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal
benefit 2.8 2.3 2.8
Other-net (3.1) (1.1) (1.6)
------ ------ ------
34.7% 36.2% 36.2%
====== ====== ======
The components of net deferred taxes arising from temporary differences as of
January 1, 2005 and January 3, 2004 are as follows:
January 1, 2005 January 3, 2004
-------------------------------------------------------------------------
In thousands Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Asset Liability Asset Liability
- -------------------------------------------------------------------------------------------------------------
Inventory valuation $ 4,863 $ -- $ 4,050 $ --
Restructuring charge 5,695 -- 7,411 --
Deferred compensation -- (18,033) -- (13,442)
Nondeductible accruals 19,147 -- 9,051 --
Amortization of intangibles -- 33,924 -- 22,410
Unrealized investment losses 4,778 -- 6,332 5,331
Net operating loss carryforwards 11,490 -- 17,984 --
Valuation allowance (2,424) -- (9,930) --
Depreciation -- 28,587 -- 23,941
Other-net 7,568 5,012 10,858 5,621
--------- --------- --------- ---------
$ 51,117 $ 49,490 $ 45,756 $ 43,861
========= ========= ========= =========
As of January 1, 2005, Mexx had net operating loss carryforwards of
approximately $32,401,000 (that begin to expire in 2005), available to reduce
future foreign taxable income. A deferred tax asset has been established;
however, a valuation allowance of $1,296,000 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 decreased $7.5 million
from the prior year, as management now believes that it is more likely certain
deferred tax assets will be used to reduce future tax payments.
As of January 3, 2004, Mexx had net operating loss carryforwards of
approximately $48,160,000 (that begin to expire in 2005), available to reduce
future foreign taxable income. A deferred tax asset had been established;
however, a valuation allowance of $8,802,000 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 $2.8
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 1, 2005, a state net operating loss was recorded and a full
valuation allowance was established in the amount of $1,128,000. For January 3,
2004, the corresponding amount was also $1,128,000.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
As of January 1, 2005, foreign earnings of $152 million have been retained
indefinitely by subsidiary companies for reinvestment. No provision is made for
income taxes that would be payable upon the distribution of earnings, and it is
not practicable to determine the amount of the related unrecognized deferred
income tax liability.
The change in the effective tax rate is a result of favorable settlements of
foreign tax audits which reduced tax reserves.
NOTE 11: 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 2004, 2003 and 2002 was
approximately $151,621,000, $146,348,000 and $124,610,000, respectively. The
above rental expense amounts exclude associated costs such as real estate taxes
and common area maintenance.
The Company leases all its retail stores under leases with terms that are
typically five or ten years. The Company amortizes leasehold improvements as
well as rental abatements, construction allowances and other rental concessions
classified as deferred rent, on a straight-line basis over the initial term of
the lease or estimated useful lives of the assets, whichever is less. The
initial lease term can include one renewal under limited circumstances if the
renewal is reasonably assured, based on consideration of all of the following
factors: (i) a written renewal at the Company's option or an automatic renewal,
(ii) there is no minimum sales requirement that could impair the Company's
ability to renew, (iii) failure to renew would subject the Company to a
substantial penalty, and (iv) there is an established history of renewals in the
format or location.
At January 1, 2005, the minimum aggregate rental commitments are as follows:
(In thousands) (In thousands)
Fiscal Year Operating Leases Fiscal Year Operating Leases
- ------------------------------------------------------------------
2005 $157,791 2008 $118,981
2006 146,560 2009 108,443
2007 129,871 Thereafter 365,216
Certain rental commitments have renewal options extending through the fiscal
year 2032. 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. The Company has no material sublease or
contingent rentals. The Company has capital lease obligations of $7.9 million
through 2008 related to computer equipment in its European operations, which are
included in the above table.
At January 1, 2005 and January 3, 2004, the Company had entered into short-term
commitments for the purchase of raw materials and for the production of finished
goods totaling approximately $675,644,000 and $614,840,000, 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 14%, 12% and
9%, respectively, of wholesale net sales in 2004; 15%, 10% and 9%, respectively,
of wholesale net sales in 2003; and 16%, 12% and 11%, respectively, of wholesale
net sales in 2002. 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 1, 2005.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
In the United States and Canada, the Company is bound by collective bargaining
agreements with the Union of Needletrades, Industrial and Textile Employees
(which, upon merger with the Hotel Employees and Restaurant Employees
International Union, is now known as UNITE-HERE) and agreements with related
locals which expire at various dates through May 2006. These agreements cover
approximately 1,580 of the Company's full-time employees. Most of the
UNITE-HERE-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 227 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.
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, wholly owned by a publicly traded
corporation. That public corporation consolidates the financial statements of
the lessor in its financial statements. The lessor has other leasing activities
and has contributed equity of 5.75% of the $63.7 million project costs. The
leases include guarantees by the Company for a substantial portion of the
financing and options to purchase the facilities at original cost; the maximum
guarantee is approximately $56 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. In December 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"), which amends the same titled FIN 46
that was issued in January 2003. FIN 46R addresses how to identify variable
interest entities and the criteria that requires the consolidation of such
entities. The third party lessor does not meet the definition of a variable
interest entity under FIN 46R, and therefore consolidation by the Company is not
required.
See Note 3 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 25 of
Notes to Consolidated Financial Statements).
NOTE 12: DEBT AND LINES OF CREDIT
On August 7, 2001, the Company issued 350 million euro (or $307.2 million based
on the exchange rate in effect on such date) of 6.625% notes due on August 7,
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 3 of Notes to Consolidated Financial
Statements).
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. The aforementioned bank facilities
replaced an existing $750 million bank facility which was scheduled to mature in
November 2003. The three-year facility included a $75 million multi-currency
revolving credit line, which permitted the Company to borrow in U.S. dollars,
Canadian dollars and euro. At January 3, 2004, the Company had no debt
outstanding under these facilities. The carrying amount of the Company's
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.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
On October 13, 2004, the Company entered into a $750 million, five-year
revolving credit agreement (the "Agreement"), replacing the $375 million,
364-day unsecured credit facility that was scheduled to mature in October 2004
and the existing $375 million bank revolving credit facility which was scheduled
to mature in October 2005. A portion of the funds available under the Agreement
not in excess of $250 million is available for the issuance of letters of
credit. Additionally, at the request of the Company, the amount of funds
available under the Agreement may be increased at any time or from time to time
by an aggregate principal amount of up to $250 million with only the consent of
the lenders (which may include new lenders) participating in such increase. The
Agreement includes a $150 million multi-currency revolving credit line, which
permits the Company to borrow in U.S. dollars, Canadian dollars and euro. 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 funds available under the
Agreement may be used to refinance existing debt, provide working capital and
for general corporate purposes of the Company, including, without limitation,
the repurchase of capital stock and the support of the Company's $750 million
commercial paper program. The Company's ability to obtain funding through its
commercial paper program is subject to, among other things, the Company
maintaining an investment-grade credit rating. At January 1, 2005, the Company
had no debt outstanding under the Agreement. The carrying amount of the
Company's 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.
As of January 1, 2005 and January 3, 2004, the Company had lines of credit
aggregating $551 million and $487 million, respectively, which were primarily
available to cover trade letters of credit. At January 1, 2005 and January 3,
2004, the Company had outstanding trade letters of credit of $310 million and
$254 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 $126.1 million (based on the exchange rates as of
January 1, 2005). As of January 1, 2005, a total of $56.1 million of borrowings
denominated in foreign currencies was outstanding at an average interest rate of
2.7%. 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 2005. These lines are guaranteed by the
Company. With the exception of the Eurobonds, which mature in 2006, most of the
Company's debt will mature in 2005 and will be refinanced under existing credit
lines. The capital lease obligations in Europe expire in 2007 and 2008.
NOTE 13: DERIVATIVE INSTRUMENTS
At January 1, 2005, the Company had various euro currency collars outstanding
with a net notional amount of $53 million, maturing through December 2005 with
values ranging between 1.20 and 1.38 U.S. dollar per euro and various Canadian
currency collars outstanding with a net notional amount of $27 million, maturing
through October 2005 and with values ranging between 1.18 and 1.25 Canadian
dollar per U.S. dollar, as compared to $42 million in euro collars at January 3,
2004. The Company also had forward contracts maturing through December 2005 to
sell 34 million euro for $43 million and 2.0 million Canadian dollars for $1.7
million. The notional value of the foreign exchange forward contracts was
approximately $45 million at January 1, 2005, as compared with approximately $76
million at January 3, 2004. Unrealized losses for outstanding foreign exchange
forward contracts and currency options were approximately $6.2 million at
January 1, 2005 and approximately $11.8 million at January 3, 2004. The
ineffective portion of these contracts was not material and was expensed in the
current year. Approximately $6.4 million relating to cash flow hedges in
Accumulated other comprehensive income (loss) will be reclassified into earnings
in 2005.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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 these arrangements 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 1, 2005.
Approximately $0.7 million relating to cash flow hedges in Accumulated other
comprehensive income (loss) will be reclassified into earnings in 2005.
The Company hedges its net investment position in euro functional subsidiaries
by designating the 350 million Eurobonds as a hedge of net investments. The
change in the Eurobonds due to changes in currency rates is recorded to Currency
translation adjustment, a component of Accumulated other comprehensive income
(loss). The loss recorded to Currency translation adjustment was $33.9 million
in 2004 and $75.1 million in 2003.
On February 11, 2004, the Company entered into interest rate swap agreements for
the notional amount of 175 million euro in connection with its 350 million
Eurobonds maturing August 7, 2006. This converted a portion of the fixed rate
Eurobonds interest expense to floating rate at a spread over six month EURIBOR.
The first interest rate setting occurred on August 7, 2004 and will be reset
each six-month period thereafter until maturity. This is designated as a fair
value hedge. The favorable interest accrual was not material for the year ended
January 1, 2005.
NOTE 14: RESTRUCTURING CHARGES
In December 2004, the Company recorded a net pretax restructuring charge of $9.8
million ($6.5 million after tax) that was recorded as an operating expense.
Substantially all of the restructuring charge is expected to be a cash charge.
The Company projects that the majority of the charge will be paid and all
associated activities will be completed in the first quarter of fiscal 2005. The
charge is comprised of the following:
o $5.7 million of the charge (the majority of which relates to employee
severance costs) is associated with the restructuring of the Company's
European operations, aimed at centralizing strategic decision-making and
facilitate the management of a multi-brand platform, as well as the closure
of its Mexx Europe catalog business.
o $4.1 million of the charge is attributable to employee severance costs
associated with the closure of the Company's Secaucus, New Jersey
distribution center. Products currently distributed through the Secaucus
facility will be distributed through existing facilities as well as a new
leased facility in Allentown, Pennsylvania.
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 and September 2004, the Company recorded net pretax
restructuring gains of $672,000 and $105,000, respectively, representing the
reversal of amounts provided in December 2002 no longer required. These
activities were substantially completed as of January 1, 2005.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating and Occupancy Costs
Store Closure Administrative and Asset Write
In thousands Costs Exit Costs Downs Total
- ----------------------------------------------------------------------------------------------
Balance at December 29, 2001 $ 5,660 $ 7,808 $ 2,280 $ 15,748
2002 provision 9,942 -- -- 9,942
Reclassification (2,069) -- 2,069 --
2002 spending (3,703) (6,295) (1,503) (11,501)
2002 reserve reduction (2,073) (433) (306) (2,812)
--------- --------- --------- ---------
Balance at December 28, 2002 $ 7,757 $ 1,080 $ 2,540 $ 11,377
--------- --------- ---------- ---------
2003 spending (5,346) (880) (2,510) (8,736)
2003 reserve reduction (672) -- -- (672)
--------- --------- --------- ---------
Balance at January 3, 2004 $ 1,739 $ 200 $ 30 $ 1,969
--------- --------- --------- ---------
2004 provision -- 9,799 -- 9,799
2004 spending (1,634) (200) (30) (1,864)
2004 reserve reduction (105) -- -- (105)
Translation difference -- 67 -- 67
--------- --------- --------- ---------
Balance at January 1, 2005 $ -- $ 9,866 $ -- $ 9,866
--------- ========= ========= =========
NOTE 15: OTHER INCOME (EXPENSE) - NET
Other income (expense) - net consists of the following:
Fiscal Year Ended
---------------------------------------------------------
In thousands January 1, 2005 January 3, 2004 December 28, 2002
- --------------------------------------------------------------------------------
Minority interest $ (3,738) $ (2,418) $ (3,789)
Other Investment Gain 11,934 -- --
Other 1,406 528 1,471
-------- -------- --------
$ 9,602 $ (1,890) $ (2,318)
======== ======== ========
NOTE 16: 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. If
previously acquired shares are tendered as payment, the shares are subject to a
six-month holding period, as well as specific authorization by the committee. To
date, this type of
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
exercise has not been approved or transacted. The plan also allows for a
cashless exercise option, commonly referred to as a "broker-assisted exercise."
Under this method of exercise the participating employee must make a valid
exercise of their stock options through a designated broker. Based on the
exercise and information provided by the Company, the broker sells the shares on
the open market. The employee receives cash upon settlement. Neither the
stock-for-stock nor broker-assisted cashless exercise option are available to
executive officers of the Company. 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 1, 2005, there were available for future
grant 1,818,353 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 1, 2005 there were available for
future grant 3,904,447 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 1, 2005 are summarized as follows:
2004 2003 2002
----------------------------- ------------------------------- ------------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
Exercise Price Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of year 9,183,382 $ 25.55 8,707,357 $ 23.00 7,584,482 $ 20.10
Granted 2,788,082 37.21 3,364,981 28.56 3,266,175 26.21
Exercised (2,359,171) 23.38 (2,283,668) 20.28 (1,784,524) 18.25
Cancelled (599,560) 30.26 (605,288) 25.45 (358,776) 22.25
----------- ------- ----------- ------- ----------- -------
End of year 9,012,733 $ 29.40 9,183,382 $ 25.55 8,707,357 $ 23.00
=========== ======= =========== ======= =========== =======
Exercisable at end of year 2,921,598 $ 24.38 2,291,063 $ 22.18 1,657,582 $ 19.95
=========== ======= =========== ======= =========== =======
Weighted average fair value of
options granted during the year $ 12.44 $ 10.44 $ 9.50
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Changes in restricted shares for the three fiscal years in the period ended
January 1, 2005 are summarized as follows:
2004 2003 2002
------------------------------ ------------------------------- ------------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
Grant Price Grant Price Grant Price
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of year 253,956 $ 27.26 926,153 $ 22.77 913,460 $ 22.67
Granted 926,555 35.01 115,620 32.65 29,832 25.58
Vested (205,619) 26.66 (723,756) 22.72 (4,551) 21.24
Cancelled (99,158) 35.68 (64,061) 23.36 (12,588) 22.45
----------- ------- ----------- ------- ----------- -------
End of year 875,734 $ 34.65 253,956 $ 27.26 926,153 $ 22.77
=========== ======= =========== ======= =========== =======
The following table summarizes information about options outstanding at January
1, 2005:
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------------
Range of Outstanding at Weighted Average Weighted Average Exercisable at Weighted Average
Remaining Contractual
Exercise Prices Jan. 1, 2005 Life Exercise Price Jan. 1, 2005 Exercise Price
- --------------------------------------------------------------------------------------------------------------------------
$13.44 - $ 22.50 1,421,812 5.2 years $ 21.11 1,421,812 $ 21.11
22.51 - 27.50 2,098,483 7.0 years 25.89 855,570 25.81
27.51 - 32.50 2,624,885 8.1 years 28.34 556,721 28.79
32.51 - 41.70 2,867,553 9.0 years 37.05 87,495 35.43
$13.44 - $ 41.70 9,012,733 7.7 years $ 29.40 2,921,598 $ 24.38
In January 2001, May 2001, March 2003, and January 2004 the committee granted a
total of 170,966 shares of restricted stock issued under the 2000 Plan to a
group of key executives. In March 2004, the committee granted an additional
63,000 shares under the 2000 Plan to a group of key executives. As of January 1,
2005, 132,000 of these shares remained outstanding. 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 restricted
shares 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 restricted shares 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, 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 remained 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 was amortized over a
period equal to the anticipated vesting period. As of January 3, 2004, 67,012 of
these shares remained outstanding and
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
were vested in the first quarter of 2004 based on achievement of performance
criteria. These shares represented 20% of the original shares granted which did
not vest in 2001.
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 vested 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. In March 2004, pursuant to the amended agreement, the
Company issued to the CEO: (a) 49,847 restricted shares, which shares vest in
three equal installments on the first three anniversaries of grant; (b)
performance shares with a three year performance cycle of 2004-2006 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 409,820 shares; and (c)
options to acquire 180,132 shares of Common Stock.
The Company's outside directors stock ownership plan provides that non-employee
directors receive as part of their annual retainer an annual grant of shares of
common stock with a value of $15,000. Effective January 2004, the Company's
non-employee directors receive as part of their annual retainer an additional
grant under the 2000 Plan of shares of common stock with a value of $60,000.
Retainer shares are non-transferable until the first anniversary of the grant,
with 25% becoming transferable on each of the first and second anniversary of
the grant and 50% becoming transferable on the third anniversary, subject to
certain exceptions. Not more than 540,000 shares of common stock may be issued
under the Company's outside directors stock ownership plan, which will expire in
2006.
In January 2004, the committee authorized the grant of 710,000 restricted shares
to a group of key executives. In 2004, an additional 14,000 restricted shares
were granted to key executives. As of January 1, 2005, 650,000 of these shares
remained outstanding. These shares are subject to restrictions on transfer and
subject to risk of forfeiture until earned by continued employment. The
restrictions expire in January 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 17: 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.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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
2004, 2003 and 2002, which is included in Selling, general & administrative
expenses, was approximately $10,660,000, $9,106,000 and $9,789,000,
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 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 $40,000, $36,000 and $502,000 in 2004, 2003 and 2002,
respectively.
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 became 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 18: 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.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 19: 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
------------------------------------------------------------------------------------------------------
January 1, 2005 January 3, 2004 December 28, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Net Income Weighted Net Income Weighted Net Income
All amounts in thousands Average per Common Average per Common Average per Common
except per share data Net Income Shares Share Net Income Shares Share Net Income Shares Share
- ------------------------------------------------------------------------------------------------------------------------------
Basic $ 313,569 108,128 $ 2.90 $ 279,693 107,451 $ 2.60 $ 231,165 105,592 $ 2.19
====== ====== ======
Effect of dilutive
securities:
Stock options and
restricted stock grants -- 1,758 0.05 -- 2,168 0.05 -- 1,604 0.03
--------- ---------- ------ --------- ---------- ------ --------- ---------- ------
Diluted $ 313,569 109,886 $ 2.85 $ 279,693 109,619 $ 2.55 $ 231,165 107,196 $ 2.16
========= ========== ====== ========= ========== ====== ========= ========== ======
Options to purchase 16,000, 66,000, and 262,000 shares of common stock were
outstanding as of the years ended 2004, 2003, and 2002, respectively, but were
not included in the computation of diluted EPS for the years then ended because
the options were anti-dilutive.
NOTE 20: CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During fiscal 2004, 2003 and 2002, the Company made income tax payments of
approximately $144,632,000, $153,683,000 and $109,536,000, respectively. The
Company made interest payments of approximately $32,770,000, $27,808,000 and
$23,939,000 in 2004, 2003 and 2002, respectively. There were no other non-cash
activities in the twelve months ended January 1, 2005 and January 3, 2004.
NOTE 21: SEGMENT REPORTING
The Company operates the following business segments: Wholesale Apparel,
Wholesale Non-Apparel and Retail. The Wholesale Apparel segment consists of
women's, men's and children'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
includes handbags, small leather goods, fashion 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 and E-commerce sites. The Company also presents its results on
a geographic basis based on selling location, 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 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."
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
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
2004 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.
Certain items in the Company's International businesses have been reclassified
to conform to current year's classifications. In addition, as the Company is
creating the multi-brand platform in Europe, it has the opportunity to
reengineer cost allocation processes to reflect the current operating results
for each of its segments.
The Company's segments are business units that offer either different products
or distribute similar products through different distribution channels.
Additional categorization across the segments is impractical and not relevant in
that the segments are each managed separately because they either contract to
manufacture and distribute distinct products with different production processes
or distribute similar products through different distribution channels.
January 1, 2005
-----------------------------------------------------------------------------------------
In thousands Wholesale Wholesale Corporate/
Apparel Non-Apparel Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Total net sales $ 3,119,195 $ 584,676 $ 1,065,826 $ (136,869) $ 4,632,828
Intercompany sales (153,677) (19,802) -- 173,479 --
------------ ------------ ------------ ------------ ------------
Sales from external customers $ 2,965,518 $ 564,874 $ 1,065,826 $ 36,610 $ 4,632,828
============ ============ ============ ============ ============
Depreciation and amortization expense $ 72,976 $ 5,425 $ 36,015 $ 1,218 $ 115,634
OPERATING INCOME:
Total operating income (loss) $ 365,624 $ 90,319 $ 73,110 $ (26,307) $ 502,746
Intercompany segment operating
(income) loss (42,200) (11,544) -- 53,744 --
------------ ------------ ------------ ------------ ------------
Segment operating income from
external customers $ 323,424 $ 78,775 $ 73,110 $ 27,437 $ 502,746
============ ============ ============ ============ ============
Segment assets $ 2,411,354 $ 128,650 $ 686,884 $ 152,360 $ 3,379,248
Expenditures for long-lived assets 207,437 2,761 150,133 -- 360,331
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
January 3, 2004
-----------------------------------------------------------------------------------------
In thousands Wholesale Wholesale Corporate/
Apparel Non-Apparel Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Total net sales $ 2,967,415 $ 528,781 $ 886,338 $ (141,419) $ 4,241,115
Intercompany sales (151,238) (20,669) -- 171,907 --
------------ ------------ ------------ ------------ ------------
Sales from external customers $ 2,816,177 $ 508,112 $ 886,338 $ 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) $ 360,923 $ 72,779 $ 75,148 $ (38,060) $ 470,790
Intercompany segment operating
(income) loss (46,699) (12,015) -- 58,714 --
------------ ------------ ------------ ------------ ------------
Segment operating income from
external customers $ 314,224 $ 60,764 $ 75,148 $ 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
December 28, 2002
-----------------------------------------------------------------------------------------
In thousands Wholesale Wholesale Corporate/
Apparel Non-Apparel Retail Eliminations Totals
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES:
Total net sales $ 2,652,734 $ 489,898 $ 747,919 $ (173,048) $ 3,717,503
Intercompany sales (168,452) (25,450) -- 193,902 --
------------ ------------ ------------ ------------ ------------
Sales from external customers $ 2,484,282 $ 464,448 $ 747,919 $ 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) $ 325,817 $ 47,148 $ 58,042 $ (41,119) $ 389,888
Intercompany segment operating
(income) loss (39,331) (13,041) -- 52,372 --
------------ ------------ ------------ ------------ ------------
Segment operating income from
external customers $ 286,486 $ 34,107 $ 58,042 $ 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
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
January 1, 2005 January 3, 2004 December 28, 2002
-------------------------------------------------------------------------------------------
In thousands Domestic International Domestic International Domestic International
- -----------------------------------------------------------------------------------------------------------------------------------
Sales from external customers $ 3,502,565 $ 1,130,263 $ 3,304,614 $ 936,501 $ 3,037,325 $ 680,178
Depreciation and amortization expense 84,698 30,936 82,486 22,495 82,629 13,766
Segment operating income 425,955 76,791 378,730 92,060 336,588 53,300
Segment assets 2,240,972 1,138,276 2,102,806 785,293 1,897,255 647,332
Expenditures for long-lived assets 88,996 271,335 186,743 45,501 235,827 55,088
A reconciliation to adjust segment assets to consolidated assets follows:
In thousands January 1, 2005 January 3, 2004 December 28, 2002
- ------------------------------------------------------------------------------------------------------
Total segment assets $ 3,379,248 $ 2,888,099 $ 2,544,587
Intercompany receivables (24,691) (25,004) (16,067)
Investments in wholly-owned subsidiaries (249,523) (249,473) (249,473)
Other (75,282) (6,623) (10,690)
----------- ----------- -----------
Total consolidated assets $ 3,029,752 $ 2,606,999 $ 2,268,357
=========== =========== ===========
NOTE 22: OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) is comprised of the effects of
foreign currency translation and changes in unrealized gains and losses on
securities as detailed below:
In thousands January 1, 2005 January 3, 2004
- -----------------------------------------------------------------------------------------------------------------------
Foreign currency translation (loss) $ (54,517) $ (48,192)
(Losses) on cash flow hedging derivatives, net of taxes of $4,379 and $5,714 (8,138) (10,071)
Unrealized gains (losses) on securities, net of taxes of $(538) and $4,573 (995) 8,056
----------- -----------
Accumulated other comprehensive (loss), net of tax $ (63,650) $ (50,207)
=========== ===========
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.
NOTE 23: RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
recognition and measurement guidance previously discussed under EITF 03-01. The
consensus clarifies the meaning of "other-than-temporary impairment" and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and investments accounted for under the cost method or
the equity method. In September 2004 the FASB issued a final FASB Staff
Position, FSP EITF Issue 03-01-1, delaying the effective date for the
measurement and recognition guidance of EITF 03-01, however the disclosure
requirements remain effective and the applicable ones have been adopted for the
Company's fiscal year ended January 1, 2005. The implementation of EITF 03-01 is
not expected to have a material impact on the Company's results of operations
and financial condition.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
In September 2004, the EITF reached a consensus on applying Paragraph 19 of SFAS
No. 131 in EITF Issue No. 04-10, "Determining Whether to Aggregate Operating
Segments That Do Not Meet the Quantitative Thresholds." The consensus states
that operating segments that do not meet the quantitative thresholds can be
aggregated only if aggregation is consistent with the objective and basic
principles of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," the segments have similar economic characteristics, and
the segments share a majority of the aggregation criteria (a)-(e) listed in
paragraph 17 of SFAS No. 131. The effective date of the consensus in this Issue
is for fiscal years ending after October 13, 2004. Adoption of the EITF has not
affected the Company's segment classifications.
In November 2004, the EITF reached a consensus on EITF Issue No. 03-13,
"Applying the Conditions in Paragraph 42 of FASB Statement No. 144, in
Determining Whether to Report Discontinued Operations." The consensus requires
an evaluation of whether the operations and cash flows of a disposed component
have been or will be substantially eliminated from the ongoing operations of the
entity or will migrate or continue. This consensus should be applied to a
component of an enterprise that is either disposed of or classified as held for
sale in fiscal periods beginning after December 15, 2004. Adoption of the EITF
in the first quarter of fiscal 2005 should not have a material affect on the
Company's results of operations and financial position.
In December 2004, the FASB released revised SFAS No. 123R, "Share-Based
Payment". The pronouncement requires public companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award--the requisite service period (typically the vesting period). SFAS No.
123R is effective as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. The Company is planning on shifting the
composition of its equity compensation plan towards restricted stock and away
from stock options. This shift towards restricted stock will ultimately reduce
dilution, as fewer shares will be used for equity compensation purposes. The
adoption of SFAS No. 123R utilizing the modified prospective basis, inclusive of
the shift towards restricted stock, will reduce 2005 fully diluted earnings per
share by an estimated $0.10-0.12.
On December 21, 2004, the FASB issued Staff Position ("FSP") No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision Within the American Jobs Creation Act of 2004." FSP No. 109-2 allows
for additional time to assess the effect of repatriating foreign earnings, which
under SFAS No. 109, "Accounting for Income Taxes," would typically be required
to be recorded in the period of enactment. The American Jobs Creation Act of
2004 creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad. The Company is currently analyzing the
potential impact of utilizing the incentive.
In December 2004, the FASB decided to postpone the issuance of their final
standard on earnings per share ("EPS") entitled "Earnings per Share - an
Amendment to FASB Statement No. 128." The final standard is expected to be
issued in the first quarter of 2005. The proposed amendment would require
changes to the treasury stock method of computing fully diluted EPS. The impact
of the proposed standard on the financial results is not expected to be
material.
NOTE 24: RELATED PARTY TRANSACTIONS
During 2004, 2003 and 2002, 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 $2.0 million, $2.35 million and $1.52 million,
respectively, for fees incurred in connection with legal services provided to
the Company. The 2004 amount represents approximately 1% of such firm's 2004 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.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
During 2004, 2003 and 2002, 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 2004, 2003 and 2002 was
599,000, 614,000 and 628,000 euro, respectively (or $746,000, $696,000 and
$594,000, respectively, based on the exchange rates in effect during such
periods).
During 2004, 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 2004, 2003 and for the period of July 9, 2002
through December 28, 2002 was approximately 759,000, 762,000 and 452,000
Canadian dollars, respectively (or $584,000, $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 25: 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.
During 2004, the Company's Augusta, Georgia facility became listed on the State
of Georgia's Hazardous Site Inventory of environmentally impacted sites due to
the detection of certain chemicals at the site. To date, the Company has not
been required to take any action regarding this matter, however the Company is
continuing to monitor this situation.
NOTE 26: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2004 and 2003 is set forth in the
table below:
March June September December
In thousands except ----------------------------------------------------------------------------------------------------
per share data 2004 2003 2004 2003 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $1,102,767 $1,075,599 $1,025,924 $959,417 $1,306,581 $1,174,192 $1,197,556 $ 1,031,907
Gross profit 501,030 455,769 489,434 425,775 593,573 519,889 558,525 488,358
Net income 68,770 64,132 50,550 44,616 111,588 (1) 97,879 82,661 (2) 73,066 (3)
Basic earnings per share $ .63 $ .60 $ .47 $ .42 $ 1.04 (1) $ .91 $ .77 (2) $ .67 (3)
Diluted earnings per share $ .62 $ .59 $ .46 $ .41 $ 1.03 (1) $ .89 $ .75 (2) $ .66 (3)
Dividends paid per common share $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06
(1) Includes the after tax effect of a restructuring gain of $68 ($105 pretax)
or $0.001 per share.
(2) Includes the after tax effect of a restructuring expense of $6,540 ($9,799
pretax) or $0.06 per share and the after tax effect of a special investment
gain of $7,965 ($11,934 pretax) or $0.07 per share.
(3) Includes the after tax effect of a restructuring gain of $429 ($672 pretax)
or $0.004 per share.
F-38
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 1, 2005
Accounts Receivable - allowance for
doubtful accounts $ 2,853 $ 1,925 $ -- $ 1,956 (A) $ 2,822
Allowance for Returns $ 13,746 $ 175,477 $ -- $ 142,501 $ 46,722
Allowance for Discounts $ 15,550 $ 136,617 $ -- $ 135,304 $ 16,863
Restructuring Reserve $ 1,969 $ 9,866 $ (105)(C) $ 1,864 (B) $ 9,866
YEAR ENDED JANUARY 3, 2004
Accounts Receivable - allowance for
doubtful accounts $ 3,777 $ 150 $ -- $ 1,074 (A) $ 2,853
Allowance for Returns $ 22,380 $ 127,718 $ -- $ 136,352 $ 13,746
Allowance for Discounts $ 18,709 $ 145,307 $ -- $ 148,466 $ 15,550
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
Allowance for Returns $ 17,331 $ 117,407 $ -- $ 112,358 $ 22,380
Allowance for Discounts $ 13,742 $ 134,287 $ -- $ 129,320 $ 18,709
Restructuring Reserve $ 15,748 $ 9,942 $ (2,812)(C) $ 11,501 (B) $ 11,377
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-39
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)
(ii) 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)
(iii) 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 Registrant's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002 [the "2002 Annual Report"]).
Exhibit
No. Description
- --- -----------
10(b)(v) - Fifth Amendment to Lease (incorporated herein by reference from
Schedule 10(b)(v) to Registrant's Annual Report on Form 10-K for
the fiscal year ended January 3, 2004 (the "2003 Annual
Report")).
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 (now
known as UNITE-HERE) for the period June 1, 2003 through May 31,
2006 (incorporated herein by reference from Exhibit 10(c) to the
2003 Annual Report).
10(d)+* - Description of Liz Claiborne, Inc. 2004 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 (incorporated herein by reference from Exhibit
10(e)(i) to the 2003 Annual Report).
10(e)(ii)+ - Second Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan (incorporated herein by reference from Exhibit
10(e)(ii) to the 2003 Annual Report).
10(e)(iii)+ - Third Amendment to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan (incorporated herein by reference from Exhibit
10(e)(iii) to the 2003 Annual Report).
10(e)(iv)+ - Trust Agreement (the "401(k) Trust Agreement") dated as of
October 1, 2003 between Liz Claiborne, Inc. and Fidelity
Management Trust Company (incorporated herein by reference from
Exhibit 10(e)(iv) to the 2003 Annual Report).
10(e)(v)+* - First Amendment to the 401(k) Trust Agreement.
10(e)(vi)+* - Second Amendment to the 401(k) Trust Agreement.
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 (incorporated herein by reference from Exhibit
10(f)(i) to the 2003 Annual Report).
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).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
- --- -----------
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 (incorporated herein by reference
from Exhibit 10(h)(i) to the 2003 Annual Report).
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).
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 (incorporated herein by reference
from Exhibit 10(i)(ii) to the 2003 Annual Report).
10(i)(iii)+ - Amendment 3 to the 2002 Plan (incorporated herein by reference
from Exhibit 10(i)(iii) to the 2003 Annual Report).
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 Registrant's "Growth
Shares" program under the 2002 Plan (incorporated herein by
reference from Exhibit 10(i)(v) to the 2003 Annual Report).
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).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
Exhibit
No. Description
- --- -----------
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 (incorporated herein by reference from
Exhibit 10(t)(i) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001).
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).
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)+ - Executive Termination Benefits Agreement, between Registrant and
Paul R. Charron (incorporated herein by reference from Exhibit 10
(v)(iii) to the 2000 Annual Report).
10(m)(v)+ - First Amendment to the Executive Termination Benefits 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 10.5 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(m)(ix) - Stock Option Certificate, dated March 4, 2004, issued to Paul R.
Charron, under Registrant's 2002 Stock Incentive Plan (the "2002
Plan") (incorporated herein by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
April 3, 2004 [the "1st Quarter 2004 10-Q"]).
10(m)(x) - Restricted Share Agreement under the 2002 Plan, dated as of March
4, 2004, between Registrant and Paul R. Charron (incorporated
herein by reference to Exhibit 10(b) to the 1st Quarter 2004
10-Q).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
Exhibit
No. Description
- --- -----------
10(m)(xi) - Performance Share Agreement under the 2002 Plan, dated as of
March 4, 2004, between Registrant and Paul R. Charron
(incorporated herein by reference to Exhibit 10(c) to the 1st
Quarter 2004 10-Q).
10(n)+ - Change of Control Agreement, between Registrant and Angela J.
Ahrendts (incorporated herein by reference from Exhibit 10(v) to
the 2002 Annual Report).
10(o)+ - Change of Control Agreement, between Registrant and Trudy F.
Sullivan (incorporated herein by reference from Exhibit 10(w) to
the 2002 Annual Report).
10(p) - Five-Year Credit Agreement, dated as of October 13, 2004, among
Liz Claiborne, Inc., the Lenders party thereto, Bank of America,
N.A., Citibank, N.A., SunTrust Bank and Wachovia Bank, National
Association, as Syndication Agents, and JPMorgan Chase Bank, as
Administrative Agent (incorporated herein by reference to Exhibit
10.1 to Registrant's Current Report on Form 8-K dated October 13,
2004).
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.