EX-99.1 3 a12-17933_1ex99d1.htm EX-99.1

Exhibit 99.1

 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 

 

 

Page
Number

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

F-2 to F-3

FINANCIAL STATEMENTS

 

 

Consolidated Balance Sheets as of December 31, 2011 and January 1, 2011

 

F-4

Consolidated Statements of Operations for the Three Fiscal Years Ended December 31, 2011

 

F-5

Consolidated Statements of Retained Earnings, Comprehensive Loss and Changes in Capital Accounts for the Three Fiscal Years Ended December 31, 2011

 

F-6

Consolidated Statements of Comprehensive Loss for the Three Fiscal Years Ended December 31, 2011

 

F-7

Consolidated Statements of Cash Flows for the Three Fiscal Years Ended December 31, 2011

 

F-8

Notes to Consolidated Financial Statements

 

F-9 to F-56

SCHEDULE II — Valuation and Qualifying Accounts

 

F-57

 

F-1



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Fifth & Pacific Companies, Inc.

 

We have audited the internal control over financial reporting of Fifth & Pacific Companies, Inc. and subsidiaries (formerly known as Liz Claiborne, Inc.) (the “Company”) as of December 31, 2011, 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, included in Management’s Report on Internal Control Over Financial Reporting disclosed in Item 9 of the Company’s 2011 Annual Report on Form 10-K. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, 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 year ended December 31, 2011 of the Company and our report dated February 29, 2012 (January 18, 2013 as to the presentation of and disclosures related to comprehensive income as described in Note 1, the addition of condensed consolidating financial information in Note 23, and the update to the financial statements to reflect the corporate name change as described in Note 24) expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the retrospective adjustment of the financial statements and related financial statement schedule for the adoption of new guidance on the presentation of comprehensive income.

 

/s/ DELOITTE & TOUCHE LLP

 

New York, New York

February 29, 2012

 

F-2



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Fifth & Pacific Companies, Inc.

 

We have audited the accompanying consolidated balance sheets of Fifth & Pacific Companies, Inc. and subsidiaries (formerly known as Liz Claiborne, Inc.) (the “Company”) as of December 31, 2011 and January 1, 2011, and the related consolidated statements of operations, statements of retained earnings, comprehensive loss and changes in capital accounts, statements of comprehensive loss, and statements of cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Exhibit 99.1. 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 consolidated financial position of Fifth & Pacific Companies, Inc. as of December 31, 2011 and January 1, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, 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, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to the financial statements, the accompanying financial statements and related financial statement schedule have been retrospectively adjusted for the adoption of new guidance on the presentation of comprehensive income.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, 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 February 29, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

/s/ DELOITTE & TOUCHE LLP

 

New York, New York

February 29, 2012 (January 18, 2013 as to the presentation of and disclosures related to comprehensive income as described in Note 1, the addition of condensed consolidating financial information in Note 23, and the update to the financial statements to reflect the corporate name change as described in Note 24)

 

F-3



 

Fifth & Pacific Companies, Inc. and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

In thousands, except share data

 

December 31,
2011

 

 

January 1,
2011

 

ASSETS

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$179,936

 

$22,714

 

Accounts receivable — trade, net

 

119,551

 

208,081

 

Inventories, net

 

193,343

 

289,439

 

Deferred income taxes

 

165

 

3,916

 

Other current assets

 

58,750

 

87,773

 

Total current assets

 

551,745

 

611,923

 

Property and Equipment, Net

 

238,664

 

375,529

 

Goodwill and Intangibles, Net

 

118,873

 

228,110

 

Deferred Income Taxes

 

 

3,217

 

Other Assets

 

40,722

 

38,880

 

Total Assets

 

$950,004

 

$1,257,659

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:

 

 

 

 

 

Short-term borrowings

 

$4,476

 

$26,951

 

Convertible Senior Notes

 

60,270

 

74,542

 

Accounts payable

 

144,060

 

195,541

 

Accrued expenses

 

217,346

 

268,605

 

Income taxes payable

 

805

 

2,348

 

Deferred income taxes

 

16

 

4,893

 

Total current liabilities

 

426,973

 

572,880

 

Long-Term Debt

 

381,569

 

476,319

 

Other Non-Current Liabilities

 

236,696

 

197,357

 

Deferred Income Taxes

 

13,752

 

32,784

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

Preferred stock, $0.01 par value, authorized shares — 50,000,000, issued shares — none

 

 

 

Common stock, $1.00 par value, authorized shares — 250,000,000, issued shares — 176,437,234

 

176,437

 

176,437

 

Capital in excess of par value

 

302,330

 

331,808

 

Retained earnings

 

1,246,063

 

1,417,785

 

Accumulated other comprehensive loss

 

(5,924)

 

(66,302)

 

 

 

1,718,906

 

1,859,728

 

Common stock in treasury, at cost — 75,592,899 and 81,892,589 shares

 

(1,827,892)

 

(1,883,898)

 

Total Fifth & Pacific Companies, Inc. stockholders’ deficit

 

(108,986)

 

(24,170)

 

Noncontrolling interest

 

 

2,489

 

Total stockholders’ deficit

 

(108,986)

 

(21,681)

 

Total Liabilities and Stockholders’ Deficit

 

$950,004

 

$1,257,659

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

F-4



 

Fifth & Pacific Companies, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Fiscal Years Ended

 

 

 

December 31,
2011

 

 

January 1,
2011

 

 

January 2,
2010

 

In thousands, except per common share data

 

 

 

 

 

 

 

Net Sales

 

$1,518,721

 

$1,623,235

 

$1,928,754

 

Cost of goods sold

 

709,330

 

831,939

 

1,073,565

 

Gross Profit

 

809,391

 

791,296

 

855,189

 

Selling, general & administrative expenses

 

904,619

 

849,968

 

1,006,361

 

Goodwill impairment

 

 

 

2,785

 

Impairment of other intangible assets

 

1,024

 

2,594

 

14,222

 

Operating Loss

 

(96,252)

 

(61,266)

 

(168,179)

 

Other income (expense), net

 

282

 

26,689

 

(6,827)

 

Gain on sales of trademarks, net

 

286,979

 

 

 

Gain on extinguishment of debt, net

 

5,157

 

 

 

Interest expense, net

 

(57,188)

 

(55,741)

 

(58,930)

 

Income (Loss) Before (Benefit) Provision for Income Taxes

 

138,978

 

(90,318)

 

(233,936)

 

(Benefit) provision for income taxes

 

(5,770)

 

9,044

 

(110,013)

 

Income (Loss) from Continuing Operations

 

144,748

 

(99,362)

 

(123,923)

 

Discontinued operations, net of income taxes

 

(316,435)

 

(152,947)

 

(182,487)

 

Net Loss

 

(171,687)

 

(252,309)

 

(306,410)

 

Net loss attributable to the noncontrolling interest

 

 

(842)

 

(681)

 

Net Loss Attributable to Fifth & Pacific Companies, Inc.

 

$(171,687)

 

$(251,467)

 

$(305,729)

 

Earnings per Share, Basic:

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations Attributable to Fifth & Pacific Companies, Inc.

 

$1.53

 

$(1.05)

 

$(1.31)

 

Net Loss Attributable to Fifth & Pacific Companies, Inc.

 

$(1.81)

 

$(2.67)

 

$(3.26)

 

Earnings per Share, Diluted:

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations Attributable to Fifth & Pacific Companies, Inc.

 

$1.28

 

$(1.05)

 

$(1.31)

 

Net Loss Attributable to Fifth & Pacific Companies, Inc.

 

$(1.35)

 

$(2.67)

 

$(3.26)

 

Weighted Average Shares, Basic

 

94,664

 

94,243

 

93,880

 

Weighted Average Shares, Diluted

 

120,692

 

94,243

 

93,880

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

F-5



 

Fifth & Pacific Companies, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE LOSS AND CHANGES IN CAPITAL ACCOUNTS

 

 

 

Common Stock

 

Capital in

 

 

 

Accumulated
Other

 

Treasury Shares

 

 

 

 

 

 

 

Number of
Shares

 

Amount

 

Excess of
Par Value

 

Retained
Earnings

 

Comprehensive
Loss

 

Number of
Shares

 

Amount

 

Noncontrolling
Interest

 

Total

 

In thousands, except share data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, JANUARY 4, 2009

 

176,437,234

 

$176,437

 

$292,144

 

$1,975,082

 

$(66,716)

 

81,316,925

 

$(1,873,300)

 

$4,012

 

$507,659

 

Net loss

 

 

 

 

(305,729)

 

 

 

 

(681)

 

(306,410)

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

(2,655)

 

 

 

 

(2,655)

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(309,065)

 

Issuance of Convertible Senior Notes, net

 

 

 

11,992

 

 

 

 

 

 

11,992

 

Restricted shares issued, net of cancellations and shares withheld for taxes

 

 

 

6,478

 

 

 

171,979

 

(5,916)

 

 

562

 

Amortization — share-based compensation

 

 

 

8,744

 

 

 

 

 

 

8,744

 

Dividend equivalent units vested

 

 

 

(32)

 

(37)

 

 

80

 

56

 

 

(13)

 

BALANCE, JANUARY 2, 2010

 

176,437,234

 

176,437

 

319,326

 

1,669,316

 

(69,371)

 

81,488,984

 

(1,879,160)

 

3,331

 

219,879

 

Net loss

 

 

 

 

(251,467)

 

 

 

 

(842)

 

(252,309)

 

Other comprehensive income, net of income taxes

 

 

 

 

 

3,069

 

 

 

 

3,069

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(249,240)

 

Exercise of stock options

 

 

 

(18)

 

 

 

(5,000)

 

42

 

 

24

 

Restricted shares issued, net of cancellations and shares withheld for taxes

 

 

 

6,414

 

 

 

408,403

 

(5,434)

 

 

980

 

Amortization — share-based compensation

 

 

 

6,939

 

 

 

 

 

 

6,939

 

Dividend equivalent units vested

 

 

 

(853)

 

(64)

 

 

202

 

654

 

 

(263)

 

BALANCE, JANUARY 1, 2011

 

176,437,234

 

176,437

 

331,808

 

1,417,785

 

(66,302)

 

81,892,589

 

(1,883,898)

 

2,489

 

(21,681)

 

Net loss

 

 

 

 

(171,687)

 

 

 

 

 

(171,687)

 

Other comprehensive income, net of income taxes

 

 

 

 

 

60,378

 

 

 

 

60,378

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111,309)

 

Exercise of stock options

 

 

 

(211)

 

 

 

(61,375)

 

515

 

 

304

 

Restricted shares issued, net of cancellations and shares withheld for taxes

 

 

 

185

 

 

 

(75,120)

 

(280)

 

 

(95)

 

Amortization — share-based compensation

 

 

 

5,811

 

 

 

 

 

 

5,811

 

Dividend equivalent units vested

 

 

 

(1,240)

 

(35)

 

 

26

 

950

 

 

(325)

 

Exchange of Convertible Senior Notes, net

 

 

 

(36,512)

 

 

 

(6,163,221)

 

54,821

 

 

18,309

 

Tendered subsidiary shares for noncontrolling interest

 

 

 

2,489

 

 

 

 

 

(2,489)

 

 

BALANCE, DECEMBER 31, 2011

 

176,437,234

 

$176,437

 

$302,330

 

$1,246,063

 

$(5,924)

 

75,592,899

 

$(1,827,892)

 

$—

 

$(108,986)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

F-6


 


 

Fifth & Pacific Companies, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

 

Fiscal Years Ended

 

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

 

In thousands

 

 

 

 

 

 

 

Net Loss

 

$

(171,687

)

$

(252,309

)

$

(306,410

)

 

 

 

 

 

 

 

 

Other Comprehensive (Loss) Income, Net of Income Taxes:

 

 

 

 

 

 

 

Translation adjustment, including Euro Notes in 2011 and other instruments, net of income taxes of $905, $8,034 and $10,986, respectively

 

(4,279

)

177

 

(1,126

)

Write-off of translation adjustment in connection with liquidation of foreign subsidiaries

 

62,166

 

--

 

--

 

Unrealized (losses) gains on available-for-sale securities, net of income taxes of $0, $0 and $0, respectively

 

(126

)

(55

)

888

 

Change in fair value of cash flow hedging derivatives, net of income taxes of $(491), $1,342 and $(515), respectively

 

2,617

 

2,947

 

(2,417

)

Comprehensive Loss

 

(111,309

)

(249,240

)

(309,065

)

 Comprehensive loss attributable to the noncontrolling interest

 

 

842

 

681

 

Comprehensive Loss Attributable to Fifth & Pacific Companies, Inc.

 

$

(111,309

)

$

(248,398

)

$

(308,384

)

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

F-7



 

Fifth & Pacific Companies, Inc. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Fiscal Years Ended

 

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

 

In thousands

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$(171,687)

 

$(252,309)

 

$(306,410)

 

Adjustments to arrive at income (loss) from continuing operations

 

316,435

 

152,947

 

182,487

 

Income (loss) from continuing operations

 

144,748

 

(99,362)

 

(123,923)

 

Adjustments to reconcile income (loss) from continuing operations to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

85,969

 

96,152

 

105,911

 

Impairment of goodwill and other intangible assets

 

1,024

 

2,594

 

17,007

 

Loss on asset disposals and impairments, including streamlining initiatives, net

 

34,238

 

19,617

 

34,806

 

Deferred income taxes

 

(6,171)

 

1,954

 

(8,911)

 

Share-based compensation

 

5,756

 

6,342

 

7,990

 

Foreign currency losses (gains), net

 

3,565

 

(24,636)

 

 

Gain on sales of trademarks, net

 

(286,979)

 

 

 

Gain on extinguishment of debt, net

 

(5,157)

 

 

 

Other, net

 

(1,563)

 

(950)

 

(104)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Decrease in accounts receivable — trade, net

 

44,508

 

18,284

 

32,962

 

Decrease (increase) in inventories, net

 

25,538

 

(11,609)

 

118,115

 

Decrease (increase) in other current and non-current assets

 

2,840

 

(1,318)

 

23,591

 

Increase (decrease) in accounts payable

 

8,159

 

33,919

 

(55,539)

 

Increase (decrease) in accrued expenses and other non-current liabilities

 

60,944

 

(40,043)

 

90,036

 

Increase (decrease) in income taxes payable

 

1,769

 

169,771

 

(972)

 

Net cash used in operating activities of discontinued operations

 

(136,216)

 

(20,074)

 

(33,679)

 

Net cash (used in) provided by operating activities

 

(17,028)

 

150,641

 

207,290

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Proceeds from sales of property and equipment

 

 

8,257

 

 

Purchases of property and equipment

 

(73,653)

 

(56,737)

 

(44,273)

 

Net proceeds from dispositions

 

309,717

 

 

 

Payments for purchases of businesses

 

 

(5,000)

 

(5,000)

 

Payments for in-store merchandise shops

 

(3,459)

 

(2,992)

 

(7,185)

 

Investments in and advances to equity investees

 

(2,506)

 

(4,033)

 

(7,237)

 

Other, net

 

435

 

(683)

 

596

 

Net cash provided by (used in) investing activities of discontinued operations

 

77,419

 

(26,111)

 

(22,736)

 

Net cash provided by (used in) investing activities

 

307,953

 

(87,299)

 

(85,835)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(1,572)

 

(193,550)

 

Proceeds from borrowings under revolving credit agreement

 

651,507

 

506,940

 

 

Repayment of borrowings under revolving credit agreement

 

(671,907)

 

(525,427)

 

 

Proceeds from issuance of Senior Secured Notes

 

220,094

 

 

 

Proceeds from issuance of Convertible Senior Notes

 

 

 

90,000

 

Repayment of Euro Notes

 

(309,159)

 

 

 

Principal payments under capital lease obligations

 

(4,216)

 

(5,642)

 

(4,361)

 

Proceeds from exercise of stock options

 

304

 

24

 

 

Payment of deferred financing fees

 

(11,168)

 

(14,665)

 

(40,836)

 

Other, net

 

(805)

 

 

 

Net cash (used in) provided by financing activities of discontinued operations

 

(2,663)

 

(23,305)

 

22,946

 

Net cash used in financing activities

 

(128,013)

 

(63,647)

 

(125,801)

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(5,690)

 

2,647

 

(713)

 

 

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

157,222

 

2,342

 

(5,059)

 

Cash and Cash Equivalents at Beginning of Year

 

22,714

 

20,372

 

25,431

 

Cash and Cash Equivalents at End of Year

 

$179,936

 

$22,714

 

$20,372

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

F-8



 

Fifth & Pacific Companies, Inc. and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1:                                             BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Fifth & Pacific Companies, Inc. and its wholly-owned and majority-owned subsidiaries (the “Company”) are engaged primarily in the design and marketing of a broad range of apparel and accessories. The Company’s segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s businesses across multiple functional areas including specialty retail, retail outlets, concessions, wholesale apparel, wholesale non-apparel, e-commerce and licensing. During the fourth quarter of 2011, the Company determined that it would disaggregate its former Domestic-Based Direct Brands segment into three reportable segments, JUICY COUTURE, KATE SPADE and LUCKY BRAND. The operations of the Company’s former Partnered Brands segment have become the Adelington Design Group & Other segment. The four reportable segments described below represent the Company’s brand-based activities for which separate financial information is available and which is utilized on a regular basis by the Company’s chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying the Company’s reportable segments, the Company considered economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, the Company reports its operations in four reportable segments, as follows:

 

·                  JUICY COUTURE segment — consists of the specialty retail, outlet, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations of the JUICY COUTURE brand.

 

·                  KATE SPADE segment — consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of the KATE SPADE and JACK SPADE brands.

 

·                LUCKY BRAND segment — consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of the LUCKY BRAND.

 

·                  Adelington Design Group & Other segment — consists of: (i) exclusive arrangements to supply jewelry for the DANA BUCHMAN, LIZ CLAIBORNE and MONET brands; (ii) the wholesale non-apparel operations of the TRIFARI brand and licensed KENSIE brand; (iii) the wholesale apparel and wholesale non-apparel operations of the licensed LIZWEAR brand and other brands; and (iv) the licensed LIZ CLAIBORNE NEW YORK brand.

 

The operations of the Company’s AXCESS brand concluded in Fall 2011 and the operations of its former licensed DKNY® Jeans family of brands concluded in January 2012. Each was included in the results of the Adelington Design Group & Other segment.

 

On November 2, 2011, the Company sold the global trademark rights for the LIZ CLAIBORNE family of brands and the trademark rights in the US and Puerto Rico for the MONET brand to J.C. Penney Corporation, Inc. (“JCPenney”) for $267.5 million. The transaction provided for the sale of domestic and international trademark rights for LIZ CLAIBORNE, CLAIBORNE, LIZ, LIZ & CO., CONCEPTS BY CLAIBORNE, LC, ELISABETH, LIZGOLF, LIZSPORT, LIZ CLAIBORNE NEW YORK and LIZWEAR and the sale of the trademark rights in the US and Puerto Rico for MONET. The LIZ CLAIBORNE NEW YORK and LIZWEAR trademarks are licensed back royalty-free to the Company until July 2020. Further, the Company serves as the exclusive supplier of jewelry to JCPenney for the LIZ CLAIBORNE and MONET brands. The transaction also included receipt by the Company of an advance of $20.0 million (refundable to JCPenney under certain circumstances) in exchange for its agreement to develop exclusive brands for JCPenney by Spring 2014.

 

On October 31, 2011, the Company completed a transaction (the “MEXX Transaction”) with affiliates of The Gores Group, LLC (“Gores”), pursuant to which the Company sold its global MEXX business to a company (“NewCo”) in which the Company indirectly holds an 18.75% interest and affiliates of Gores hold an 81.25% interest, for cash consideration, subject to working capital adjustments, of $85.0 million, including revolving credit facility debt that was assumed by NewCo. The operating loss associated with the Company’s former International-Based Direct Brands segment included allocated corporate expenses that could not be reported as discontinued operations and therefore were reported in the Company’s segment results.

 

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On October 24, 2011, the Company sold its KENSIE, KENSIE GIRL and MAC & JAC trademarks to an affiliate of Bluestar Alliance LLC (“Bluestar”). On October 11, 2011, the Company sold its DANA BUCHMAN trademark to Kohl’s Corporation (“Kohl’s”). The aggregate cash proceeds of these two transactions were $39.8 million. The Company will serve as the exclusive supplier of jewelry to Kohl’s for the DANA BUCHMAN brand for two years. The Company also entered an exclusive license agreement to produce and sell jewelry under the KENSIE brand name.

 

During the second quarter of 2011, the Company initiated actions to exit its 277 MONET concessions in Europe. As of December 31, 2011, the Company completed substantially all of the planned closures.

 

In October 2010, the Company initiated actions to exit its 82 LIZ CLAIBORNE concessions in Europe. These actions included staff reductions and consolidation of office space. During the first quarter of 2011, the Company completed the closure of all such concessions, which included the exit and transfer of title to property and equipment of certain locations in exchange for a nominal fee.

 

During the third quarter of 2010, the Company announced a plan to exit 87 LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico. The Company completed the closure of these stores in January 2011.

 

In January 2010, the Company entered into an agreement with Laura’s Shoppe (Canada) Ltd. and Laura’s Shoppe (P.V.) Inc. (collectively, “Laura Canada”), which included the assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and equipment to Laura Canada in exchange for a net fee of approximately $7.9 million.

 

The activities of the Company’s global MEXX business, its KENSIE and MAC & JAC brand, its former LIZ CLAIBORNE Canada stores, closed LIZ CLAIBORNE outlet stores in the US and Puerto Rico, closed LIZ CLAIBORNE concessions in Europe and closed MONET concessions in Europe have been segregated and reported as discontinued operations for all periods presented. Certain amounts have been reclassified to conform to the current year presentation. The Company continues activities with the LIZ CLAIBORNE family of brands, MONET brand and DANA BUCHMAN brand and therefore the activities of those brands have not been presented as discontinued operations.

 

Summarized financial data for the aforementioned brands that are classified as discontinued operations are provided in Note 2 — Discontinued Operations.

 

On June 8, 1999, the Company acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. (“Lucky Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s denim-based sportswear. The total purchase price consisted of aggregate cash payments of $126.2 million and additional payments made from 2005 to 2010 totaling $70.0 million for 12.7% of the remaining equity of Lucky Brand. The aggregate purchase price for the remaining 2.3% of the original shares consisted of the following two installments: (i) a payment made in 2008 of $15.7 million that was based on a multiple of Lucky Brand’s 2007 earnings and (ii) a 2011 payment based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment. Based on Lucky Brand’s 2010 earnings, no final payment was required, and LUCKY BRAND became a wholly-owned subsidiary in January 2011.

 

PRINCIPLES OF CONSOLIDATION

 

The Consolidated Financial Statements include the accounts of the Company. All inter-company balances and transactions have been eliminated in consolidation.

 

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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, inventories, intangible assets,

 

F-10



 

accrued expenses and share-based compensation. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Due to 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

 

The Company recognizes revenue from its wholesale, retail and licensing operations. 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 historical 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. Sales tax collected from customers is excluded from revenue. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. Licensing revenues, which amounted to $80.7 million, $61.2 million and $50.4 million during 2011, 2010 and 2009, respectively, are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.

 

Income Taxes

 

Deferred income 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 realized or settled. The Company also assesses the likelihood of the realization of deferred tax assets and adjusts the carrying amount of these deferred tax assets by a valuation allowance to the extent the Company believes it more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the worldwide provision for income taxes. Changes in estimates may create volatility in the Company’s effective tax rate in future periods for various reasons including changes in tax laws or rates, changes in forecasted amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is the Company’s policy to recognize the impact of an uncertain income tax position on its income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. The Company records interest expense and penalties payable to relevant tax authorities as income tax expense.

 

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 historical 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 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 historical 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.

 

F-11



 

Inventories, Net

 

Inventories for seasonal, replenishment and on-going merchandise are recorded at the lower of actual average cost or market value. The Company continually evaluates the composition of its inventories by assessing slow-turning, ongoing product as well as prior seasons’ fashion product. Market value of distressed inventory is estimated 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.

 

In the first quarter of 2009, the Company entered into a ten-year, buying/sourcing agency agreement with Li & Fung Limited (“Li & Fung”) (see Note 8 — Commitments and Contingencies). Pursuant to the agreement, the Company received a payment of $75.0 million at closing, which was recorded within Accrued expenses and Other non-current liabilities on the accompanying Consolidated Balance Sheets. Under the terms of the buying/sourcing agency agreement, the Company is subject to minimum purchase requirements based on the value of inventory purchased each year under the agreement. The 2009 licensing agreements with JCPenney and QVC, Inc. (“QVC”) (see Note 16 — Additional Financial Information) resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing agreement. As a result, the Company refunded $24.3 million of the closing payment received from Li & Fung during the second quarter of 2010. The Company will reclassify up to $5.0 million per contract year of the $50.7 million net payment as a reduction of inventory cost as inventory is purchased using the buying/sourcing agent, up to the minimum requirement for the initial term of the agreement and subsequently reflect a reduction of Cost of goods sold as the inventory is sold.

 

Intangibles, Net

 

Intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. The Company’s annual impairment test is performed as of the first day of the third fiscal quarter.

 

The fair values of purchased intangible assets with indefinite lives, primarily trademarks and tradenames, are estimated and compared to their carrying values. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party 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, royalty rates in the category of intellectual property, discount 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.

 

The recoverability of the carrying values of all intangible assets with finite lives is re-evaluated when events or changes in circumstances indicate an asset’s value may be impaired. Impairment testing is based on a review of forecasted operating cash flows and the profitability of the related brand. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Consolidated Statement of Operations.

 

Intangible assets with finite lives are amortized over their respective lives to their estimated residual values. Trademarks with finite lives are amortized over their estimated useful lives. Intangible merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over periods ranging from 12 to 14 years.

 

The Company classifies gains and losses on the sales of trademarks as Other income (expense), net.

 

As a result of the impairment analysis performed in connection with the Company’s purchased trademarks with indefinite lives, no impairment charges were recorded during 2011, 2010 or 2009.

 

During 2011, the Company recorded non-cash impairment charges of $1.0 million primarily within its Adelington Design Group & Other segment principally related to merchandising rights of its MONET and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.

 

F-12



 

During 2010, the Company recorded non-cash impairment charges of $2.6 million primarily within its Adelington Design Group & Other segment principally related to merchandising rights of its LIZ CLAIBORNE and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.

 

Also, as a result of the decline in actual and projected performance and cash flows of the former licensed DKNY® Jeans and DKNY® Active brands during 2009, the Company determined the carrying value of the related licensed trademark intangible asset exceeded its estimated fair value and recorded a non-cash impairment charge of $9.5 million. In addition, as a result of the Company’s entering into the 2009 license agreements with JCPenney and QVC (see Note 16 — Additional Financial Information), the Company performed an impairment analysis of its LIZ CLAIBORNE merchandising rights. The decreased use of such intangible assets resulted in the recognition of a non-cash impairment charge of $4.5 million to reduce the carrying value of the merchandising rights to their estimated fair value.

 

Accrued Expenses

 

Accrued expenses for employee insurance, workers’ compensation, contracted advertising and other outstanding 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.

 

Share-Based Compensation

 

The Company recognizes compensation expense based on the fair value of employee share-based awards, including stock options and restricted stock, net of estimated forfeitures. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.

 

OTHER SIGNIFICANT ACCOUNTING POLICIES

 

Fair Value Measurements

 

The Company applies the relevant accounting guidance on fair value measurements to (i) all financial instruments that are being measured and reported on a fair value basis; (ii) non-financial assets and liabilities measured and reported at fair value on a non-recurring basis; and (iii) disclosures of fair value of certain financial assets and liabilities.

 

The following fair value hierarchy is used in selecting inputs for those instruments measured at fair value that distinguishes between assumptions based on market data (observable) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels.

 

Level 1 — Quoted market prices in active markets for identical assets or liabilities;

 

Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and

 

Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

 

Fair value measurement for the Company’s assets assumes the highest and best use (the use that generates the highest returns individually or as a group) for the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. This applies even if the intended use of the asset by the Company is different.

 

Fair value measurement for the Company’s liabilities assumes that the liability is transferred to a market participant at the measurement date and that the nonperformance risk relating to the liability is the same before and after the transaction. Nonperformance risk refers to the risk that the obligation will not be fulfilled and includes the Company’s own credit risk.

 

The Company has chosen not to elect the fair value measurement option for any instruments not required to be measured at fair value on a recurring basis.

 

F-13



 

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.

 

Property and Equipment, Net

 

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 depreciated over the shorter of the remaining lease term or the estimated useful lives of the assets. Improvements are capitalized and depreciated in accordance with the Company’s policies; costs for maintenance and repairs are expensed as incurred. 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 recorded on the straight-line method over the shorter of the estimated useful life of the asset or the initial lease term. The Company recognizes a liability for the fair value of an asset retirement obligation (“ARO”) if the fair value can be reasonably estimated. The Company’s ARO’s are primarily associated with the removal and disposal of leasehold improvements at the end of a lease term when the Company is contractually obligated to restore a facility to a condition specified in the lease agreement. Amortization of ARO’s is recorded on a straight-line basis over the lease term.

 

The Company capitalizes the costs of software developed or obtained for internal use. Capitalization of software developed or obtained for internal use commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis over five years, when such software is substantially ready for use.

 

The Company evaluates the recoverability of property and equipment if circumstances indicate an impairment may have occurred. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows to be generated from such assets, on an undiscounted basis. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of the impaired assets is reduced to fair value through a charge to the Company’s Consolidated Statement of Operations.

 

The Company recorded pretax charges of $26.5 million in 2011, $10.5 million in 2010 and $28.1 million in 2009 to reduce the carrying values of certain property and equipment to their estimated fair values (see Note 10 — Fair Value Measurements).

 

Operating Leases

 

The Company leases office space, retail stores and distribution facilities. Many of these operating leases provide for tenant improvement allowances, rent increases and/or contingent rent provisions. Rental expense is recognized on a straight-line basis commencing with the possession date of the property, which is typically the earlier of the lease commencement date or the date when the Company takes possession of the property. Certain store leases include contingent rents that are based on a percentage of retail sales over stated thresholds. Tenant allowances are amortized on a straight-line basis over the life of the lease as a reduction of rent expense and are included in Selling, general & administrative expenses (“SG&A”).

 

The Company leases retail stores under leases with terms that are typically five or ten years. The Company amortizes rental abatements, construction allowances and other rental concessions classified as deferred rent on a straight-line basis over the initial term of the lease. 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.

 

Derivative Instruments

 

The Company’s derivative instruments are recorded in the Consolidated Balance Sheets as either an asset or liability and measured at their fair value. The changes in a derivative’s fair value are recognized either currently in earnings or Accumulated other comprehensive loss, depending on whether the derivative qualifies for hedge accounting treatment. The Company tests each derivative for effectiveness at inception of each hedge and at the end of each reporting period.

 

F-14



 

From time to time the Company uses foreign currency forward contracts and options for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases. These instruments are designated as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the changes in fair value are included in Accumulated other comprehensive loss, net of income taxes, with the corresponding asset or liability recorded in the Consolidated Balance Sheet. The ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods sold in current period earnings. Amounts recorded in Accumulated other comprehensive 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 impact the Company’s results of operations.

 

Prior to the sale of the global MEXX business, the Company hedged its net investment position in certain euro-denominated functional currency subsidiaries by borrowing directly in foreign currency and designating a portion of foreign currency debt as a hedge of net investments. The foreign currency transaction gain or loss recognized for the effective portion of a foreign currency denominated debt instrument that was designated as the hedging instrument in a net investment hedge was recorded as a translation adjustment. The Company has at times used derivative instruments to hedge the changes in the fair value of debt due to interest rates, with the change in fair value recognized currently in Interest expense, net, together with the change in fair value of the hedged item attributable to interest rates.

 

Occasionally, the Company purchases short-term foreign currency contracts to neutralize quarter-end balance sheet and other expected exposures. These derivative instruments do not qualify as cash flow hedges and are recorded at fair value with all gains or losses recognized as a component of SG&A or Other income (expense), net in current period earnings (see Note 11 — Derivative Instruments).

 

Foreign Currency Translation

 

Assets and liabilities of non-US subsidiaries are translated at period-end exchange rates. Revenues and expenses for each month are translated using that month’s average exchange rate and then are combined for the period totals. Resulting translation adjustments are included in Accumulated other comprehensive 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’ deficit.

 

Foreign Currency Transactions

 

Outstanding balances in foreign currencies are translated at the end of period exchange rates. The resulting exchange differences are recorded in the Consolidated Statements of Operations or Accumulated other comprehensive loss, as appropriate.

 

Cost of Goods Sold

 

Cost of goods sold for wholesale operations includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, import costs, third party inspection activities, buying/sourcing 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 SG&A and, as such, the Company’s gross profit 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 customers are required to provide documentary evidence of specific performance and when the amount of consideration paid by the Company for these services is at or below fair value, are charged to SG&A. Costs associated with customer cooperative advertising allowances without specific performance guidelines are recorded as a reduction of sales. The Company incurred expenses of $49.3 million, $53.4 million and $57.9 million for advertising, marketing & promotion for all brands in 2011, 2010 and 2009, respectively.

 

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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 Operations. In fiscal years 2011, 2010 and 2009, shipping and handling costs were $38.8 million, $46.3 million and $69.3 million, respectively.

 

Investments in Unconsolidated Subsidiaries

 

The Company uses the equity method of accounting for its investments in and its proportionate share in earnings of affiliates that it does not control, but over which it exerts significant influence (see Note 19 — Related Party Transactions). The Company considers whether the fair value of its equity method investments has declined below carrying value whenever adverse events or changes in circumstances indicate the recorded value may not be recoverable.

 

The Company uses the cost method of accounting for its investment in an affiliate that it does not control and over which the Company does not exert significant influence (see Note 19 — Related Party Transactions). The Company evaluates such investment for other-than-temporary impairment due to changes in circumstances and if such changes are likely to have a significant adverse effect which may indicate an impairment of the investment. If an impairment indicator is present, the Company estimates the fair value of the cost method investment to determine whether the investment is actually impaired. If the investment is impaired, the Company determines whether the impairment is considered other-than-temporary.

 

Cash Dividends and Common Stock Repurchases

 

On December 16, 2008, the Board of Directors announced the suspension of the Company’s quarterly cash dividend indefinitely.

 

The Company’s amended and restated revolving credit agreement currently restricts its ability to pay dividends and repurchase stock (see Note 9 — Debt and Lines of Credit).

 

Fiscal Year

 

The Company’s fiscal year ends on the Saturday closest to December 31. The 2011, 2010 and 2009 fiscal years, which ended on December 31, 2011, January 1, 2011 and January 2, 2010, respectively, reflected 52-week periods.

 

Subsequent Events

 

The Company’s policy is to evaluate all events or transactions that occur from the balance sheet date through the date of the issuance of its financial statements. The Company has evaluated events or transactions that occurred from the balance sheet date through the date the Company issued these financial statements (see Note 23 — Subsequent Events).

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

On December 31, 2011, the Company adopted new accounting guidance on multi-employer defined benefit pension plans, which required additional disclosures about an employer’s participation in a multi-employer pension plan. The additional disclosures required by the employer are: (i) detailed information for significant multi-employer plans in which the employer participates; (ii) level of participation, including contributions to significant plans in excess of five percent of total contributions made by all contributing employers; (iii) the financial health and funded status of the plan as well as whether the plan has imposed surcharges on contributions to the plan; and (iv) the nature of the employer’s commitments to the plan and details of collective-bargaining agreements. The adoption of the new accounting guidance did not affect the Company’s financial position, results of operations or cash flows (see Note 8 — Commitments and Contingencies).

 

On January 1, 2012, the Company adopted new accounting guidance on comprehensive income, which revises the presentation of comprehensive income in financial statements. The revised presentation required the Company to disclose the total of comprehensive income, the components of net income and the components of other comprehensive income in either (i) a continuous statement of comprehensive income or (ii) as two separate but consecutive statements. The adoption and retrospective application of the new accounting guidance did not affect the Company’s financial position, results of operations or cash flows (see Consolidated Statements of Comprehensive Loss).

 

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NOTE 2:                                             DISCONTINUED OPERATIONS

 

The Company has completed various disposal transactions including: (i) the assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and equipment in 2010; (ii) the closure of the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico in January 2011; (iii) the completion of the exit of its LIZ CLAIBORNE concessions in Europe in the first quarter of 2011; (iv) the closure of MONET concessions in Europe; (v) the sale of an 81.25% interest in the global MEXX business; and (vi) the sale of KENSIE, KENSIE GIRL and MAC & JAC trademarks.

 

The Company recorded pretax charges of $236.1 million, $30.9 million and $5.4 million ($222.2 million, $27.5 million and $4.9 million, after tax) in 2011, 2010 and 2009, respectively, to reflect the estimated difference between the carrying value of the net assets disposed and their estimated fair value, less costs to dispose, including transaction costs.

 

Summarized results of discontinued operations are as follows:

 

 

 

Fiscal Years Ended

 

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

 

In thousands

 

 

 

 

 

 

 

Net sales

 

$692,258

 

$952,415

 

$1,083,698

 

Loss before provision (benefit) for income taxes

 

$(90,772)

 

$(127,245)

 

$(176,701)

 

Provision (benefit) for income taxes

 

3,417

 

(1,786)

 

887

 

Loss from discontinued operations, net of income taxes

 

$(94,189)

 

$(125,459)

 

$(177,588)

 

Loss on disposal of discontinued operations, net of income taxes

 

$(222,246)

 

$(27,488)

 

$(4,899)

 

 

For the years ended December 31, 2011, January 1, 2011 and January 2, 2010, the Company recorded charges of $40.7 million, $31.1 million and $50.7 million, respectively, related to its streamlining initiatives within Discontinued operations, net of income taxes.

 

NOTE 3:                                             INVENTORIES, NET

 

Inventories, net consisted of the following:

 

 

 

December 31,
2011

 

January 1,
2011

 

In thousands

 

 

 

 

 

Raw materials and work in process

 

$230

 

$2,434

 

Finished goods

 

193,113

 

287,005

 

Total(a)

 

$193,343

 

$289,439

 

 


(a)

The decrease in the balance compared to January 1, 2011, primarily reflected the sale of an 81.25% interest in the global MEXX business (see Note 1 — Basis of Presentation and Significant Accounting Policies).

 

NOTE 4:                                             PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

 

 

December 31,
2011

 

January 1,
2011

 

In thousands

 

 

 

 

 

Land and buildings(a)

 

$72,009

 

$67,207

 

Machinery and equipment(b)

 

233,540

 

316,569

 

Furniture and fixtures(b)

 

127,913

 

261,709

 

Leasehold improvements(b)

 

249,734

 

488,663

 

 

 

683,196

 

1,134,148

 

Less: Accumulated depreciation and amortization(b)

 

444,532

 

758,619

 

Total property and equipment, net

 

$238,664

 

$375,529

 

 

F-17



 


(a)

The increase in the balance compared to January 1, 2011 primarily reflected the purchase of the underlying assets of the Ohio distribution center in the second quarter of 2011 under the terms of the previously existing synthetic lease agreement, partially offset by the sale of an 81.25% interest in the global MEXX business (see Note 1 — Basis of Presentation and Significant Accounting Policies).

 

 

(b)

The decrease in the balance compared to January 1, 2011 primarily reflected the sale of an 81.25% interest in the global MEXX business (see Note 1 — Basis of Presentation and Significant Accounting Policies and Note 2 — Discontinued Operations).

 

Depreciation and amortization expense on property and equipment for the years ended December 31, 2011, January 1, 2011 and January 2, 2010, was $66.0 million, $65.6 million and $71.6 million, respectively, which included depreciation for property and equipment under capital leases of $3.8 million, $4.8 million and $4.8 million, respectively. Machinery and equipment under capital leases was $22.6 million and $30.4 million as of December 31, 2011 and January 1, 2011, respectively.

 

NOTE 5:                                             GOODWILL AND INTANGIBLES, NET

 

The following tables disclose the carrying value of all the intangible assets:

 

 

 

Weighted Average
Amortization
Period

 

December 31,
2011

 

January 1,
2011

 

In thousands

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

Gross carrying amount:

 

 

 

 

 

 

 

Owned trademarks

 

4 years

 

$1,479

 

$1,479

 

Customer relationships(a)

 

13 years

 

9,478

 

12,319

 

Merchandising rights(b)

 

4 years

 

17,742

 

29,048

 

Other

 

4 years

 

2,322

 

2,322

 

Subtotal

 

7 years

 

31,021

 

45,168

 

Accumulated amortization:

 

 

 

 

 

 

 

Owned trademarks

 

 

 

(1,112)

 

(753)

 

Customer relationships

 

 

 

(5,426)

 

(4,453)

 

Merchandising rights

 

 

 

(12,837)

 

(21,744)

 

Other

 

 

 

(1,792)

 

(1,643)

 

Subtotal

 

 

 

(21,167)

 

(28,593)

 

Net:

 

 

 

 

 

 

 

Owned trademarks

 

 

 

367

 

726

 

Customer relationships

 

 

 

4,052

 

7,866

 

Merchandising rights

 

 

 

4,905

 

7,304

 

Other

 

 

 

530

 

679

 

Total amortized intangible assets, net

 

 

 

9,854

 

16,575

 

Unamortized intangible assets:

 

 

 

 

 

 

 

Owned trademarks(c)

 

 

 

107,500

 

210,127

 

Total intangible assets

 

 

 

117,354

 

226,702

 

Goodwill

 

 

 

1,519

 

1,408

 

Total goodwill and intangibles, net

 

 

 

$118,873

 

$228,110

 

 


(a)

The decrease in the balance compared to January 1, 2011 primarily reflected the sale of the customer relationships associated with the Company’s former KENSIE and MAC & JAC brands.

 

 

(b)

The decrease in the balance compared to January 1, 2011 primarily reflected the sale of an 81.25% interest in the global MEXX business and included non-cash impairment charges of $1.0 million primarily within the Company’s Adelington Design Group & Other segment related to the merchandising rights of its former MONET and former licensed DKNY ® Jeans brands (see Note 1 — Basis of Presentation and Significant Accounting Policies).

 

 

(c)

The decrease in the balance compared to January 1, 2011 primarily reflected the sale of an 81.25% interest in the global MEXX business, the sale of the MONET trademark rights in the US and Puerto Rico and the sale of the

 

F-18



 

 

KENSIE, KENSIE GIRL and MAC & JAC trademarks (see Note 1 — Basis of Presentation and Significant Accounting Policies).

 

Amortization expense of intangible assets was $4.4 million, $5.6 million and $14.7 million for the years ended December 31, 2011, January 1, 2011 and January 2, 2010, respectively.

 

The estimated amortization expense of intangible assets for the next five years is as follows:

 

Fiscal Year

 

 

Amortization
Expense

 

(In millions)

 

 

 

 

2012

 

$2.9

 

2013

 

 2.0

 

2014

 

 1.6

 

2015

 

 0.9

 

2016

 

 0.5

 

 

The changes in carrying amount of goodwill for the years ended December 31, 2011 and January 1, 2011 were as follows:

 

 

 

Adelington Design
Group & Other

 

In thousands

 

 

 

Balance as of January 2, 2010

 

$—

 

Additional purchase price — Mac & Jac

 

1,408

 

Balance as of January 1, 2011

 

1,408

 

Additional purchase price — Mac & Jac

 

179

 

Translation adjustment

 

(68)

 

Balance as of December 31, 2011

 

$1,519

 

 

In the second quarter of 2011, the Company paid $1.6 million of additional purchase price related to its contingent earn-out obligation to the former owners of MAC & JAC.

 

During 2009, the Company recorded a pretax goodwill impairment charge of $2.8 million associated with contingent consideration for its acquisition of MAC & JAC.

 

NOTE 6:                                             ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

 

 

December 31,
2011

 

January 1,
2011

 

In thousands

 

 

 

 

 

Streamlining initiatives

 

$43,087

 

$30,838

 

Lease obligations

 

35,065

 

43,510

 

Payroll, bonuses and other employment related obligations

 

28,221

 

30,370

 

Taxes, other than taxes on income

 

19,753

 

21,692

 

Employee benefits

 

11,314

 

25,243

 

Deferred income(a)

 

10,949

 

14,280

 

Insurance related

 

10,011

 

9,290

 

Interest

 

9,238

 

12,881

 

Advertising

 

7,731

 

12,605

 

Fair value of derivatives

 

 

3,463

 

Acquisition related obligations

 

 

1,408

 

Other

 

41,977

 

63,025

 

Total(b)

 

$217,346

 

$268,605

 

 


(a)

The long-term portion of deferred income of $74.5 million on December 31, 2011 is included within Other non-current liabilities on the accompanying Consolidated Balance Sheet.

 

F-19



 

(b)                                     The decrease in the balance compared to January 1, 2011 primarily reflected the sale of an 81.25% interest in the global MEXX business (see Note 1 — Basis of Presentation and Significant Accounting Policies).

 

NOTE 7:                                             INCOME TAXES

 

Income (loss) before (benefit) provision for income taxes consisted of the following:

 

 

 

Fiscal Years Ended

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

In thousands

 

 

 

 

 

 

United States

 

$139,319

 

$(82,993)

 

$(240,015)

International

 

(341)

 

(7,325)

 

6,079

Total

 

$138,978

 

$(90,318)

 

$(233,936)

 

The (benefit) provision for income taxes was as follows:

 

 

 

Fiscal Years Ended

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

In thousands

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Federal

 

$1,981

 

$4,687

 

$(106,978)

Foreign

 

1,497

 

873

 

862

State and local

 

(3,077)

 

(346)

 

5,014

Total Current

 

401

 

5,214

 

(101,102)

Deferred:

 

 

 

 

 

 

Federal

 

(4,107)

 

2,881

 

(6,442)

Foreign

 

(1,634)

 

172

 

(200)

State and local

 

(430)

 

777

 

(2,269)

Total Deferred

 

(6,171)

 

3,830

 

(8,911)

 

 

$(5,770)

 

$9,044

 

$(110,013)

 

Fifth & Pacific Companies, Inc. and its US subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities 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 effective income tax rate differed from the statutory federal income tax rate as follows:

 

 

 

Fiscal Years Ended

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

Federal tax provision (benefit) at statutory rate

 

35.0%

 

(35.0)%

 

(35.0)%

State and local income taxes, net of federal benefit

 

(2.4)

 

0.5

 

1.2

Impairments of intangible and other assets

 

(42.2)

 

 

(16.5)

Sales of interest in subsidiaries and other assets

 

(49.9)

 

 

Increase in valuation allowance

 

52.1

 

39.7

 

(3.1)

Tax on unrecognized tax benefits

 

1.4

 

2.2

 

3.9

Rate differential on foreign income

 

1.0

 

4.0

 

(0.6)

Other, net

 

0.8

 

(1.4)

 

3.1

 

 

(4.2)%

 

10.0%

 

(47.0)%

 

F-20



 

The components of net deferred taxes arising from temporary differences as of December 31, 2011 and January 1, 2011 were as follows:

 

 

 

December 31,
2011

 

January 1,
2011

In thousands

 

 

 

 

Deferred tax assets:

 

 

 

 

Inventory valuation

 

$4,313

 

$7,177

Streamlining initiatives

 

15,961

 

7,968

Deferred compensation

 

2,274

 

2,463

Nondeductible accruals

 

73,155

 

69,476

Share-based compensation

 

15,603

 

16,654

Net operating loss carryforward

 

222,239

 

273,051

Tax credit carryforward

 

27,940

 

27,940

Goodwill

 

54,519

 

64,450

Consolidated partnerships

 

5,250

 

7,436

Noncontrolling interest

 

73,863

 

Other

 

22,459

 

19,428

Total deferred tax assets

 

517,576

 

496,043

Deferred tax liabilities:

 

 

 

 

Unrealized gains

 

(297)

 

(2,205)

Trademarks and other intangibles

 

(15,394)

 

(39,884)

Property and equipment

 

(20,743)

 

(31,643)

Total deferred tax liabilities

 

(36,434)

 

(73,732)

Less: Valuation allowance

 

(494,745)

 

(452,855)

Net deferred tax liability

 

$(13,603)

 

$(30,544)

 

As of December 31, 2011, the Company and its domestic subsidiaries had net operating loss and foreign tax credit carryforwards of $454.5 million (federal tax effected amount of $159.0) and $27.9 million, respectively, for federal income tax purposes that will reduce future federal taxable income. The net operating loss and foreign tax credit carryforwards for federal income tax purposes will expire in 2031 and 2019, respectively.

 

As of December 31, 2011, the Company and certain of its domestic subsidiaries recorded a $57.5 million deferred tax asset related to net operating loss carryforwards for state income tax purposes that will reduce future state taxable income. The net operating loss carryforwards for state income tax purposes begin to expire in 2012.

 

As of December 31, 2011, certain of the Company’s foreign subsidiaries recorded a $5.7 million deferred tax asset related to net operating loss carryforwards for foreign income tax purposes that will reduce future foreign taxable income. The net operating loss carryforwards for foreign income tax purposes begin to expire in 2014.

 

As of December 31, 2011, the Company had total deferred tax assets related to net operating loss carryforwards of $222.2 million, of which $159.0 million, $57.5 million and $5.7 million were attributable to federal, domestic state and local, and foreign subsidiaries, respectively.

 

As of December 31, 2011, the Company and its subsidiaries recorded valuation allowances in the amount of $494.7 million against its net operating loss and other deferred tax assets due to the combination of its history of pretax losses and the Company’s ability to carry forward or carry back tax losses or credits. This represents a total increase in the valuation allowance of $41.9 million compared to the balance at January 1, 2011.

 

The Company has not provided for deferred taxes on the outside basis difference in its investments in foreign subsidiaries that are essentially permanent in duration. As of December 31, 2011, there were no unremitted earnings. It is not practicable to determine the amount of income taxes that would be payable in the event such outside basis differences reverse or unremitted earnings are repatriated.

 

F-21



 

Changes in the amounts of unrecognized tax benefits are summarized as follows:

 

 

 

Fiscal Years Ended

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

In thousands

 

 

 

 

 

 

Balance as of January 1, 2011

 

$107,932

 

$83,574

 

$20,149

Increases from prior period positions

 

565

 

22,835

 

10,865

Decreases from prior period positions

 

(5,458)

 

(979)

 

(111)

Increases from current period positions

 

973

 

3,212

 

53,209

Decreases relating to settlements with taxing authorities

 

 

(30)

 

(538)

Reduction due to the lapse of the applicable statute of limitations

 

(30)

 

(680)

 

Balance as of December 31, 2011(a)

 

$103,982

 

$107,932

 

$83,574

 


(a)                                      As of December 31, 2011 and January 1, 2011, liabilities associated with the amounts are included within Income taxes payable and Other non-current liabilities on the accompanying Consolidated Balance Sheets.

 

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. For the year ended December 31, 2011, the Company increased its accrual for interest by $1.2 million and decreased its accrual for penalties $0.1 million, respectively. For the year ended January 1, 2011, the Company increased its accruals for interest and penalties by $2.3 million and $1.5 million, respectively. For the year ended January 2, 2010, the Company did not materially change its accrual for interest and penalties. At December 31, 2011 and January 1, 2011, the accrual for interest and penalties was $6.6 million and $5.4 million and $2.4 million and $2.5 million, respectively.

 

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $103.9 million. The Company expects to reduce the liability for unrecognized tax benefits by an amount between $3.5 million and $5.4 million within the next 12 months due to either settlement or the expiration of the statute of limitations.

 

The Company files tax returns in the US Federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is audited and finally resolved. While it is difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that the unrecognized tax benefits reflect the most likely outcome. These unrecognized tax benefits, as well as the related interest, are adjusted in light of changing facts and circumstances. Favorable resolution would be recognized as a reduction to the effective tax rate in the period of resolution.

 

The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax jurisdictions include the US and the Netherlands. The Company is no longer subject to US Federal examination by the Internal Revenue Service (“IRS”) for the years before 2006 and, with a few exceptions, this applies to tax examinations by state authorities for the years before 2005. As a result of the US Federal tax law change extending the carryback period from two to five years and the Company’s carryback of its 2009 tax loss to 2004 and 2005, the IRS has the ability to re-open its past examinations of 2004 and 2005. The Company is no longer subject to income tax examination by the Dutch tax authorities for years before 2005.

 

NOTE 8:                                             COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases office, showroom, warehouse/distribution, retail space and computers and other equipment under various non-cancelable operating lease agreements, which expire through 2024. Rental expense for 2011, 2010 and 2009 was $128.2 million, $127.4 million and $136.9 million, respectively, excluding certain costs such as real estate taxes and common area maintenance.

 

F-22



 

At December 31, 2011, minimum aggregate rental commitments under non-cancelable operating and capital leases were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term

Fiscal Year

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

Interest

 

Principal

In millions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

$101.7

 

$93.6

 

$89.0

 

$83.2

 

$72.6

 

$185.1

 

$625.2

 

$—

 

$—

Capital Leases

 

4.9

 

4.5

 

 

 

 

 

9.4

 

0.1

 

4.4

 

Certain rental commitments have renewal options extending through the fiscal year 2024. 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. Future rental commitments for leases have not been reduced by minimum non-cancelable sublease rentals aggregating $28.1 million.

 

In connection with the disposition of the LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain MEXX Canada retail stores (see Note 2 — Discontinued Operations), an aggregate of 153 store leases were assigned to third parties, for which the Company remains secondarily liable for the remaining obligations on 139 such leases. As of December 31, 2011, the future aggregate payments under these leases amounted to $226.4 million and extended to various dates through 2025.

 

Buying/Sourcing

 

During the first quarter of 2009, the Company entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as the Company’s buying/sourcing agent for all of the Company’s brands and products (other than jewelry) and the Company received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction. The Company’s agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the divestiture of any current brand, or certain termination events. The Company is also obligated to use Li & Fung as its buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The 2009 licensing arrangements with JCPenney in the US and Puerto Rico and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under its agreement with Li & Fung, the Company refunded $24.3 million of the closing payment received from Li & Fung in the second quarter of 2010. The Company is currently in discussions with Li & Fung regarding a potential refund in connection with the Company’s sale of the KENSIE, KENSIE GIRL and MAC & JAC trademarks and the early termination of the Company’s former DKNY® Jeans and DKNY® Active license. The Company does not believe any such amount will be material in the aggregate. In addition, the Company’s agreement with Li & Fung is not exclusive; however, the Company is required to source a specified percentage of product purchases from Li & Fung.

 

Other

 

No single customer accounted for a significant portion of net sales in 2011. The Company does not believe that any concentration of credit risk represents a material risk of loss with respect to its financial position as of December 31, 2011.

 

On November 21, 2006, the Company entered into an off-balance sheet financing arrangement with a financial institution (commonly referred to as a “synthetic lease”) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement expired on May 31, 2011. The lease included guarantees by the Company for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum guarantee was approximately $27.0 million. The lessor’s risk included an initial capital investment in excess of 10.0% of the total value of the lease, which was at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to the Company through a seven-year capital lease totaling $30.6 million.

 

The Company closed its Rhode Island distribution facility in May 2010. In June 2010, the Company paid $4.8 million and received $2.8 million of proceeds, each in connection with its former Rhode Island distribution center, which was financed under the synthetic lease. Pursuant to the terms of the synthetic lease, the Company purchased the Ohio distribution center for $28.2 million in the second quarter of 2011. The Company previously recognized its guarantee obligation of $5.2 million under the terms of the synthetic lease for the Ohio distribution center.

 

F-23



 

In the second quarter of 2011, the Company initiated actions to close its Ohio distribution center, which will result in the termination of all or a significant portion of its union employees (see Note 12 — Streamlining Initiatives). During the third quarter of 2011, the Company ceased contributing to a union-sponsored multi-employer defined benefit pension plan (the “Fund”), which is regulated by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Under ERISA, cessation of employer contributions to a multi-employer defined benefit pension plan is likely to trigger an obligation by such employer for a “withdrawal liability” to such plan, with the amount of such withdrawal liability representing the portion of the plan’s underfunding allocable to the withdrawing employer. The Company incurred such a liability in the second quarter of 2011 and recorded a $17.6 million charge to SG&A in the accompanying Consolidated Statement of Operations related to its estimate of the withdrawal liability. Under applicable statutory rules, this withdrawal liability is payable over a period of time, and the Company previously estimated that it would pay such liability in equal quarterly installments over a period of eight to 12 years, with payments anticipated to commence in 2012. In February 2012, the Company was notified by the Fund that the Fund calculated the total withdrawal liability to be $19.1 million, a difference of approximately $1.5 million, and that 17 quarterly payments of $1.2 million are to be made commencing on March 1, 2012, and continuing for four years, with a final payment of $1.0 million on June 1, 2016. In light of the Fund’s notice, the Company recorded an additional charge to SG&A in 2011.

 

In June 2011, the Company entered into an agreement with Globalluxe Kate Spade HK Limited (“Globalluxe”) to, among other things, reacquire the existing KATE SPADE businesses in Southeast Asia from Globalluxe (see Note 19 — Related Party Transactions).

 

At December 31, 2011, the Company had entered into short-term commitments for the purchase of raw materials and for the production of finished goods totaling $109.4 million.

 

The Company is a party to several pending legal proceedings and claims. 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 financial position, results of operations, liquidity or cash flows (see Note 21 — Legal Proceedings).

 

NOTE 9:                                             DEBT AND LINES OF CREDIT

 

Long-term debt consisted of the following:

 

 

 

December 31,
2011

 

January 1,
2011

 

In thousands

 

 

 

 

 

5.0% Euro Notes, due July 2013(a)

 

$157,139

 

$467,498

 

6.0% Convertible Senior Notes, due June 2014(b)

 

60,270

 

74,542

 

10.5% Senior Secured Notes, due April 2019(c)

 

220,085

 

 

Revolving credit facility

 

 

22,735

 

Capital lease obligations

 

8,821

 

13,037

 

Total debt

 

446,315

 

577,812

 

Less: Short-term borrowings(d)

 

4,476

 

26,951

 

Convertible Senior Notes(e)

 

60,270

 

74,542

 

Long-term debt

 

$381,569

 

$476,319

 

 


(a)

The change in the balance of these euro-denominated notes reflected the repurchase of 228.5 million euro of the Company’s Euro Notes in 2011 and the impact of changes in foreign currency exchange rates.

 

 

(b)

The balance at December 31, 2011 and January 1, 2011 represented principal of $69.2 million and $90.0 million, respectively, and an unamortized debt discount of $8.9 million and $15.5 million, respectively.

 

 

(c)

The balance at December 31, 2011 reflected the issuance of the Senior Notes on April 7, 2011.

 

 

(d)

At December 31, 2011, the balance consisted of obligations under capital leases and at January 1, 2011, the balance consisted primarily of outstanding borrowings under the Company’s amended and restated revolving credit facility and obligations under capital leases.

 

F-24



 

(e)

The Convertible Notes were reflected as a current liability since they were convertible at December 31, 2011 and January 1, 2011.

 

Euro Notes

 

On July 6, 2006, the Company completed the issuance of the 350.0 million euro (or $446.9 million based on the exchange rate in effect on such date) 5.0% Notes (the “Euro Notes”) due July 8, 2013. The net proceeds of the offering were used to refinance the Company’s then outstanding 350.0 million euro 6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Euro Notes are listed on the Luxembourg Stock Exchange and bear interest from and including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. A portion of the Euro Notes was designated as a hedge of the Company’s net investment in certain of the Company’s euro-denominated functional currency subsidiaries (see Note 11 — Derivative Instruments).

 

On April 8, 2011, the Company completed a tender offer (the “Tender Offer”), whereby it repurchased 128.5 million euro aggregate principal amount of the Euro Notes for total early tender and consent consideration of 123.1 million euro, plus accrued interest. The Company recognized a $6.5 million pretax gain on the extinguishment of debt in the second quarter of 2011.

 

On December 15, 2011, the Company repurchased 100.0 million euro aggregate principal amount of the Euro Notes for total consideration of 100.5 million euro, plus accrued interest. The Company recognized a $0.8 million pretax loss on the extinguishment of debt in the fourth quarter of 2011.

 

Convertible Notes

 

On June 24, 2009, the Company issued $90.0 million Convertible Notes (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 6.0% per year and mature on June 15, 2014. The Company used the net proceeds from this offering to repay $86.6 million of outstanding borrowings under its amended and restated revolving credit facility.

 

The Convertible Notes are convertible at an initial conversion rate of 279.6421 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (representing an initial conversion price of $3.576 per share of common stock), subject to adjustment in certain circumstances. On May 19, 2011, the Company obtained stockholder approval under the rules of the New York Stock Exchange for the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes. As a result of the approval, if the Convertible Notes are surrendered for conversion, the Company may settle the conversion value of each of the Convertible Notes in the form of cash, stock or a combination of cash and stock, at its discretion. Holders may convert the Convertible Notes at their option prior to the close of business on the business day immediately preceding March 15, 2014 only under the following circumstances: (i) during any fiscal quarter commencing after October 3, 2009, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to $4.2912 (which is 120% of the applicable conversion price) on each applicable trading day; (ii) during the five business day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such day; or (iii) upon the occurrence of specified corporate events. In addition, on or after March 15, 2014 until the close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. As a result of stock price performance, the Convertible Notes were convertible during the fourth quarter of 2011 and are convertible during the first quarter of 2012.

 

The Company separately accounts for the liability and equity components of the Convertible Notes in a manner that reflects the Company’s nonconvertible debt borrowing rate when interest is recognized in subsequent periods. The Company allocated $20.6 million of the $90.0 million principal amount of the Convertible Notes to the equity component and to debt discount. The debt discount will be amortized into interest expense through June 2014 using the effective interest method. The Company’s effective interest rate on the Convertible Notes is 12.25%. The non-cash interest expense that will be recorded will increase as the Convertible Notes approach maturity and accrete to face value. Interest expense associated with the semi-annual interest payment and non-cash amortization of the debt discount was $9.2 million, $8.8 million and $4.6 million for the years ended December 31, 2011, January 1, 2011 and January 2, 2010, respectively.

 

On December 21, 2011, a holder of $20.8 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 6,163,221 shares of the Company’s common stock. The Company paid accrued interest on the holder’s Convertible Notes through the settlement date in cash. The Company allocated $18.3 million of the consideration to the liability component and $5.2 million to the equity component. The Company recognized a $0.5 million pretax loss on the extinguishment of debt in the fourth quarter of 2011.

 

F-25


 


 

Senior Notes

 

On April 7, 2011, the Company completed an offering of $220.0 million 10.5% Senior Secured Notes (the “Senior Notes”). The Senior Notes mature on April 15, 2019 and bear interest, which is payable semi-annually, at a rate of 10.5% per annum. The Company used the net proceeds of $212.9 million from the issuance of the Senior Notes primarily to fund the Tender Offer. The remaining proceeds were used for general corporate purposes. The Senior Notes are guaranteed on a senior secured basis by certain of the Company’s current and future domestic subsidiaries. The Senior Notes and the guarantees are secured on a first-priority basis by a lien on certain of the Company’s trademarks and on a second-priority basis by the other assets of the Company and of the guarantors that secure the Company’s amended and restated revolving credit facility.

 

The indenture governing the Senior Notes contains provisions that may require the Company to offer to repurchase the Senior Notes at 101% of their aggregate principal amount upon certain defined “Change of Control” events. In addition, the indenture may require that the proceeds from sales of the Company’s assets (subject to various exceptions and the ability of the Company to apply the proceeds to repay indebtedness or reinvest in its business) be used to offer to repurchase the Senior Notes at 100% of their aggregate principal amount. The indenture also contains other standard high-yield debt covenants, which limit the Company’s ability to incur additional indebtedness, incur additional liens, make asset sales, make dividend payments and investments, make payments and other transfers between itself and its subsidiaries, enter into affiliate transactions and merge or consolidate with other entities.

 

Pursuant to a registration rights agreement executed as part of the offering, the Company agreed, on or before April 7, 2012, (i) to use reasonable best efforts to consummate an exchange offer for new notes registered with the SEC with substantially identical terms; and (ii) if required, to have a shelf registration statement declared effective with respect to resales of the Senior Notes.

 

Amended and Restated Revolving Credit Facility

 

In May 2010, the Company completed a second amendment to and restatement of its revolving credit facility (as amended, the “Amended Agreement”). Availability under the Company’s second amended and restated revolving credit facility is the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of the Company’s eligible accounts receivable and inventory. A portion of the funds available under the Amended Agreement not in excess of $200.0 million is available for the issuance of letters of credit, whereby standby letters of credit may not exceed $65.0 million. The amended and restated revolving credit facility is secured by a first priority lien on substantially all of the Company’s assets and includes a $200.0 million multi-currency revolving credit line and a $150.0 million US Dollar credit line. The Amended Agreement allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the Amended Agreement, with a spread based on the aggregate availability under the Amended Agreement.

 

The Amended Agreement restricts the Company’s ability to, among other things, incur indebtedness, grant liens, repurchase stock, issue cash dividends, make investments and acquisitions and sell assets, in each case subject to certain designated exceptions. In addition, the Amended Agreement (i) requires the Company to maintain minimum aggregate borrowing availability of not less than $45.0 million; (ii) requires the Company to apply substantially all cash collections to reduce outstanding borrowings under the Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of the then-applicable aggregate commitments; (iii) adjusts certain interest rate spreads based upon availability; (iv) provides for the inclusion of an intangible asset value of $30.0 million in the borrowing base which declines in value over two years; (v) permitted the incurrence of liens and sale of assets in connection with the grant and exercise of the purchase option under the 2009 license agreement with JCPenney; and (vi) permitted the acquisition of certain joint venture interests and the indebtedness and guarantees by certain parties arising in connection with such acquisition, subject to certain capped amounts and meeting certain borrowing availability tests.

 

The funds available under the Amended Agreement may be used to refinance or repurchase certain existing debt, provide for working capital and for general corporate purposes and back both trade and standby letters of credit. The Amended Agreement contains customary events of default clauses and cross-default provisions with respect to the Company’s other outstanding indebtedness, including the Euro Notes, the Convertible Notes and Senior Notes. The Amended Agreement will expire in August 2014, provided that in the event that the remaining Euro Notes are not refinanced, purchased or defeased prior to April 8, 2013, then the maturity date shall be April 8, 2013, and in the event that the Convertible Notes are not refinanced, purchased or defeased prior to March 15, 2014, then the maturity date shall be March 15, 2014. In both circumstances, if any such refinancing or extension provides for a maturity date that is earlier than 91 days following August 6, 2014, then the maturity date shall be the date that is 91 days prior to the maturity date of such notes.

 

F-26



 

In March 2011, the Company entered into an amendment to the Amended Agreement. Among other things, the amendment modified certain prepayment provisions in the Amended Agreement so that the proceeds from the offering of the Senior Notes would not be required to repay outstanding borrowings under the amended and restated revolving credit facility, but instead could be used to fund the Tender Offer and permitted the use of up to $35.0 million for general corporate purposes.

 

In September 2011, the Company entered into a third amendment to the Amended Agreement. Pursuant to the third amendment, the required lenders consented to the consummation of the MEXX Transaction. In addition, the third amendment provided for the repayment of all outstanding obligations under the $40.0 million Canadian Sublimit (as defined in the Amended Agreement) and the $100.0 million European Sublimit (as defined in the Amended Agreement) and elimination of the European Sublimit on the closing date of the MEXX Transaction. The overall borrowing limit, the Canadian Sublimit and the borrowing base calculations remained otherwise unchanged. Any remaining net proceeds from the MEXX Transaction were used to temporarily repay other outstanding amounts under the amended and restated revolving credit facility.

 

In November 2011, the Company entered into a fourth amendment to the Amended Agreement. The fourth amendment, among other things, permitted the sale of certain of the Company’s trademarks pursuant to their respective purchase agreements, and allowed the net proceeds of such sales to be used to prepay or repurchase the Company’s existing Euro Notes, Convertible Notes or Senior Notes, subject to certain tests and conditions.

 

The Company currently believes that the financial institutions under the Amended Agreement are able to fulfill their commitments, although such ability to fulfill commitments will depend on the financial condition of the Company’s lenders at the time of borrowing.

 

As of December 31, 2011, availability under the Company’s amended and restated revolving credit facility was as follows:

 

 

 

Total
Facility
(a)

 

Borrowing
Base
(a)

 

Outstanding
Borrowings

 

Letters of
Credit
Issued
(b)

 

Available
Capacity

 

Excess
Capacity
(c)

In thousands

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility(a)

 

$350,000

 

$393,827

 

$—

 

$33,909

 

$316,091

 

$271,091

 


(a)                                     Availability under the Amended Agreement is the lesser of $350.0 million or a borrowing base comprised primarily of eligible accounts receivable and inventory.

 

(b)                                     Included $8.0 million of outstanding MEXX letters of credit that were cash collateralized as of the MEXX closing on October 31, 2011.

 

(c)                                      Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the Amended Agreement of $45.0 million.

 

Capital Lease

 

On November 21, 2006, the Company entered into a seven year capital lease with a financial institution totaling $30.6 million. The purpose of the lease was to finance the equipment associated with its distribution facilities in Ohio and Rhode Island, which had been previously financed through the Company’s 2001 synthetic lease, which matured in 2006 (see Note 8 — Commitments and Contingencies). On June 15, 2010, the Company prepaid $1.5 million principal of the capital lease due to the closure of its former distribution center in Rhode Island.

 

F-27



 

NOTE 10:                                      FAIR VALUE MEASUREMENTS

 

As discussed in Note 1 — Basis of Presentation and Significant Accounting Policies, the Company utilizes a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.

 

The following table presents the financial assets and liabilities the Company measures at fair value on a recurring basis, based on such fair value hierarchy:

 

 

 

Level 2

 

 

January 1,
2011

In thousands

 

 

Financial Assets:

 

 

Derivatives

 

$        —

Financial Liabilities:

 

 

Derivatives

 

$(3,463)

 

The fair values of the Company’s Level 2 derivative instruments were primarily based on observable forward exchange rates. Unobservable quantitative inputs used in the valuation of the Company’s derivative instruments included volatilities, discount rates and estimated credit losses.

 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2011, based on such fair value hierarchy:

 

 

 

Net Carrying
Value as of
December 31,

 

Fair Value Measured and Recorded at
Reporting Date Using:

 

Total
Losses — Year
Ended

 

 

2011

 

Level 1

 

Level 2

 

Level 3

 

December 31, 2011

In thousands

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

$21,240

 

$—

 

$—

 

$21,240

 

$26,480

Intangible assets

 

 

 

 

 

1,024

 

As a result of the decisions to close the Company’s Ohio distribution center and exit certain JUICY COUTURE and LUCKY BRAND retail locations, as well as a decline in respective future anticipated cash flows of certain retail locations of JUICY COUTURE and LUCKY BRAND, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Operations.

 

During 2011, the Company recorded a pretax charge of $222.2 million in Discontinued operations, net of income taxes on the accompanying Consolidated Statement of Operations to reduce the net carrying value primarily of the MEXX, MAC & JAC and Adelington Design Group & Other assets and liabilities to fair value, less costs to dispose.

 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2010, based on such fair value hierarchy:

 

 

 

Net Carrying
Value as of
January 1,

 

Fair Value Measured and
Recorded at
Reporting Date Using:

 

Total Losses —
Year Ended
January 1,

 

 

 

2011

 

Level 1

 

Level 2

 

Level 3

 

2011

 

In thousands

 

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

$4,600

 

$—

 

$—

 

$4,600

 

$10,508

 

Intangible assets

 

 

 

 

 

2,594

 

Assets held for sale

 

 

 

 

 

8,018

 

 

As a result of the decisions to exit the LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico and certain LUCKY BRAND retail locations, cease use of certain corporate assets and close a distribution center in 2010, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Operations.

 

F-28



 

In the second quarter of 2010, the Company recorded non-cash pretax impairment charges of $2.6 million primarily within the Adelington Design Group & Other segment principally related to merchandising rights of the LIZ CLAIBORNE and former licensed DKNY® Jeans brands.

 

In the third quarter of 2010, the Company determined that the carrying value of the assets held for sale related to its closed Mt. Pocono distribution center exceeded the estimated fair value and recorded a non-cash pretax impairment charge of $8.0 million.

 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2009, based on such fair value hierarchy:

 

 

 

Net Carrying
Value as of
January 2,

 

Fair Value Measured and
Recorded at
Reporting Date Using:

 

Total Losses —
Year Ended
January 2,

 

 

2010

 

Level 1

 

Level 2

 

Level 3

 

2010

In thousands

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

$3,690

 

$—

 

$—

 

$3,690

 

$28,085

Intangible assets

 

 

 

 

 

14,222

Assets held for sale

 

15,070

 

 

 

15,070

 

2,472

 

As a result of the decision to exit certain operational retail formats, an impairment analysis was performed on the associated property and equipment. The Company determined that the carrying value of a portion of such assets exceeded their fair value. The impairments resulted from a decline in respective future anticipated cash flows of certain retail locations of: (i) KATE SPADE; (ii) LUCKY BRAND; (iii) Adelington Design Group & Other; and (iv) JUICY COUTURE, as well as certain corporate software and the Company’s Santa Fe Springs, California and Lincoln, Rhode Island distribution centers.

 

The fair values of the Company’s Level 3 Property and equipment, Intangible assets and Assets held for sale are based on either a market approach or an income approach using the Company’s forecasted cash flows over the estimated useful lives of such assets, as appropriate.

 

The fair values and carrying values of the Company’s debt instruments are detailed as follows:

 

 

 

December 31, 2011

 

January 1, 2011

 

 

Fair Value

 

Carrying Value

 

Fair Value

 

Carrying Value

In thousands

 

 

 

 

 

 

 

 

5.0% Euro Notes, due July 2013(a)

 

$145,491

 

$157,139

 

$397,177

 

$467,498

6.0% Convertible Senior Notes, due June 2014(a)

 

174,397

 

60,270

 

197,306

 

74,542

10.5% Senior Secured Notes due April 2019(a)

 

234,850

 

220,085

 

 

Revolving credit facility(b)

 

 

 

22,735

 

22,735

 


(a)                                      Carrying values include unamortized debt discount or premium.

 

(b)                                     Borrowings under the revolving credit facility bear interest based on market rates; accordingly, its fair value approximates its carrying value.

 

The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values. The fair values of cash and cash equivalents, receivables and accounts payable approximate their carrying values due to the short-term nature of these instruments.

 

NOTE 11:                                     DERIVATIVE INSTRUMENTS

 

In order to reduce exposures related to changes in foreign currency exchange rates, the Company previously utilized foreign currency collars and forward contracts for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by the Company’s former MEXX operations in Europe and Canada. As of December 31, 2011, the Company had no outstanding forward contracts.

 

F-29



 

The following table summarizes the fair value and presentation in the Consolidated Financial Statements for derivatives designated as hedging instruments:

 

 

 

Foreign Currency Contracts Designated as Hedging Instruments

 

 

Asset Derivatives

 

Liability Derivatives

Period

 

Balance Sheet
Location

 

Notional
Amount

 

Fair Value

 

Balance Sheet
Location

 

Notional
Amount

 

Fair Value

In thousands

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2011

 

Other current assets

 

$1,500

 

$—

 

Accrued expenses

 

$120,504

 

$3,463

 

The following table summarizes the effect of foreign currency exchange contracts on the Consolidated Financial Statements:

 

 

 

Amount of Gain or
(Loss) Recognized in
Accumulated OCI
on Derivative
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Operations
(Effective and
Ineffective Portion)

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Operations
(Effective Portion)

 

Amount of Gain or
(Loss) Recognized in
Operations on
Derivative
(Ineffective Portion)

In thousands

 

 

 

 

 

 

 

 

Fiscal year ended December 31, 2011

 

$(4,482)

 

Discontinued operations, net of income taxes

 

$(7,590)

 

$         —

Fiscal year ended January 1, 2011

 

3,487

 

Discontinued operations, net of income taxes

 

(802)

 

(282)

Fiscal year ended January 2, 2010

 

(7,113)

 

Discontinued operations, net of income taxes

 

(4,181)

 

(1,428)

 

The Company hedged its net investment position in certain euro-denominated functional currency subsidiaries by designating a portion of the outstanding Euro Notes as the hedging instrument in a net investment hedge. To the extent the hedge was effective, related foreign currency translation gains and losses were recorded within Other comprehensive loss. Translation gains and losses related to the ineffective portion of the hedge were recognized in current operations within Other income (expense), net.

 

As of January 1, 2011, the Company dedesignated an aggregate 230.0 million euro of its outstanding Euro Notes as a hedge of its net investment in certain euro-denominated functional currency subsidiaries.

 

In connection with the sale of an 81.25% interest in the global MEXX business on October 31, 2011, the Company dedesignated the remaining amount of the Euro Notes that had been previously designated as a hedge of the Company’s net investment in certain euro-denominated functional currency subsidiaries. Accordingly, all foreign currency transaction gains or losses related to the remaining Euro Notes are recorded in earnings beginning on November 1, 2011.

 

The Company recognized the following foreign currency translation gains (losses) related to the net investment hedge:

 

 

 

Fiscal Years Ended

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

In thousands

 

 

 

 

 

 

Effective portion recognized within Accumulated OCI

 

$(10,216)

 

$13,095

 

$(9,418)

Ineffective portion recognized within Other income (expense), net

 

4,954

 

21,555

 

(6,507)

 

Also, as a result of the sale of an 81.25% interest in the global MEXX business, the Company’s net investment in certain euro-denominated functional currency subsidiaries was substantially liquidated, and the cumulative translation adjustment recognized on the Company’s Euro Notes through October 31, 2011 was written off and included within Loss on

 

F-30



 

disposal of discontinued operations, net of income taxes on the accompanying Consolidated Statement of Operations (see Note 18 — Accumulated Other Comprehensive Loss).

 

The Company occasionally uses short-term foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with certain expected transactions. In order to mitigate the exposure related to the Tender Offer, the Company entered into forward contracts to sell $182.0 million for 128.0 million euro, which settled in the second quarter of 2011. During the second quarter of 2011, the Company entered into forward contracts designated as non-hedging derivative instruments maturing in July 2011 to sell $15.7 million for 11.0 million euro. The transaction gains of $2.5 million related to these derivative instruments were reflected within Other income (expense), net for the year ended December 31, 2011.

 

NOTE 12:                                      STREAMLINING INITIATIVES

 

2011 Actions

 

In the fourth quarter of 2011, the Company commenced additional streamlining initiatives that impacted all of its reportable segments and included rationalization of office space and staff reductions, which are expected to be completed by the end of 2012. In the second quarter of 2011, the Company initiated actions to close its Ohio distribution center, which are expected to be completed in the fourth quarter of 2012. In the first quarter of 2011, the Company initiated actions to reduce staff at JUICY COUTURE. These actions resulted in charges related to contract terminations, severance, asset impairments and other charges.

 

In the fourth quarter of 2011, the company agreed to terminate its agreement with an affiliate of DKI, which ended the exclusive license agreement for the DKNY® Jeans and DKNY® Active brands. These actions included contract terminations and staff reductions and concluded in the first quarter of 2012.

 

2010 Actions

 

The Company continued to consolidate its warehouse operations, which included the closure of its Vernon, California distribution facility in September 2010.

 

In April 2010, the Company completed an agreement with an affiliate of DKI to terminate its former licensed DKNY® Mens Sportswear operations and close, transfer or repurpose its DKNY® Jeans outlet stores (see Note 16 — Additional Financial Information). These actions included contract terminations, staff reductions and consolidation of office space and were substantially completed by the end of 2010.

 

2009 Actions

 

In the first quarter of 2009, the Company entered into a long-term, buying/sourcing agency agreement with Li & Fung. As a result, the Company’s international buying offices were integrated into Li & Fung or reduced to support functions. The Company’s streamlining initiatives related to this action included lease terminations, property and equipment disposals and employee terminations and relocation and were completed during 2009. Expenses associated with this action were partially offset by a payment of $8.0 million received from Li & Fung during the second quarter of 2009.

 

During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania distribution center, including staff eliminations and sold the facility in the fourth quarter of 2010.

 

Also, during the first quarter of 2009, the Company committed to a plan to close or repurpose its Lucky Brand Kids stores, although the Company will continue to offer associated merchandise through other channels. The action included lease terminations and staff reductions and was completed in the fourth quarter of 2009.

 

In August 2009, the Company initiated additional streamlining initiatives that impacted all of its reportable segments and included rationalization of distribution centers and office space, store closures, staff reductions, including consolidation of certain support and production functions and outsourcing certain corporate functions.

 

In connection with the license agreements with JCPenney and QVC (see Note 16 — Additional Financial Information), the Company consolidated office space and reduced staff in certain support functions. As a result, the Company incurred charges related to the reduction of leased space, impairments of property and equipment and other assets, severance and other restructuring costs. These actions were completed in the second quarter of 2010.

 

F-31


 


 

The Company also initiated actions to consolidate certain warehouse operations, with the closure of its leased Santa Fe Springs, California distribution facility in January 2010 and the closure of its Rhode Island distribution facility in May 2010.

 

The Company expects to pay approximately $36.8 million of accrued streamlining costs during 2012. A summary rollforward and components of the Company’s streamlining initiatives were as follows:

 

 

 

Payroll and
Related Costs

 

Contract
Termination
Costs

 

Asset
Write-Downs

 

Other Costs

 

Total

 

In thousands

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2009

 

$

3,791

 

$13,108

 

   $

 

   $

341

 

$17,240

 

2009 provision, net(a)(b) 

 

50,354

 

31,496

 

32,762

 

5,989

 

120,601

 

2009 asset write-downs(b) 

 

 

 

(32,762)

 

 

(32,762)

 

Translation difference

 

1

 

142

 

 

17

 

160

 

2009 spending

 

(32,548)

 

(19,847)

 

 

(5,112)

 

(57,507)

 

Balance at January 2, 2010

 

21,598

 

24,899

 

 

1,235

 

47,732

 

2010 provision

 

11,943

 

28,691

 

13,616

 

6,722

 

60,972

 

2010 asset write-downs

 

 

 

(13,616)

 

 

(13,616)

 

Translation difference

 

7

 

(104)

 

 

22

 

(75)

 

2010 spending

 

(33,287)

 

(26,558)

 

 

(6,285)

 

(66,130)

 

Balance at January 1, 2011

 

261

 

26,928

 

 

1,694

 

28,883

 

2011 provision

 

19,981

 

9,110

 

19,652

 

41,358

 

90,101

 

2011 asset write-downs

 

 

 

(19,652)

 

 

(19,652)

 

Translation difference

 

(1)

 

(10)

 

 

(8)

 

(19)

 

2011 spending

 

(12,825)

 

(18,184)

 

 

(12,115)

 

(43,124)

 

Balance at December 31, 2011

 

$

7,416

 

$17,844

 

   $

 

   $

30,929

 

$56,189

 

 


(a)             Net of the receipt of $8.0 million from Li & Fung.

 

(b)            Asset write-downs included a non-cash impairment charge of $4.5 million related to LIZ CLAIBORNE merchandising rights (see Note 1 — Basis of Presentation and Significant Accounting Policies).

 

Expenses associated with the Company’s streamlining actions were primarily recorded in SG&A in the Consolidated Statements of Operations and impacted reportable segments as follows:

 

 

 

 

Fiscal Years Ended

 

 

 

December 31,
2011

 

January 1,
2011

 

January 2,
2010

 

In thousands

 

 

 

 

 

 

 

JUICY COUTURE

 

$21,200

 

$13,623

 

$19,747

 

LUCKY BRAND

 

11,978

 

7,325

 

18,365

 

KATE SPADE

 

5,883

 

2,516

 

12,055

 

International-Based Direct Brands(a) 

 

708

 

220

 

873

 

Adelington Design Group & Other

 

50,332

 

37,288

 

69,561

 

Total

 

$90,101

 

$60,972

 

$120,601

 

 


(a)             Represents allocated corporate charges that were not reported as discontinued operations.

 

NOTE 13:             SHARE-BASED COMPENSATION

 

The Company issues stock options, restricted shares, restricted share units and shares with performance features to employees under share-based compensation plans, which are described herein. The Company recognized share-based compensation expense of $5.8 million, $6.3 million and $8.0 million, excluding amounts related to discontinued operations, for the fiscal years ended December 31, 2011, January 1, 2011 and January 2, 2010, respectively.

 

Compensation expense for stock options and restricted stock awards is measured at fair value on the date of grant based on the number of shares granted. The fair value of stock options is estimated based on the binominal lattice pricing model; the fair value of restricted shares is based on the quoted market price on the date of the grant. Stock option expense is recognized using the straight-line attribution basis over the entire vesting period of the award. Restricted share, restricted

 

F-32



 

share unit and performance share expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Expense is recognized net of estimated forfeitures.

 

Stock Plans

 

In March 1992, March 2000, March 2002, March 2005 and May 2011, the Company adopted the “1992 Plan,” the “2000 Plan,” the “2002 Plan,” the “2005 Plan” and the “2011 Plan,” respectively, under which options (both nonqualified options and incentive stock options) to acquire shares of common stock may be granted to officers, other key employees, consultants and outside directors, in each case as 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 exercise has not been approved or transacted. The Committee has the authority under all of the plans to allow for a cashless exercise option, commonly referred to as a “broker-assisted exercise.” Under this method of exercise, participating employees 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 employees receive cash upon settlement, some of which is used to pay the purchase price. Neither the stock-for-stock nor broker-assisted cashless exercise option are generally available to executive officers or directors of the Company. Although there are none currently outstanding, 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. Vesting schedules will be accelerated upon a change of control of the Company. Options and stock appreciation rights generally may not be transferred during the lifetime of a holder.