EX-99.1 2 a12-17934_1ex99d1.htm EX-99.1

Exhibit 99.1

 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

September 29, 2012

(Unaudited)

 

 

 

 

 

PAGE
NUMBER

 

 

 

 

 

PART I -

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 29, 2012, December 31, 2011 and October 1, 2011

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Nine and Three Month Periods Ended September 29, 2012 and October 1, 2011

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Nine and Three Month Periods Ended September 29, 2012 and October 1, 2011

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 29, 2012 and October 1, 2011

 

5 – 6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7 – 40

 



 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

 

(Unaudited)

 

 

 

 

September 29,
2012

 

December 31,
2011

 

October 1,
2011

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

31,221

 

$

179,936

 

$

11,757

 

Accounts receivable - trade, net

 

 

126,655

 

119,551

 

149,588

 

Inventories, net

 

 

245,578

 

193,343

 

255,793

 

Deferred income taxes

 

 

170

 

165

 

118

 

Other current assets

 

 

47,917

 

58,750

 

59,581

 

Assets held for sale

 

 

--

 

--

 

227,614

 

Total current assets

 

 

451,541

 

551,745

 

704,451

 

 

 

 

 

 

 

 

 

 

Property and Equipment, Net

 

 

224,587

 

238,664

 

254,612

 

Goodwill and Intangibles, Net

 

 

118,197

 

118,873

 

153,833

 

Deferred Income Taxes

 

 

--

 

--

 

487

 

Other Assets

 

 

49,027

 

40,722

 

30,623

 

Total Assets

 

 

$

843,352

 

$

950,004

 

$

1,144,006

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

$

4,681

 

$

4,476

 

$

148,155

 

Convertible Senior Notes

 

 

28,687

 

60,270

 

77,386

 

Accounts payable

 

 

168,849

 

144,060

 

154,747

 

Accrued expenses

 

 

215,001

 

217,346

 

185,165

 

Income taxes payable

 

 

794

 

805

 

2,402

 

Deferred income taxes

 

 

16

 

16

 

4,715

 

Liabilities held for sale

 

 

--

 

--

 

229,187

 

Total current liabilities

 

 

418,028

 

426,973

 

801,757

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

384,841

 

381,569

 

521,722

 

Other Non-Current Liabilities

 

 

216,957

 

236,696

 

221,494

 

Deferred Income Taxes

 

 

15,724

 

13,752

 

19,018

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

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

 

176,437

 

Capital in excess of par value

 

 

147,137

 

302,330

 

338,486

 

Retained earnings

 

 

1,094,421

 

1,246,063

 

1,016,896

 

Accumulated other comprehensive loss

 

 

(5,854

)

(5,924

)

(68,252

)

 

 

 

1,412,141

 

1,718,906

 

1,463,567

 

Common stock in treasury, at cost – 63,237,133, 75,592,899 and 81,853,705 shares

 

 

(1,604,339

)

(1,827,892

)

(1,883,552

)

Total stockholders’ deficit

 

 

(192,198

)

(108,986

)

(419,985

)

Total Liabilities and Stockholders’ Deficit

 

 

$

843,352

 

$

950,004

 

$

1,144,006

 

 

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

 

2



 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

 

(Unaudited)

 

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

 

September 29,
2012
(39 Weeks)

 

October 1,
2011
(39 Weeks)

 

September 29,
2012
(13 Weeks)

 

October 1,
2011
(13 Weeks)

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

$

1,018,561

 

$

1,071,658

 

$

364,556

 

$

380,693

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

445,620

 

502,758

 

161,439

 

173,856

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

572,941

 

568,900

 

203,117

 

206,837

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

 

643,707

 

634,521

 

203,398

 

211,685

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of intangible assets

 

 

--

 

814

 

--

 

814

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(70,766

)

(66,435

)

(281

)

(5,662

)

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

1,479

 

(7,077

)

(1,038

)

16,818

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of trademarks

 

 

--

 

15,600

 

--

 

15,600

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on extinguishment of debt, net

 

 

(8,669

)

6,547

 

(3,023

)

--

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(37,836

)

(42,908

)

(13,228

)

(15,834

)

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income Before Provision for Income Taxes

 

 

(115,792

)

(94,273

)

(17,570

)

10,922

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

4,882

 

5,605

 

1,823

 

3,919

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

 

(120,674

)

(99,878

)

(19,393

)

7,003

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes

 

 

(10,865

)

(300,997

)

592

 

(221,637

)

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

$

(131,539

)

$

(400,875

)

$

(18,801

)

$

(214,634

)

 

 

 

 

 

 

 

 

 

 

 

Earnings per Share:

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

 

$

(1.12

)

$

(1.06

)

$

(0.17

)

$

0.07

 

Net Loss

 

 

$

(1.22

)

$

(4.24

)

$

(0.17

)

$

(2.27

)

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares, Basic

 

 

107,692

 

94,443

 

113,109

 

94,483

 

Weighted Average Shares, Diluted

 

 

107,692

 

94,443

 

113,109

 

95,323

 

 

 

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

 

3



 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

 

(Unaudited)

 

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

 

September 29,
2012
(39 Weeks)

 

October 1,
2011
(39 Weeks)

 

September 29,
2012
(13 Weeks)

 

October 1,
2011
(13 Weeks)

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

$

(131,539

)

$

(400,875

)

$

(18,801

)

$

(214,634

)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment, including Euro Notes in 2011 and other instruments, net of income taxes of $0, $(234), $0 and $(1,870), respectively

 

 

229

 

(1,852

)

247

 

574

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on available-for-sale securities, net of income taxes of $0

 

 

(159

)

(109

)

(114

)

(54

)

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges, net of income taxes of $0, $332, $0 and $403, respectively

 

 

--

 

11

 

--

 

4,522

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss

 

 

$

(131,469

)

$

(402,825

)

$

(18,668

)

$

(209,592

)

 

 

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

 

4



 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(Unaudited)

 

 

 

 

Nine Months Ended

 

 

 

 

September 29, 2012
(39 Weeks)

 

October 1, 2011
(39 Weeks)

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net loss

 

 

$

(131,539

)

$

(400,875

)

Adjustments to arrive at loss from continuing operations

 

 

10,865

 

300,997

 

Loss from continuing operations

 

 

(120,674

)

(99,878

)

 

 

 

 

 

 

 

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

54,783

 

64,755

 

Impairment of intangible assets

 

 

--

 

814

 

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

 

 

31,378

 

20,076

 

Share-based compensation

 

 

7,157

 

4,108

 

Foreign currency (gains) losses, net

 

 

(174

)

10,826

 

Gain on sale of trademarks

 

 

--

 

(15,600

)

Loss (gain) on extinguishment of debt

 

 

8,669

 

(6,547

)

Other, net

 

 

112

 

(1,742

)

Changes in assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in accounts receivable – trade, net

 

 

(6,851

)

12,366

 

Increase in inventories, net

 

 

(51,950

)

(42,935

)

Decrease in other current and non-current assets

 

 

5,187

 

1,470

 

Increase in accounts payable

 

 

26,944

 

18,671

 

(Decrease) increase in accrued expenses and other non-current liabilities

 

 

(29,933

)

12,163

 

Net change in income tax assets and liabilities

 

 

3,844

 

5,893

 

Net cash used in operating activities of discontinued operations

 

 

(15,773

)

(127,985

)

Net cash used in operating activities

 

 

(87,281

)

(143,545

)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(55,180

)

(57,545

)

Net proceeds from disposition

 

 

--

 

15,600

 

Payments for in-store merchandise shops

 

 

(1,767

)

(2,247

)

Investments in and advances to equity investees

 

 

(5,000

)

(6

)

Other, net

 

 

236

 

370

 

Net cash used in investing activities of discontinued operations

 

 

--

 

(12,086

)

Net cash used in investing activities

 

 

(61,711

)

(55,914

)

 

 

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

 

5



 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT’D)

 

(In thousands)

 

(Unaudited)

 

 

 

 

Nine Months Ended

 

 

 

 

September 29, 2012
(39 Weeks)

 

October 1, 2011
(39 Weeks)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from borrowings under revolving credit agreement

 

 

113,389

 

602,022

 

Repayment of borrowings under revolving credit agreement

 

 

(113,389

)

(480,091

)

Proceeds from issuance of Senior Secured Notes

 

 

164,540

 

220,094

 

Repayment of Euro Notes

 

 

(158,027

)

(178,333

)

Principal payments under capital lease obligations

 

 

(3,331

)

(3,138

)

Proceeds from exercise of stock options

 

 

6,049

 

25

 

Payment of deferred financing fees

 

 

(6,064

)

(8,505

)

Other, net

 

 

--

 

(806

)

Net cash provided by financing activities of discontinued operations

 

 

--

 

45,292

 

Net cash provided by financing activities

 

 

3,167

 

196,560

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(2,890

)

2,750

 

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

 

(148,715

)

(149

)

Cash and Cash Equivalents at Beginning of Period

 

 

179,936

 

22,714

 

Cash and Cash Equivalents at End of Period

 

 

31,221

 

22,565

 

Less: Cash and Cash Equivalents Held for Sale

 

 

--

 

10,808

 

Cash and Cash Equivalents

 

 

$

31,221

 

$

11,757

 

 

 

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

 

6



 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unless otherwise noted, all amounts are in thousands, except per share amounts)

 

(Unaudited)

 

1.    BASIS OF PRESENTATION

 

The Condensed Consolidated Financial Statements of Fifth & Pacific Companies, Inc. and its wholly-owned and majority-owned subsidiaries (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that its disclosures are adequate to make the information presented not misleading. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K. Information presented as of December 31, 2011 is derived from audited financial statements.

 

Effective May 14, 2012, the Company completed its previously announced corporate name change from Liz Claiborne, Inc. to better communicate its strategic focus on growing its three global lifestyle brands (JUICY COUTURE, KATE SPADE and LUCKY BRAND) and reflect the sale of the LIZ CLAIBORNE brand to J.C. Penney Corporation, Inc. (“JCPenney”), among other recent transactions. The Company’s stock trades on the New York Stock Exchange (“NYSE”) as Fifth & Pacific Companies, Inc. under the symbol “FNP.”

 

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. 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 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 with Kohl’s Corporation (“Kohl’s”) 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 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

 

7



 

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 assets and liabilities of the global MEXX business were reported as held for sale as of October 1, 2011. 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.

 

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. 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 through October 11, 2013. The Company also entered an exclusive license agreement to produce and sell jewelry under the KENSIE brand name.

 

In December 2011, the Company substantially completed the exit of its 277 MONET concessions in Europe.

 

During the first quarter of 2011, the Company completed the closure of 82 LIZ CLAIBORNE concessions in Europe, which included the exit and transfer of title to property and equipment of certain locations in exchange for a nominal fee.

 

In January 2011, the Company completed the closure of 87 LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico.

 

The activities of the Company’s global MEXX business, its KENSIE, KENSIE GIRL and MAC & JAC brands, its 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.

 

In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year. Management has evaluated events or transactions that have occurred from the balance sheet date through the date the Company issued these financial statements.

 

NATURE OF OPERATIONS

 

Fifth & Pacific Companies, Inc. is engaged primarily in the design and marketing of a broad range of apparel and accessories. The Company’s fiscal year ends on the Saturday closest to December 31. The 2012 fiscal year, ending December 29, 2012, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter. The 2011 fiscal year, ending December 31, 2011, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter.

 

PRINCIPLES OF CONSOLIDATION

 

The Condensed 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 Company’s critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations in conformity with US GAAP. These critical accounting policies are applied in a consistent manner. The Company’s critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

The application of critical accounting policies requires that the Company make estimates and assumptions about future events and apply judgments that 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. The Company continues to monitor the critical accounting policies to ensure proper application of current rules and regulations. During the third quarter of 2012, there were no significant changes in the critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

8



 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In May 2011, new accounting guidance on fair value measurements was issued, which requires updates to fair value measurement disclosures to conform US GAAP and International Financial Reporting Standards. This guidance includes additional disclosure requirements about Level 3 fair value measurements and is effective for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance did not affect the Company’s financial position, results of operations or cash flows, but required additional disclosure (see Note 9 – Fair Value Measurements).

 

2.    DISCONTINUED OPERATIONS

 

The Company has completed various disposal transactions including: (i) the closure of the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico in January 2011; (ii) the closure of its LIZ CLAIBORNE concessions in Europe in the first quarter of 2011; (iii) the closure of its MONET concessions in Europe in December 2011; (iv) the sale of an 81.25% interest in the global MEXX business in October 2011; and (v) the sale of the KENSIE, KENSIE GIRL and MAC & JAC trademarks in October 2011.

 

The components of Assets held for sale and Liabilities held for sale were as follows:

 

In thousands

 

  October 1, 2011

 

Assets held for sale:

 

 

 

Cash and cash equivalents

 

$

10,808

 

Accounts receivable – trade, net

 

74,457

 

Inventories, net

 

108,135

 

Other assets

 

34,214

 

Assets held for sale

 

$

227,614

 

Liabilities held for sale:

 

 

 

Short-term borrowings

 

$

45,138

 

Accounts payable

 

67,284

 

Accrued expenses

 

89,496

 

Deferred income taxes

 

15,447

 

Other liabilities

 

11,822

 

Liabilities held for sale

 

$

229,187

 

 

Summarized results of discontinued operations were as follows:

 

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

 

September 29,
2012
(39 Weeks)

 

October 1,
2011
(39 Weeks)

 

September 29,
2012
(13 Weeks)

 

October 1,
2011
(13 Weeks)

 

In thousands

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

1,615

 

$

618,590

 

$

(159

)

$

228,224

 

 

 

 

 

 

 

 

 

 

 

 

Loss before (benefit) provision for income taxes

 

 

$

(4,837

)

$

(90,166

)

$

(364

)

$

(22,370

)

(Benefit) provision for income taxes

 

 

(1,867

)

3,502

 

20

 

2,461

 

Loss from discontinued operations, net of income taxes

 

 

$

(2,970

)

$

(93,668

)

$

(384

)

$

(24,831

)

 

 

 

 

 

 

 

 

 

 

 

(Loss) income on disposal of discontinued operations, net of income taxes

 

 

$

(7,895

)

$

(207,329

)

$

976

 

$

(196,806

)

 

The Company recorded pretax charges (benefits) of $7.9 million and $218.2 million ($207.3 million after tax) during the nine months ended September 29, 2012 and October 1, 2011, respectively, and $(1.0) million and $207.7 million ($196.8 million after tax) during the three months ended September 29, 2012 and October 1, 2011, 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.

 

The Company recorded charges related to its streamlining initiatives of $5.1 million and $36.4 million during the nine months ended September 29, 2012 and October 1, 2011, respectively, and $16.9 million for the three months ended October 1, 2011, within Discontinued operations, net of income taxes on the accompanying Condensed Consolidated Statements of Operations.

 

9



 

3.    STOCKHOLDERS’ DEFICIT

 

Activity for the nine months ended September 29, 2012 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts was as follows:

 

In thousands

 

Capital in Excess
of Par Value

 

Retained Earnings

 

Common Stock in
Treasury, at Cost

 

Balance as of December 31, 2011

 

 

$

302,330

 

 

$

1,246,063

 

 

$

(1,827,892

)

Net loss

 

 

--

 

 

(131,539

)

 

--

 

Exercise of stock options

 

 

(10,642

)

 

(2,197

)

 

18,888

 

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

 

 

(3,951

)

 

(142

)

 

2,772

 

Share-based compensation

 

 

7,157

 

 

--

 

 

--

 

Dividend equivalent units vested

 

 

--

 

 

(2

)

 

2

 

Exchange of Convertible Senior Notes, net

 

 

(147,757

)

 

(17,762

)

 

201,891

 

Balance as of September 29, 2012

 

 

$

147,137

 

 

$

1,094,421

 

 

$

(1,604,339

)

 

Activity for the nine months ended October 1, 2011 in the Capital in excess of par value, Retained earnings, Common stock in treasury, at cost and Noncontrolling interest accounts was as follows:

 

In thousands

 

 

Capital in
Excess of Par
Value

 

Retained
Earnings

 

Common
Stock in
Treasury, at
Cost

 

Noncontrolling
Interest

 

Balance as of January 1, 2011

 

 

$

331,808

 

$

1,417,785

 

$

(1,883,898

)

$

2,489

 

Net loss

 

 

--

 

(400,875

)

--

 

--

 

Exercise of stock options

 

 

(26

)

--

 

51

 

--

 

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

 

 

180

 

--

 

(34

)

--

 

Share-based compensation

 

 

4,427

 

--

 

--

 

--

 

Dividend equivalent units vested

 

 

(392

)

(14

)

329

 

--

 

Tendered subsidiary shares for noncontrolling interest (a)

 

 

2,489

 

--

 

--

 

(2,489

)

Balance as of October 1, 2011

 

 

$

338,486

 

$

1,016,896

 

$

(1,883,552

)

$

--

 

 

 

 

 

 

 

 

 

(a)

 

The Company acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. (“Lucky Brand”) on June 8, 1999 and 12.7% of the remaining equity of Lucky Brand from 2005 to 2010. The aggregate purchase price for the remaining 2.3% of the original shares consisted of a payment made in 2008 that was based on a multiple of Lucky Brand’s 2007 earnings and a 2011 contingent 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.

 

Accumulated other comprehensive loss consisted of the following:

 

In thousands

 

 

September 29,
2012

 

December 31,
2011

 

October 1,
2011

 

Cumulative translation adjustment, net of income taxes of $0, $0 and $(671), respectively

 

 

$

(5,855

)

$

(6,084

)

$

(65,823

)

Unrealized losses on cash flow hedging derivatives, net of income taxes of $0, $0 and $159, respectively

 

 

--

 

--

 

(2,606

)

Unrealized gains on available-for-sale securities, net of income taxes of $0

 

 

1

 

160

 

177

 

Accumulated other comprehensive loss, net of income taxes

 

 

$

(5,854

)

$

(5,924

)

$

(68,252

)

 

As discussed in Note 15 - Derivative Instruments, prior to the substantial liquidation of certain euro-denominated functional currency subsidiaries, the Company hedged its net investment position in such subsidiaries by designating a portion of the outstanding 5.0% Notes (the “Euro Notes”) as the hedging instrument in a net investment hedge. As discussed in Note 1 - Basis of Presentation, the Company sold an 81.25% interest in the global MEXX business on October 31, 2011. That transaction resulted in the liquidation of certain of the Company’s former euro-denominated functional currency subsidiaries and other non-US dollar denominated functional currency subsidiaries. As a result, in the fourth quarter of 2011, the Company recorded a charge of $62.2 million within Loss on

 

10



 

disposal of discontinued operations to write off the cumulative translation adjustment related to the liquidated subsidiaries, the Euro Notes and other instruments.

 

4.    INVENTORIES, NET

 

Inventories, net consisted of the following:

 

In thousands

 

 

September 29,
2012

 

December 31,
2011

 

October 1,
2011

 

Raw materials and work in process

 

 

$

195

 

$

230

 

$

1,138

 

Finished goods

 

 

245,383

 

193,113

 

254,655

 

Total inventories, net

 

 

$

245,578

 

$

193,343

 

$

255,793

 

 

5.    PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

In thousands

 

 

September 29,
2012

 

December 31,
2011

 

October 1,
2011

 

Land and buildings (a)

 

 

$

48,893

 

$

72,009

 

$

73,125

 

Machinery and equipment

 

 

229,686

 

233,540

 

230,816

 

Furniture and fixtures

 

 

137,839

 

127,913

 

131,588

 

Leasehold improvements

 

 

257,969

 

249,734

 

268,934

 

 

 

 

674,387

 

683,196

 

704,463

 

Less: Accumulated depreciation and amortization

 

 

449,800

 

444,532

 

449,851

 

Total property and equipment, net

 

 

$

224,587

 

$

238,664

 

$

254,612

 

 

 

 

 

 

 

 

 

(a)

 

The decrease in the balance compared to October 1, 2011 primarily reflected aggregate non-cash impairment charges of $24.6 million related to the Company’s Ohio distribution center and New Jersey corporate office.

 

Depreciation and amortization expense on property and equipment for the nine months ended September 29, 2012 and October 1, 2011 was $42.9 million and $50.1 million, respectively, which included depreciation for property and equipment under capital leases of $2.2 million and $2.9 million, respectively. Depreciation and amortization expense on property and equipment for the three months ended September 29, 2012 and October 1, 2011 was $13.2 million and $16.5 million, respectively, which included depreciation for property and equipment under capital leases of $0.7 million and $1.0 million, respectively. Machinery and equipment under capital leases was $22.6 million as of September 29, 2012, December 31, 2011 and October 1, 2011.

 

11



 

6.     GOODWILL AND INTANGIBLES, NET

 

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

 

In thousands

 

 

Weighted
Average
Amortization
Period

 

September 29, 2012

 

December 31, 2011

 

October 1, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount:

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

4 years

 

 

$

1,479

 

$

1,479

 

$

1,479

 

Customer relationships (a)

 

 

 

13 years

 

 

6,439

 

9,478

 

9,918

 

Merchandising rights (b)

 

 

 

4 years

 

 

17,578

 

17,742

 

28,504

 

Other

 

 

 

4 years

 

 

2,322

 

2,322

 

2,322

 

Subtotal

 

 

 

6 years

 

 

27,818

 

31,021

 

42,223

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

 

 

 

(1,316

)

(1,112

)

(1,023

)

Customer relationships

 

 

 

 

 

 

(2,927

)

(5,426

)

(5,152

)

Merchandising rights

 

 

 

 

 

 

(12,548

)

(12,837

)

(22,924

)

Other

 

 

 

 

 

 

(1,904

)

(1,792

)

(1,754

)

Subtotal

 

 

 

 

 

 

(18,695

)

(21,167

)

(30,853

)

Net:

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

 

 

 

163

 

367

 

456

 

Customer relationships

 

 

 

 

 

 

3,512

 

4,052

 

4,766

 

Merchandising rights

 

 

 

 

 

 

5,030

 

4,905

 

5,580

 

Other

 

 

 

 

 

 

418

 

530

 

568

 

Total amortized intangible assets, net

 

 

 

 

 

 

9,123

 

9,854

 

11,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks (c)

 

 

 

 

 

 

107,500

 

107,500

 

140,988

 

Total intangible assets, net

 

 

 

 

 

 

116,623

 

117,354

 

152,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

 

1,574

 

1,519

 

1,475

 

Total goodwill and intangibles, net

 

 

 

 

 

 

$

118,197

 

$

118,873

 

$

153,833

 

 

 

 

 

 

 

 

 

(a)

 

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

(b)

 

The decrease in the balance compared to October 1, 2011 included non-cash impairment charges 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).

(c)

 

The decrease in the balance compared to October 1, 2011 primarily reflected the sale of the MONET trademark rights in the US and Puerto Rico and the sale of the KENSIE, KENSIE GIRL and MAC & JAC trademarks (see Note 1 – Basis of Presentation).

 

Amortization expense of intangible assets was $2.4 million and $3.4 million for the nine months ended September 29, 2012 and October 1, 2011, respectively, and $0.7 million and $1.2 million for the three months ended September 29, 2012 and October 1, 2011, respectively.

 

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

 

Fiscal Year

 

Amortization Expense

(In millions)

 

 

 

 

2012

 

 

$

3.0

 

2013

 

 

2.5

 

2014

 

 

2.1

 

2015

 

 

1.4

 

2016

 

 

0.7

 

 

12



 

7.    INCOME TAXES

 

During the third quarter of 2012 and 2011, the Company continued to record a full valuation allowance on deferred tax assets in most jurisdictions due to the combination of its history of pretax losses and its inability to carry back tax losses or credits.

 

The Company’s provision for income taxes for the nine and three months ended September 29, 2012 and October 1, 2011 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.

 

The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax jurisdictions include the US, Canada and the United Kingdom. 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 2007. As a result of a 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 expects a reduction in the liability for unrecognized tax benefits by an amount between $17.4 million and $18.5 million within the next 12 months due to the expiration of various statutes of limitation and potential tax settlements. The change in the expected reduction in the liability for unrecognized tax benefits compared to the Company’s previous disclosure is not expected to have a material effect on the Company’s Consolidated Financial Statements. As of September 29, 2012, uncertain tax positions of $103.8 million existed, of which $87.9 million would provide an effective rate impact in the future if subsequently recognized.

 

8.    DEBT AND LINES OF CREDIT

 

Long-term debt consisted of the following:

 

In thousands

 

 

September 29, 2012

 

December 31, 2011

 

October 1, 2011

 

 

 

 

 

 

 

 

 

 

5.0% Euro Notes, due July 2013 (a)

 

 

$

--

 

$

157,139

 

$

296,145

 

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

 

 

28,687

 

60,270

 

77,386

 

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

 

 

384,033

 

220,085

 

220,088

 

Revolving credit facility

 

 

--

 

--

 

143,745

 

Capital lease obligations

 

 

5,489

 

8,821

 

9,899

 

Total debt

 

 

418,209

 

446,315

 

747,263

 

Less: Short-term borrowings (d)

 

 

4,681

 

4,476

 

148,155

 

Convertible Notes (b)(e)

 

 

28,687

 

60,270

 

77,386

 

Long-term debt

 

 

$

384,841

 

$

381,569

 

$

521,722

 

 

 

 

 

 

 

 

 

(a)

 

The change in the balance of these euro-denominated notes reflected the repurchase of the remaining Euro Notes since October 1, 2011 and the impact of changes in foreign currency exchange rates.

(b)

 

The balance at September 29, 2012, December 31, 2011 and October 1, 2011 represented principal of $31.6 million, $69.2 million and $90.0 million, respectively and an unamortized debt discount of $2.9 million, $8.9 million and $12.6 million, respectively. The change in the balance primarily reflected the conversion of $58.4 million aggregate principal amount of Convertible Notes into 17.0 million shares of common stock since October 1, 2011.

(c)

 

The increase in the balance reflected the issuance of $152.0 million aggregate principal amount of Senior Secured Notes (the “Additional Notes”) at 108.25% of par value on June 8, 2012.

(d)

 

At October 1, 2011, the balance consisted primarily of outstanding borrowings under the Company’s amended and restated revolving credit facility and obligations under capital leases and at September 29, 2012 and December 31, 2011, the balance consisted of obligations under capital leases.

(e)

 

The Convertible Notes were reflected as a current liability since they were convertible at September 29, 2012, December 31, 2011 and October 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) Euro Notes. Prior to the sale of an 81.25% interest in the global MEXX business in October 2011 (see Note 1 – Basis of Presentation), 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 15 – 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,

 

13



 

the Company repurchased 100.0 million euro aggregate principal amount of the Euro Notes in a privately-negotiated transaction for total consideration of 100.5 million euro, plus accrued interest.

 

In the first quarter of 2012, in a privately-negotiated transaction, the Company repurchased 40.0 million euro aggregate principal amount of the Euro Notes for total consideration of 40.6 million euro, plus accrued interest. The Company recognized a $0.8 million pretax loss on the extinguishment of debt in the first quarter of 2012.

 

On June 6, 2012, in a privately-negotiated transaction, the Company repurchased 28.6 million euro aggregate principal amount of the Euro Notes for total consideration of 29.6 million euro, plus accrued interest. The Company recognized a $1.3 million pretax loss on the extinguishment of debt in the second quarter of 2012.

 

On July 12, 2012, the Company completed the optional redemption of the remaining 52.9 million euro aggregate principal amount of Euro Notes for 55.4 million euro, plus accrued interest. The redemption was funded by a portion of the net proceeds from the Company’s issuance of Additional Notes in June 2012. The Company recognized a $3.0 million pretax loss on the extinguishment of debt in the third quarter of 2012.

 

Convertible Notes

On June 24, 2009, the Company issued $90.0 million Convertible Senior 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 (as amended to date, the “Amended 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. 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 third quarter of 2012 and are convertible during the fourth 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 is 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 $3.9 million and $6.9 million for the nine months ended September 29, 2012 and October 1, 2011, respectively, and $0.9 million and $2.3 million for three months ended September 29, 2012 and October 1, 2011, 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.

 

On April 3, 2012, holders of $22.6 million aggregate principal amount of the Convertible Notes converted all such outstanding Convertible Notes into 6,493,144 shares of the Company’s common stock. The Company paid accrued interest on the holders’ Convertible Notes through the settlement date in cash. The Company allocated $21.7 million of the consideration to the liability component and $3.4 million to the equity component. The Company recognized a $2.1 million pretax loss on the extinguishment of debt in the first quarter of 2012.

 

14



 

On June 25, 2012, a holder of $15.0 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 4,346,376 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 $14.7 million of the consideration to the liability component and $1.9 million to the equity component. The Company recognized a $1.4 million pretax loss on the extinguishment of debt in the second quarter of 2012.

 

Senior Notes

On April 7, 2011, the Company completed an offering of $220.0 million principal amount of 10.5% Senior Secured Notes (the “Existing Senior Notes,” together with the Additional Notes, the “Senior Notes”). The Company used the net proceeds of $212.9 million from such issuance of the Existing Senior Notes primarily to fund the Tender Offer. The remaining proceeds were used for general corporate purposes. On June 8, 2012, the Company completed the offering of the Additional Notes, at 108.25% of par value. The Company used a portion of the net proceeds of $160.6 million from the offering of the Additional Notes to repay outstanding borrowings under its Amended Facility and to fund the redemption of 52.9 million euro aggregate principal of Euro Notes on July 12, 2012.  The Company will use the remaining proceeds to fund all or a portion of the anticipated purchase of a 51.0% interest in Kate Spade Japan Co., Ltd. (“KSJ”), which is a joint venture that was formed between Sanei International Co., LTD (“Sanei”), a Japanese entity, and Kate Spade LLC, one of the Company’s wholly-owned subsidiaries (see Note 10 – Commitments and Contingencies).  Any remaining net proceeds will be used for general corporate purposes.

 

The Senior Notes mature on April 15, 2019 and 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 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 April 7, 2011 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 April 7, 2011 offering of Existing Senior Notes. As of the date of this filing, the registration statement has not been filed, and the Company is currently required to pay additional interest to the holders of the Existing Senior Notes issued on April 7, 2011 until the obligations under the registration rights agreement are fulfilled. The Company was required to pay additional interest of 0.50% during the 90-day period subsequent to July 8, 2012 and is required to pay additional interest of 0.75% during the 90-day period subsequent to October 6, 2012. If the Company does not complete the exchange offer by January 5, 2013, the interest rate will increase by 1.0%, which is the maximum required by the indenture governing the Existing Senior Notes.

 

Pursuant to a registration rights agreement executed as part of the Additional Notes offering, the Company agreed, on or before October 15, 2012, (i) to use reasonable best efforts to consummate an offer, in exchange for the Existing Senior Notes, for new notes registered with the SEC with substantially identical terms as the Existing Senior Notes; (ii) to use reasonable best efforts to consummate an offer, in exchange for the Additional Notes, new notes registered with the SEC with substantially identical terms as the Additional Notes and to include the Additional Notes in any exchange offer registration statement for the Existing Senior Notes; and (iii) if required, to have a shelf registration statement declared effective with respect to resales of the Additional Notes. The Company will be required to pay additional interest to the holders of the Additional Notes if the obligations under the registration rights agreement are not fulfilled. The Company is required to pay additional interest of 0.25% during the 90-day period subsequent to October 15, 2012; the interest rate increases by 0.25% at the end of each subsequent 90-day period, up to a maximum of 1.0%.

 

Amended Facility

In May 2010, the Company completed a second amendment to and restatement of its Amended Facility, which was subsequently amended in March 2011, September 2011 and November 2011 to permit the various corporate, debt financing, disposal and other transactions that the Company completed. Availability under the Company’s Amended 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 Facility 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 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

 

15



 

Dollar credit line. The Amended Facility 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 Facility, with a spread based on the aggregate availability under the Amended Facility.

 

The Amended Facility 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 Facility (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 Facility when availability under the Amended Facility 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) provided for the inclusion of an intangible asset value of $30.0 million in the borrowing base which declined 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 Facility 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 Facility contains customary events of default clauses and cross-default provisions with respect to the Company’s other outstanding indebtedness, including the Convertible Notes and Senior Notes. The Amended Facility will expire in August 2014, provided that in the event that the remaining Convertible Notes are not refinanced, purchased or defeased prior to March 15, 2014, then the maturity date shall be March 15, 2014. 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.

 

On June 5, 2012, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Amended Facility. The Fifth Amendment, among other things, permits the Company (i) to issue the Additional Notes, (ii) to pay the consideration for the June 6, 2012 Euro Notes repurchase and the July 12, 2012 Euro Notes redemption and (iii) to fund all or a portion of the KSJ buyout, subject to certain tests and conditions.

 

The Company currently believes that the financial institutions under the Amended Facility 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 September 29, 2012, availability under the Company’s Amended Facility was as follows:

 

In thousands

 

Total
Facility
(a)

 

Borrowing
Base
(a)

 

Outstanding
Borrowings

 

Letters of
Credit
Issued

 

Available
Capacity

 

Excess
Capacity
(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility (a) 

 

$350,000

 

$327,693

 

$ --

 

$26,480

 

$301,213

 

$256,213

 

 


 

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

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

 

9.                   FAIR VALUE MEASUREMENTS

 

The Company utilizes the following three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value:

 

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.

 

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.

 

16



 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2012, based on such fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

Total Losses

 

 

 

Net Carrying
Value as of
September 29,

 

Fair Value Measured and Recorded at Reporting Date Using:

 

Nine Months
Ended September 29,

 

Three Months
Ended September 29,

 

In thousands

 

2012

 

Level 1

 

Level 2

 

Level 3

 

2012

 

2012

 

Property and equipment

 

$

23,687

 

$

--

 

$

--

 

$ 23,687

 

$

27,905

 

$

--

 

 

In connection with a change in the pattern of use and likely disposal of the Company’s New Jersey corporate office, an impairment analysis was performed on the associated property and equipment. As a result of a decline in the estimated fair value of the Company’s Ohio distribution center, as well as the decisions to exit 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 Selling, general and administrative expenses (“SG&A”) on the accompanying Condensed Consolidated Statements of Operations.

 

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

 

 

 

 

 

 

 

 

 

 

 

Total Losses

 

 

 

Net Carrying
Value as of

 

Fair Value Measured and Recorded at Reporting Date Using:

 

 

Nine Months
Ended

 

Three Months
Ended

 

In thousands

 

October 1, 2011

 

Level 1

 

Level 2

 

Level 3

 

October 1, 2011

 

October 1, 2011

 

Property and equipment

 

$

21,187

 

$

--

 

$

--

 

$ 21,187

 

$

15,076

 

$

6,318

 

Intangible assets

 

 

12,116

 

 

--

 

 

--

 

12,116

 

 

814

 

 

814

 

 

As a result of the decisions to close the Company’s Ohio distribution center and exit certain JUICY COUTURE and LUCKY BRAND retail locations, 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 Condensed Consolidated Statements of Operations.

 

During the third quarter of 2011, the Company recorded a pretax charge of $191.3 million in Discontinued operations, net of income taxes on the accompanying Condensed Consolidated Statement of Operations to reduce the net carrying value of the MEXX assets and liabilities that were held for sale to fair value, less estimated costs to dispose.

 

The fair values of the Company’s Level 3 Property and equipment, Intangible assets and Assets and liabilities held for sale are based on either a market approach or an income approach using unobservable inputs including the Company’s forecasted cash flows and 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:

 

 

 

September 29, 2012

 

December 31, 2011

 

October 1, 2011

 

In thousands

 

Fair Value

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Carrying Value

 

5.0% Euro Notes, due July 2013 (a)

 

  $

--

 

$

--

 

$

145,491

 

$

157,139

 

$

269,640

 

$

296,145

 

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

 

115,374

 

28,687

 

174,397

 

60,270

 

143,837

 

77,386

 

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

 

420,128

 

384,033

 

234,850

 

220,085

 

222,429

 

220,088

 

Revolving credit facility (b)(c) 

 

--

 

--

 

--

 

--

 

188,883

 

188,883

 

 


 

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

(b)            Borrowings under the Amended Facility bear interest based on market rate; accordingly, its fair value approximates its carrying value.

(c)             Includes $45.1 million of MEXX outstanding borrowings reported as held for sale as of October 1, 2011.

 

17



 

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.

 

10.            COMMITMENTS AND CONTINGENCIES

 

Acquisition

On July 13, 2012, the Company announced that Kate Spade, LLC exercised, on a conditional basis, an option to acquire the remaining 51.0% interest in KSJ from Sanei. The exercise of the option is subject to the satisfaction of a number of conditions, including completion of financial and other due diligence and the execution of a mutually satisfactory joint venture termination agreement. If the conditions are satisfied, the resulting purchase is expected to be completed in the fourth quarter of 2012. The expected purchase price, including debt repayment and related transaction fees, is estimated to be between $45.0 and $50.0 million. Any purchase will be funded by a portion of the net proceeds from the Company’s issuance of Additional Notes in June 2012, together with cash on hand.

 

Buying/Sourcing

During the first quarter of 2009, the Company entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung Limited (“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, Inc. (“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 2011 sales of the KENSIE, KENSIE GIRL and MAC & JAC trademarks resulted in the removal of buying/sourcing for such products sold from the Li & Fung buying/sourcing arrangement. As a result, under its agreement with Li & Fung, the Company refunded $1.8 million of the closing payment received from Li & Fung in the second quarter of 2012. 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.

 

Leases

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 MEXX Canada retail stores (see Note 1 – Basis of Presentation), an aggregate of 153 store leases were assigned to third parties, for which the Company remains secondarily liable for the remaining obligations on 135 such leases. As of September 29, 2012, the future aggregate payments under these leases amounted to $203.1 million and extended to various dates through 2025.

 

Other

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 11 – 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 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 commencing 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 would commence on March 1, 2012, and continue for four years, with a final payment of $1.0 million on June 1, 2016.

 

The Company’s initiative to outsource its distribution function and close the Ohio distribution center has encountered delays, and the Company expects to continue to ship a portion of its merchandise from the Ohio distribution center past the end of the 2012 fiscal year.

 

18



 

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 13 – Additional Financial Information).

 

On June 27, 2012, the Company received notification of Gores’ calculation of the working capital adjustments related to the MEXX Transaction, pursuant to the terms of the agreement. The Company has disputed such calculation and has notified Gores that the adjustment should result instead in a payment to the Company. The Company does not expect that any amount that may be payable to Gores related to such adjustments will have a material adverse effect on its financial position, results of operations, liquidity or cash flows.

 

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 Notes 8 and 21 of Notes to Consolidated Financial Statements in the Company’s 2011 Annual Report on Form 10-K and Notes 10 and 17 of Notes to Condensed Consolidated Financial Statements in the Company’s June 30, 2012 Quarterly Report on Form 10-Q).

 

11.            STREAMLINING INITIATIVES

 

In the third quarter of 2012, the Company initiated actions to reduce staff at JUICY COUTURE.  These actions resulted in charges related to severance and are expected to be completed in the fourth quarter of 2012.

 

In the fourth quarter of 2011, the Company commenced 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 connection with this initiative, in the second quarter of 2012, the Company commenced a reduction of the workforce in its corporate centers in New Jersey and New York. These actions resulted in charges related to severance and asset impairments and are expected to be completed in the fourth quarter of 2012.

 

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.

 

In the second quarter of 2011, the Company initiated actions to close its Ohio distribution center, which were previously expected to be completed in the fourth quarter of 2012. However, due to delays in completing the outsourcing of the Company’s distribution function, the Ohio distribution center will remain open past the end of the 2012 fiscal year, with related restructuring actions completed coincident with the closure of such facility. 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.

 

For the nine months ended September 29, 2012, the Company recorded pretax charges totaling $43.2 million related to these initiatives. The Company expects to pay approximately $16.1 million of accrued streamlining costs in the next 12 months. For the nine months ended October 1, 2011, the Company recorded pretax charges of $49.5 million related to these initiatives, including $2.6 million of contract termination costs, $17.2 million of asset write-downs and disposals, $9.3 million of payroll and related costs and $20.4 million of other costs. Approximately $24.6 million and $17.2 million of these charges were non-cash during the nine months ended September 29, 2012 and October 1, 2011, respectively.

 

For the nine and three months ended September 29, 2012 and October 1, 2011, expenses associated with the Company’s streamlining actions were primarily recorded in SG&A in the Condensed Consolidated Statements of Operations and impacted reportable segments as follows:

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

September 29,
2012
(39 Weeks)

 

October 1,
2011
(39 Weeks)

 

September 29,
2012
 (13 Weeks)

 

October 1,
2011

(13 Weeks)

 

JUICY COUTURE

 

$

14,501

 

$

17,709

 

$

3,062

 

$

2,993

 

LUCKY BRAND

 

10,766

 

7,028

 

1,032

 

2,204

 

KATE SPADE

 

9,695

 

4,513

 

890

 

1,399

 

International-Based Direct Brands (a) 

 

--

 

616

 

--

 

221

 

Adelington Design Group & Other

 

8,195

 

19,661

 

845

 

4,847

 

Total

 

$

43,157

 

$

49,527

 

$

5,829

 

$

11,664

 

 

19



 


 

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

 

A summary rollforward of the liability for streamlining initiatives is as follows:

 

In thousands

 

 

Payroll and
Related Costs

 

Contract
Termination
Costs

 

Asset
Write-Downs

 

Other Costs

 

Total

 

Balance at December 31, 2011

 

 

$

7,416

 

$

17,844

 

$

--

 

$

30,929

 

$

56,189

 

2012 provision

 

 

12,143

 

2,696

 

24,608

 

3,710

 

43,157

 

2012 asset write-downs

 

 

--

 

--

 

(24,608

)

--

 

(24,608

)

Translation difference

 

 

38

 

124

 

--

 

7

 

169

 

2012 spending

 

 

(11,839

)

(14,291

)

--

 

(17,979

)

(44,109

)

Balance at September 29, 2012

 

 

$

7,758

 

$

6,373

 

$

-

 

$

16,667

 

$

30,798

 

 

12.            EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share (“EPS”).

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

September 29,
2012
(39 Weeks)

 

October 1,
2011
(39 Weeks)

 

September 29,
2012
(13 Weeks)

 

October 1,
2011
(13 Weeks)

 

(Loss) income from continuing operations, basic(a)

 

 $

(120,674

)

$

(99,878

)

$

(19,393

)

 $

7,003

 

Convertible Notes interest expense(b)

 

--

 

--

 

--

 

--

 

(Loss) income from continuing operations, diluted(a)

 

 $

(120,674

)

$

(99,878

)

$

(19,393

)

 $

7,003

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

107,692

 

94,443

 

113,109

 

94,483

 

Stock options and nonvested shares(c)(d)

 

--

 

--

 

--

 

840

 

Convertible Notes(a)(b)

 

--

 

--

 

--

 

--

 

Diluted weighted average shares outstanding(a)(b)(c)(d)

 

107,692

 

94,443

 

113,109

 

95,323

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

 $

(1.12

)

$

(1.06

)

$

(0.17

)

 $

0.07

 

(Loss) income from discontinued operations

 

 $

(0.10

)

$

(3.18

)

$

--

 

 $

(2.34

)

Net loss

 

 $

(1.22

)

$

(4.24

)

$

(0.17

)

 $

(2.27

)


 

(a)

Because the Company incurred a loss from continuing operations for the nine and three months ended September 29, 2012 and nine months ended October 1, 2011, approximately 13.7 million, 8.9 million and 25.2 million potentially dilutive shares issuable upon conversion of the Convertible Notes, respectively, were considered antidilutive for such periods, and were excluded from the computation of diluted loss per share.

(b)

Interest expense of $2.3 million and approximately 25.2 million shares issuable upon conversion of the Convertible Notes were considered antidilutive and were excluded from the computation of diluted loss per share for three months ended October 1, 2011.

(c)

Excludes approximately 1.2 million and 0.8 million nonvested shares for the nine and three months ended September 29, 2012 and October 1, 2011, respectively, for which the performance criteria have not yet been achieved.

(d)

Because the Company incurred a loss from continuing operations for the nine and three months ended September 29, 2012 and nine months ended October 1, 2011, all outstanding stock options and nonvested shares are antidilutive for such periods. Accordingly, for the nine and three months ended September 29, 2012 and nine months ended October 1, 2011, approximately 5.9 million, 5.9 million and 7.6 million outstanding stock options, respectively, and approximately 0.5 million, 0.5 million and 1.0 million outstanding nonvested shares, respectively, were excluded from the computation of diluted loss per share.

 

13.            ADDITIONAL FINANCIAL INFORMATION

 

Licensing-Related Transactions

During the fourth quarter of 2011, the Company completed various disposal or sale transactions, including: (i) the sale of the global trademark rights for the LIZ CLAIBORNE family of brands and the trademark rights in the United States and Puerto Rico for the

 

20



 

MONET brand to JCPenney for $267.5 million and (ii) the sale of the DANA BUCHMAN trademark to Kohl’s and the sale of the KENSIE, KENSIE GIRL and MAC & JAC trademarks to an affiliate of Bluestar, for aggregate consideration of $39.8 million.

 

In connection with these transactions, the Company maintains: (i) an exclusive supplier arrangement to provide JCPenney with LIZ CLAIBORNE and MONET branded jewelry; (ii) a royalty free license through July 2020 for the LIZ CLAIBORNE NEW YORK brand, which is sold exclusively at QVC through the 2009 previously existing license between the Company and QVC; (iii) a royalty-free license through July 2020 to use the LIZWEAR brand to design, manufacture and distribute LIZWEAR-branded products to the club store channel; (iv) an exclusive supplier arrangement to provide Kohl’s with DANA BUCHMAN-branded jewelry through October 11, 2013; and (v) an exclusive license to produce and sell jewelry under the KENSIE brand name.

 

On August 11, 2011, the Company amended its long-term license agreement with Elizabeth Arden, Inc. (“Elizabeth Arden”), which included the sale of the trademarks for its former Curve brand and selected other smaller fragrance brands. The amendment also included (i) a lower effective royalty rate associated with the fragrance brands that remain under license, including the JUICY COUTURE and LUCKY BRAND fragrances; (ii) a reduction in the future minimum guaranteed royalties for the term of the license; and (iii) a pre-payment of certain royalties. The Company received $58.4 million in connection with this transaction and recognized a pretax gain on the sale of the trademarks for its former Curve brand and selected other fragrance brands of $15.6 million for the nine and three months ended October 1, 2011.

 

The Company had an exclusive license agreement with an affiliate of Donna Karan International, Inc. (“DKI”) to design, produce, market and sell men’s and women’s jeanswear and activewear and women’s sportswear products in the Western Hemisphere under the “DKNY® Jeans” and “DKNY® Active” marks and logos. On October 11, 2011, the Company agreed to an early termination of the DKNY® Jeans and DKNY® Active license with DKI in exchange for a fee of $8.5 million, including $3.7 million due to DKI in connection with the previously terminated DKNY® Mens Sportswear license. The DKNY® Jeans and DKNY® Active license terminated on January 3, 2012, one year ahead of the scheduled license maturity.

 

Condensed Consolidated Statements of Cash Flows Supplementary Disclosures

During the nine months ended September 29, 2012 and October 1, 2011, net income tax refunds (payments) were not significant. During the nine months ended September 29, 2012 and October 1, 2011, the Company made interest payments of $17.9 million and $30.4 million, respectively. As of September 29, 2012, December 31, 2011 and October 1, 2011, the Company accrued capital expenditures totaling $12.4 million, $6.4 million and $8.1 million, respectively.

 

Depreciation and amortization expense for the nine months ended September 29, 2012 and October 1, 2011 included $8.2 million and $7.2 million, respectively, related to amortization of deferred financing costs.

 

During the nine months ended September 29, 2012, holders of $37.6 million aggregate principal amount of the Convertible Notes converted all such outstanding Convertible Notes into 10,839,520 shares of the Company’s common stock.

 

Related Party Transactions

In June 2011, the Company established a joint venture in China with E-Land Fashion China Holdings, Limited. The joint venture is a Hong Kong limited liability company and its purpose is to market and distribute small leather goods and other fashion products and accessories in China under the KATE SPADE brand. The joint venture operates under the name of KS China Co., Limited (“KSC”) for an initial 10 year period and commenced operations in the fourth quarter of 2011. The Company accounts for its 40.0% interest in KSC under the equity method of accounting. The Company made capital contributions to KSC of $2.5 million in the fourth quarter of 2011 and $5.0 million during the first nine months of 2012. The Company is required to make an additional capital contribution to KSC of $5.5 million in 2013. During the fourth quarter of 2011, KSC reacquired the existing KATE SPADE business in China from Globalluxe.

 

Additionally, the Company agreed that it or one of its affiliates will reacquire existing KATE SPADE businesses in Southeast Asia in 2014 from Globalluxe, with the purchase price based upon a multiple of Globalluxe’s earnings, subject to a cap of $30.0 million.

 

On November 20, 2009, the Company and Sanei established KSJ. The joint venture is a Japanese corporation and its purpose is to market and distribute small leather goods and other fashion products and accessories in Japan under the KATE SPADE brand. The Company accounts for its 49.0% interest in KSJ under the equity method of accounting.

 

The Company’s equity in earnings (losses) of its equity investees was $(0.5) million and $1.5 million in the nine months ended September 29, 2012 and October 1, 2011, respectively, and $(1.5) million and $0.4 million for the three months ended September 29, 2012 and October 1, 2011, respectively, which was included in Other income (expense), net on the accompanying Condensed Consolidated Statements of Operations. As of September 29, 2012, December 31, 2011 and October 1, 2011, Investments in and advances to equity investees amounted to $23.3 million, $19.1 million and $16.3 million, respectively, and was included in Other assets on the accompanying Condensed Consolidated Balance Sheets.

 

21



 

Subsequent to the MEXX Transaction (see Note 1 – Basis of Presentation), the Company retains an 18.75% ownership interest in NewCo and accounts for such investment at cost. The Company’s cost investment was $10.0 million as of September 29, 2012 and December 31, 2011 and was included in Other assets on the accompanying Condensed Consolidated Balance Sheets.

 

14.            SEGMENT REPORTING

 

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 Company’s 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 CODM to evaluate performance and allocate resources. In identifying the Company’s reportable segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, the Company configured its operations into the following four reportable segments, each reflecting the different financial missions, cultural profiles and focal points appropriate for these four reportable segments:

 

·                  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 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.

 

As discussed in Note 1 – Basis of Presentation, on October 31, 2011, the Company completed the sale of 81.25% of its global MEXX business, which was represented by the Company’s former International-Based Direct Brands reportable segment. 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 are reflected in the Company’s 2011 segment results.

 

The Company’s Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources based primarily on the operating income of each reportable segment. The accounting policies of the Company’s reportable segments are the same as those described in Note 1 – Basis of Presentation. There are no inter-segment sales or transfers. The Company also presents its results on a geographic basis based on selling location, between Domestic (wholesale customers, Company-owned specialty retail and outlet stores located in the United States and e-commerce sites) and International (wholesale customers and Company-owned specialty retail, outlet and concession stores located outside of the United States). The Company, as licensor, also licenses to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Operating
(Loss)
Income

 

% of Sales

 

Nine Months Ended September 29, 2012 (39 weeks)

 

 

 

 

 

 

 

 

 

 

JUICY COUTURE

 

$

344,984

 

33.9 

%

 

$

(45,899

)

(13.3

) %

 

LUCKY BRAND

 

324,245

 

31.8 

%

 

(30,083

)

(9.3

) %

 

KATE SPADE

 

289,216

 

28.4 

%

 

14,748

 

5.1

   %

 

Adelington Design Group & Other

 

60,116

 

5.9 

%

 

(9,532

)

(15.9

) %

 

Totals

 

$

1,018,561

 

100.0

%

 

$

(70,766

)

(6.9

) %

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended October 1, 2011 (39 weeks)

 

 

 

 

 

 

 

 

 

 

 

JUICY COUTURE

 

$

369,906

 

34.5 

%

 

$

(17,420

)

(4.7

) %

 

LUCKY BRAND

 

281,298

 

26.3 

%

 

(34,092

)

(12.1

) %

 

KATE SPADE

 

202,769

 

18.9 

%

 

7,381

 

3.6

   %

 

International-Based Direct Brands

 

--

 

-- 

%

 

(8,963

)

--

   %

 

Adelington Design Group & Other

 

217,685

 

20.3 

%

 

(13,341

)

(6.1

) %

 

Totals

 

$

1,071,658

 

100.0 

%

 

$

(66,435

)

(6.2

) %

 

 

22



 

Dollars in thousands

 

Net Sales

 

% to Total

 

Operating
(Loss)
Income

 

% of Sales

 

Three Months Ended September 29, 2012 (13 weeks)

 

 

 

 

 

 

 

 

 

 

JUICY COUTURE

 

$

129,837

 

35.6 

%

 

$

(8,139

)

(6.3

) %

 

LUCKY BRAND

 

111,797

 

30.7 

%

 

(3,249

)

(2.9

) %

 

KATE SPADE

 

101,880

 

27.9 

%

 

8,324

 

8.2

   %

 

Adelington Design Group & Other

 

21,042

 

5.8 

%

 

2,783

 

13.2

   %

 

Totals

 

$

364,556

 

100.0 

%

 

$

(281

)

(0.1

) %

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended October 1, 2011 (13 weeks)

 

 

 

 

 

 

 

 

 

 

 

JUICY COUTURE

 

$

137,435

 

36.1 

%

 

$

2,157

 

1.6

   %

 

LUCKY BRAND

 

100,676

 

26.4 

%

 

(7,838

)

(7.8

) %

 

KATE SPADE

 

75,386

 

19.8 

%

 

4,060

 

5.4

   %

 

International-Based Direct Brands

 

--

 

-- 

%

 

(3,110

)

--

   %

 

Adelington Design Group & Other

 

67,196

 

17.7 

%

 

(931

)

(1.4

) %

 

Totals

 

$

380,693

 

100.0 

%

 

$

(5,662

)

(1.5

) %

 

 

GEOGRAPHIC DATA:

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Operating
(Loss)
Income

 

% of Sales

 

Nine Months Ended September 29, 2012 (39 weeks)

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

972,921

 

95.5 

%

 

$

(61,464

)

(6.3

) %

 

International

 

45,640

 

4.5 

%

 

(9,302

)

(20.4

) %

 

Totals

 

$

1,018,561

 

100.0 

%

 

$

(70,766

)

(6.9

) %

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended October 1, 2011 (39 weeks)

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

1,025,900

 

95.7 

%

 

$

(77,968

)

(7.6

) %

 

International

 

45,758

 

4.3 

%

 

11,533

 

25.2

   %

 

Totals

 

$

1,071,658

 

100.0 

%

 

$

(66,435

)

(6.2

) %

 

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Operating
(Loss)
Income

 

% of Sales

 

Three Months Ended September 29, 2012 (13 weeks)

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

344,147

 

94.4 

%

 

$

(394

)

(0.1

) %

 

International

 

20,409

 

5.6 

%

 

113

 

0.6

   %

 

Totals

 

$

364,556

 

100.0 

%

 

$

(281

)

(0.1

) %

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended October 1, 2011 (13 weeks)

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

$

363,550

 

95.5 

%

 

$

(9,442

)

(2.6

) %

 

International

 

17,143

 

4.5 

%

 

3,780

 

22.1

   %

 

Totals

 

$

380,693

 

100.0 

%

 

$

(5,662

)

(1.5

) %

 

 

There were no significant changes in segment assets during the nine and three months ended September 29, 2012.

 

15.    DERIVATIVE INSTRUMENTS