10-Q 1 a14-7983_110q.htm 10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x                                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

April 5, 2014

or

o                                    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from..................................................................................to..................................................................................

 

Commission file number:

1-10689

 

KATE SPADE & COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-2842791

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer
Identification No.)

 

 

2 Park Avenue, New York, New York

 

10016

(Address of principal executive offices)

 

(Zip Code)

 

 

(212) 354-4900

 

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o  Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x

 

The number of shares of the Company’s Common Stock, par value $1.00 per share, outstanding at May 2, 2014 was 126,546,550.

 



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KATE SPADE & COMPANY

INDEX TO FORM 10-Q

April 5, 2014

(Unaudited)

 

 

 

PAGE
NUMBER

 

 

 

 

PART I -

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of April 5, 2014, December 28, 2013 and March 30, 2013

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Month Periods Ended April 5, 2014 and March 30, 2013

 

5

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Month Periods Ended April 5, 2014 and March 30, 2013

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended April 5, 2014 and March 30, 2013

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8 – 37

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

38 – 50

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

50

 

 

 

 

Item 4.

Controls and Procedures

 

50 – 51

 

 

 

 

PART II -

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

51

 

 

 

 

Item 1A.

Risk Factors

 

51

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

Item 5.

Other Information

 

52

 

 

 

 

Item 6.

Exhibits

 

53

 

 

 

 

SIGNATURES

 

54

 



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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Statements contained in, or incorporated by reference into, this Form 10-Q, future filings by us with the Securities and Exchange Commission, our press releases, and oral statements made by, or with the approval of, our authorized personnel, that relate to our future performance or future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements are indicated by words or phrases such as “intend,” “anticipate,” “plan,” “estimate,” “target,” “aim,” “forecast,” “project,” “expect,” “believe,” “we are optimistic that we can,” “current visibility indicates that we forecast,” “contemplation” or “currently envisions” and similar phrases.

 

Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:

 

·                  our ability to complete the transition to a mono-brand business centered on the KATE SPADE family of brands, including our ability to successfully complete the transition of our management and operations;

·                  our ability to operate as a mono-brand business and to successfully implement our long-term strategic plans;

·                  general economic conditions in the United States, Asia, Europe and other parts of the world;

·                  levels of consumer confidence, consumer spending and purchases of discretionary items, including fashion apparel and related products, such as ours;

·                  issues related to our current level of debt, including an inability to pursue certain business strategies because of the restrictive covenants in the agreements governing our debt and our potential inability to obtain the capital resources needed to operate and grow our business;

·                  restrictions in the credit and capital markets, which would impair our ability to access additional sources of liquidity, if needed;

·                  changes in the cost of raw materials, occupancy, labor, advertising and transportation which could impact prices of our products;

·                  our ability to expand into markets outside of the US, such as India, Russia, South East Asia, and South America, as well as continued expansion in China, Japan and Brazil, including our ability to promote brand awareness in our international markets, find suitable partners in certain of those markets and hire and retain key employees for those markets;

·                  our ability to maintain targeted profit margins and levels of promotional activity;

·                  our ability to expand our retail footprint with profitable store locations;

·                  our ability to achieve the business plan for our KATE SPADE SATURDAY business, including our ability to attract new customers and achieve favorable margins;

·                  our ability to implement operational improvements and realize economies of scale in finished product and raw material costs in connection with growth in our business;

·                  our ability to expand the KATE SPADE family of brands into new product categories;

·                  our ability to successfully implement our marketing initiatives;

·                  risks associated with the sale of the Lucky Brand business, including our ability to collect the full amount of principal and interest due and owing pursuant to a three year note issued by Lucky Brand Dungarees, LLC, an affiliate of Leonard Green & Partners, L.P., to us as partial consideration for the purchase of the Lucky Brand business and our ability to comply with our transition service requirements;

·                  risks associated with the sale of the JUICY COUTURE intellectual property to Authentic Brands Group, including our ability to complete the transition plan for the JUICY COUTURE business in a satisfactory manner and to manage the associated transition costs, the impact of the transition plan and the announced future plans for the JUICY COUTURE brand on our relationships with our employees, our major customers, vendors and landlords and unanticipated expenses and charges that may occur as a result of the transition plan and the announced future plans for the JUICY COUTURE brand, such as litigation risks, including litigation regarding employment and workers’ compensation;

·                  our dependence on a limited number of large US department store customers, and the risk of consolidations, restructurings, bankruptcies and other ownership changes in the retail industry and financial difficulties at our larger department store customers;

 



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·                  whether we will be successful operating the KATE SPADE businesses in Japan and Southeast Asia and the risks associated with such operations, including with respect to the conclusion of transition services provided by our former operating partners;

·                  risks associated with decreased diversification of our business as a result of the reduction of our brand portfolio to the KATE SPADE and Adelington Design Group businesses;

·                  our ability to anticipate and respond to constantly changing consumer demands and tastes and fashion trends, across multiple brands, product lines, shopping channels and geographies;

·                  our ability to attract and retain talented, highly qualified executives, and maintain satisfactory relationships with our employees;

·                  our ability to adequately establish, defend and protect our trademarks and other proprietary rights;

·                  risks associated with the dependence of our Adelington Design Group business on third party arrangements and partners;

·                  the impact of the highly competitive nature of the markets within which we operate, both within the US and abroad;

·                  our reliance on independent foreign manufacturers, including the risk of their failure to comply with safety standards or our policies regarding labor practices;

·                  risks associated with our buying/sourcing agreement with Li & Fung Limited, which results in a single third party foreign buying/sourcing agent for a significant portion of our products;

·                  risks associated with our arrangement to continue to operate the Ohio distribution facility with a third party operations and labor management company that provides distribution operations services, including risks related to increased operating expenses, systems capabilities and operating under a third party arrangement;

·                  a variety of legal, regulatory, political and economic risks, including risks related to the importation and exportation of product, tariffs and other trade barriers;

·                  our ability to adapt to and compete effectively in the current quota environment in which general quota has expired on apparel products, but political activity seeking to re-impose quota has been initiated or threatened;

·                  our exposure to currency fluctuations;

·                  risks associated with material disruptions in our information technology systems, both owned and licensed, and with our third party e-commerce platforms and operations;

·                  risks associated with data security, including privacy breaches;

·                  risks associated with credit card fraud and identity theft;

·                  risks associated with third party service providers, both domestic and overseas, including service providers in the area of e-commerce;

·                  limitations on our ability to utilize all or a portion of our US deferred tax assets if we experience an “ownership change”; and

·                  the outcome of current and future litigation and other proceedings in which we are involved.

 

The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All subsequent written and oral forward-looking statements concerning the matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are qualified by these cautionary statements.

 

Forward-looking statements are based on current expectations only and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions, including those described in “Item 1A Risk Factors” in this report as well as in our 2013 Annual Report on Form 10-K. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition, some factors are beyond our control. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 



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4

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

 

(Unaudited)

 

 

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128,477

 

$

130,222

 

$

7,404

 

Accounts receivable - trade, net

 

87,053

 

89,554

 

102,490

 

Inventories, net

 

210,110

 

184,634

 

219,974

 

Deferred income taxes

 

174

 

218

 

1,490

 

Other current assets

 

53,918

 

45,031

 

50,829

 

Assets held for sale

 

11,282

 

202,054

 

--

 

Total current assets

 

491,014

 

651,713

 

382,187

 

 

 

 

 

 

 

 

 

Property and Equipment, Net

 

155,783

 

149,071

 

220,664

 

Goodwill

 

71,914

 

49,111

 

54,706

 

Intangibles, Net

 

94,270

 

90,678

 

128,340

 

Deferred Income Taxes

 

56

 

57

 

133

 

Note Receivable

 

85,877

 

--

 

--

 

Other Assets

 

37,724

 

36,881

 

40,251

 

Total Assets

 

$

936,638

 

$

977,511

 

$

826,281

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Short-term borrowings

 

$

5,322

 

$

3,407

 

$

47,268

 

Convertible Senior Notes

 

--

 

--

 

8,150

 

Accounts payable

 

118,605

 

142,654

 

146,665

 

Accrued expenses

 

173,241

 

200,178

 

197,112

 

Income taxes payable

 

1,588

 

2,631

 

486

 

Deferred income taxes

 

--

 

--

 

231

 

Liabilities held for sale

 

7,628

 

96,370

 

--

 

Total current liabilities

 

306,384

 

445,240

 

399,912

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

390,273

 

390,794

 

383,312

 

Other Non-Current Liabilities

 

156,930

 

157,335

 

191,081

 

Deferred Income Taxes

 

16,742

 

16,624

 

22,158

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

Stockholders’ Equity (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

 

181,538

 

155,984

 

148,446

 

Retained earnings

 

1,033,865

 

1,020,633

 

950,040

 

Accumulated other comprehensive loss

 

(19,574

)

(20,879

)

(14,148

)

 

 

1,372,266

 

1,332,175

 

1,260,775

 

Common stock in treasury, at cost 49,900,684, 53,501,234 and 56,488,599 shares

 

(1,305,957

)

(1,364,657

)

(1,430,957

)

Total stockholders’ equity (deficit)

 

66,309

 

(32,482

)

(170,182

)

Total Liabilities and Stockholders’ Equity (Deficit)

 

$

936,638

 

$

977,511

 

$

826,281

 

 

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

 



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5

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per common share data)

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

 

 

 

 

 

 

Net Sales

 

 

$

328,091

 

 

 

$

245,687

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

146,624

 

 

 

104,631

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

181,467

 

 

 

141,056

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

 

224,549

 

 

 

163,091

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(43,082

)

 

 

(22,035

)

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

 

(251

)

 

 

(1,905

)

 

 

 

 

 

 

 

 

 

 

 

Loss on sales of trademarks

 

 

--

 

 

 

(1,274

)

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

--

 

 

 

(1,108

)

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(9,522

)

 

 

(12,341

)

 

 

 

 

 

 

 

 

 

 

 

Loss Before Provision for Income Taxes

 

 

(52,855

)

 

 

(38,663

)

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

1,807

 

 

 

954

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

 

(54,662

)

 

 

(39,617

)

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes

 

 

100,832

 

 

 

(12,557

)

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

$

46,170

 

 

 

$

(52,174

)

 

 

 

 

 

 

 

 

 

 

 

(Loss) Earnings per Share:

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

 

$

(0.44

)

 

 

$

(0.33

)

 

Net Income (Loss)

 

 

$

0.37

 

 

 

$

(0.44

)

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares, Basic and Diluted

 

 

124,403

 

 

 

119,032

 

 

 

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

 



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6

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(In thousands)

 

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

 

 

 

 

 

 

Net Income (Loss)

 

 

$

46,170

 

 

 

$

(52,174

)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment, net of income taxes of $0

 

 

1,685

 

 

 

(4,545

)

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges, net of income taxes of $(232) and $288, respectively

 

 

(380

)

 

 

471

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

 

$

47,475

 

 

 

$

(56,248

)

 

 

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

 



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7

 

KATE SPADE & COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net Income (Loss)

 

 

$

46,170

 

 

 

$

(52,174

)

 

Adjustments to arrive at loss from continuing operations

 

 

(100,832

)

 

 

12,557

 

 

Loss from continuing operations

 

 

(54,662

)

 

 

(39,617

)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,078

 

 

 

13,869

 

 

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

 

 

1,859

 

 

 

1,205

 

 

Share-based compensation

 

 

20,324

 

 

 

1,787

 

 

Loss on sales of trademarks

 

 

--

 

 

 

1,274

 

 

Loss on extinguishment of debt

 

 

--

 

 

 

1,108

 

 

Foreign currency (gains) losses, net

 

 

(874

)

 

 

6,242

 

 

Other, net

 

 

307

 

 

 

322

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable – trade, net

 

 

(685

)

 

 

18,934

 

 

Increase in inventories, net

 

 

(23,943

)

 

 

(7,399

)

 

(Increase) decrease in other current and non-current assets

 

 

(4,594

)

 

 

32

 

 

Decrease in accounts payable

 

 

(17,604

)

 

 

(12,721

)

 

Decrease in accrued expenses and other non-current liabilities

 

 

(19,386

)

 

 

(36,757

)

 

Net change in income tax assets and liabilities

 

 

(1,057

)

 

 

694

 

 

Net cash used in operating activities of discontinued operations

 

 

(17,353

)

 

 

(15,058

)

 

Net cash used in operating activities

 

 

(98,590

)

 

 

(66,085

)

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

Net payments for dispositions

 

 

(7,747

)

 

 

--

 

 

Purchases of property and equipment

 

 

(27,921

)

 

 

(15,465

)

 

Payments for purchases of businesses

 

 

(32,268

)

 

 

--

 

 

Payments for in-store merchandise shops

 

 

(786

)

 

 

(232

)

 

Investments in and advances to equity investee

 

 

--

 

 

 

(3,000

)

 

Other, net

 

 

66

 

 

 

(52

)

 

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

 

 

138,454

 

 

 

(7,801

)

 

Net cash provided by (used in) investing activities

 

 

69,798

 

 

 

(26,550

)

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit agreement

 

 

1,908

 

 

 

136,385

 

 

Repayment of borrowings under revolving credit agreement

 

 

--

 

 

 

(92,301

)

 

Principal payments under capital lease obligations

 

 

(98

)

 

 

(1,161

)

 

Proceeds from exercise of stock options

 

 

30,336

 

 

 

395

 

 

Payment of deferred financing fees

 

 

(982

)

 

 

(444

)

 

Net cash provided by financing activities

 

 

31,164

 

 

 

42,874

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(533

)

 

 

(2,237

)

 

 

 

 

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

 

1,839

 

 

 

(51,998

)

 

Cash and Cash Equivalents at Beginning of Period

 

 

130,222

 

 

 

59,402

 

 

Cash and Cash Equivalents at End of Period

 

 

132,061

 

 

 

7,404

 

 

Less: Cash and Cash Equivalents Held for Sale

 

 

3,584

 

 

 

--

 

 

Cash and Cash Equivalents

 

 

$

128,477

 

 

 

$

7,404

 

 

 

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

 



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8

 

KATE SPADE & COMPANY

 

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 Kate Spade & Company 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 2013 Annual Report on Form 10-K. Information presented as of December 28, 2013 is derived from audited financial statements.

 

Effective February 25, 2014, the Company completed its previously announced corporate name change from Fifth & Pacific Companies, Inc. to reflect the Company’s mono-brand focus following the sales of the Lucky Brand business and the sale of its JUICY COUTURE brandname and related intellectual property assets (the “Juicy Couture IP”). The Company’s stock trades on the New York Stock Exchange (“NYSE”) as Kate Spade & Company under the symbol “KATE.”

 

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, e-commerce, concessions, wholesale apparel, wholesale non-apparel and licensing. The three 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 three reportable segments, as follows:

 

·                  KATE SPADE segment – consists of the specialty retail, outlet, e-commerce, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags) and licensing operations of the kate spade new york, KATE SPADE SATURDAY and JACK SPADE brands.

·                  Adelington Design Group segment – consists of: (i) exclusive arrangements to supply jewelry for the 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.

·                  JUICY COUTURE segment – consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of the JUICY COUTURE brand. The Company continues wind-down operations of the JUICY COUTURE brand, pursuant to the license agreement with ABG – Juicy LLC, an affiliate of Authentic Brands Group (“ABG”), as discussed below.

 

On February 5, 2014, the Company, through its Kate Spade, LLC and Kate Spade Hong Kong Ltd. subsidiaries, reacquired existing KATE SPADE businesses in Southeast Asia from Globalluxe Kate Spade HK Limited (“Globalluxe”) for $32.3 million, including $2.3 million for working capital and other previously agreed adjustments (see Note 2 – Acquisition).

 

On February 3, 2014, the Company sold 100.0% of the capital stock of Lucky Brand Dungarees, Inc. (“Lucky Brand”) to LBD Acquisition Company, LLC (“LBD Acquisition”), a Delaware limited liability company and affiliate of Leonard Green & Partners, L.P. (“Leonard Green”), for an aggregate payment of $225.0 million, comprised of $140.0 million cash consideration and a three-year $85.0 million note (the “Lucky Brand Note”) issued by Lucky Brand Dungarees, LLC (“Lucky Brand LLC”) at closing, subject to working capital and other adjustments (the “Lucky Brand Transaction”). The assets and liabilities of the former Lucky Brand business were

 



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segregated and reported as held for sale as of December 28, 2013 (see Note 3 – Discontinued Operations). The Lucky Brand Note matures in February 2017 and is guaranteed by substantially all of Lucky Brand LLC’s subsidiaries. The Lucky Brand Note is secured by second-priority lien on all accounts receivable and inventory of Lucky Brand LLC and the guarantor subsidiaries and a first-priority lien on all other collateral of Lucky Brand LLC and the guarantors. The accounts receivable and inventory secure Lucky Brand LLC’s asset-based revolving loan facility on a first-priority basis, and the other collateral secures that loan facility on a second-priority basis. The principal amount of the Lucky Brand Note increases by $5.0 million per year in equal monthly increments and bears cash interest of $8.0 million per year, payable semiannually in arrears. The Lucky Brand Note is prepayable at any time by Lucky Brand LLC without a prepayment premium, subject to certain restrictions as to the minimum amount that may be prepaid without the Company’s consent.

 

On November 6, 2013, the Company completed the sale of the Juicy Couture IP to ABG for a total purchase price of $195.0 million. An additional payment may be payable to the Company in an amount of up to $10.0 million if certain conditions regarding future performance are achieved. The Juicy Couture IP is licensed back to the Company until December 31, 2014 to accommodate the wind-down of operations. JUICY COUTURE will pay guaranteed minimum royalties to ABG of $10.0 million during the term of the wind-down license. On March 29, 2014, the Company entered into an agreement to sell its JUICY COUTURE business in Europe to an operating partner of ABG for $8.6 million, subject to working capital adjustments. The transaction closed on April 7, 2014.

 

The activities of the Company’s former Lucky Brand business and its JUICY COUTURE business in Europe have been segregated and reported as discontinued operations for all periods presented. The Company continues activities with certain JUICY COUTURE operations and therefore the remaining activities of that brand have not been presented as discontinued operations.

 

Summarized financial data for the aforementioned brands that are classified as discontinued operations are provided in Note 3 – 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

 

Kate Spade & Company is engaged primarily in the design and marketing of a broad range of accessories and apparel. The Company’s fiscal year ends on the Saturday closest to December 31. The 2014 fiscal year, ending January 3, 2015, reflects a 53-week period, resulting in a 14-week, three-month period for the first quarter. The 2013 fiscal year, ending December 28, 2013, reflects a 52-week period, resulting in a 13-week, three-month period for the first 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 28, 2013.

 

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 first quarter of 2014, there were no

 



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significant changes in the critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

On December 29, 2013, the first day of the Company’s 2014 fiscal year, the Company adopted new accounting guidance on the presentation of unrecognized tax benefits, which requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or that the tax law of the applicable jurisdiction does not require the entity to use; and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of the new accounting guidance did not affect the Company’s financial position, results of operations or cash flows.

 

 

2.    ACQUISITION

 

On February 5, 2014, the Company, through its Kate Spade, LLC and Kate Spade Hong Kong Ltd. subsidiaries, reacquired existing KATE SPADE businesses in Southeast Asia from Globalluxe for a purchase price of $32.3 million, including $2.3 million for working capital and other previously agreed adjustments.

 

In Hong Kong, Macau and Taiwan, the Company directly owns and operates the related businesses previously operated by Globalluxe. The Company’s distribution partner operates the KATE SPADE businesses in Singapore, Malaysia and Indonesia through distribution agreements and funded approximately $1.5 million to Globalluxe to acquire operating assets in certain regions. Globalluxe and its distribution partners operated six stores and one concession in Hong Kong, one concession in Taiwan, one store in Macau, two stores and one concession in Singapore, two stores in Malaysia, three stores and one concession in Indonesia, and two stores and six concessions in Thailand. Prior to the transaction, the Company maintained wholesale distribution to Globalluxe. Following the transaction, the Company maintains wholesale distribution to distributors who operate the businesses in Singapore, Malaysia, Indonesia and Thailand and recognizes direct-to-consumer sales in Hong Kong, Macau and Taiwan.

 

The allocation of the purchase price to the assets acquired and liabilities assumed was based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the net tangible and identifiable intangible assets is reflected as goodwill. Accordingly, the Company recorded $21.8 million of goodwill, which is reflected in the KATE SPADE reportable segment. The recorded goodwill is deductible for income tax purposes.

 

The following table summarizes the estimated fair values of the assets acquired as of the acquisition date:

 

In thousands

 

 

 

 

Assets acquired:

 

 

 

Current assets

 

$

3,549

 

Property and equipment, net

 

1,267

 

Goodwill and intangibles, net

 

26,592

 

Other assets

 

860

 

Total assets acquired

 

$

32,268

 

 

The following table presents details of the acquired intangible assets:

 

In thousands

 

 

Useful Life

 

Estimated Fair Value

 

Reacquired distribution rights

 

1.7 years

 

$           4,500

 

 

Retail customer list

 

3 years

 

256

 

 

 



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3.    DISCONTINUED OPERATIONS

 

The Company completed the sale of Lucky Brand in February 2014. As discussed above, on April 7, 2014, the Company sold its JUICY COUTURE business in Europe.

 

The components of Assets held for sale and Liabilities held for sale related to the JUICY COUTURE business in Europe as of April 5, 2014 and the former Lucky Brand business as of December 28, 2013 were as follows:

 

In thousands

 

 

April 5, 2014

 

December 28, 2013  

Assets held for sale:

 

 

 

 

Cash and cash equivalents

 

$

3,584

 

 $

163

 

Accounts receivable – trade, net

 

1,400

 

41,709

 

Inventories, net

 

2,618

 

80,503

 

Property and Equipment, net

 

601

 

68,533

 

Other assets

 

3,079

 

11,146

 

Assets held for sale

 

$

11,282

 

 $

202,054

 

Liabilities held for sale:

 

 

 

 

 

Accounts payable

 

$

4,017

 

 $

52,977

 

Accrued expenses

 

1,039

 

27,773

 

Other liabilities

 

2,572

 

15,620

 

Liabilities held for sale

 

$

7,628

 

 $

96,370

 

 

The Company recorded pretax income (charges) of $105.3 million and $(12.7) million during the three months ended April 5, 2014 and March 30, 2013, 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:

 

 

 

Three Months Ended

 

In thousands

 

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

 

 

 

 

 

 

Net sales

 

$

46,109

 

$

126,088

 

 

 

 

 

 

 

(Loss) income before provision for income taxes

 

$

(3,785

)

$

245

 

Provision for income taxes

 

639

 

56

 

(Loss) income from discontinued operations, net of income taxes

 

$

(4,424

)

$

189

 

 

 

 

 

 

 

Gain (loss) on disposal of discontinued operations, net of income taxes

 

$

105,256

 

$

(12,746

)

 

For the three months ended April 5, 2014 and March 30, 2013, the Company recorded charges of $7.5 million, which included $5.2 million of share-based compensation expense, and $0.1 million, respectively, related to its streamlining initiatives within Discontinued operations, net of income taxes.

 



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4.    STOCKHOLDERS’ EQUITY (DEFICIT)

 

Activity for the three months ended April 5, 2014 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 28, 2013

 

 

$

155,984

 

 

$

1,020,633

 

$

(1,364,657

)

Net income

 

 

--

 

 

46,170

 

--

 

Exercise of stock options

 

 

--

 

 

(24,111

)

54,447

 

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

 

 

--

 

 

(8,827

)

4,253

 

Share-based compensation

 

 

25,554

 

 

--

 

--

 

Balance as of April 5, 2014

 

 

$

181,538

 

 

$

1,033,865

 

$

(1,305,957

)

 

Activity for the three months ended March 30, 2013 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 29, 2012

 

 

$

147,018

 

 

$

1,071,551

 

$

(1,511,862

)

Net loss

 

 

--

 

 

(52,174

)

--

 

Exercise of stock options

 

 

--

 

 

(1,390

)

1,785

 

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

 

 

--

 

 

(2,785

)

2,028

 

Share-based compensation

 

 

2,080

 

 

--

 

--

 

Exchange of Convertible Senior Notes, net

 

 

(652

)

 

(65,162

)

77,092

 

Balance as of March 30, 2013

 

 

$

148,446

 

 

$

950,040

 

$

(1,430,957

)

 

Accumulated other comprehensive (loss) income consisted of the following:

 

In thousands

 

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

Cumulative translation adjustment, net of income taxes of $0

 

 

$

(20,177

)

 

$

(21,862

)

 

$

(14,619

)

Unrealized gains on cash flow hedging derivatives, net of income taxes of $370, $602 and $288, respectively

 

 

603

 

 

983

 

 

471

 

Accumulated other comprehensive loss, net of income taxes

 

 

$

(19,574

)

 

$

(20,879

)

 

$

(14,148

)

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended April 5, 2014:

 

In thousands

 

 

Cumulative Translation
Adjustment

 

Unrealized Gains on
Cash Flow Hedging
Derivatives

 

Balance as of December 28, 2013

 

 

$

(21,862

)

 

 

$

983

 

 

Other comprehensive income (loss) before reclassification

 

 

1,685

 

 

 

(141

)

 

Amounts reclassified from accumulated other comprehensive income

 

 

--

 

 

 

(239

)

 

Net current-period other comprehensive income (loss)

 

 

1,685

 

 

 

(380

)

 

Balance as of April 5, 2014

 

 

$

(20,177

)

 

 

$

603

 

 

 



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The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended March 30, 2013:

 

In thousands

 

 

Cumulative Translation
Adjustment

 

Unrealized Gains on
Cash Flow Hedging
Derivatives

 

Balance as of December 29, 2012

 

 

$

(10,074

)

 

 

$

--

 

 

Other comprehensive (loss) income before reclassification

 

 

(4,545

)

 

 

377

 

 

Amounts reclassified from accumulated other comprehensive income

 

 

--

 

 

 

94

 

 

Net current-period other comprehensive (loss) income

 

 

(4,545

)

 

 

471

 

 

Balance as of March 30, 2013

 

 

$

(14,619

)

 

 

$

471

 

 

 

 

5.    INVENTORIES, NET

 

Inventories, net consisted of the following:

 

In thousands

 

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

Raw materials and work in process

 

$

1,569

 

$

1,028

 

$

1,087

 

Finished goods

 

208,541

 

183,606

 

218,887

 

Total inventories, net

 

$

210,110

 

$

184,634

 

$

219,974

 

 

 

6.    PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

In thousands

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

Land and buildings (a)

 

$

9,300

 

$

9,300

 

$

45,988

 

Machinery and equipment (b)

 

170,382

 

171,811

 

209,412

 

Furniture and fixtures (b)

 

84,107

 

83,753

 

133,430

 

Leasehold improvements (b)

 

179,620

 

173,207

 

257,773

 

 

 

443,409

 

438,071

 

646,603

 

Less: Accumulated depreciation and amortization (b)

 

287,626

 

289,000

 

425,939

 

Total property and equipment, net

 

$

155,783

 

$

149,071

 

$

220,664

 


 

(a)

The decrease in the balance compared to March 30, 2013 primarily reflected the sale-leaseback of the Company’s North Bergen, NJ office and West Chester, OH distribution center (the “Ohio Facility”).

(b)

The decrease in the balance compared to March 30, 2013 primarily reflected the sale of the former Lucky Brand business and non-cash impairment charges recorded in the fourth quarter of 2013 associated with the wind-down of the JUICY COUTURE operations.

 

Depreciation and amortization expense on property and equipment for the three months ended April 5, 2014 and March 30, 2013 was $16.2 million and $14.0 million, respectively, which included depreciation for property and equipment under capital leases of $0.2 million and $0.5 million, respectively. Property and equipment under capital leases was $9.3 million, $9.3 million and $22.6 million as of April 5, 2014, December 28, 2013 and March 30, 2013, respectively.

 

During the third quarter of 2013, the Company sold the Ohio Facility for net proceeds of $20.3 million and entered into a sale-leaseback arrangement with the buyer for a 10-year term, which was classified as an operating lease. The Company realized a gain of $9.5 million associated with the sale-leaseback, which has been deferred and will be recognized as a reduction to Selling, general & administrative expenses (“SG&A”) over the lease term.

 

During the second quarter of 2013, the Company sold its North Bergen, NJ office for net proceeds of $8.7 million. The Company entered into a sale-leaseback arrangement with the buyer for a 12-year term with two five-year renewal options, which was classified as a capital lease (see Note 11 – Commitments and Contingencies).

 



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7.     GOODWILL AND INTANGIBLES, NET

 

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

 

In thousands

 

Weighted
Average
Amortization
Period

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

Gross carrying amount:

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

5 years

 

 

$

2,000

 

 

$

2,000

 

 

$

1,479

 

 

Customer relationships

 

11 years

 

 

7,545

 

 

7,273

 

 

7,370

 

 

Merchandising rights (a)

 

4 years

 

 

6,856

 

 

6,087

 

 

15,407

 

 

Reacquired rights (b)

 

2 years

 

 

16,037

 

 

11,299

 

 

12,607

 

 

Other

 

4 years

 

 

2,322

 

 

2,322

 

 

2,322

 

 

Subtotal

 

 

 

 

34,760

 

 

28,981

 

 

39,185

 

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

 

(200

)

 

(100

)

 

(1,396

)

 

Customer relationships

 

 

 

 

(4,245

)

 

(4,022

)

 

(3,374

)

 

Merchandising rights

 

 

 

 

(2,918

)

 

(2,595

)

 

(9,845

)

 

Reacquired rights

 

 

 

 

(5,898

)

 

(4,394

)

 

(1,751

)

 

Other

 

 

 

 

(2,129

)

 

(2,092

)

 

(1,979

)

 

Subtotal

 

 

 

 

(15,390

)

 

(13,203

)

 

(18,345

)

 

Net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

 

1,800

 

 

1,900

 

 

83

 

 

Customer relationships

 

 

 

 

3,300

 

 

3,251

 

 

3,996

 

 

Merchandising rights

 

 

 

 

3,938

 

 

3,492

 

 

5,562

 

 

Reacquired rights

 

 

 

 

10,139

 

 

6,905

 

 

10,856

 

 

Other

 

 

 

 

193

 

 

230

 

 

343

 

 

Total amortized intangible assets, net

 

 

 

 

19,370

 

 

15,778

 

 

20,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned trademarks (c)

 

 

 

 

74,900

 

 

74,900

 

 

107,500

 

 

Total intangible assets

 

 

 

 

$

94,270

 

 

$

90,678

 

 

$

128,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (b)

 

 

 

 

$

71,914

 

 

$

49,111

 

 

$

54,706

 

 


(a)

The decrease in the balance compared to March 30, 2013 primarily reflected the sale of the Lucky Brand business and the impairment of the JUICY COUTURE merchandising rights.

(b)

The increase in the balance compared to March 30, 2013 primarily reflected the reacquired existing KATE SPADE businesses in Southeast Asia (see Note 2 – Acquisition).

(c)

The decrease in the balance compared to March 30, 2013 primarily reflected the sale of the Juicy Couture IP (see Note 1 – Basis of Presentation), a non-cash impairment charge of $3.3 million in the Company’s Adelington Design Group segment related to the TRIFARI trademark and the reclassification of the remaining carrying value of such trademark to an amortized intangible asset in the third quarter of 2013.

 

Amortization expense of intangible assets was $2.2 million and $1.6 million for the three months ended April 5, 2014 and March 30, 2013, respectively.

 



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

 

Fiscal Year

 

Amortization Expense

 

(In millions)

 

 

 

2014

 

$

7.9

 

 

2015

 

 

6.7

 

 

2016

 

 

1.7

 

 

2017

 

 

1.3

 

 

2018

 

 

0.8

 

 

 

The changes in carrying amount of goodwill for the three months ended April 5, 2014 were as follows:

 

In thousands

 

KATE SPADE

 

Adelington
Design Group

 

Total

Balance as of December 28, 2013

 

 

$

47,664

 

 

 

$

1,447

 

 

 

$

49,111

 

Acquisition of existing KATE SPADE businesses in Southeast Asia

 

 

21,836

 

 

 

--

 

 

 

21,836

 

Translation adjustment

 

 

1,003

 

 

 

(36

)

 

 

967

 

Balance as of April 5, 2014

 

 

$

70,503

 

 

 

$

1,411

 

 

 

$

71,914

 

 

The changes in carrying amount of goodwill for the three months ended March 30, 2013 were as follows:

 

In thousands

 

KATE SPADE

 

Adelington
Design Group

 

Total

Balance as of December 29, 2012

 

 

$

58,669

 

 

 

$

1,554

 

 

 

$

60,223

 

Translation adjustment

 

 

(5,486

)

 

 

(31

)

 

 

(5,517

)

Balance as of March 30, 2013

 

 

$

53,183

 

 

 

$

1,523

 

 

 

$

54,706

 

 

 

8.    INCOME TAXES

 

During the first quarter of 2014 and 2013, 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 three months ended April 5, 2014 and March 30, 2013 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, Japan, United Kingdom, Canada and Brazil. 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 2009. As a result of a 2009 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. In addition, the IRS and other taxing authorities can also subject the Company’s net operating loss carryforwards to further review when such net operation loss carryforwards are utilized.

 

The Company expects a reduction in the liability for unrecognized tax benefits by an amount between $71.7 million and $73.8 million within the next 12 months due to either settlement or the expiration of the statute of limitations. As of April 5, 2014, uncertain tax positions of $84.1 million exist, which would provide an effective rate impact in the future if subsequently recognized.

 



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9.    DEBT AND LINES OF CREDIT

 

Long-term debt consisted of the following:

 

In thousands

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

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

 

$

--

 

$

--

 

$

8,150

 

10.5% Senior Secured Notes, due April 2019

 

381,799

 

382,209

 

383,312

 

Revolving credit facility

 

4,900

 

2,997

 

44,084

 

Capital lease obligations (b)

 

8,896

 

8,995

 

3,184

 

Total debt

 

395,595

 

394,201

 

438,730

 

Less: Short-term borrowings (c) 

 

5,322

 

3,407

 

47,268

 

Convertible Notes (d)

 

--

 

--

 

8,150

 

Long-term debt

 

$

390,273

 

$

390,794

 

$

383,312

 

 


(a)

The decrease in the balance compared to March 30, 2013 reflected the exchange of the remaining aggregate principal amount of the 6.0% Convertible Senior Notes due June 2014 (the “Convertible Notes”) during 2013. The balance at March 30, 2013 represented principal of $8.8 million and an unamortized debt discount of $0.6 million.

(b)

The increase in the balance compared to March 30, 2013 primarily reflected the sale-leaseback for the office building in North Bergen, NJ during the second quarter of 2013, partially offset by the expiration of a capital lease for machinery and equipment during the fourth quarter of 2013.

(c)

At April 5, 2014, December 28, 2013 and March 30, 2013, the balance consisted of outstanding borrowings under the Company’s amended and restated revolving credit facility (as amended to date, the “Amended Facility”) and obligations under capital leases.

(d)

The Convertible Notes were reflected as a current liability since they were convertible at March 30, 2013.

 

Convertible Notes

During the first quarter of 2013, a holder of $11.2 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 3,171,670 shares of the Company’s common stock. The Company recognized $1.1 million pretax loss on the extinguishment of debt related to the Convertible Notes in the first quarter of 2013.

 

Senior Notes

On April 7, 2011, the Company completed an offering of $220.0 million principal amount of 10.5% Senior Secured Notes (the “Original Notes,” together with the June 2012 issuance of $152.0 million aggregate principal amount of 10.5% Senior Notes (the “Additional Notes”), the “Senior Notes”). The Company used the net proceeds of $212.9 million from such issuance of the Original Notes primarily to fund a tender offer of 128.5 million euro aggregate principal amount of 5.0% Euro Notes due July 8, 2013 (the “Euro Notes”) on April 8, 2011. 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 amount of Euro Notes on July 12, 2012. The Company used the remaining proceeds to fund a portion of the acquisition of a 51.0% interest in Kate Spade Japan Co., Ltd (“KSJ”).

 

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 registration rights agreements executed as part of the offering of Original Notes and the Additional Notes, the Company was required to complete SEC-registered offers to issue new Senior Notes (with substantially

 



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the same terms and principal amount) in exchange for the Original Notes and the Additional Notes. The Company was required to pay additional interest on the Senior Notes through the completion of the exchange offers on March 20, 2013. All accrued and unpaid additional interest was paid (together with regular interest on the Senior Notes) on April 15, 2013.

 

On March 14, 2014, the Company issued a conditional redemption notice (the “Notice”) with respect to the Senior Notes. Pursuant to the Notice, the Company gave holders of the Senior Notes notice that it would redeem up to $37.2 million aggregate principal amount of the Senior Notes (the “Redemption Notes”) at a price equal to 103.0% of the aggregate principal amount of the Redemption Notes, plus accrued interest. Such redemption occurred on April 14, 2014. The remaining principal amount of the Senior Notes of $334.8 million was redeemed in the second quarter of 2014 with the proceeds for a term loan issuance (see Note 20 – Subsequent Events).

 

Amended Facility

In April 2013, the Company completed a third amendment to and restatement of its revolving credit facility (as amended to date, the “Amended Facility”), which extended the maturity date from August 2014 to April 2018. Availability under the Amended Facility shall be the lesser of $350.0 million and a borrowing base that is computed monthly and comprised of the Company’s eligible cash, accounts receivable and inventory. The Amended Facility also includes a swingline subfacility of $55.0 million, a multicurrency subfacility of $100.0 million and the option to expand the facility by up to $100.0 million under certain specified conditions. A portion of the facility provided under the Amended Facility of up to $200.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $65.0 million in the aggregate. 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 is guaranteed by substantially all of the Company’s domestic subsidiaries and certain of the Company’s foreign subsidiaries and secured by a first priority lien on substantially all of the assets of the Company and the other borrowers and guarantors (other than certain trademark collateral in which the holders of the Company’s Senior Notes have a first priority lien, which trademark collateral secures the obligations under the Amended Facility on a second priority lien basis).

 

The Amended Facility restricts the Company’s ability to, among other things, incur indebtedness, grant liens, issue cash dividends, enter into mergers, consolidations, liquidations and dissolutions, change lines of business, make investments and acquisitions and sell assets, in each case subject to certain designated exceptions. In addition, the amended terms and conditions: (i) provide for a decrease in fees and interest rates (including eurocurrency spreads of 1.75% to 2.25% over LIBOR, depending on the level of availability); (ii) provide improved advance rates on eligible inventory; (iii) require the Company to maintain pro forma compliance with a fixed charge coverage ratio of 1.0:1.0 on a trailing 12 month basis if minimum aggregate borrowing availability falls below $35.0 million, or 10.0% of the commitments then in effect; (iv) require the Company to apply substantially all cash collections to reduce outstanding borrowings under the Amended Facility when availability under such facility falls below the greater of $40.0 million and 12.5% of the lesser of the borrowing base and aggregate commitments; (v) permit the acquisition of certain joint venture interests and certain distribution territories; (vi) decrease specified aggregate availability conditions to making certain other investments; and (vii) permit certain other acquisitions, investments, restricted payments, debt prepayments and incurrence of unsecured indebtedness if the Company is able to satisfy specified payment conditions.

 

Effective November 6, 2013, the Company entered into an amendment to the Amended Facility to permit the sale of the Juicy Couture IP and permit the Company to add back to Adjusted EBITDA such cash restructuring and transition charges associated with that transaction in the calculation of certain covenants included in the Company’s debt and credit facilities.

 

Effective February 3, 2014, the Company entered into an amendment to the Amended Facility to permit the sale of the former Lucky Brand business.

 

The funds available under the Amended Facility may be used for working capital and for general corporate purposes, including refinancing, repayment, repurchase and cash settlement of certain existing indebtedness. Acquisitions and other investments are permitted, subject to certain payment conditions. The Amended Facility contains customary events of default clauses and cross-default provisions with respect to the Company’s other outstanding indebtedness, including the Senior Notes.

 



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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 April 5, 2014, 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

 

$215,997

 

$4,900

 

$18,388

 

$192,709

 

$157,709

 


(a)

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

(b)

Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the prior Amended Facility of $35.0 million.

 

Capital Lease Obligations

In the second quarter of 2013, the Company entered into a sale-leaseback agreement for its office building in North Bergen, NJ, which included a sale price of $8.7 million and total lease payments of $26.9 million over a 12-year lease term. The Company’s capital lease obligations of $8.9 million and $9.0 million as of April 5, 2014 and December 28, 2013, respectively, included $0.4 million within Short-term borrowings on the accompanying Condensed Consolidated Balance Sheets.

 

 

10.     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 following table presents the financial assets and liabilities the Company measured at fair value on a recurring basis, based on the fair value hierarchy:

 

 

 

Level 2

 

In thousands

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

 

Financial Assets:

 

 

 

 

 

 

 

Derivatives

 

$

1,052

 

 

$

1,701

 

 

$

608

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

--

 

 

$

--

 

 

$

(157

)

 

 

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.

 



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19

 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2013, based on such fair value hierarchy:

 

 

 

Net Carrying
Value as of

 

Fair Value Measured and Recorded at
Reporting Date Using:

 

Total Losses
for the Three
Months Ended

 

In thousands

 

March 30, 2013

 

Level 1

 

Level 2

 

Level 3

 

March 30, 2013

 

Property and equipment

 

$

27

 

$

--

 

$

--

 

$

27

 

$

667

 

 

As a result of a decision to revise the Company’s plan to outsource its distribution function (see Note 12 - Streamlining Initiatives), an impairment analysis was performed on certain property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in an impairment charge, which was recorded in SG&A on the accompanying Condensed Consolidated Statement of Operations.

 

The fair values of the Company’s Level 3 Property and equipment 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:

 

 

 

April 5, 2014

 

December 28, 2013

 

March 30, 2013

In thousands

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Carrying
Value

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

 

$

--

 

$

--

 

$

--

 

$

--

 

$

46,312

 

$

8,150

10.5% Senior Secured Notes due April 2019 (a)

 

392,460

 

381,799

 

400,830

 

382,209

 

417,570

 

383,312

Revolving credit facility (b)

 

4,900

 

4,900

 

2,997

 

2,997

 

44,084

 

44,084


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

(b)              Borrowings under the revolving credit facility bear interest based on market rate; 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. The estimated fair value of the Lucky Brand Note approximates its carrying value.

 

 

11.    COMMITMENTS AND CONTINGENCIES

 

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. Since 2009, the Company has completed various disposition transactions, including the licensing arrangements with J.C. Penney Corporation, Inc. (“JCPenney”) in the US and Puerto Rico and with QVC, Inc. (“QVC”), the sales of the KENSIE, KENSIE GIRL and MAC & JAC trademarks, the sale of the Juicy Couture IP and the sale of Lucky Brand, which resulted in the removal of buying/sourcing for such products from the Li & Fung buying/sourcing arrangement. As a result, the Company refunded $24.3 million of the closing payment in the second quarter of 2010 and $1.8 million in the second quarter of 2012 and settled $6.0 million in the fourth quarter of 2013. The Company was not required to make any payments to Li & Fung as a result of the sale of

 



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Lucky Brand. 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 Lucky Brand business, LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 277 store leases were assigned to or assumed by third parties, for which the Company remains secondarily liable for the remaining obligations on 208 such leases. As of April 5, 2014, the future aggregate payments under these leases amounted to $195.9 million and extended to various dates through 2025.

 

On November 19, 2013, the Company entered into an agreement to terminate the lease of its JUICY COUTURE flagship store on Fifth Avenue in New York City in exchange for $51.0 million, which is expected to be completed in the second quarter of 2014.

 

During the second quarter of 2013, the Company entered into a sale-leaseback agreement for its North Bergen, NJ office with a 12-year term and two five-year renewal options. This leaseback was classified as a capital lease and recorded at fair value. As of April 5, 2014, the estimated future minimum lease payments under the noncancelable capital lease were as follows:

 

In millions

 

 

 

2014

 

$

1,495

 

2015

 

2,036

 

2016

 

2,089

 

2017

 

2,141

 

2018

 

2,194

 

Thereafter

 

15,328

 

Total

 

25,283

 

Less: Amounts representing interest and executory costs

 

(16,387

)

Net present values

 

8,896

 

Less: Capital lease obligations included in short-term debt

 

(422

)

Long-term capital lease obligations

 

$

8,474

 

 

Other

The Company is a party to various 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.

 

 

12.    STREAMLINING INITIATIVES

 

2014 Actions

In connection with the sale of the Juicy Couture IP and former Lucky Brand business, the Board of Directors of the Company approved various changes to its senior management, which resulted in charges related to severance in the first quarter of 2014. As discussed in Note 17 – Share-Based Compensation, the Company’s Compensation Committee approved the continued vesting of unvested options and restricted stock awards without any required service period or the accelerated vesting of such awards for former employees, including former executive officers. In addition, as a result of the reduction of office space in the Company’s former New York office, the Company recorded charges related to contract terminations and other charges in the first quarter of 2014.

 

2013 Actions

In connection with the sale of the Juicy Couture IP, the Company initiated actions to reduce staff at JUICY COUTURE during the fourth quarter of 2013. Also, as a result of the requirement to wind down the JUICY COUTURE operations, the Company expects to close JUICY COUTURE offices and retail locations that will not be converted to KATE SPADE stores. These actions resulted in charges related to asset impairments, severance and other items and are expected to be substantially completed by the end of the second quarter of 2014.

 



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2011 Actions

In the second quarter of 2011, the Company initiated actions to close its Ohio distribution center (the “Ohio Facility”), which were expected to be completed in the fourth quarter of 2012. In August 2012, the Company encountered systems and operational issues that delayed the planned migration of the Company’s product distribution function out of the Ohio Facility. Subsequently, the Company determined that it would continue to use the Ohio Facility and discontinue the migration of the product distribution function to Li & Fung, and the Company mutually agreed with Li & Fung to allow the distribution agreement with Li & Fung to expire as of January 31, 2013. On February 5, 2013, the Company entered into a contract with a third-party distribution center operations and labor management company to provide distribution operations services at the Ohio Facility. These actions resulted in charges related to contract terminations, severance, asset impairments and other charges and were substantially completed in the second quarter of 2013.

 

For the three months ended April 5, 2014, the Company recorded pretax charges totaling $33.8 million related to these initiatives. The Company expects to pay approximately $16.7 million of accrued streamlining costs in the next 12 months. For the three months ended March 30, 2013, the Company recorded pretax charges of $4.7 million related to these initiatives, including $2.4 million of payroll and related costs, $0.2 million of contract termination costs, $0.7 million of asset write-downs and disposals and $1.4 million of other costs. Approximately $17.5 million and $0.7 million of these charges were non-cash during the three months ended April 5, 2014 and March 30, 2013, respectively.

 

For the three months ended April 5, 2014 and March 30, 2013, expenses associated with the Company’s streamlining actions were primarily recorded in SG&A on the accompanying Condensed Consolidated Statements of Operations and impacted reportable segments and Corporate as follows:

 

 

 

Three Months Ended

 

In thousands

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

KATE SPADE

 

$

2,097

 

$

694

 

Adelington Design Group

 

103

 

329

 

JUICY COUTURE

 

1,597

 

2,248

 

Lucky Brand (a)

 

--

 

1,065

 

Corporate

 

29,968

 

372

 

Total

 

$

33,765

 

$

4,708

 


(a)

Represents restructuring charges principally related to distribution functions that are not directly attributable to Lucky Brand and therefore have not been included in 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 28, 2013

 

$

10,094

 

$

2,115

 

$

--

 

$

11,877

 

$

24,086

 

2014 provision (a)

 

29,401

 

4,582

 

958

 

(1,176

)

33,765

 

2014 asset write-downs

 

--

 

--

 

(958

)

--

 

(958

)

2014 spending (a)

 

(32,890

)

(255

)

--

 

145

 

(33,000

)

Balance at April 5, 2014 (b)

 

$

6,605

 

$

6,442

 

$

--

 

$

10,846

 

$

23,893

 


(a)

Payroll and related costs and spending include $16.5 million of non-cash share-based compensation expense.

(b)

The balance in other costs at April 5, 2014 includes $10.1 million for a withdrawal liability incurred in 2011 related to a multi-employer pension plan that the Company will pay through June 1, 2016.

 


 


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22

 

13.    EARNINGS PER COMMON SHARE

 

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

 

 

 

Three Months Ended

 

In thousands

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

Loss from continuing operations

 

$

(54,662

)

$

(39,617

)

Income (loss) from discontinued operations, net of income taxes

 

100,832

 

(12,557

)

Net income (loss)

 

$

46,170

 

$

(52,174

)

 

 

 

 

 

 

Basic weighted average shares outstanding

 

124,403

 

119,032

 

Stock options and nonvested shares (a)(b) 

 

--

 

--

 

Convertible Notes(c)

 

--

 

--

 

Diluted weighted average shares outstanding

 

124,403

 

119,032

 

 

 

 

 

 

 

(Loss) Earnings per share:

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

Loss from continuing operations

 

$

(0.44

)

$

(0.33

)

Income (loss) from discontinued operations

 

$

0.81

 

$

(0.11

)

Net income (loss)

 

$

0.37

 

$

(0.44

)


(a)

Because the Company incurred a loss from continuing operations for the three months ended April 5, 2014 and March 30, 2013, approximately 1.7 million and 5.6 million outstanding stock options and approximately 1.7 million and 0.4 million outstanding nonvested shares were considered antidilutive for such periods, and excluded from the computation of diluted loss per share.

(b)

Excludes approximately 1.1 million nonvested shares for the three months ended March 30, 2013, for which the performance criteria have not yet been achieved.

(c)

Because the Company incurred a loss from continuing operations for the three months ended March 30, 2013, approximately 3.3 million potentially dilutive shares issuable upon conversion of the Convertible Notes were considered antidilutive for such period, and were excluded from the computation of diluted loss per share.

 

 

14.    ADDITIONAL FINANCIAL INFORMATION

 

Licensing-Related Transactions

In 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 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 November 2011, in connection with the Company’s sale of its LIZ CLAIBORNE brand and certain rights to its MONET brand to JCPenney, the Company entered into an agreement with JCPenney to develop exclusive brands for JCPenney, which included payment to the Company of a $20.0 million refundable advance. The agreement terminated by its terms without being exercised on February 1, 2013, and the $20.0 million advance was refunded to JCPenney on February 8, 2013, pursuant to the terms of the agreement.

 

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; and (iv) an exclusive license to produce and sell jewelry under the KENSIE brand name.

 

Condensed Consolidated Statements of Cash Flows Supplementary Disclosures

During the three months ended April 5, 2014 and March 30, 2013, the Company had net income tax payments of $2.9 million and $0.3 million, respectively and made interest payments of $0.7 million and $0.7 million,

 



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respectively. As of April 5, 2014, December 28, 2013 and March 30, 2013, the Company accrued capital expenditures totaling $8.9 million, $13.3 million and $3.5 million, respectively.

 

Depreciation and amortization expense for the three months ended April 5, 2014 and March 30, 2013 included $1.2 million and $2.1 million, respectively, related to amortization of deferred financing costs.

 

On February 3, 2014, the Company received a three-year $85.0 million note issued by Lucky Brand LLC (see Note 1 – Basis of Presentation), which is reflected in Note Receivable on the accompanying Condensed Consolidated Balance Sheet.

 

During the first quarter of 2013, a holder of $11.2 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 3,171,670 shares of the Company’s common stock.

 

During the first quarter of 2013, the Company refunded the $20.0 million advance to JCPenney, which was included within Decrease in accrued expenses and other non-current liabilities on the accompanying Condensed Consolidated Statement of Cash Flows.

 

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 of $5.5 million to KSC in 2013, of which $3.0 million was paid in the first quarter of 2013.

 

The Company’s equity in (loss) earnings of its equity investee was $(0.3) million in the first quarter of 2014 and 2013. As of April 5, 2014, December 28, 2013 and March 30, 2013, the Company recorded $9.1 million, $9.4 million and $7.8 million, respectively, related to its investments in KSC, which was included in Other assets on the accompanying Condensed Consolidated Balance Sheets.

 

Subsequent to the sale of its former global Mexx business, the Company retained a noncontrolling ownership interest in such business until the third quarter of 2013 and accounted for its investment at cost. The Company’s cost investment was valued at $10.0 million as of March 30, 2013 and was included in Other assets on the accompanying Condensed Consolidated Balance Sheet.

 

 

15.    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, e-commerce, concessions, wholesale apparel, wholesale non-apparel and licensing. The three 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 three reportable segments, each reflecting the different financial missions, cultural profiles and focal points appropriate for these three reportable segments:

 

·                  KATE SPADE segment – consists of the specialty retail, outlet, e-commerce, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags) and licensing operations of the kate spade new york, KATE SPADE SATURDAY and JACK SPADE brands.

·                  Adelington Design Group segment – consists of: (i) exclusive arrangements to supply jewelry for the 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 CLAIBORE NEW YORK brand.

·                  JUICY COUTURE segmentconsists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of the JUICY COUTURE brand. The Company continues wind-down operations of the JUICY COUTURE brand, pursuant to the license agreement with ABG.

 



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24

 

As discussed in Note 1 – Basis of Presentation, on February 3, 2014, the Company completed the sale of Lucky Brand.

 

The Company’s Chief Executive Officer has been identified as the CODM. The Company’s measure of segment profitability is Adjusted EBITDA of each reportable segment. Accordingly, the CODM evaluates performance and allocates resources based primarily on Segment Adjusted EBITDA. Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives, brand-exiting activities and acquisition related costs; and (iii) losses on asset disposals and impairments. Unallocated Corporate costs also exclude non-cash share-based compensation expense. In addition, Segment Adjusted EBITDA does not include Corporate expenses associated with the following functions: corporate finance, investor relations, communications, legal, human resources and information technology shared services and costs of corporate facilities and the Company’s former executive offices, which are included in Unallocated Corporate costs. The Company does not allocate amounts reported below Operating loss to its reportable segments, other than equity income (loss) in the Company’s equity method investee. The Company’s definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

 

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 and e-commerce sites). 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

 

Adjusted
EBITDA 
(a)

 

% of Sales

 

Three Months Ended April 5, 2014 (14 weeks)

 

 

 

 

 

 

 

 

 

Reportable Segments:

 

 

 

 

 

 

 

 

 

KATE SPADE

 

$

217,128

 

 

66.2 %

 

$

32,269

 

 

14.9%

 

Adelington Design Group

 

6,486

 

 

2.0 %

 

427

 

 

6.6%

 

JUICY COUTURE

 

104,477

 

 

31.8 %

 

(19

)

 

--%

 

Lucky Brand

 

--

 

 

-- %

 

54

 

 

--%

 

Corporate

 

--

 

 

-- %

 

(15,275

)

 

--%

 

Totals

 

$

328,091

 

 

100.0 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 30, 2013 (13 weeks)

 

 

 

 

 

 

 

 

 

 

 

Reportable Segments:

 

 

 

 

 

 

 

 

 

 

 

KATE SPADE

 

$

140,963

 

 

57.4%

 

$

18,956

 

 

13.4%

 

Adelington Design Group

 

15,486

 

 

6.3%

 

3,872

 

 

25.0%

 

JUICY COUTURE

 

89,238

 

 

36.3%

 

(8,596

)

 

(9.6)%

 

Lucky Brand

 

--

 

 

--%

 

(660

)

 

--%

 

Corporate

 

--

 

 

--%

 

(17,119

)

 

--%

 

Totals

 

$

245,687

 

 

100.0%

 

 

 

 

 

 


(a)

The Adjusted EBITDA of the Lucky Brand reportable segment represents expenses related principally to distribution functions that were included in the Lucky Brand historical results, but are not directly attributable to Lucky Brand and therefore, have not been included in discontinued operations.

 



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25

 

The following tables provide a reconciliation to Loss from Continuing Operations:

 

 

 

Three Months Ended

 

In thousands

 

April 5, 2014
(14 Weeks)

 

March 30, 2013
(13 Weeks)

 

Reportable Segments Adjusted EBITDA:

 

 

 

 

 

KATE SPADE (a)

 

 

$

32,269

 

 

 

$

18,956

 

 

Adelington Design Group

 

 

427

 

 

 

3,872

 

 

JUICY COUTURE

 

 

(19

)

 

 

(8,596

)

 

Lucky Brand

 

 

54

 

 

 

(660

)

 

Total Reportable Segments Adjusted EBITDA

 

 

32,731

 

 

 

13,572

 

 

Unallocated Corporate Costs

 

 

(15,275

)

 

 

(17,119

)

 

Depreciation and amortization, net (b)

 

 

(15,223

)

 

 

(12,233

)

 

Charges due to streamlining initiatives, brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net (c)

 

 

(25,289

)

 

 

(4,738

)

 

Share-based compensation (d)

 

 

(20,324

)

 

 

(1,787

)

 

Equity loss included in Reportable Segments Adjusted EBITDA

 

 

298

 

 

 

270

 

 

Operating Loss

 

 

(43,082

)

 

 

(22,035

)

 

Other expense, net (a)

 

 

(251

)

 

 

(1,905

)

 

Loss on sales of trademarks

 

 

--

 

 

 

(1,274

)

 

Loss on extinguishment of debt

 

 

--

 

 

 

(1,108

)

 

Interest expense, net

 

 

(9,522

)

 

 

(12,341

)

 

Provision for income taxes

 

 

1,807

 

 

 

954

 

 

Loss from Continuing Operations

 

 

$

(54,662

)

 

 

$

(39,617

)

 


(a)

Amounts include equity in the losses of the Company’s equity method investee of $0.3 million for the three months ended April 5, 2014 and March 30, 2013.

(b)

Excludes amortization included in Interest expense, net.

(c)

See Note 12 – Streamlining Initiatives for a discussion of streamlining charges.

(d)

Includes share-based compensation expense of $16.5 million and $0.4 million in 2014 and 2013, respectively, that was classified as restructuring.

 

 

GEOGRAPHIC DATA:

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Three Months Ended April 5, 2014 (14 weeks)

 

 

 

 

 

Domestic

 

$

275,480

 

84.0%

 

International

 

52,611

 

16.0%

 

Total

 

$

328,091

 

100.0%