UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to

 

Commission File Number: 0-23214

 

SAMSONITE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		36-3511556
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
11200 East 45th Avenue, Denver, CO		80239
(Address of principal executive offices)		(Zip Code)
(303) 373-2000
(Registrant’s telephone number, including area code)
(Former name, if changed since last report)

 

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 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes o  No ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 224,834,708 shares of common stock, par value $0.01 per share, as of September 10, 2004

 

 

FORM 10-Q

CONTENTS

 

PART I—FINANCIAL INFORMATION
	Item 1: Financial Statements
	Unaudited Consolidated Balance Sheets as of July 31, 2004 and January 31, 2004
	Unaudited Consolidated Statements of Operations for the three months ended July 31, 2004 and 2003
	Unaudited Consolidated Statements of Operations for the six months ended July 31, 2004 and 2003
	Unaudited Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the six months ended July 31, 2004
	Unaudited Consolidated Statements of Cash Flows for the six months ended July 31, 2004 and 2003
	Unaudited Notes to Consolidated Financial Statements
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements
	Item 3: Quantitative And Qualitative Disclosures About Market Risk
	Item 4: Controls and Procedures
PART II—OTHER INFORMATION
	Item 1: Legal Proceedings
	Item 2: Changes in Securities
	Item 3: Defaults upon Senior Securities
	Item 4: Submission of Matters to a Vote of Security Holders
	Item 5: Other Information
	Item 6: Exhibits and Reports on Form 8-K
	Signature
	Certifications
	Index to Exhibits

 

Important Notice:

 

This Quarterly Report on Form 10-Q (including documents incorporated by reference herein) contains statements with respect to the Company’s expectations or beliefs as to future events. These types of statements are “forward-looking” and are subject to uncertainties. See “Forward-Looking Statements”.

 

2

 

PART I—FINANCIAL INFORMATION

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets

as of July 31, 2004 and January 31, 2004

(In thousands)

 

		July 31, 2004			January 31, 2004
Assets
Current assets:
Cash and cash equivalents		$	25,237		29,524
Trade receivables, net of allowances for doubtful accounts of $7,717 and $7,809		81,736			76,246
Notes and other receivables		19,253			14,471
Inventories (Note 3)		139,111			132,376
Deferred income tax assets		1,887			1,471
Prepaid expenses and other current assets		24,467			21,616
Total current assets		291,691			275,704
Property, plant and equipment, net (Note 4)		105,636			114,471
Intangible assets, less accumulated amortization of $66,302 and $65,304 (Note 5)		97,767			98,589
Other assets and long-term receivables, net of allowances for doubtful accounts of $521		15,516			13,124
		$	510,610		501,888

 

See accompanying notes to consolidated financial statements

 

3

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets

as of July 31, 2004 and January 31, 2004

(In thousands, except share data)

 

		July 31, 2004			January 31, 2004
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Short-term debt (Note 6)		$	5,960		6,110
Current installments of long-term obligations (Note 6)		1,502			1,682
Accounts payable		59,079			52,976
Accrued liabilities		68,580			65,694
Total current liabilities		135,121			126,462
Long-term obligations, less current installments (Note 6)		344,834			325,885
Deferred income tax liabilities		10,540			11,039
Other non-current liabilities		54,620			49,202
Total liabilities		545,115			512,588
Minority interests in consolidated subsidiaries		12,612			12,132
Stockholders’ equity (deficit) (Note 8):
Preferred stock		173,186			166,498
Common stock		2,352			2,352
Additional paid-in capital		768,433			768,433
Accumulated deficit		(536,731		)	(507,975	)
Accumulated other comprehensive loss		(34,357		)	(32,140	)
		372,883			397,168
Treasury stock, at cost (10,500,000 shares)		(420,000		)	(420,000	)
Total stockholders’ deficit		(47,117		)	(22,832	)
Commitments and contingencies (Notes 6, 8, 9 and 11)
		$	510,610		501,888

 

See accompanying notes to consolidated financial statements

 

4

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

for the three months ended July 31, 2004 and 2003

(In thousands, except per share data)

 

		Three Months Ended July 31,
		2004			2003
Net sales (Note 1E)		$	222,357		192,191
Cost of goods sold		120,516			107,920
Gross profit		101,841			84,271
Selling, general and administrative expenses		86,531			65,277
Amortization of intangible assets		589			325
Provision for restructuring operations (Note 2)		684			—
Operating income		14,037			18,669
Other income (expense):
Interest income		133			83
Interest expense and amortization of debt issue costs and premium		(9,387		)	(11,514	)
Other income (expense) —net (Note 7)		(19,899		)	(5,137	)
Income (loss) before income taxes and minority interest		(15,116		)	2,101
Income tax expense		(2,188		)	(3,132	)
Minority interest in losses (earnings) of subsidiaries		(1,040		)	(1,284	)
Net loss		(18,344		)	(2,315	)
Senior redeemable preferred stock dividends and accretion of senior redeemable preferred stock discount		(3,358		)	(12,907	)
Net loss to common stockholders		$	(21,702	)	(15,222	)
Weighted average common shares outstanding—basic and diluted		224,705			22,092
Net loss per common share—basic and diluted		$	(0.10	)	(0.69	)

 

See accompanying notes to consolidated financial statements

 

5

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Operations

for the six months ended July 31, 2004 and 2003

(In thousands, except per share data)

 

		Six Months Ended July 31,
		2004			2003
Net sales (Note 1E)		$	420,551		354,093
Cost of goods sold		229,778			197,572
Gross profit		190,773			156,521
Selling, general and administrative expenses		164,446			126,788
Amortization of intangible assets		1,179			647
Asset impairment charge (Note 2)		671			—
Provision for restructuring operations (Note 2)		4,074			—
Operating income		20,403			29,086
Other income (expense):
Interest income		230			171
Interest expense and amortization of debt issue costs and premium		(19,168		)	(23,303	)
Other income (expense) —net (Note 7)		(18,287		)	(5,449	)
Income (loss) before income taxes and minority interest		(16,822		)	505
Income tax expense		(3,291		)	(5,309	)
Minority interest in losses (earnings) of subsidiaries		(1,955		)	(1,497	)
Net loss		(22,068		)	(6,301	)
Senior redeemable preferred stock dividends and accretion of senior redeemable preferred stock discount		(6,688		)	(24,539	)
Net loss to common stockholders		$	(28,756	)	(30,840	)
Weighted average common shares outstanding—basic and diluted		224,705			20,979
Net loss per common share—basic and diluted		$	(0.13	)	(1.47	)

 

See accompanying notes to consolidated financial statements

 

6

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statement of Stockholders’ Equity (Deficit)

and Comprehensive Loss for the six months ended July 31, 2004

(In thousands, except share amounts)

 

		Preferred Stock (1)			Common Stock (2)		Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Compre- hensive Loss		Treasury Stock
Balance, February 1, 2004		$	166,498		2,352		768,433		(507,975	)	(32,140	)			(420,000	)
Net loss		—			—		—		(22,068	)			(22,068	)	—
Unrealized gain on cash flow hedges (net of income tax effect of $279)		—			—		—		—		642		642		—
Reclassification adjustment for losses included in net loss (net of income tax effect of $346)		—			—		—		—		635		635		—
Foreign currency translation adjustment		—			—		—		—		(3,494	)			—
Comprehensive loss		—			—		—		—		—		(20,791	)	—
Senior redeemable preferred stock dividends and accretion of senior redeemable preferred stock discount		6,688			—		—		(6,688	)	—				—
Balance, July 31, 2004		$	173,186		2,352		768,433		(536,731	)	(34,357	)			(420,000	)

 

(1)   $.01 par value; 2,000,000 shares authorized; 159,982 shares issued and outstanding at July 31, 2004 and January 31, 2004.

 

(2)   $.01 par value; 1,000,000,000 shares authorized; 235,205,324 shares issued at July 31, 2004 and January 31, 2004 and 224,705,324 shares outstanding at July 31, 2004 and January 31, 2004.

 

See accompanying notes to consolidated financial statements

 

7

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

for the six months ended July 31, 2004 and 2003

(In thousands)

 

		Six Months Ended July 31,
		2004			2003
Cash flows provided by (used in) operating activities:
Net loss		$	(22,068	)	(6,301	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Non-operating loss (gain) items:
Gain on disposition of fixed assets, net		(703		)	(2,047	)
Depreciation and amortization of property, plant and equipment		9,487			9,167
Amortization of intangible assets		1,179			647
Amortization of debt issue costs and premium		1,177			1,971
Provision for doubtful accounts		712			40
Provision for restructuring operations		4,074			—
Asset impairment charge		671			—
Pension and other post retirement benefit plan losses, net		1,564			436
Write-off of deferred financing costs		4,058			—
Changes in operating assets and liabilities:
Trade and other receivables		(12,258		)	238
Inventories		(8,514		)	(66	)
Prepaid expenses and other current assets		(3,877		)	122
Accounts payable and accrued liabilities		8,261			(13,390	)
Other—net		3,116			(4,558	)
Net cash used in operating activities		$	(13,121	)	(13,741	)

 

See accompanying notes to consolidated financial statements

 

8

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

for the six months ended July 31, 2004 and 2003

(In thousands)

 

		Six Months Ended July 31,
		2004			2003
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment		$	(5,630	)	(5,423	)
Proceeds from sale of assets held for sale and property and equipment		2,917			3,327
Other, net		(379		)	—
Net cash used in investing activities		(3,092		)	(2,096	)
Cash flows provided by (used in) financing activities:
Net change in short-term obligations		(33		)	3,447
Issuance of floating rate and 8 7/8% senior notes		325,810			—
Repurchase of 10 3/4% and 11 1/8% Notes		(323,393		)	—
Net borrowings (payments) on other long-term obligations		16,926			(84,497	)
Proceeds from issuance of convertible preferred stock		—			106,000
Issuance costs of floating rate and 8 7/8% senior notes in the current year and convertible preferred stock and new senior credit facility in the prior year		(7,535		)	(14,152	)
Other, net		666			512
Net cash provided by financing activities		12,441			11,310
Effect of exchange rate changes on cash and cash equivalents		(515		)	(2,413	)
Net decrease in cash and cash equivalents		(4,287		)	(6,940	)
Cash and cash equivalents, beginning of period		29,524			22,705
Cash and cash equivalents, end of period		$	25,237		15,765
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	18,418		22,881
Cash paid during the period for income taxes		$	2,862		4,892

 

See accompanying notes to consolidated financial statements

 

9

 

SAMSONITE CORPORATION AND SUBSIDIARIES

Unaudited Notes to Consolidated Financial Statements

Dollars and Euros in Thousands

 

1.             General

 

A.            Business

 

The principal activity of Samsonite Corporation and subsidiaries (the “Company”) is the manufacture and distribution of luggage, casual bags, business cases and travel related products throughout the world, primarily under the Samsonite®, and American Tourister® brand names and other owned and licensed brand names. The principal luggage related product customers of the Company are department/specialty retail stores, mass merchants, catalog showrooms and warehouse clubs. The Company also sells its luggage, casual bags, business cases and other products through its Company-owned stores. In addition, the Company licenses and distributes designer clothing and footwear in Europe, Asia and the United States.

 

B.            Interim Financial Statements

 

The accompanying unaudited consolidated financial statements reflect all adjustments, which are normal and recurring in nature, and which, in the opinion of management, are necessary to a fair statement of the financial position as of July 31, 2004 and results of operations for the three and six month periods ended July 31, 2004 and 2003. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

 

C.            Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

 

D.            Per Share Data

 

The Company computes earnings (loss) per share in accordance with the requirements of Statement of Financial Accounting Standards No. 128, Earnings Per Share (“SFAS 128”). SFAS 128 requires the disclosure of “basic” earnings per share and “diluted” earnings per share. Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding increased for potentially dilutive common shares outstanding during the period. The dilutive effect of stock options, warrants, convertible preferred stock and their equivalents is calculated using the treasury stock method.

 

Net income (loss) per common share is computed based on a weighted average number of shares of common stock outstanding during the period of 224,705,324 and 20,978,820 for the six months ended July 31, 2004 and 2003, respectively, and 224,705,324 and 22,092,066 for the three months ended July 31, 2004 and 2003, respectively. Basic earnings per share and earnings per share—assuming dilution are the same for the three and six months ended July 31, 2004 and 2003 because of the antidilutive effect of stock options and awards when there is a net loss to common stockholders. There are options to purchase 1,534,350 and 1,787,711 shares outstanding at July 31, 2004 and 2003, respectively; outstanding warrants to purchase approximately 15.5 million shares of common stock at an exercise price of $0.75 per share at July 31, 2004; and warrants to purchase 828,356 shares of common stock at an exercise price of $13.02 per share at July 31, 2004.

 

10

 

E.             Royalty Revenues

 

The Company licenses its brand names to certain unrelated third parties as well as certain foreign subsidiaries and joint ventures. Net sales include royalties earned of $3,994 and $4,567 for the three months ended July 31, 2004 and 2003, respectively, and $8,400 and $9,003 for the six months ended July 31, 2004 and 2003, respectively.

 

F.             Derivative Financial Instruments

 

The Company accounts for derivative financial instruments in accordance with the requirements of Statement of Financial Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and its corresponding amendments. SFAS 133 requires the Company to measure all derivatives at fair value and to recognize them in the consolidated balance sheet as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging instruments and ineffective portions of hedges are recognized in earnings in the current period.

 

From time to time, the Company enters into derivative transactions to hedge interest rates on floating rate debt obligations and forecasted foreign currency transactions. These derivatives are classified as cash flow hedges. The Company also enters into derivative transactions to reduce exposure to the effect of exchange rates on the results of foreign operations (primarily the effect of changes in the euro exchange rate on the results of the Company’s significant European operations). These transactions are not allowed hedge accounting treatment under SFAS 133; the Company records these instruments at fair value and records realized and unrealized gains and losses in Other Income (Expense)—Net.

 

Net gains or losses on interest rate hedges are recorded in interest expense when reclassified to earnings. Net gains or losses on hedges of forecasted foreign currency transactions are reclassified to revenues or cost of sales depending on the type of transaction being hedged. Net gains or losses on cash flow hedges are reclassified from other comprehensive income as the underlying hedged transactions occur. At July 31, 2004, cash flow hedges for forecasted foreign currency transactions extend until August 2005. The estimated amount of net gains from interest rate and foreign currency transactions expected to be reclassified into earnings within the next twelve months is $207. The amount ultimately reclassified into earnings is dependent on the effect of changes in interest rates and currency exchange rates over the next twelve months.

 

2.             Asset Impairment and Provision for Restructuring Operations

 

During the second quarter of fiscal 2005, the Company recorded a provision for restructuring of $684 related to the closure of the Nogales, Mexico production facility in July 2004. During the first quarter of fiscal 2005, the Company recorded a restructuring provision of $3,390 for the closure of the Tres Cantos, Spain manufacturing plant and severance costs recorded associated with approximately 40 positions that were eliminated.  An asset impairment provision of $671 was also recorded to write-down costs related to a project to convert an idle U.S. factory to a warehouse during the first quarter of fiscal 2005.

 

11

 

3.             Inventories

 

Inventories consisted of the following:

 

		July 31, 2004			January 31, 2004
Raw Materials		$	20,621		20,281
Work in Process		3,778			4,208
Finished Goods		114,712			107,887
		$	139,111		132,376

 

4.             Property, Plant and Equipment

 

Property, plant and equipment consisted of the following:

 

		July 31, 2004			January 31, 2004
Land		$	10,845		11,603
Buildings		79,317			82,744
Machinery, equipment and other		136,378			137,949
Computer software		12,942			12,895
		239,482			245,191
Less accumulated amortization and depreciation		(133,846		)	(130,720	)
		$	105,636		114,471

 

5.             Intangible Assets

 

Intangible assets at July 31, 2004 and January 31, 2004 consisted of the following:

 

		July 31, 2004							January 31, 2004
		Gross			Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Intangibles subject to amortization
Licenses		$	26,669		(26,669	)	—		26,669		(26,669	)	—
Patents, trademarks and other		19,368			(12,479	)	6,889		19,368		(11,422	)	7,946
Leasehold rights		2,165			(1,253	)	912		2,319		(1,264	)	1,055
Unamortized prior service cost		2,138			—		2,138		2,138		—		2,138
		$	50,340		(40,401	)	9,939		50,494		(39,355	)	11,139
Intangibles not subject to amortization
Tradenames		$	106,999		(22,855	)	84,144		106,998		(22,855	)	84,143
Goodwill		6,730			(3,046	)	3,684		6,401		(3,094	)	3,307
		$	113,729		(25,901	)	87,828		113,399		(25,949	)	87,450
Total		$	164,069		(66,302	)	97,767		163,893		(65,304	)	98,589

 

In accordance with the provisions of SFAS 142, “Goodwill and Other Intangible Assets,” the Company discontinued amortizing goodwill and other intangibles, which have an indefinite life.  Such intangibles are tested for impairment annually.

 

12

 

During the six months ended July 31, 2004, the Company acquired intangibles from the additional purchase of the minority interest in its Singapore subsidiary of $378; there were no other significant acquisitions of intangibles assets.  Changes in the exchange rate between the U.S. dollar and other foreign currencies, primarily the euro, can affect the reported gross and net book value of the Company’s intangible assets.  Amortization expense for intangible assets for the six months ended July 31, 2004 and 2003 was $1,179 and $647, respectively, and for the three months ended July 31, 2004 and 2003 was $589 and $325, respectively.  Future amortization expense for the net carrying amount of intangible assets at July 31, 2004 is estimated to be $1,175 for the remainder of fiscal 2005, $2,309 in fiscal 2006, $2,032 in fiscal 2007, $1,942 in fiscal 2008, $38 in fiscal 2009 and $305 beyond fiscal 2009.

 

6.             Debt

 

At July 31, 2004 and January 31, 2004 debt consisted of the following:

 

		July 31, 2004			January 31, 2004
Senior Credit Facility (a)		$	17,684		—
Floating rate senior notes (b)		120,240			—
8 7/8% senior subordinated notes (b)		205,000			—
103/4% senior subordinated notes (b)		—			322,861
Other obligations(c)		8,666			9,368
Capital lease obligations		706			916
Series B Notes (d)		—			532
Total debt		352,296			333,677
Less short-term debt and current installments of long-term obligations		(7,462		)	(7,792	)
Long-term obligations less current installments		$	344,834		325,885

 

(a)           The Company’s senior credit facility consists of a $60,000 multi currency revolving credit facility allocated to the U.S. and Europe in the amount of $35,000 and 22,026 euros ($25,000 as of July 31, 2003), respectively. The revolving credit facility matures on July 31, 2007.

 

The U.S. portion of the revolving credit facility is a borrowing base facility under which borrowings are limited to a percentage of eligible U.S. inventory and accounts receivable up to a maximum of $35,000. At July 31, 2004, $35,000 of this portion of the facility was available for borrowing. At July 31, 2004, the Company had $4,595 of letters of credit outstanding under the U.S. portion of the revolving credit facility which reduced the net availability on the U.S. line of credit to $30,405. Borrowing availability under the European portion of the revolving credit facility is determined monthly based upon a ratio of European debt to European earnings before interest, taxes, depreciation and amortization. At July 31, 2004, approximately 14,500 euros, or $17,684, was outstanding under the European portion of the facility.

 

Borrowings under the revolving credit facility accrue interest at rates adjusted periodically depending on the Company’s financial performance as measured each fiscal quarter and interest rate market conditions. Additionally, the Company is required to pay a commitment fee of from 0.25% to 0.50% (depending on the Company’s financial performance) on the unused portion of the revolving credit facility.

 

The obligations under the U.S. portion of the revolving credit facility are secured by, among other things, the Company’s domestic real and personal property, guaranties from certain of its domestic subsidiaries, pledges of 100% of the capital stock of certain of its domestic subsidiaries, pledges of 66% of the capital stock of certain of its foreign subsidiaries and the personal property of certain of its domestic subsidiaries. The obligations under the European portion of the revolving credit facility are secured by, among other things, the collateral and guaranties

 

13

 

securing the U.S. portion of the revolving credit facility and pledges of 100% of the capital stock of the Company’s European affiliates, S.C. Denmark ApS and SC International Holdings C.V.

 

The revolving credit facility contains financial and other covenants that, among other things, limit the Company’s ability to draw down the full amount of the revolving credit facility, engage in transactions with its affiliates, make acquisitions, participate in certain mergers, or make distributions or cash dividend payments to its equity holders or with respect to its subordinated debt.

 

(b)           On May 21, 2004, the Company retired $14,600 of its 10³/₄% Senior Subordinate Notes (the “10³/₄% Notes”) through an open market purchase at a price of 103.50% of the principal amount.

 

On May 25, 2004, the Company commenced an offer to purchase and consent solicitation for the purpose of retiring and refinancing the remaining principal balance of the 10³/₄% Notes of $308,300.  Holders of the notes who tendered their notes prior to June 8, 2004 received a total tender offer consideration of $1.04267 per $1 of principal amount plus accrued and unpaid interest. Notes that remained outstanding following the expiration of the tender offer on June 8, 2004 were redeemed on July 11, 2004 at a redemption price of 103.5833% of the face value of the notes.

 

To refinance the 10³/₄% Notes and to pay the tender and redemption premiums, on June 9, 2004 the Company issued €100,000 floating rate senior notes due 2010 and $205,000 8⁷/₈% senior subordinated notes due 2011.  Interest on the euro floating rate senior notes will be payable on March 1, June 1, September 1 and December 1 of each year and will be reset each quarterly period based on three-month EURIBOR plus 4.375%.  Interest on the senior subordinated notes is payable on June 1 and December 1 of each year.  The euro floating rate notes rank equally in right of payment with the existing and future senior debt.  The senior subordinated notes rank subordinate in right of payment to the existing and future senior debt, including indebtedness under the existing credit facility and will rank equally in right of payment with any future subordinated indebtedness. The indentures under which the senior notes and the senior subordinated notes were issued contain covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries (as defined in the indenture) to incur additional indebtedness, pay dividends and make certain other distributions, issue capital stock, make investments, repurchase stock, create liens, enter into transactions with affiliates, create dividend or other payment restrictions affecting restricted subsidiaries, merge or consolidate, and transfer or sell assets.  Both note issuances are redeemable at the option of the Company at various dates and redemption prices as set forth in the indentures.

 

A total of $13,700 of redemption premiums, tender and consent solicitation payments and dealer-manager fees were charged to other income (expense) during the six months ended July 31, 2004 in connection with the repurchase and retirement of the 10 ³/₄% notes. Additionally, a total of $7,500 deferred financing costs were incurred in connection with the issuance of the floating rate senior notes and the 8 7/8% senior subordinated notes. A total of $4,058 of unamortized deferred financing costs related to the original issuance of the 10 ³/₄% notes was written off to other income (expense).

 

(c)           Other obligations consist of various notes payable to banks by foreign subsidiaries.  The obligations bear interest at varying rates and mature through 2006.

 

(d)           The Company redeemed the Series B Senior Subordinated Notes that bear interest at 11¹/₈% per annum on June 22, 2004.

 

14

 

7.             Other Income (Expense)—Net

 

Other income (expense)—net consisted of the following:

 

		Three months ended July 31,					Six months ended July 31,
		2004			2003		2004		2003
Net gain (loss) from foreign currency forward delivery contracts		$	(528	)	(507	)	1,202		(877	)
Gain (loss) on disposition of fixed assets, net		(261		)	10		703		2,047
Write-off of deferred financing costs and bank loan amendment fees		(4,058		)	(5,200	)	(4,058	)	(6,129	)
Foreign currency transaction gains (losses)		(140		)	781		63		632
Pension expense (a)		(695		)	(403	)	(1,390	)	(806	)
Redemption premium and expenses on 10 3/4% senior subordinated notes		(13,700		)	—		(13,700	)	—
Other, net		(517		)	182		(1,107	)	(316	)
		$	(19,899	)	(5,137	)	(18,287	)	(5,449	)

 

(a)           Pension expense included in other income (expense) - net relates to the actuarial determined pension expense associated with the pension plans of two companies unrelated to the Company’s operations whose pension obligations were assumed by the Company as a result of a 1993 agreement with the Pension Benefit Guaranty Corporation. The plans were part of a controlled group of corporations of which the Company was a part prior to 1993.

 

8.             Employee Stock Options

 

The Company has authorized 2,550,000 shares for the granting of options under the 1995 Stock Option and Award Plan and 75,000,000 shares for the granting of options under the FY 1999 Stock Option and Incentive Award Plan. See Note 10 to the consolidated financial statements included in the 2004 Form 10-K for a description of such plans.

 

At July 31, 2004, the Company had outstanding options for a total of 1,534,350 shares at option prices ranging from $2.62 to $10.00 per share. Options for 1,280,690 shares were exercisable at July 31, 2004 at a weighted average exercise price of $6.51 per share. There were no options exercised during the six months ended July 31, 2004.

 

On April 19, 2004, the Company entered into an agreement with its Chief Executive Officer (“CEO”) and a British Virgin Islands corporation formed by a trust established by the CEO for the benefit of himself and his family, to issue to such corporation options to purchase 30,000,000 shares of the Company’s common stock.  The exercise price for 15,000,000 of the options is $0.35 per share and the exercise price for 15,000,000 of the options is $0.70 per share.  The options vest over a five-year period commencing with the date of the CEO’s employment.  Vesting is subject to the Company’s performance with respect to certain performance criteria.  The Company recorded stock compensation expense related to these options of $4,133 and $3,688 during the six months and three months ended July 31, 2004, respectively. As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company applies the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Because of certain performance and exercise provisions of the options granted to the CEO, the Company is applying the variable accounting provisions of APB No. 25 to the options.

 

 

15

 

9.             Pension and Other Employee Benefits

 

The components of net period benefit cost related to U.S. pension and postretirement costs include the following:

 

		Pension Benefits					Other Postretirement Benefits
		Three Months Ended July 31,
		2004			2003		2004		2003
Service cost		$	368		518		79		151
Interest cost		3,034			4,500		217		243
Expected return on plan assets		(3,500		)	(5,384	)	—		—
Amortization of prior service cost		61			87		(67	)	(67	)
Amortization of the net (gain) loss		634			138		(71	)	(39	)
Net periodic benefit cost (income)		$	597		(141	)	158		288
		Pension Benefits					Other Postretirement Benefits
		Six Months Ended July 31,
		2004			2003		2004		2003
Service cost		$	736		1,023		158		261
Interest cost		6,068			8,879		434		442
Expected return on plan assets		(7,000		)	(10,623	)	—		—
Amortization of prior service cost		122			171		(134	)	(134	)
Amortization of the net (gain) loss		1,268			272		(142	)	(49	)
Net periodic benefit cost (income)		$	1,194		(278	)	316		520

 

The Company previously disclosed in its consolidated financial statements for the year ended January 31, 2004, that it expected to contribute $1,000 to its unfunded postretirement pension plans in 2004.  As of July 31, 2004, $262 of contributions have been made.

 

The Company’s retiree medical plans provide prescription drug benefits that may be affected by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“the Medicare Act”), signed into law in December 2003.  In accordance with FASB Staff Position 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the effects of the Medicare Act on the medical plans have not been included in the measurement of the net periodic postretirement benefit cost for the second quarter of fiscal 2005.  Specific authoritative guidance from the FASB on the accounting for the federal subsidy is pending and that guidance, when issued, may require us to revise previously reported information and may require us to amend the plans to benefit from the Medicare Act.  We expect the total effect to be insignificant.

 

10.          Segment Information

 

The Company’s operations consist of the manufacture and distribution of luggage and other travel-related products, the licensing of the Company’s brand names and the design and sale of clothing and footwear. Management of the business and evaluation of operating results is organized primarily along geographic lines dividing responsibility for the Company’s operations as follows: Europe; The Americas, which includes the United States wholesale and retail operations and “Other Americas” which includes Canada and Latin America; Asia, which includes India, China, Singapore, South Korea, Taiwan, Malaysia and Hong Kong; and Other which primarily includes licensing revenues from luggage and non-luggage brand names owned by the Company, and corporate overhead.

 

The Company evaluates the performance of its segments based on operating income of the respective business units. Intersegment sales prices are market based. Because the operations of the U.S. Wholesale and Retail segments are closely related, certain intercompany expense allocations between the two segments are not representative of actual costs to operate those segments. Additionally, certain overhead expenses, which benefit the U.S. Wholesale and Retail segments, are included in other operations.  Certain fiscal 2004 data has been reclassified to conform to the fiscal 2005 presentation.

 

16

 

Segment information for the six and three months ended July 31, 2004 and 2003 is as follows:

 

		Europe			U.S. Wholesale		U.S. Retail		Other Americas		Asia		Other Operations		Eliminations		Totals
Six months ended July 31, 2004
Revenues from external customers		$	192,320		94,503		59,293		24,686		41,640		8,109		—		420,551
Intersegment revenues		$	1,407		14,326		—		—		3,806		—		(19,539	)	—
Operating income (loss)(a)		$	13,979		1,114		4,001		2,420		7,552		(8,819	)	156		20,403
Total assets		$	229,228		69,248		32,155		37,878		41,940		255,589		(155,428	)	510,610
2003
Revenues from external customers		$	162,420		79,164		53,443		20,783		29,688		8,595		—		354,093
Intersegment revenues		$	2,281		16,233		—		—		4,081		—		(22,595	)	—
Operating income (loss)(a)		$	18,118		2,657		723		1,371		5,088		1,812		(683	)	29,086
Total assets		$	217,057		89,439		22,317		37,327		33,388		268,247		(162,283	)	505,492

 

		Europe			U.S. Wholesale		U.S. Retail		Other Americas		Asia		Other Operations		Eliminations		Totals
Three months ended July 31, 2004
Revenues from external customers		$	100,171		51,722		32,087		13,575		20,938		3,864		—		222,357
Intersegment revenues		$	692		7,500		—		(20	)	2,091		—		(10,263	)	—
Operating income (loss)(a)		$	8,687		1,557		3,463		1,661		3,818		(5,267	)	118		14,037
Total assets		$	229,228		69,248		32,155		37,878		41,940		255,589		(155,428	)	510,610
2003
Revenues from external customers		$	88,239		45,090		30,408		11,666		12,532		4,256		—		192,191
Intersegment revenues		$	695		8,910		—		—		1,933		—		(11,538	)	—
Operating income (loss)(a)		$	11,334		2,103		1,894		1,151		1,669		197		321		18,669
Total assets		$	217,057		89,439		22,317		37,327		33,388		268,247		(162,283	)	505,492

 

(a)           Operating income (loss) represents net sales less operating expenses. In computing operating income (loss) none of the following items have been added or deducted: interest income, interest expense, other income (expense)—net, income taxes, minority interest and extraordinary items. General corporate expenses and amortization of intangibles are included in other operations.

 

11.          Litigation, Commitments and Contingencies

 

The Company is a party to various legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these matters will not have a material adverse affect on its consolidated financial position, results of operations or liquidity.

 

17