Item 1. Business.
OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
General
Fifth & Pacific Companies, Inc. designs and markets a global portfolio of retail-based, premium brands including JUICY COUTURE, KATE SPADE and LUCKY BRAND. We also have a private brand jewelry design and development division that markets brands through department stores and serves J.C. Penney Corporation, Inc. ("JCPenney") via exclusive supplier agreements for the LIZ CLAIBORNE and MONET jewelry lines and Kohl's Corporation ("Kohl's") via an exclusive supplier agreement for DANA BUCHMAN jewelry. We also have licenses for the LIZ CLAIBORNE NEW YORK brand, available at QVC, Inc. ("QVC") and LIZWEAR, which is distributed through the club store channel. We maintain a noncontrolling stake in MEXX, a European and Canadian apparel and accessories retail-based brand.
Our operations and management structure reflect a brand-centric approach, designed to optimize the operational coordination and resource allocation of our businesses across multiple functional areas including specialty retail, outlet, concession, wholesale apparel, wholesale non-apparel, e-commerce and licensing. For a discussion of our segment reporting structure, see "Business Segments" below.
Recent Initiatives and Business Strategy
We have continued to pursue transactions and initiatives with a significant impact on our portfolio of brands and which improve our operations or liquidity. During 2012 and early 2013, we:
•positioned KATE SPADE for greater global growth, by, among other things, completing the acquisition (the "KSJ Buyout") of the 51.0% interest previously held by Sanei International Co., LTD ("Sanei"), in Kate Spade Japan Co., Ltd. ("KSJ"), which operates the KATE SPADE and JACK SPADE businesses in Japan (KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009);
•launched the KATE SPADE SATURDAY brand in the US and have planned its launch in Japan in March 2013;
•continued to build on recent successes to drive growth at LUCKY BRAND, with the management team focused on leveraging LUCKY BRAND's strong denim heritage while expanding existing product assortments and implementing new offerings, in addition to significantly improving the overall consumer shopping experience;
•executed restructuring actions and hired a new CEO at JUICY COUTURE to lead turnaround efforts at that brand;
•continued to reduce Corporate costs;
•initiated actions to transition our outsourced order management, fulfillment and customer service functions related to each of our brands' e-commerce operations away from our current third-party provider to a new third-party provider; and
•contracted with a third-party facility operations management company to provide distribution operations services at our West Chester, Ohio distribution center (the "Ohio Facility") with a variable cost structure.
We also continued to enhance our debt and liquidity profile through the following transactions:
•the repurchase of the remaining 121.5 million euro aggregate principal balance of our former 5.0% euro Notes that were due July 2013 (the "Euro Notes");
•the issuance of an additional $152.0 million 10.5% Senior Secured Notes due April 2019 (the "Additional Notes");
•the conversion of $60.4 million aggregate principal amount of our 6.0% Convertible Senior Notes due June 2014 (the "Convertible Notes") into 17.4 million shares of our common stock, leaving $8.8 million aggregate principal amount of the Convertible Notes outstanding; and
•the repayment of all outstanding indebtedness under our amended and restated revolving credit facility (as amended to date, the "Amended Facility"), leaving no amounts outstanding, $223.6 million available for borrowing (based on a borrowing base of $251.2 million and $27.7 million of outstanding letters of credit) and $59.5 million of cash and cash equivalents and marketable securities on hand as of December 29, 2012.
Our business is organized in a brand-centric, streamlined operating model with a focus on achieving a competitive cost structure. Nevertheless, macroeconomic challenges and uncertainty continue to dampen consumer spending and unemployment levels remain high. Therefore, we continue to focus on the careful execution of our strategic plans and seek opportunities to improve our productivity and profitability.
We have established our operating and financial goals based on the following strategies:
•Turn around JUICY COUTURE. In December 2012, we appointed Paul Blum to be JUICY COUTURE's Chief Executive Officer. He will be responsible for driving growth and turnaround initiatives and will focus on: (i) implementing improved pricing, merchandising and inventory allocation strategies; (ii) reworking the merchandising and design of handbags and other accessories to be more in-line aesthetically with the apparel; (iii) expanding the JUICY COUTURE baby and girls' lines, as well as the intimates business; (iv) implementing outlet-specific strategies that have been successful at KATE SPADE and LUCKY BRAND, including product, visual merchandising, line planning, pricing, and promotions; and (v) accelerating international growth through joint ventures and other investments in foreign operations.
•Continue to grow KATE SPADE. Our strategic initiatives for KATE SPADE include: (i) opening new retail locations in North America, Japan, Brazil and United Kingdom; (ii) adding international points of distribution; (iii) broadening the array of products and enhancing customer service; (iv) the launch of KATE SPADE SATURDAY; and (v) continued investment in e-commerce growth.
•Create high quality top and bottom-line growth at LUCKY BRAND. The LUCKY BRAND management team will continue to leverage the brand's strong denim heritage while expanding the core business and pursuing business opportunities in plus sizes, kids and handbags. Specific strategic initiatives for the brand also include developing the brand internationally, opening domestic outlet stores, and strengthening online and digital presence.
•Focus on cash flow generation and manage liquidity. We are focused on driving operating cash flow generation and managing liquidity through consistent profitability of our brands, cost reductions and the efficient use of working capital. Business Segments
Our segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our 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 our brand-based activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to evaluate performance and allocate resources. In identifying our
reportable segments, we consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, we report our operations in 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 our JUICY COUTURE brand.
•KATE SPADE segment - consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of our KATE SPADE, KATE SPADE SATURDAY and JACK SPADE brands.
•LUCKY BRAND segment - consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of our LUCKY BRAND.
•Adelington Design Group 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.
We, as licensor, also license 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.
See Notes 1 and 18 of Notes to Consolidated Financial Statements and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations."
JUICY COUTURE
Our JUICY COUTURE brand offers luxurious, casual and fun women's and girl's apparel, as well as accessories and jewelry under various JUICY COUTURE trademarks. JUICY COUTURE products are sold predominately through wholly-owned specialty retail and outlet stores, select upscale specialty retail stores and department stores throughout the US, through a network of distributors and owned and licensed retail stores in Asia, Canada, Europe, South America and the Middle East, as well as through our JUICY COUTURE e-commerce website. In addition, JUICY COUTURE has existing licensing agreements for fragrances, footwear, optics, watches, swimwear, electronics cases and baby products.
KATE SPADE
Our KATE SPADE brand offers fashion products (accessories, apparel and jewelry) for women under the KATE SPADE and KATE SPADE SATURDAY trademarks and for men under the JACK SPADE trademark. These products are sold primarily in the US through wholly-owned specialty retail and outlet stores, select specialty retail and upscale department stores, our operations in Japan, Brazil and the United Kingdom and through our KATE SPADE, KATE SPADE SATURDAY and JACK SPADE e-commerce websites, as well as through a joint venture in China and through a network of distributors in Asia and the Middle East. KATE SPADE's product line includes handbags, small leather goods, fashion accessories, jewelry and apparel. In addition, KATE SPADE has existing licensing agreements for footwear, optics, fragrances, tabletop products, legwear, electronics cases, bedding and stationery. KATE SPADE SATURDAY products include apparel, handbags, small leather goods, jewelry, fashion accessories, footwear, optics, electronic cases, beauty, tabletop products and home décor items. JACK SPADE products include briefcases, travel bags, small leather goods and apparel.
(*)Our agreement to supply DANA BUCHMAN branded jewelry to Kohl's expires on October 11, 2013.
LUCKY BRAND
Our LUCKY BRAND offers an expanded assortment of men's and women's denim, woven and knit tops, dresses and sweaters, graphic tees, as well as accessories and jewelry, under various LUCKY BRAND trademarks. LUCKY BRAND products are available for sale at wholly-owned specialty retail and outlet stores in the United States and Canada, select department and specialty stores and through the LUCKY BRAND e-commerce website. LUCKY BRAND also has licensing agreements for children's wear fragrances, footwear, swimwear, handbags, eyewear and electronic cases.
ADELINGTON DESIGN GROUP
The operations within our Adelington Design Group segment consist principally of:
•Exclusive supplier arrangements to provide JCPenney with LIZ CLAIBORNE and MONET branded jewelry and Kohl's with DANA BUCHMAN branded jewelry;
•An exclusive license to produce and sell jewelry under the KENSIE brand name;
•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;
•LIZWEAR, women's apparel available through the club store channel; and
•TRIFARI, a signature jewelry brand for women sold primarily in mid-tier department stores.
SALES AND MARKETING
Domestic direct-to-consumer sales are made through our own retail and outlet stores and e-commerce websites. Our domestic wholesale sales are made primarily to department store chains and specialty retail store customers. Wholesale sales are also made to international customers, military exchanges and to other channels of distribution.
In Europe, direct-to-consumer sales are made through our own retail and outlet stores, e-commerce websites and concession stores within department store locations. Wholesale sales are made primarily to department store and specialty retail store customers. In Canada, direct-to-consumer sales are made through our own retail and outlet stores. In Japan, KATE SPADE distributes its products mainly through 54 points of sale that include department store concessions retail stores and e-commerce. In other international markets, including the remainder of Asia, the Middle East and Central and South America, we operate principally through third party licensees, virtually all of which purchase products from us for re-sale at freestanding retail stores and dedicated department store shops they operate. We also have a direct-to-consumer and wholesale presence through distribution agreements, a joint venture in China for our KATE SPADE brand and our own retail stores.
We continually monitor retail sales in order to directly assess consumer response to our products. During 2012, we continued our domestic in-store sales, marketing and merchandising programs designed to encourage multiple item regular price sales, build one-on-one relationships with consumers and maintain our merchandise presentation standards. These programs train sales associates on suggested selling techniques, product, merchandise presentation and client development strategies and are offered for JUICY COUTURE, KATE SPADE and LUCKY BRAND. Our retail stores reflect the distinct personalities of each brand, offering a unique shopping experience and exclusive merchandise.
Specialty Retail Stores, Outlet Stores and Concessions:
As of December 29, 2012, we operated a total of 344 specialty retail stores under various Company trademarks, consisting of 295 retail stores within the US and 49 retail stores outside of the US (primarily in
Japan, Europe and Canada). As of December 29, 2012, we operated a total of 133 outlet stores under various Company-owned and licensed trademarks, consisting of 129 outlet stores within the US and 4 outlet stores outside of the US (primarily in Europe and Canada). Outside of North America, we operate concession stores in select retail stores, which are either owned or leased by a third party department store or specialty store retailer. As of December 29, 2012, we operated 32 KATE SPADE concession stores in Japan and two JUICY COUTURE concession stores in Europe.
The following tables set forth select information, as of December 29, 2012, with respect to our specialty retail stores, outlet stores and concessions:
E-commerce:
Our products are sold on a number of branded websites. E-commerce continued to be an important business driver in 2012. We also operate several websites that provide information about our merchandise
but do not sell directly to customers. The following table sets forth select information concerning our branded websites:
(a)This website offers investors information concerning the Company.
(b)This website provides information and resources to address domestic violence matters.
(c)This website is expected to launch in the US in Spring 2013.
(d)This website is expected to launch in Japan in March 2013.
We are currently executing a transition of our outsourced order management, fulfillment and customer service functions related to each of our brand's e-commerce operations away from our current third-party provider to a new third-party provider. The transition includes certain updates to our current e-commerce platform software and functionality and generally involves a number of other third parties. The transition from the current provider is scheduled to be effected on a staged, brand-by-brand basis occurring over the next several months and is expected to be completed by the second quarter of 2013.
Wholesale:
Wholesale sales (before allowances) to our 100 largest customers accounted for substantially all of our 2012 wholesale sales (before allowances). No single customer accounted for more than 10.0% of net sales for 2012. Many major department store groups make centralized buying decisions; accordingly, any material change in our relationship with any such group could have a material adverse effect on our operations. Sales to our domestic department and specialty retail store customers are made primarily through our New York City and Los Angeles showrooms. Internationally, sales to our department and specialty retail store customers are made through showrooms in the United Kingdom.
Orders from our wholesale customers generally precede the related shipping periods by several months. Our largest customers discuss with us retail trends and their plans regarding their anticipated levels of total purchases of our products for future seasons. These discussions are intended to assist us in planning the production and timely delivery of our products.
We utilize in-stock reorder programs in several divisions to enable customers to reorder certain items through electronic means for quick delivery, as discussed below in the section entitled "Buying/Sourcing." Many of our wholesale customers participate in our in-stock reorder programs through their own internal replenishment systems.
Licensing:
We license many of our brands to third parties with expertise in certain specialized products and/or market segments, thereby extending each licensed brand's market presence. As of December 29, 2012, we had 25 license arrangements, pursuant to which third party licensees produce merchandise under Company-owned trademarks in accordance with designs furnished or approved by us, the present terms of which (not including renewal terms) expire at various dates through 2017. Each of the licenses earns revenue based on a percentage of the licensee's sales of the licensed products against a guaranteed minimum royalty, which generally increases over the term of the agreement. Income from our licensing operations is included in net sales for the segment under which the license resides.
In October 2009, we entered into a multi-year license agreement with JCPenney, which granted JCPenney an exclusive right and license (subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and included the worldwide manufacturing of the licensed products and the sale, marketing, merchandising, advertising and promotion of the licensed products in the US and Puerto Rico. Under the agreement, JCPenney only used designs provided or approved by us. In November 2011, we 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, LCNY 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 to us on a royalty-free basis through July 2020. In addition, certain other trademarks within the LIZ CLAIBORNE family of brands are licensed back to us on a royalty-free basis for sublicense to our pre-existing third party licensees of such trademarks.
In October 2009, we also entered into a multi-year license agreement with QVC, granting rights (subject to pre-existing licenses) to certain trademarks and other intellectual property rights. QVC has the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any apparel, accessories, or home categories in the US and certain international markets. QVC merchandises and sources the product and we provide brand management oversight. The agreement provides for the payment to us of a royalty based on net sales of licensed products by QVC. Pursuant to the November 2011 sale transaction discussed above, we have a royalty-free license from JCPenney to continue to maintain the license with QVC for the LIZ CLAIBORNE NEW YORK trademark through July 2020.
The following table sets forth information with respect to certain licensed product categories of our brands:
Marketing:
Marketing for our brands is focused on reinforcing brand relevance, increasing awareness, engaging consumers and guiding them to our retail stores and e-commerce sites. We use a variety of marketing strategies to enhance our brand equity and promote our brands. These initiatives include direct mail, in-store events and internet marketing, including the use of social media. We incurred expenses of $60.5 million, $49.3 million and $53.4 million for advertising, marketing and promotion for all brands in 2012, 2011 and 2010, respectively.
In 2012, we continued our domestic in-store shop and fixture programs, which are designed to enhance the presentation of our products on department store selling floors generally through the use of proprietary fixturing, merchandise presentations and graphics. In-store shops operate under the following brand names: JACK SPADE, JUICY COUTURE, KATE SPADE, and LUCKY BRAND. Our accessories operations also offer an in-store shop and fixture program. In 2012, we installed an aggregate of 32 in-store shops. We plan to install an aggregate of approximately 40 additional in-store shops in 2013.
For further information concerning our domestic and international sales, see Note 18 of Notes to Consolidated Financial Statements.
BUYING/SOURCING
Pursuant to a buying/sourcing agency agreement, Li & Fung acts as the primary global apparel and accessories buying/sourcing agent for all brands in our portfolio, with the exception of our jewelry product lines. We pay to Li & Fung an agency commission based on the cost of product purchases using Li & Fung as our buying/sourcing agent. Our agreement with Li & Fung provides for a refund of a portion of the 2009 closing payment in certain limited circumstances, including a change of control of the Company, the divestiture or discontinuation of any current brand, or certain termination events. We are also obligated to use Li & Fung as our 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 with 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 our agreement with Li & Fung, we 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 our agreement with Li & Fung, we refunded $1.8 million of the closing payment received from Li & Fung in the second quarter of 2012. In addition, our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.
Products produced in Asia represent a substantial majority of our purchases. We also source product in the US and other regions. During 2012, approximately 300 suppliers located in 21 countries manufactured our products, with the largest finished goods supplier accounting for less than 7.0% of the total of finished goods we purchased. Purchases from our suppliers are processed utilizing individual purchase orders specifying the price and quantity of the items to be produced.
Most of our products are purchased as completed product "packages" from our manufacturing contractors, where the contractor purchases all necessary raw materials and other product components, according to our specifications. When we do not purchase "packages," we obtain fabrics, trimmings and other raw materials in bulk from various foreign and domestic suppliers, which are delivered to our manufacturing contractors for use in our products. We do not have any long-term, formal arrangements with any supplier of raw materials. To date, we have experienced little difficulty in satisfying our raw material requirements and consider our sources of supply adequate.
We operate under substantial time constraints in producing each of our collections. In order to deliver, in a timely manner, merchandise which reflects current tastes, we attempt to schedule a substantial portion of our materials and manufacturing commitments relatively late in the production cycle, thereby favoring suppliers able to make quick adjustments in response to changing production needs and in time to take advantage of favorable (cost effective) shipping alternatives. However, in order to secure necessary materials and to schedule production time at manufacturing facilities, we must make substantial advance commitments prior to the receipt of firm orders from customers for the items to be produced. These advance commitments may have lead times in excess of five months. We continue to seek to reduce the time required to move products from design to the customer.
If we misjudge our ability to sell our products, we could be faced with substantial outstanding fabric and/or manufacturing commitments, resulting in excess inventories. See "Item 1A
Item 1A. Risk Factors.
You should carefully consider the following risk factors, in addition to other information included in this Annual Report on Form 10-K and in other documents we file with the SEC, in evaluating us and our business. If any of the following risks occur, our business, financial condition, liquidity and results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may impact our business.
Our ability to continue to have the necessary liquidity through cash flows from operations and availability under our Amended Facility may be adversely impacted by a number of factors. These factors include the level of our operating cash flows, our ability to maintain established levels of availability under, and to comply with the financial
and other covenants included in, our Amended Facility and the borrowing base requirement in our Amended Facility that limits the amount of borrowings we may make based on a formula of, among other things, eligible accounts receivable and inventory and the minimum availability covenant in our Amended Facility that requires us to maintain availability in excess of an agreed upon level.
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores and normal maintenance activities; (iii) fund remaining efforts associated with our streamlining initiatives, which include continued evolution of our distribution strategy, reconfigurations of corporate support functions, consolidation of office space and reductions in staff; (iv) invest in our information systems; (v) fund general operational and contractual obligations; and (vi) potentially repurchase or retire debt obligations. Under the Amended Facility, the aggregate commitments are $350.0 million. Our borrowing availability under the Amended Facility is determined primarily by the level of our eligible accounts receivable and inventory balances. As of December 29, 2012, we had $223.6 million of borrowing availability, no outstanding borrowings and $27.7 million of outstanding letters of credit under the Amended Facility.
As a result of a May 2010 amendment to and restatement of our Amended Facility, the maturity date of the Amended Facility was extended from May 2011 to August 2014, provided that in the event that our 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.
In June 2012, we entered into a further amendment to the Amended Facility. The amendment, among other things, permitted us (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.
We are subject to various covenants and other requirements, such as financial requirements, reporting requirements and negative covenants. We are required to maintain minimum aggregate borrowing availability of not less than $45.0 million and must 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. Our borrowing availability under the Amended Facility is determined primarily by the level of our eligible accounts receivable and inventory balances. If we do not have a sufficient borrowing base at any given time, borrowing availability under our Amended Facility may trigger the requirement to apply substantially all cash collections to reduce outstanding borrowings or default and also may not be sufficient to support our liquidity needs. Insufficient borrowing availability under our Amended Facility would likely have a material adverse effect on our business, financial condition, liquidity and results of operations. We currently believe 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 our lenders at the time of borrowing.
While there can be no certainty that availability under the Amended Facility plus cash on hand will be sufficient to fund our liquidity needs, based upon our current projections, we currently anticipate that our borrowing availability will be sufficient for at least the next 12 months. Over recent years, the economic environment has resulted in significantly lower employment levels, disposable income and actual and/or perceived wealth, lower consumer confidence and reduced retail sales. Further reductions in consumer spending, as well as a failure of consumer spending levels to rise to previous levels, or a worsening of current economic conditions would adversely impact our net sales and operating cash flows. In addition, the sufficiency and availability of our sources of liquidity may be affected by a variety of other factors, including, without limitation: (i) factors affecting the level of our operating cash flows, such as retailer and consumer acceptance of our products; (ii) the status of, and any adverse changes in, our credit ratings;
(iii) our ability to maintain required levels of borrowing availability and other covenants included in our debt and credit facilities; (iv) the financial wherewithal of our larger department store and specialty retail store customers; and (v) interest rate and exchange rate fluctuations. Also, our agreement with Li & Fung provides for a refund of a portion of the $75.0 million closing payment in certain limited circumstances, including a change in control of our Company, the divestiture of any of our current brands, or certain termination events. The 2009 licensing arrangements with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we refunded $24.3 million of the closing payment during 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 our agreement with Li & Fung, we refunded $1.8 million of the closing payment received from Li & Fung in the second quarter of 2012. Our agreement with Li & Fung is not exclusive; however, we are required to source a minimum value and a specified percentage of product purchases from Li & Fung.
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.
Should we be unable to comply with the requirements in the Amended Facility, we would be unable to borrow under such agreement, and any amounts outstanding would become immediately due and payable unless we were able to secure a waiver or an amendment under the Amended Facility. Should we be unable to borrow under the Amended Facility, or if outstanding borrowings thereunder become immediately due and payable, our liquidity may be significantly impaired, which could have a material adverse effect on our business, financial condition and results of operations. In addition, an acceleration of amounts outstanding under the Amended Facility would likely cause cross-defaults under our other outstanding indebtedness, including the Convertible Notes, the Euro Notes and the Senior Notes.
In 2010, we received $171.5 million of net income tax refunds on previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009 domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable income. We repaid amounts outstanding under our Amended Facility with the amount of such refunds. As a result of the US Federal tax law change extending the carryback period from two to five years and our carryback of our 2009 tax loss to 2004 and 2005, the IRS has the ability to re-open its past examinations of 2004 and 2005.
General economic conditions in the US, Europe and other parts of the world, including a continued weakening or instability of such economies, restricted credit markets and lower levels of consumer spending, can affect consumer confidence and consumer purchases of discretionary items, including fashion apparel and related products, such as ours.
The economies of the US, Europe and other parts of the world in which we operate weakened significantly as a result of the global economic crisis that began in the second half of 2008 and which has for the most part persisted since then, with recent signs of modest improvement in the US. Our results are dependent on a number of factors impacting consumer spending, including, but not limited to: (i) general economic and business conditions both in the US and abroad; (ii) consumer confidence; (iii) wages and current and expected employment levels; (iv) the housing market; (v) consumer debt levels; (vi) availability of consumer credit; (vii) credit and interest rates; (viii) fluctuations in foreign currency exchange rates; (ix) fuel and energy costs; (x) energy shortages; (xi) the performance of the financial, equity and credit markets; (xii) taxes; (xiii) general political conditions, both domestic and abroad; and (xiv) the level of customer traffic within department stores, malls and other shopping and selling environments.
Global economic conditions over the past few years have included significant recessionary pressures and declines in employment levels, disposable income and actual and/or perceived wealth and declines in consumer confidence and economic growth. The current unstable economic environment has been characterized by a dramatic decline in consumer discretionary spending and has disproportionately affected retailers and sellers of consumer goods, particularly those whose goods represent discretionary purchases, including fashion apparel and related products such as ours. While the decline in consumer spending has recently moderated, these economic conditions could still lead to continued declines in consumer spending over the foreseeable future and may have resulted in a resetting of consumer spending habits that makes it unlikely that such spending will return to prior levels for the foreseeable future. A number of our markets continue to suffer particularly severe downturns, and we have experienced significant declines in revenues.
While we have seen intermittent signs of stabilization in North America, there continues to be volatility in the European markets and there are no assurances that the global economy will continue to recover. If the global economy continues to be weak or deteriorates further, there will likely be a negative effect on our revenues, operating margins and earnings across all of our segments.
Economic conditions have also led to a highly promotional environment and strong discounting pressure from both our wholesale and retail customers, which have had a negative effect on our revenues and profitability. This promotional environment may likely continue even after economic growth returns, as we expect that consumer spending trends are likely to remain at historically depressed levels for the foreseeable future. The domestic and international political situation also affects consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts or other hostilities could lead to further decreases in consumer spending. The recent downturn and uncertain outlook in the global economy will likely continue to have a material adverse impact on our business, financial condition, liquidity and results of operations.
Fluctuations in the price, availability and quality of the fabrics or other raw materials used to manufacture our products, as well as the price for labor, marketing and transportation, could have a material adverse effect on our cost of sales or our ability to meet our customers' demands. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them. Such factors may be exacerbated by legislation and regulations associated with global climate change. The price and availability of such raw materials may fluctuate significantly, depending on many factors. In the future, we may not be able to pass all or a portion of such higher prices on to our customers.
We cannot assure the successful implementation and results of our long-term strategic plans, including without limitation, our ability to sustain the improved performance of our Lucky Brand business, or our ability to successfully improve the operations and results, creative direction and product offering at our JUICY COUTURE brand.
Our ability to execute our long-term growth plan and achieve our projected results is subject to a variety of risks, including the fact that our strategic plan contemplates a continued expansion of our specialty retail business in our KATE SPADE, JUICY COUTURE and LUCKY BRAND segments. The successful operation and expansion of our specialty retail businesses are subject to, among other things, our ability to: (i) successfully expand the specialty retail store base; (ii) negotiate favorable leases; (iii) design and create appealing merchandise; (iv) manage inventory levels; (v) install and operate effective retail systems; (vi) apply appropriate pricing strategies; (vii) integrate such stores into our overall business mix; and (viii) successfully extend these brands into markets worldwide through distribution, licensing or joint venture arrangements or other business models, including in growing markets such as China. We may not be successful in this regard, and our inability to successfully expand our specialty retail business would have a material adverse effect on our business, financial condition, liquidity and results of operations. In 2012, we continued to closely manage spending and opened 41 retail stores and acquired 21
KATE SPADE stores in connection with the KSJ Buyout. We continue to monitor our capital spending and expect to open 80-85 retail stores in 2013.
While we have worked to revitalize the JUICY COUTURE product offering, recent results at our JUICY COUTURE business have been challenging. The JUICY COUTURE results have been negatively impacted by a number of factors, including business process and operational issues, primarily related to inventory management, including buying, merchandising, allocation and underperformance of outlets, as well as product issues, including pricing, assortment and the underperformance of certain merchandise categories. We have taken, and will continue to take, actions designed to correct these issues, including implementing changes to JUICY COUTURE's organizational structure and revising JUICY COUTURE's business processes in an effort to improve efficiency and effectiveness. In December 2012, the Company appointed Paul Blum as CEO of JUICY COUTURE. There can be no assurances, however, that our actions will be successful; any continued operational or product issues could have an adverse impact on the operations and results of JUICY COUTURE and our business, financial position, liquidity and results of operations.
We continue our efforts, which we began in January 2010, to reposition and drive profitability improvements for LUCKY BRAND. These efforts focus on leveraging LUCKY BRAND's strong brand heritage and ensuring consistent availability of key products and sizes. As part of this effort, in January 2010, we hired current LUCKY BRAND CEO David DeMattei and Creative Director Patrick Wade. While we have seen recent improvement in the brand's performance, there can be no assurances that we will be able to improve LUCKY BRAND's results.
The 2011 sales of the global trademark rights to the LIZ CLAIBORNE family of brands and the sale of the trademark rights in the US and Puerto Rico for the MONET brand present risks, including, without limitation, the impact of such transactions on the LIZ CLAIBORNE brand licensing arrangements, our ability to continue a good working relationship with those licensees and possible changes or disputes in our other brand relationships or relationships with other retailers and existing licensees as a result of the transactions.
In November 2011, we sold the global trademark rights to the LIZ CLAIBORNE family of brands and the trademark rights in the US and Puerto Rico for the MONET brand. In connection with this transaction, 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; and (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.
In connection with the license agreements we entered into in 2009 with JCPenney and QVC, most of our then-existing LIZ CLAIBORNE product licensees began to work with QVC and JCPenney directly. Under our sale transaction with JCPenney, licenses under the LIZ CLAIBORNE family of brands have been licensed back to us. The working relationships established in 2009 will continue with current licensees under the LIZ CLAIBORNE family of brands. Such existing licensees and JCPenney and/or QVC might not be able to successfully work together on the license product categories. In the future, product licensees may make claims that the LIZ CLAIBORNE 2009 brand license arrangements adversely impacted their ongoing ability to sell LIZ CLAIBORNE merchandise.
In addition, these transactions may have an adverse impact on sales of our other brands to our US department store customers. We operate in a highly competitive retail environment. Certain of our other US department store customers could still choose to decrease or eliminate the amount of other products purchased from us or change the manner of doing business with us as result of these transactions. Such a decision by a group of US department stores or any other significant customers could have a material adverse effect on our business, financial condition, results of operations, cash flows and liquidity.
The success of our business depends on 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.
The apparel and accessories industries have historically been subject to rapidly changing consumer demands and tastes and fashion trends and to levels of discretionary spending, especially for fashion apparel and related products, which levels are currently weak. These industries are also subject to being able to expand business to growing markets worldwide. We believe that our success is largely dependent on our ability to effectively anticipate, gauge and respond to changing consumer demands and tastes across multiple product lines, shopping channels and geographies, in the design, pricing, styling and production of our products and in the merchandising and pricing of products in our retail stores, and in the business model employed, and partners we select to work with, in new and growing markets worldwide. Our brands and products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to constant change. Also, we must maintain and enhance favorable brand recognition, which may be affected by consumer attitudes towards the desirability of fashion products bearing a "mega brand" label and which are widely available at a broad range of retail stores. Our success is also dependent on our ability to successfully extend our businesses into new territories and markets, such as China, Japan and Brazil.
We attempt to schedule a substantial portion of our materials and manufacturing commitments relatively late in the production cycle. However, in order to secure necessary materials and ensure availability of manufacturing facilities, we must make substantial advance commitments, which may be up to five months or longer, prior to the receipt of firm orders from customers for the items to be produced. We need to translate market trends into appropriate, saleable product offerings relatively far in advance, while minimizing excess inventory positions, and correctly balance the level of our fabric and/or merchandise commitments with actual customer orders. We cannot assure that we will be able to continue to develop appealing styles and brands or successfully meet changing customer and consumer demands in the future. In addition, we cannot assure that any new products or brands that we introduce will be successfully received and supported by our wholesale customers or consumers. Our failure to gauge consumer needs and fashion trends by brand and respond appropriately, and to appropriately forecast our ability to sell products, could adversely affect retail and consumer acceptance of our products and leave us with substantial outstanding fabric and/or manufacturing commitments, resulting in increases in unsold inventory or missed opportunities. If that occurs, we may need to employ markdowns or promotional sales to dispose of excess inventory, which may harm our business and results. At the same time, our focus on inventory management may result, from time to time, in our not having a sufficient supply of products to meet demand and cause us to lose potential sales.
We cannot assure that we can attract and retain talented highly qualified executives, or maintain satisfactory relationships with our employees, both union and non-union.
Our success depends, to a significant extent, both upon the continued services of our executive management team, including brand-level executives, as well as our ability to attract, hire, motivate and retain additional talented and highly qualified management in the future, including the areas of design, merchandising, sales, supply chain, marketing, production and systems, as well as our ability to hire and train qualified retail management and associates. In addition, we will need to provide for the succession of senior management, including brand-level executives. The loss of key members of management and our failure to successfully plan for succession could disrupt our operations and our ability to successfully operate our business and execute our strategic plan.
We are bound by collective bargaining agreements covering approximately 120 employees at our Ohio Facility and 16 employees at our North Bergen, New Jersey offices. During 2011, we were also party to a collective bargaining agreement covering employees at our distribution facility in Burnaby, Canada, which closed in January 2012; the collective bargaining agreement terminated effective with the closure of this facility. We consider our relations with our non-union and union employees to be satisfactory and to date
we have not experienced any interruption of our operations due to labor disputes. While our relations with the unions have historically been amicable, we cannot rule out the possibility of a labor dispute at one or more of our facilities relating to any facility closings, outsourcing or ongoing negotiations with respect to contracts that expire. Any such dispute could have a material adverse impact on our business, financial position, liquidity and results of operations.
Costs related to withdrawal from a multi-employer pension fund could negatively affect our results of operations and cash flow.
In the second quarter of 2011, we initiated actions to close our Ohio Facility, which was expected to result in the termination of all or a significant portion of our union employees. In the third quarter of 2011, we ceased contributing to a 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 triggers 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. We incurred such a liability in the second quarter of 2011 and recorded a $17.6 million charge to Selling, general & administrative expenses ("SG&A"), related to our estimate of the withdrawal liability. Under applicable statutory rules, this withdrawal liability is payable over a period of time, and we previously estimated that we would pay such liability in equal quarterly installments over a period of eight to 12 years, with payments anticipated to commence in 2012. In February 2012, we were notified by the Fund that the Fund calculated our 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. In light of the Fund's notice, we recorded an additional charge to SG&A in 2011. As of December 29, 2012, the accrued withdrawal liability was $14.3 million, which was included in Accrued expenses and Other non-current liabilities on the accompanying Consolidated Balance Sheet. We do not believe that this withdrawal liability amount or the schedule of payments will have a material adverse impact on our financial position, results of operations or cash flows.
We have experienced delays in our previously announced plan to close our Ohio Facility and transition to Li & Fung for a significant portion of our US distribution operations and have decided to discontinue the transition. While we intend to continue to use the Ohio Facility and have contracted with another third party to operate the facility, there continue to be risks in connection with the operations of our Ohio Facility.
In connection with our streamlining initiatives, in July 2011, we announced our plan to close our Ohio Facility in the second half of 2012 and migrate the distribution function to a third party service provider, and that we had entered into a Memorandum of Agreement (the "Agreement") between us and the Chicago and Midwest Regional Joint Board of Workers United (the "Union"), which was ratified by the Union. The Agreement set forth the terms and conditions pursuant to which we had planned to effectuate orderly layoffs of our employees at the Ohio Facility, in connection with the anticipated closure and sale of the Ohio Facility in the fourth quarter of 2012. The Agreement provided, among other things, that the terms and conditions of the collective bargaining agreement between the Company and the Union, effective June 17, 2008 to June 16, 2011, as previously extended to July 16, 2011 by the parties (the "CBA"), were to remain in effect during the expected shutdown of the Ohio Facility, except as such terms are amended by the Agreement. In August 2011, we entered into an agreement with Li & Fung for the provision of distribution services in the United States and at that time we planned to migrate from our Ohio Facility to the Li & Fung facility.
In August 2012, we encountered systems and operational issues that have delayed our planned migration of our product distribution function out of the Ohio Facility, resulting in increased operating costs during the second half of 2012. Subsequently, we determined that it would be advisable to discontinue the migration of the product distribution function to Li & Fung, and we mutually agreed with Li & Fung to allow the distribution agreement with Li & Fung to expire as of January 31, 2013. Our current sourcing arrangements with Li & Fung are unaffected by the expiration of the distribution agreement.
In connection with such expiration, we decided that, given the complex distribution needs of our businesses, we should continue to use the Ohio Facility, and on February 5, 2013, we entered into a contract with a third-party distribution center operations and labor management company to provide distribution operations services at the Ohio Facility. In addition, the Company has notified the employees covered by the Agreement of the completion of layoffs on March 31, 2013, at which time the Agreement and CBA terminate. The third-party distribution center operations company has informed us that it intends to employ our prior employees, including union employees, at the Ohio Facility. There are a number of risks associated with continuing to operate the Ohio Facility, including increased operating expenses in 2013, risks related to systems capabilities at the Ohio Facility and risks related to the ability of the third-party distribution center operations company to appropriately staff the Ohio Facility with both union and non-union employees on reasonable and appropriate terms. We also have limited ability to control our third-party distribution center operations company, and such company may take actions with respect to its employees without our approval and may not maintain good relations with its employees and unions. Issues that arise in connection with the operation of our Ohio Facility could cause supply disruptions and other logistical issues and could therefore have a material, adverse effect on our business, financial condition, liquidity and results of operations.
Our wholesale businesses are dependent to a significant degree on sales to a limited number of large US department store customers, and our business could suffer as a result of consolidations, restructurings, bankruptcies and other ownership changes in the retail industry, financial difficulties at our large department store customers.
Many major department store groups make centralized buying decisions. Accordingly, any material change in our relationship with any such group could have a material adverse effect on our operations. We expect that our largest customers will continue to account for a significant percentage of our wholesale sales.
Our continued partial dependence on sales to a limited number of large US department store customers is subject to our ability to respond effectively to, among other things: (i) these customers' buying patterns, including their purchase and retail floor space commitments for apparel in general (compared with other product categories they sell) and our products specifically (compared with products offered by our competitors, including with respect to customer and consumer acceptance, pricing and new product introductions); (ii) these customers' strategic and operational initiatives, including their continued focus on further development of their "private label" initiatives; (iii) these customers' desire to have us provide them with exclusive and/or differentiated designs and product mixes; (iv) these customers' requirements for vendor margin support; (v) any credit risks presented by these customers, especially given the significant proportion of our accounts receivable they represent; and (vi) the effect of any potential consolidation among these larger customers.
We do not enter into long-term agreements with any of our wholesale customers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. A decision by the controlling owner of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease or eliminate the amount of merchandise purchased from us or to change their manner of doing business with us could have a material adverse effect on our business, financial condition, liquidity and results of operations. As a result of the recent unfavorable economic environment, we have experienced a softening of demand from a number of wholesale customers, such as large department stores, who have been highly promotional and have
aggressively marked down all of their merchandise, including our products. Any promotional pricing or discounting in response to softening demand may also have a negative effect on brand image and prestige, which may be difficult to counteract once the economy improves. Furthermore, this promotional activity may lead to requests from those customers for increased markdown allowances at the end of the season. Promotional activity at our wholesale customers will also often result in promotional activity at our retail stores, further eroding revenues and profitability.
We sell our wholesale merchandise primarily to major department stores across the US and extend credit based on an evaluation of each customer's financial condition, usually without requiring collateral. However, the financial difficulties of a customer could cause us to curtail or eliminate business with that customer. We may also assume more credit risk relating to our receivables from that customer. Our inability to collect on our trade accounts receivable from any of our largest customers could have a material adverse effect on our business, financial condition, liquidity and results of operations. Moreover, the difficult macroeconomic conditions and uncertainties in the global credit markets could negatively impact our customers and consumers which, in turn, could have an adverse impact on our business, financial condition, liquidity and results of operations.
We cannot assure that the MEXX business, in which we hold a minority interest, will be successful or that our minority interest in the new entity will not decrease in value.
On October 31, 2011, we sold the global MEXX business to a new entity in which we retained a minority interest. Under the terms of such transaction, we have obligations regarding the transitioning of the MEXX business to the new entity, including the requirement that the Company provide certain transition services to the new entity. There are a number of risks associated with such transition, including the potential costs associated with such transition services. Such costs may negatively impact our business, financial condition, results of operations, cash flows and liquidity. The new entity may not be successful in its operation of the MEXX business, and our minority ownership may decrease in value. In addition, we have a number of disputes arising from the sale of the MEXX business. See "Item 3 - Legal Proceedings."
Our business could suffer if we cannot adequately establish, defend and protect our trademarks and other proprietary rights.
We believe that our trademarks and other proprietary rights are significantly important to our success and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks and anti-counterfeiting activities. Counterfeiting of our products, particularly our JUICY COUTURE, LUCKY BRAND and KATE SPADE brands, continues, however, and in the course of our international expansion we have experienced conflicts with various third parties that have acquired or claimed ownership rights in some of our trademarks or otherwise have contested our rights to our trademarks. We have, in the past, resolved certain of these conflicts through both legal action and negotiated settlements, none of which, we believe, has had a material impact on our financial condition, liquidity or results of operations. However, the actions taken to establish and protect our trademarks and other proprietary rights might not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of their trademarks and proprietary rights. Moreover, in certain countries others may assert rights in, or ownership of, our trademarks and other proprietary rights or we may not be able to successfully resolve such conflicts, or resolving such conflicts may require us to make significant monetary payments. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the US. The loss of such trademarks and other proprietary rights, or the loss of the exclusive use of such trademarks and other proprietary rights, could have a material adverse effect on us. Any litigation regarding our trademarks or other proprietary rights could be time consuming and costly.
Our success will depend on our ability to successfully develop or acquire new product lines and enter new markets or product categories.
We have in the past, and may, from time to time, acquire or develop new product lines, enter new markets or product categories, including through licensing arrangements, and/or implement new business models (such as the wholesale jewelry model we retain for the sold LIZ CLAIBORNE, DANA BUCHMAN, MONET and KENSIE/MAC & JAC brands and the recently announced KATE SPADE SATURDAY line). Such activities are accompanied by a variety of risks inherent in any such new business venture, including the following:
•our ability to identify appropriate business development opportunities, including new product lines and new markets, including important growth markets such as China, Japan and Brazil;
•new businesses, business models, product lines or market activities may require methods of operations, investments and marketing and financial strategies different from those employed in our other businesses, and may also involve buyers, store customers and/or competitors different from our historical buyers, store customers and competitors;
•consumer acceptance of the new products or lines, and the impact on existing businesses given the new products or lines, including the pricing of such lines;
•we may not be able to generate projected or satisfactory levels of sales, profits and/or return on investment for a new business or product line, and may also encounter unanticipated events and unknown or uncertain liabilities that could materially impact our business;
•we may experience possible difficulties, delays and/or unanticipated costs in integrating the business, operations, personnel and/or systems of an acquired business and may also not be able to retain and appropriately motivate key personnel of an acquired business;
•risks related to complying with different laws and regulations in new markets;
•we may not be able to maintain product licenses, which are subject to agreement with a variety of terms and conditions, or to enter into new licenses to enable us to launch new products and lines; and
•with respect to a business where we are not the brand owner, but instead act as an exclusive licensee or an exclusive supplier, such as the arrangements within our Adelington Design Group discussed above for the LIZ CLAIBORNE, MONET, DANA BUCHMAN and KENSIE brands, there are a number of inherent risks, including, without limitation, compliance with terms set forth in the applicable agreements, the level of orders placed by our business partners and the public perception and/or acceptance of our business partners, the brands or other product lines, which are not within our control.
The markets in which we operate are highly competitive, both within the US and abroad.
We face intense competitive challenges from other domestic and foreign fashion apparel and accessories producers and retailers. Competition is based on a number of factors, including the following:
•anticipating and responding to changing consumer demands in a timely manner;
•establishing and maintaining favorable brand name and recognition;
•product quality;
•maintaining and growing market share;
•exploiting markets outside of the US, including growth markets such as China;
•developing quality and differentiated products that appeal to consumers;
•establishing and maintaining acceptable relationships with our retail customers;
•pricing products appropriately;
•providing appropriate service and support to retailers;
•optimizing our retail and supply chain capabilities;
•size and location of our retail stores and department store selling space; and
•protecting intellectual property.
Any increased competition, or our failure to adequately address these competitive factors, could result in reduced sales or prices, or both, which could have a material adverse effect on us. We also believe there is an increasing focus by the department stores to concentrate an increasing portion of their product assortments within their own private label products. These private label lines compete directly with our product lines and may receive prominent positioning on the retail floor by department stores. Finally, in the current economic environment, which is characterized by softening demand for discretionary items, such as apparel and related products, there has been a consistently increased level of promotional activity, both at our retail stores and at department stores, which has had an adverse effect on our revenues and profitability.
Our reliance on independent foreign manufacturers could cause delay and loss and damage our reputation and customer relationships. Also, there are risks associated with our agreement with Li & Fung, which results in a single foreign buying/sourcing agent for a significant portion of our products.
We do not own any product manufacturing facilities; all of our products are manufactured in accordance with our specifications through arrangements with independent suppliers. Products produced in Asia represent a substantial majority of our sales. We also source product in the US and other regions, including approximately 300 suppliers manufacturing our products. At the end of 2012, such suppliers were located in 21 countries, with the largest finished goods supplier at such time accounting for less than 7.0% of the total of finished goods we purchased in 2012. A supplier's failure to manufacture and deliver products to us in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items. The failure to make timely deliveries may drive customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could have a material adverse effect on us and our reputation in the marketplace. Also, a manufacturer's failure to comply with safety and content regulations and standards, including with respect to children's product and fashion jewelry, could result in substantial liability and damage to our reputation. While we provide our manufacturers with standards, and we employ independent testing for safety and content issues, we might not be able to prevent or detect all failures of our manufacturers to comply with such standards and regulations.
Additionally, we require our independent manufacturers (as well as our licensees) to operate in compliance with applicable laws and regulations. While we believe that our internal and vendor operating guidelines promote ethical business practices and our staff periodically visits and monitors the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer used by us (or any of our licensees), or the divergence of an independent manufacturer's (or licensee's) labor practices from those generally accepted as ethical in the US, could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our business, financial condition, liquidity and results of operations.
On February 23, 2009, we entered into a long-term, buying/sourcing agency agreement with Li & Fung, pursuant to which Li & Fung acts as the primary global apparel and accessories buying/sourcing agent for all brands in our portfolio, with the exception of our jewelry product lines. Pursuant to the
agreement, we received at closing on March 31, 2009 a payment of $75.0 million and an additional payment of $8.0 million to offset specific, identifiable, incremental expenses associated with the transaction. We pay to Li & Fung an agency commission based on the cost of our product purchases through Li & Fung. The 2009 licensing arrangements with JCPenney and QVC resulted in the removal of sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we refunded $24.3 million of the closing payment during 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 our agreement with Li & Fung, we refunded $1.8 million of the closing payment received from Li & Fung in the second quarter of 2012. Our agreement with Li & Fung is not exclusive; however, we are required to buy/source a minimum value and a specified percentage of product purchases from Li & Fung.
Our arrangements with foreign suppliers and with our foreign buying/sourcing agents are subject generally to the risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds, terrorist activities, pandemic disease and, in certain parts of the world, political, economic and currency instability. Our operations have not been materially affected by any such factors to date. However, due to the very substantial portion of our products that are produced abroad, any substantial disruption of our relationships with our foreign suppliers could adversely affect our operations. Moreover, difficult macroeconomic conditions and uncertainties in the global credit markets could negatively impact our suppliers, which in turn, could have an adverse impact on our business, financial position, liquidity and results of operations.
Our international operations are subject to a variety of legal, regulatory, political and economic risks, including risks relating to the importation and exportation of product.
We source most of our products outside the US through arrangements with independent suppliers in approximately 21 countries as of December 29, 2012. There are a number of risks associated with importing our products, including but not limited to the following:
•the potential reimposition of quotas, which could limit the amount and type of goods that may be imported annually from a given country, in the context of a trade retaliatory case;
•changes in social, political, legal and economic conditions or terrorist acts that could result in the disruption of trade from the countries in which our manufacturers or suppliers are located;
•the imposition of additional regulations, or the administration of existing regulations, relating to products which are imported, exported or otherwise distributed;
•the imposition of additional duties, tariffs, taxes and other charges or other trade barriers on imports or exports;
•risks of increased sourcing costs, including costs for materials and labor and such increases potentially resulting from the elimination of quota on apparel products;
•our ability to adapt to and compete effectively in the current quota environment, in which general quota has expired on apparel products, resulting in changing in sourcing patterns and lowered barriers to entry, but political activities which could result in the reimposition of quotas or other restrictive measures have been initiated or threatened;
•significant delays in the delivery of cargo due to security considerations;
•the imposition of antidumping or countervailing duty proceedings resulting in the potential assessment of special antidumping or countervailing duties; and
•the enactment of new legislation or the administration of current international trade regulations, or executive action affecting international textile agreements, including the US reevaluation of the trading status of certain countries and/or retaliatory duties, quotas or other trade sanctions, which, if enacted, would increase the cost of products purchased from suppliers in such countries.
Any one of these or similar factors could have a material adverse effect on our business, financial condition, liquidity, results of operations and current business practices.
Our ability to operate and be successful in new international markets and to operate and maintain the current level of sales in our existing international markets, including with respect to the KATE SPADE brand in Japan, China and Brazil and our JUICY COUTURE brand in China, is subject to risks associated with international operations. These include complying with a variety of foreign laws and regulations; adapting to local customs and culture; unexpected changes in regulatory requirements; new tariffs or other barriers in some international markets; political instability and terrorist attacks; changes in diplomatic and trade relationships; and general economic fluctuations in specific countries, markets or currencies. Any one of these or similar factors could have a material adverse effect on our business, financial condition, liquidity, results of operations and current business practices.
Our business and balance sheets are exposed to domestic and foreign currency fluctuations.
While we generally purchase our products in US dollars, we source most of our products overseas. As a result, the cost of these products may be affected by changes in the value of the relevant currencies, including currency devaluations. Changes in currency exchange rates may also affect the US dollar value of the foreign currency denominated prices at which our international businesses sell products. Our international sales, as well as our international businesses' inventory and accounts receivable levels, could be affected by currency fluctuations. In addition, with expected international expansion at KATE SPADE, JUICY COUTURE, and LUCKY BRAND, we may increase our exposure to such fluctuations.
Although we from time to time may hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, we cannot assure that foreign currency fluctuations will not have a material adverse impact on our business, financial condition, liquidity or results of operations.
A material disruption in our information technology systems and e-commerce operations could adversely affect our business or results of operations.
We rely extensively on our information technology ("IT") systems to track inventory, manage our supply chain, record and process transactions, summarize results and manage our business. The failure of IT systems to operate effectively, problems with transitioning to upgraded or replacement systems or difficulty in integrating new systems could adversely impact our business. In addition, our IT systems are subject to damage or interruption from power outages, computer, network and telecommunications failures, computer viruses, security breaches and usage errors by our employees. If our IT systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data and interruptions or delays in our operations in the interim. Any material disruption in our IT systems could adversely affect our business or results of operations, as well as our ability to effect the transitions of the recently sold businesses.
We are currently executing a transition of our outsourced order management, fulfillment and customer service functions related to each of our brands' e-commerce operations away from our current third-party provider to a new third-party provider. The transition includes certain updates to our current e-commerce platform software and functionality and generally involves a number of other third parties. While the transition from the current provider is scheduled to be effected on a staged, brand-by-brand basis occurring over the next several months and is expected to be completed by the second quarter of 2013, we may not be able to successfully achieve the transition on the timetable currently contemplated, and the transition may not be successful or could encounter various difficulties and unexpected issues. Any
delays or issues that we encounter in the transition could have a material adverse effect on the businesses of our brands and could negatively affect our reputation, which in turn could have a material, adverse effect on our overall business, results of operations and financial condition, as well as impair customer confidence in our product offerings and/or overall services for a longer period thereafter.
Privacy breaches and liability for online content could negatively affect our reputation, credibility and business.
We rely on third party computer hardware, software and fulfillment operations for our e-commerce operations and for the various social media tools and websites we use as part of our marketing strategy. There is a growing concern over the security of personal information transmitted over the internet, consumer identity theft and user privacy. Despite the implementation of reasonable security measures by us and our third party providers, these sites and systems may be susceptible to electronic or physical computer break-ins and security breaches. Any perceived or actual unauthorized disclosure of personally-identifiable information regarding our customers or website visitors could harm our reputation and credibility, decline our e-commerce net sales, impair our ability to attract website visitors and reduce our ability to attract and retain customers. Additionally, as the number of users of forums and social media features on our websites increases, we could be exposed to liability in connection with material posted on our websites by users and other third parties. Finally, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding unauthorized disclosure of personal information and, if we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies.
We may be exposed to risks and costs associated with credit card fraud and identity theft.
A growing portion of our customer orders are placed through our e-commerce websites. In addition, a significant portion of our direct-to-consumer sales require us and other parties involved in processing transactions to collect and to securely transmit certain customer data, such as credit card information, over public networks. Third parties may have the ability to breach the security of customer transaction data. Although we take the security of our systems and the privacy of our customers' confidential information seriously, there can be no assurances that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers' information. Any security breach could cause consumers to lose confidence in the security of our website or stores and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation, any of which could harm our business.
We rely on third parties to provide us with services in connection with the administration of certain aspects of our business.
We have entered into agreements with overseas third party service providers, both domestic and overseas, to provide processing and administrative functions over a broad range of areas, and we may continue to do so in the future. These areas include finance and accounting, information technology, human resources, buying/sourcing, distribution functions, and e-commerce. Services provided by third parties could be interrupted as a result of many factors, including contract disputes. Any failure by third parties to provide us with these services on a timely basis or within our service level expectations and performance standards could result in a disruption of our operations and could have a material adverse effect on our business, financial condition, liquidity and results of operations. In addition, to the extent we are unable to maintain these arrangements, we would incur substantial costs, including costs associated with hiring new employees, in order to return these services in-house or to transition the services to other third parties.
Our ability to utilize all or a portion of our US deferred tax assets may be limited significantly if we experience an "ownership change."
As of December 29, 2012, we had US federal deferred tax assets of approximately $557.4 million, which include net operating loss ("NOL") carryforwards and other items which could be considered net unrealized built in losses ("NUBIL"). Among other factors, our ability to utilize our NOL and/or our NUBIL items to offset future taxable income may be limited significantly if we experience an "ownership change" as defined in section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). In general, an ownership change will occur if there is a cumulative increase in ownership of our stock by "5-percent shareholders" (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The limitation arising from an "ownership change" under section 382 of the Code on our ability to utilize our US deferred tax assets depends on the value of our stock at the time of the ownership change. We continue to monitor changes in our ownership and do not believe we have a change in control as of December 29, 2012. If all or a portion of our deferred tax assets are subject to limitation because we experience an ownership change, depending on the value of our stock at the time of the ownership change, our future cash flows could be adversely impacted due to increased tax liability. As of December 29, 2012, substantially all tax benefit of the US deferred tax assets has been offset with a full valuation allowance that was recognized in our financial statements.
The outcome of current and future litigations and other proceedings in which we are involved may have a material adverse effect on our results of operations, liquidity or cash flows.
On November 27, 2012, Kate Spade LLC received a demand letter from Saturdays Surf LLC, a company that sells surfboards, wetsuits, and men's apparel, alleging that the name of KATE SPADE's new global women's lifestyle brand, "KATE SPADE SATURDAY," infringes the trademark rights of Saturdays Surf LLC. On December 19, 2012, Kate Spade LLC filed a complaint in the United States District Court for the Southern District of New York seeking a declaration that its KATE SPADE SATURDAY trademark does not infringe the trademark rights of Saturdays Surf LLC. Saturdays Surf LLC filed an answer and counterclaims on February 7, 2013. On February 13, 2013, Saturdays Surf LLC filed a motion for a temporary restraining order and preliminary injunction to block us from launching KATE SPADE SATURDAY. On the same day, the District Court denied the motion for a temporary restraining order, allowing the launch to go forward as planned, and set a schedule for expedited briefing, discovery, and hearing on the preliminary injunction motion. The preliminary injunction motion is expected to be heard on April 18, 2013. We are vigorously defending against these claims, and based on our examination of this matter and our experience to date, while there can be no assurances that an adverse decision would not have a material adverse impact on our results of operations, liquidity or cash flows, we believe we are likely to prevail.
We are a party to several litigations and other proceedings and claims which, if determined unfavorably to us, could have a material adverse effect on our results of operations, liquidity or cash flows. We may in the future become party to other claims and legal actions which, either individually or in the aggregate, could have a material adverse effect on our results of operations, liquidity or cash flows. In addition, any of the current or possible future legal proceedings in which we may be involved could require significant management and financial resources, which could otherwise be devoted to the operation of our business.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
Our distribution and administrative functions are conducted in both leased and owned facilities. We also lease space for our specialty retail and outlet stores. We believe that our existing facilities are well maintained, in good operating condition and are adequate for our present level of operations, although from time to time we use unaffiliated third parties to provide distribution services to meet our distribution requirements.
Our principal executive offices, as well as certain sales, merchandising and design staffs, are located at 1441 Broadway, New York, New York, where we lease 51,000 square feet. The lease contains certain renewal options and rights of first refusal for additional space. We own and operate a 297,000 square foot office building in North Bergen, New Jersey, which houses operational staff.
The following table sets forth information with respect to our key properties:
(a)We also lease showroom, warehouse and office space in various other domestic and international locations. We closed our Allentown, Pennsylvania and Dayton, New Jersey distribution centers during 2008, for which we remain obligated under the respective leases.
Item 3.
Item 3. Legal Proceedings.
On January 25, 2013, Gores Malibu Holdings (Luxembourg) S.a.r.l. filed a complaint in the United States District Court for the Southern District of New York against Fifth and Pacific Companies, Inc. and Fifth & Pacific Companies Foreign Holdings, Inc. (amended on February 5, 2013). The complaint claims $15.0 million in damages for alleged breaches of the merger agreement related to the sale of the global MEXX business, including breaches of tax and tax-related covenants, breaches of interim operating covenants and breaches of reimbursement obligations related to employee bonuses. In addition, as previously disclosed, we and Gores Malibu are currently in dispute resolution proceedings with respect to working capital adjustments that are required to be made under the Merger Agreement. We cannot currently predict the outcomes of these proceedings.
On November 27, 2012, Kate Spade LLC received a demand letter from Saturdays Surf LLC, a company that sells surfboards, wetsuits, and men's apparel, alleging that the name of KATE SPADE's new global women's lifestyle brand, "KATE SPADE SATURDAY," infringes the trademark rights of Saturdays Surf LLC. On December 19, 2012, Kate Spade LLC filed a complaint in the United States District Court for the Southern District of New York seeking a declaration that its KATE SPADE SATURDAY trademark does not infringe the trademark rights of Saturdays Surf LLC. Saturdays Surf LLC filed an answer and counterclaims on February 7, 2013. On February 13, 2013, Saturdays Surf LLC filed a motion for a temporary restraining order and preliminary injunction to block us from launching KATE SPADE
SATURDAY. On the same day, the District Court denied the motion for a temporary restraining order, allowing the launch to go forward as planned, and set a schedule for expedited briefing, discovery, and hearing on the preliminary injunction motion. The preliminary injunction motion is expected to be heard on April 18, 2013. We are vigorously defending against these claims, and based on our examination of this matter and our experience to date, while there can be no assurances that an adverse decision would not have a material adverse impact on our results of operations, liquidity or cash flows, we believe we are likely to prevail.
The Company is a party to several other pending legal and other 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 1, 9 and 22 of Notes to Consolidated Financial Statements).
Executive Officers of the Registrant.
Information as to the executive officers of the Company, as of February 15, 2013 is set forth below:
Executive officers serve at the discretion of the Board of Directors.
Mr. McComb joined the Company as Chief Executive Officer and a member of the Board of Directors on November 6, 2006. Prior to joining the Company, Mr. McComb was a company group chairman at Johnson & Johnson. During his 14-year tenure with Johnson & Johnson, Mr. McComb oversaw some of the company's largest consumer product businesses and brands, including Tylenol, Motrin and Clean & Clear. He also led the team that repositioned and restored growth to the Tylenol brand and oversaw the growth of J&J's McNeil Consumer business with key brand licenses such as St. Joseph aspirin, where he implemented a strategy to grow the brand beyond the over-the-counter market by adding pediatric prescription drugs. Mr. McComb serves on the Boards of the American Apparel & Footwear Association and the National Retail Federation, and is a trustee of The Pennington School. He is a member of Kilts Center for Marketing's steering committee at The University of Chicago Booth School of Business. He is also a member of the Business Roundtable.
Mr. Carrara joined the Company in April 2012 as Executive Vice President, Chief Financial Officer and Chief Operating Officer. Prior to that, he had held numerous finance positions at Tommy Hilfiger over the prior 12 years, including Chief Financial Officer for the Jeans division from 1999 to 2003; Chief Operating Officer and Chief Financial Officer of wholesale operations from 2003 to 2004; Executive Vice President of US Operations - Wholesale and Retail from 2004 to 2005 and Chief Operating Officer from 2006 to 2011.
Mr. Rubino joined the Company in May 1994 as an Associate General Counsel. In May 1996, he was appointed Deputy General Counsel and in March 1998 became Vice President, Deputy General Counsel. He was appointed Corporate Secretary in July 2001. Mr. Rubino was promoted to General Counsel in June 2007 and assumed his current position in October 2008. Prior to joining the Company, he was a Corporate Associate at Kramer Levin Naftalis & Frankel, LLP.
Mr. Vill joined the company as Vice President, Treasury and Investor Relations in April 1999 and has held various financial positions since. From 2005 through 2007, he also had responsibility for divisional finance and in March 2012, served as Interim Chief Financial Officer. In his current position, Mr. Vill serves as Corporate Treasurer and head of Investor Relations and has joint responsibility for the Corporate FP&A, Accounting and Tax Departments. Prior to joining the Company, Mr. Vill was Vice President, Finance for Hanover Direct in 1998. Prior to that, he held numerous positions during his seven year tenure at Saks Fifth Avenue, leading up to his role as Vice President-Treasurer.
Ms. Yanussi joined the Company in April 2012 as Vice President of Information Technology and assumed her current position in January 2013. Prior to joining the Company, she held various positions at Tommy Hilfiger over a period of eleven years, most recently as Senior Vice President of Operations and Logistics, North America at Tommy Hilfiger for over four years and Vice President of Operations prior to that.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
MARKET INFORMATION
Effective May 15, 2012, our common stock trades on the NYSE under the symbol FNP. Prior to that date, our common stock traded on the NYSE under the symbol LIZ. The table below sets forth the high and low closing sale prices of our common stock for the periods indicated.
HOLDERS
On February 15, 2013, the closing sale price of our common stock was $17.08. As of February 15, 2013, the approximate number of record holders of common stock was 3,837.
DIVIDENDS
We did not pay any dividends during 2012 or 2011.
PERFORMANCE GRAPH
Comparison of Cumulative Five Year Return
(a)The New Benchmarking Group consisted of Abercrombie & Fitch Co.; Aeropostale, Inc.; American Apparel, Inc.; American Eagle Outfitters, Inc.; Ann, Inc.; Bebe Stores, Inc.; Chico's FAS, Inc.; Coach, Inc.; Guess?, Inc.; Express, Inc.; Michael Kors Holdings Limited; New York & Company, Inc.; Pacific Sunwear of California, Inc.; True Religion Apparel, Inc.; Tumi Holdings Inc.; Urban Outfitters, Inc. and Wet Seal, Inc.
(b)The Prior Benchmarking Group consisted of Abercrombie & Fitch Co.; Aeropostale, Inc.; American Apparel, Inc.; American Eagle Outfitters, Inc.; Ann, Inc.; Bebe Stores, Inc.; Charming Shoppes, Inc.; Chico's FAS, Inc.; Coach, Inc.; Guess?, Inc.; Express, Inc.; New York & Company, Inc.; Pacific Sunwear of California, Inc.; Polo Ralph Lauren Corporation; The Talbots, Inc.; True Religion Apparel, Inc.; Urban Outfitters, Inc. and Wet Seal, Inc. The line graph above compares the cumulative total stockholder return on the Company's Common Stock over a 5-year period with the return on (i) the Standard & Poor's 500 Stock Index ("S&P 500") (which the Company's shares ceased to be a part of as of the close of business on December 1, 2008); (ii) the Standard & Poor's SmallCap 600 Stock Index ("S&P SmallCap 600") (which the Company's shares became a part of on December 2, 2008); and (iii) two indices comprised of the Company and: (a) the previously designated compensation peer group (the "Prior Benchmarking Group") designated by the Board's Compensation Committee in consultation with its compensation consultants, against which executive compensation practices of the Company are compared and (b) the new compensation peer group (the "New Benchmarking Group") designated by the Compensation Committee in October 2012 in consultation with its compensation consultants, which reflects a total of two additions to and three
deletions from the Prior Benchmarking Group. We have historically constructed our compensation benchmarking group based on companies with comparable products, revenue composition and size. We believe the New Benchmarking Group provides a more meaningful comparison in terms of comparable products, revenue composition and size in light of changes in the Company's operations over the past year.
In accordance with SEC disclosure rules, the measurements are indexed to a value of $100 at December 28, 2007 (the last trading day before the beginning of our 2008 fiscal year) and assume that all dividends were reinvested.
UNREGISTERED SALES OF EQUITY SECURITIES
During the fourth quarter of 2012, holders of $11.8 million aggregate principal amount of the Convertible Notes converted all such outstanding Convertible Notes into 3,357,586 shares of our common stock. We paid accrued interest on the holders' Convertible Notes through the settlement date in cash. The issuance of the shares of our common stock was exempt from any registration requirements under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) of the Securities Act.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes information about our purchases during the quarter ended December 29, 2012, of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:
(a)Includes shares withheld to cover tax-withholding requirements relating to the vesting of restricted stock issued to employees pursuant to the Company's shareholder-approved stock incentive plans.
(b)The Company initially announced the authorization of a share buyback program in December 1989. Since its inception, the Company's Board of Directors has authorized the purchase under the program of an aggregate of $2.275 billion of the Company's stock. The Amended Facility currently restricts the Company's ability to repurchase stock.
Item 6.
Item 6. Selected Financial Data.
The following table sets forth certain information regarding our results of operations and financial position and is qualified in its entirety by the Consolidated Financial Statements and notes thereto, which appear elsewhere herein.
(a)During 2012, 2011 and 2010, we recorded pretax charges of $47.8 million, $90.1 million and $61.0 million, respectively, related to our streamlining initiatives, which are discussed in Note 13 of Notes to Consolidated Financial Statements.
During 2009 and 2008, we recorded pretax charges of $120.6 million and $77.8 million related to our streamlining initiatives.
During 2012, we recorded a pretax gain of $40.1 million related to the KSJ Buyout (see Note 2 of Notes to Consolidated Financial Statements).
During 2011, we recorded a pretax gain of $287.0 million related to the sales of: (i) the global trademark rights for the LIZ CLAIBORNE family of brands; (ii) the trademark rights in the US and Puerto Rico for MONET; (iii) the DANA BUCHMAN trademark; and (iv) the trademark rights related to our former Curve brand and selected other smaller fragrance brands.
During 2010, we recorded non-cash pretax impairment charges of $2.6 million primarily within our Adelington Design Group segment principally related to merchandising rights of our LIZ CLAIBORNE and former licensed DKNY® Jeans brands.
During 2009, we recorded non-cash pretax impairment charges of $2.8 million related to goodwill and $14.2 million related to other intangible assets in our Adelington Design Group segment.
During 2008, we sold a distribution center and recorded a gain of $14.3 million. During 2008, we recorded non-cash pretax impairment charges of (i) $382.4 million related to goodwill previously recorded in our former Domestic-Based Direct Brands segment and (ii) $10.0 million in our Adelington Design Group segment related to our Villager, Crazy Horse and Russ trademark.
During 2009, we recorded pretax charges of $19.2 million primarily related to retailer assistance associated with the transition of our LIZ CLAIBORNE brands to license arrangements and other accounts receivable allowances associated with exiting activities. In addition, during 2008 we recorded additional pretax charges related to our strategic review aggregating $58.6 million primarily related to inventory and accounts receivable allowances associated with the termination of certain cosmetics product offerings, the closure of certain brands and various professional and consulting costs.
(b)Because we incurred losses from continuing operations in 2012, 2010, 2009 and 2008, outstanding stock options, nonvested shares and potentially dilutive shares issuable upon conversion of the Convertible Notes are antidilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business/Segments
Our segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our 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 our brand-based activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker ("CODM") to evaluate performance and allocate resources. In identifying our reportable segments, we consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, we report our operations in 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 our JUICY COUTURE brand.
•KATE SPADE segment - consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of our KATE SPADE, KATE SPADE SATURDAY and JACK SPADE brands.
•LUCKY BRAND segment - consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of our LUCKY BRAND.
•Adelington Design Group 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.
(*)Our agreement to supply DANA BUCHMAN branded jewelry to Kohl's expires on October 11, 2013. The operations associated with our AXCESS brand concluded with Kohl's in Fall 2011, and the operations of our former licensed DKNY® Jeans family of brands concluded in January 2012. Each was included in the results of the Adelington Design Group segment.
We, as licensor, also license 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.
Market Environment
The industries in which we operate have historically been subject to cyclical variations, including recessions in the general economy. Our results are dependent on a number of factors impacting consumer spending, including but not limited to, general economic and business conditions; consumer confidence; wages and employment levels; the housing market; levels of perceived and actual consumer wealth; consumer debt levels; availability of consumer credit; credit and interest rates; fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the performance of the financial equity and credit markets; tariffs and other trade barriers; taxes; general political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping and selling environments.
Macroeconomic challenges and uncertainty continue to dampen consumer spending, unemployment levels remain high, consumer retail traffic remains inconsistent and the retail environment remains promotional. In addition, economic conditions in international markets in which we operate, including Europe and Asia, remain uncertain and volatile. We continue to focus on the execution of our strategic plans and improvements in productivity, with a primary focus on operating cash flow generation, retail execution and international expansion. We will also continue to carefully manage liquidity and spending.
Competitive Profile
We operate in global fashion markets that are intensely competitive and subject to, among other things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As we anticipate that the global economic uncertainty will continue into the foreseeable future, we will continue to carefully manage spending. We will continue our streamlining efforts to drive cost out of our operations through initiatives that are aimed at driving efficiencies as well as improvements in working capital and operating cash flows.
In summary, the measure of our success in the future will depend on our ability to continue to navigate through an uncertain macroeconomic environment with challenging market conditions, execute on our strategic vision, including attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve, sourcing the manufacture and distribution of our products on a competitive and efficient basis, sustaining recent improved performance in our LUCKY BRAND business, improving the operations and results, executing turn around actions at our JUICY COUTURE business while expanding its international operations, and continuing to drive profitable growth at KATE SPADE. Our plan to improve operations and results at our JUICY COUTURE brand includes implementing improved pricing, merchandising and inventory allocation strategies, reworking the merchandising and design of handbags and other accessories to be more in-line aesthetically with the apparel and expanding the JUICY COUTURE baby and girls' lines, as well as the intimates business.
Reference is also made to the other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices as set forth in this Annual Report on Form 10-K, including, without limitation, under "Statement Regarding Forward - Looking Statements" and "Item 1A - Risk Factors."
Recent Developments and Operational Initiatives
During 2012 and early 2013, we continued to pursue transactions and initiatives with a significant impact on our portfolio of brands and which improve our operations or liquidity.
On October 31, 2012, our wholly-owned subsidiary Kate Spade, LLC, through its own wholly-owned Japanese subsidiary KSJ Co., Ltd. ("KSJ"), a Japanese kabushiki kaisha, acquired the 51.0% interest (the "KSJ Buyout") in KSJ that was previously held by Sanei International Co., LTD, ("Sanei"). KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009. KSJ operated the KATE SPADE, KATE SPADE SATURDAY and JACK SPADE businesses in Japan, and KATE SPADE will continue to operate such businesses in Japan through its Japanese subsidiary. The purchase price for the KSJ Buyout was $41.0 million, net of $0.4 million of cash acquired.
We also launched the KATE SPADE SATURDAY brand in Japan and plan its launch in the US in Spring 2013. We have executed restructuring actions at JUICY COUTURE and hired a new CEO to lead turnaround efforts at that brand and continued to reduce corporate costs.
In the second quarter of 2011, we initiated actions to close our Ohio distribution center (the "Ohio Facility"), which was previously expected to be completed the fourth quarter of 2012. In August 2011, we entered into an agreement with Li & Fung Limited ("Li & Fung") for distribution services in the United
States for our Company-owned retail stores, as well as for our wholesale business. In August 2012, we encountered systems and operational issues that delayed the migration of our product distribution function out of the Ohio Facility, resulting in increased operating costs during the second half of 2012. Subsequently, we determined that it would be advisable to discontinue the migration of the product distribution function to Li & Fung, and we mutually agreed with Li & Fung to allow the distribution agreement with Li & Fung to expire as of January 31, 2013. In connection with such expiration, we have discontinued the migration of our distribution function to Li & Fung and have decided to continue to utilize the Company-owned Ohio distribution center for such function. On February 5, 2013, we entered into a contract with a third-party facility operations management company to provide distribution operations services at the Ohio Facility with a variable cost structure.
Debt and Liquidity Enhancements
In January 2013, holders of $11.2 million aggregate principal amount of our 6.0% Convertible Senior Notes due June 2014 (the "Convertible Notes") converted all of such outstanding Convertible Notes into 3.2 million shares of our common stock.
On July 12, 2012, we completed the optional redemption of the remaining 52.9 million euro aggregate principal amount of 5.0% Notes due July 2013 (the "Euro Notes") for 55.4 million euro, plus accrued interest. The redemption was funded by a portion of the net proceeds from our issuance of $152.0 million aggregate principal amount (the "Additional Notes") of 10.5% Senior Secured Notes due April 15, 2019 in June 2012.
On June 8, 2012, we completed the offering of the Additional Notes at 108.25% of par value. We used a portion of the net proceeds of $160.6 million from the issuance of the Additional Notes to repay outstanding borrowings under our amended and restated revolving credit facility (as amended to date, the "Amended Facility") and to fund the redemption of the remaining 52.9 million euro aggregate principal amount of Euro Notes discussed above. We used the remaining proceeds to fund the KSJ Buyout, discussed above and for general corporate purposes.
In 2012, holders of $49.4 million aggregate principal amount of our 6.0% Convertible Notes converted all of such outstanding Convertible Notes into 14.2 million shares of our common stock.
In 2012, in privately-negotiated transactions, we repurchased 68.6 million euro aggregate principal amount of the Euro Notes for total consideration of 70.2 million euro, plus accrued interest.
We ended fiscal 2012 with no outstanding indebtedness under the Amended Facility and $59.5 million of cash and cash equivalents and marketable securities on hand.
Our cost reduction efforts have included tighter controls surrounding discretionary spending and streamlining initiatives that have included rationalization of distribution centers and office space, store closures and staff reductions, including consolidation of certain support and production functions and outsourcing certain corporate functions. We have also engaged more extensively in direct shipping and other arrangements. We expect that our streamlining initiatives will provide long-term cost savings. We will also continue to closely manage spending, with 2013 capital expenditures expected to be approximately $105.0-$115.0 million, compared to $85.8 million in 2012.
For a discussion of certain risks relating to our recent initiatives, see "Item 1A - Risk Factors."
Discontinued Operations
We have 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 our LIZ CLAIBORNE concessions in Europe in the first quarter of 2011; (iii) the closure of our 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 activities of the global MEXX business, our KENSIE, KENSIE GIRL and MAC & JAC brands, our closed LIZ CLAIBORNE outlet stores in the US and Puerto Rico, our closed LIZ CLAIBORNE concessions in Europe and closed MONET concessions in Europe have been segregated and reported as discontinued operations for all periods presented. We continue 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.
2012 Overall Results
Our 2012 results reflected:
•A $175.2 million decrease in net sales related to brands that have been licensed or exited related principally to the conclusion of: (i) wholesale sales in early 2012 for the former licensed DKNY® Jeans family of brands; (ii) AXCESS wholesale sales in Fall 2011; and (iii) licensing revenues related to the LIZ CLAIBORNE family of brands and the DANA BUCHMAN brand, due to the sales of the trademark rights for such brands in the fourth quarter of 2011;
•Significant net sales growth and improved gross margin at KATE SPADE and, to a lesser extent, at LUCKY BRAND; and
•Reduced performance at JUICY COUTURE primarily during the third and fourth quarters of 2012 due to lower than expected full-price inventory sell-through (driven by merchandise mix and inventory allocation issues), underperformance of certain merchandise categories and underperformance of outlets.
During 2012, we recorded the following pretax items:
•A $40.1 million gain on acquisition of subsidiary related to the KSJ Buyout;
•A $9.8 million net loss on the extinguishment of debt in connection with the conversion of $49.4 million of our Convertible Notes into 14.2 million shares of our common stock and the repurchase or redemption of the remaining 121.5 million euro aggregate principal amount of our Euro Notes; and
•Expenses associated with our streamlining initiatives of $47.8 million and charges primarily associated with other exiting activities of $2.1 million.
Our 2011 results reflected:
•A $234.0 million decrease in net sales related to brands that have been licensed or exited, related principally to remaining wholesale sales that concluded in the first half of 2010 for the LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the former arrangement with JCPenney and the arrangement with QVC; and
•Mixed comparable direct-to-consumer performance in our segments, reflecting reduced consumer demand and inconsistent traffic patterns and levels of consumer spending.
During 2011, we recorded the following pretax items:
•A net $287.0 million gain related to the sales of: (i) the global trademark rights for the LIZ CLAIBORNE family of brands; (ii) the trademark rights in the US and Puerto Rico for MONET; (iii) the DANA BUCHMAN trademark; and (iv) the trademark rights related to our former Curve brand and selected other smaller fragrance brands;
•A $5.2 million net gain on the extinguishment of debt in connection with the repurchase of 228.5 million euro aggregate principal amount of our Euro Notes and the conversion of $20.8 million of our Convertible Notes into 6,163,221 shares of our common stock;
•Expenses associated with our streamlining initiatives of $90.1 million and charges primarily associated with other exiting activities of $7.7 million; and
•A $5.0 million foreign currency translation gain related to our Euro Notes (see "Financial Position, Liquidity and Capital Resources - Hedging Activities"). Net Sales
Net sales in 2012 were $1.505 billion, a decrease of $13.6 million or 0.9%, compared to 2011 net sales of $1.519 billion. Excluding the impact of a $175.2 million decline in net sales related to brands that have been licensed or exited, net sales increased $161.6 million, or 10.6%. Net sales increased in our KATE SPADE and LUCKY BRAND segments, partially offset by a decline in net sales within our JUICY COUTURE segment.
The decrease in net sales due to brands that have been exited related principally to the conclusion of: (i) wholesale sales in early 2012 for the former licensed DKNY® Jeans family of brands; (ii) AXCESS wholesale sales in Fall 2011; and (iii) licensing revenues related to the LIZ CLAIBORNE family of brands and the DANA BUCHMAN brand due to the sales of the trademark rights for such brands in the fourth quarter of 2011.
Gross Profit and (Loss) Income from Continuing Operations
Gross profit in 2012 was $843.0 million, an increase of $33.6 million compared to 2011, primarily due to increased net sales and gross profit rates in our KATE SPADE and LUCKY BRAND segments, partially offset by decreased net sales in our Adelington Design Group and JUICY COUTURE segments. Our gross profit rate increased from 53.3% in 2011 to 56.0% in 2012 due to an increased proportion of sales from direct-to-consumer operations in our KATE SPADE and LUCKY BRAND segments, partially offset by greater than planned promotional activity at JUICY COUTURE.
We recorded a loss from continuing operations of $(59.5) million in 2012, as compared to income from continuing operations of $144.7 million in 2011. The year-over-year change primarily reflected: (i) a $287.0 million gain on the 2011 sales of the global trademark rights for the LIZ CLAIBORNE family of brands, the trademark rights in the US and Puerto Rico for MONET, the DANA BUCHMAN trademark and the trademark rights related to our former Curve brand and selected other smaller fragrance brands; (ii) a $40.1 million gain on the KSJ Buyout; (iii) a $33.6 million increase in gross profit; (iv) a $27.2 million decrease in Selling, general & administrative expenses ("SG&A"); and (v) losses on extinguishment of debt in 2012 compared to gains on extinguishment of debt in 2011.
Balance Sheet
We ended 2012 with a net debt position (total debt less cash and cash equivalents and marketable securities) of $346.8 million as compared to $265.7 million at year-end 2011. The $81.1 million increase in our net debt primarily reflected: (i) the funding of $85.8 million of capital and in-store shop expenditures over the last 12 months; (ii) the payment of $41.0 million for the KSJ Buyout; and (iii) the conversion of $49.4 million aggregate principal amount of our Convertible Notes into 14.2 million shares of our common stock. We generated $24.6 million in cash from continuing operations over the past 12 months.
RESULTS OF OPERATIONS
As discussed above, we present our results based on four reportable segments.
2012 vs. 2011
The following table sets forth our operating results for the year ended December 29, 2012 (52 weeks), compared to the year ended December 31, 2011 (52 weeks):
*Not meaningful.
Net Sales
Net sales for 2012 were $1.505 billion, a decrease of $13.6 million or 0.9%, as compared to net sales for 2011 of $1.519 billion. Excluding the impact of a $175.2 million decline in net sales related to brands that have been licensed or exited, net sales increased $161.6 million, or 10.6%. The decrease in net sales due to brands that have been exited related principally to the conclusion of: (i) wholesale sales in early 2012 for the former licensed DKNY® Jeans family of brands; (ii) AXCESS wholesale sales in Fall 2011; and (iii) licensing revenues related to the LIZ CLAIBORNE family of brands and the DANA BUCHMAN brand due to the sales of the trademark rights for such brands in the fourth quarter of 2011. Net sales increased in our KATE SPADE and LUCKY BRAND segments, partially offset by a decline in net sales within our JUICY COUTURE segment.
Net sales results for our segments are provided below:
•JUICY COUTURE net sales were $498.6 million, a 6.0% decrease compared to 2011, which primarily reflected decreases in our wholesale non-apparel, specialty retail and outlet operations, partially offset by increases in our e-commerce and wholesale apparel operations.
We ended 2012 with 78 specialty retail stores, 54 outlet stores and 2 concessions, reflecting the net addition over the last 12 months of 3 outlet stores and the net closure of 3 concessions. Key operating metrics for our JUICY COUTURE retail operations included the following:
-Average retail square footage in 2012 was approximately 428 thousand square feet, a 2.1% increase compared to 2011;
-Sales productivity was $685 per average square foot as compared to $674 for 2011; and
-Comparable direct-to-consumer net sales, inclusive of e-commerce and concessions, decreased 3.5% in 2012.
•LUCKY BRAND net sales were $461.7 million, a 10.4% increase compared to 2011, reflecting increases in wholesale apparel, outlet, specialty retail and e-commerce operations, partially offset by a decrease in our wholesale non-apparel operations.
We ended 2012 with 177 specialty retail stores and 47 outlet stores, reflecting the net closure over the last 12 months of 2 specialty retail stores and the net addition of 5 outlet stores. Key operating metrics for our LUCKY BRAND retail operations included the following:
-Average retail square footage in 2012 was approximately 560 thousand square feet, a 1.2% decrease compared to 2011;
-Sales productivity was $440 per average square foot as compared to $420 for 2011; and
-Comparable direct-to-consumer net sales increased by 10.0% in 2012.
•KATE SPADE net sales were $461.9 million, a 47.6% increase compared to 2011; reflecting increases across all operations in the segment. Net sales in 2012 included $16.0 million of KSJ net sales in our consolidated results.
We ended 2012 with 89 specialty retail stores, 32 outlet stores and 32 concessions, reflecting the net addition over the last 12 months of 18 specialty retail stores and 3 outlet stores and the acquisition of 21 specialty retail stores and 32 concessions. Key operating metrics for our KATE SPADE retail operations included the following:
-Average retail square footage in 2012 was approximately 170 thousand square feet, inclusive of the acquisition of KSJ, a 15.2% increase compared to 2011;
-Sales productivity was $1,016 per average square foot as compared to $934 for 2011; and
-Comparable direct-to-consumer net sales increased by 29.5% in 2012.
•Adelington Design Group net sales were $82.8 million, a decrease of $174.0 million, or 67.8%, compared to 2011, substantially all of which related to brands that have been exited, as discussed above.
Comparable direct-to-consumer net sales are calculated as follows:
•New stores become comparable after 14 full fiscal months of operations (on the first day of the 15th full fiscal month);
•Except in unusual circumstances, closing stores become non-comparable one full fiscal month prior to the scheduled closing date;
•A remodeled store will be changed to non-comparable when there is a 20.0% or more increase/decrease in its selling square footage (effective at the start of the fiscal month when construction begins). The store becomes comparable again after 14 full fiscal months from the re-open date;
•A store that relocates becomes non-comparable when the new location is materially different from the original location (in respect to selling square footage and/or traffic patterns);
•Stores that are acquired are not comparable until they have been reflected in our results for a period of 12 months; and
•E-commerce sales are comparable after 12 full fiscal months from the website launch date (on the first day of the 13th full month).
Net sales per average square foot is defined as net sales divided by the average of beginning and end of period gross square feet.
Gross Profit
Gross profit in 2012 was $843.0 million (56.0% of net sales), compared to $809.4 million (53.3% of net sales) in 2011. The increase in gross profit is primarily due to increased net sales and gross profit rates in our KATE SPADE and LUCKY BRAND segments, partially offset by decreased net sales in our Adelington Design Group and JUICY COUTURE segments. The improvement in the gross profit rate was primarily driven by our KATE SPADE and LUCKY BRAND segments, partially offset by greater than planned promotional activity at JUICY COUTURE.
Expenses related to warehousing activities, including receiving, storing, picking, packing and general warehousing charges are included in SG&A; accordingly, our gross profit may not be directly comparable to others who may include these expenses as a component of cost of goods sold.
Selling, General & Administrative Expenses
SG&A decreased $27.2 million, or 3.0%, to $877.5 million in 2012 compared to 2011. The change in SG&A reflected the following:
•An $88.2 million decrease associated in our Adelington Design Group segment related to the exited brands discussed above and reduced Corporate costs;
•A $41.9 million decrease in expenses associated with our streamlining initiatives and brand-exiting activities; and
•A $102.9 million increase in SG&A in our KATE SPADE, LUCKY BRAND and JUICY COUTURE segments, primarily reflecting: (i) increased compensation related expenses at KATE SPADE and LUCKY BRAND; (ii) increased advertising expenses and e-commerce fees across all three reportable segments; (iii) increased rent and other store operating expenses at KATE SPADE, primarily related to direct-to-consumer expansion; and (iv) a net increase in fixed asset charges at JUICY COUTURE.
SG&A as a percentage of net sales was 58.3%, compared to 59.6% in 2011, primarily reflecting increased net sales in our KATE SPADE and LUCKY BRAND segments, which exceeded the proportionate increase in SG&A in those segments.
Impairment of Intangible Assets
In 2011, we recorded aggregate non-cash impairment charges of $1.0 million within our Adelington Design Group segment, primarily related to the merchandising rights of our MONET and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.
Operating Loss
Operating loss for 2012 was $34.5 million ((2.3)% of net sales), compared to an operating loss of $96.3 million ((6.3)% of net sales) in 2011.
Other (Expense) Income, Net
Other (expense) income, net amounted to $(0.1) million in 2012 and $0.2 million in 2011. Other (expense) income, net consists primarily of (i) foreign currency transaction gains and losses, including the impact of the partial dedesignation of the hedge of our investment in certain euro-denominated functional currency subsidiaries, which resulted in the recognition of foreign currency translation gains and losses on our Euro Notes within earnings in 2011; and (ii) equity in the earnings of our equity investees.
Gain on Acquisition of Subsidiary
In 2012, we recorded a $40.1 million gain on the KSJ Buyout, resulting from the adjustment of our pre-existing 49.0% interest in KSJ to estimated fair value.
Gain on Sales of Trademarks, Net
In 2011, we recorded a $287.0 million gain on the sale of trademark rights related to the sale of: (i) the global trademark rights for the LIZ CLAIBORNE family of brands; (ii) the trademark rights in the US and Puerto Rico for MONET; (iii) the DANA BUCHMAN trademark; and (iv) the trademark rights related to our former Curve brand and selected other smaller fragrance brands.
(Loss) Gain on Extinguishment of Debt, Net
In 2012, we recorded a $(9.8) million loss on the extinguishment of debt in connection with the conversion of $49.4 million of our Convertible Notes into 14.2 million shares of our common stock and the repurchase or redemption of 121.5 million euro aggregate principal amount of our Euro Notes. In 2011, we recorded a $5.2 million gain on the extinguishment of debt in connection with the repurchase of 228.5 million euro aggregate principal amount of our Euro Notes and the conversion of $20.8 million of our Convertible Notes into 6.2 million shares of our common stock.
Interest Expense, Net
Interest expense, net decreased to $51.7 million in 2012 from $57.2 million in 2011, primarily reflecting a decrease of $14.3 million due to the redemptions and repurchases of the Euro Notes discussed above, a $4.5 million decrease due to a reduction in the principal amount of our Convertible Notes and a $3.1 million decrease in interest expense related to reduced borrowings under our Amended Facility, partially offset by an increase of $15.6 million in interest expense related to the Senior Notes.
Provision (Benefit) for Income Taxes
In 2012, we recorded a provision for income taxes of $3.5 million, compared to a benefit for income taxes of $(5.8) million in 2011. The income tax provision 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. We did not record income tax benefits for substantially all losses incurred during 2012 and 2011, as it is not more likely than not that we will utilize such benefits due to the combination of our history of pretax losses and our ability to carry forward or carry back tax losses or credits.
(Loss) Income from Continuing Operations
(Loss) income from continuing operations in 2012 was $(59.5) million, or (4.0)% of net sales, compared to $144.7 million in 2011, or 9.5% of net sales. Earnings per share ("EPS"), Basic from continuing operations was $(0.54) in 2012 and $1.53 in 2011. EPS, Diluted from continuing operations was $(0.54) in 2012 and $1.28 in 2011.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in 2012 was $15.0 million, compared to $316.4 million in 2011, reflecting a loss on disposal of discontinued operations of $11.9 million and a $3.1 million loss from discontinued operations in 2012, as compared to a loss on disposal of discontinued operations of $222.2 million and a $94.2 million loss from discontinued operations in 2011. EPS, Basic from discontinued operations was $(0.14) in 2012 and $(3.34) in 2011. EPS, diluted from discontinued operations was $(0.12) in 2012 and $(2.63) in 2011.
Net Loss
Net loss in 2012 decreased to $74.5 million from $171.7 million in 2011. EPS, Basic was $(0.68) in 2012 and $(1.81) in 2011. EPS, Diluted was $(0.68) in 2012 and $(1.35) in 2011.
Segment Adjusted EBITDA
Our Chief Executive Officer has been identified as the CODM. During the fourth quarter of 2012, we determined that our 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 is also a key metric utilized in our annual bonus and long-term incentive plans. Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives and brand-exiting activities; 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 executive offices and corporate facilities, which are included in Unallocated Corporate costs. We do not allocate amounts reported below Operating loss to our reportable segments, other than equity income (loss) in equity method investees. Our definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Segment Adjusted EBITDA for our reportable segments and Unallocated Corporate costs are provided below.
(a)Amounts include equity in the (losses) earnings of equity method investees of $(1.2) million and $1.7 million in 2012 and 2011, respectively.
(b)Excludes amortization included in Interest expense, net.
(c)See Note 13 of Notes to Consolidated Financial Statements for a discussion of streamlining charges.
A discussion of Segment Adjusted EBITDA of our reportable segments and Unallocated Corporate costs for 2012 and 2011 follows:
•JUICY COUTURE Adjusted EBITDA in 2012 was $24.6 million (4.9% of net sales), compared to Adjusted EBITDA of $64.2 million (12.1% of net sales) in 2011. The period-over-period change reflected (i) decreased gross profit, as discussed above; and (ii) an increase in SG&A related to advertising expenses and professional fees.
•LUCKY BRAND Adjusted EBITDA in 2012 was $34.7 million (7.5% of net sales), compared to Adjusted EBITDA of $25.4 million (6.1% of net sales) in 2011. The period-over-period change reflected increased gross profit, as discussed above, partially offset by an increase in SG&A related to payroll and advertising expenses.
•KATE SPADE Adjusted EBITDA in 2012 was $95.0 million (20.6% of net sales), compared to $57.4 million (18.3% of net sales) in 2011. The period-over-period increase reflected an increase in gross profit, as discussed above, partially offset by an increase in SG&A related to direct-to-consumer expansion, including an increase in payroll related expenses, advertising expenses and e-commerce fees. KATE SPADE Adjusted EBITDA in 2012 included $0.5 million of Adjusted EBITDA from KSJ in its results.
•Adelington Design Group Adjusted EBITDA in 2012 was $21.0 million (25.4% of net sales), compared to Adjusted EBITDA of $38.9 million (15.1% of net sales) in 2011. The decrease in Adjusted EBITDA reflected reduced gross profit and SG&A related to brands that have been exited, as discussed above.
Unallocated Corporate costs include costs for corporate finance, investor relations, communications, legal, human resources and information technology shared services and costs of executive offices and corporate facilities. Unallocated Corporate costs decreased to $70.7 million in 2012 from $90.2 million in 2011 due to reduced payroll and related expenses, occupancy costs and professional fees. The decrease in those expenses resulted principally from corporate streamlining actions executed throughout 2011 and 2012, which included reductions in staff and rationalization of office space. We also decreased discretionary spending.
2011 vs. 2010
The following table sets forth our operating results for the year ended December 31, 2011 (52 weeks), compared to the year ended January 1, 2011 (52 weeks):
*Not meaningful.
Net Sales
Net sales for 2011 were $1.519 billion, a decrease of $104.5 million or 6.4%, as compared to net sales for 2010 of $1.623 billion. Excluding the impact of a $234.0 million decline in net sales related to brands that have been licensed or exited, net sales increased $129.5 million, or 8.0%. The decrease in net sales due to brands that have been licensed or exited related principally to remaining wholesale sales that concluded in the first half of 2010 for the LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the former arrangement with JCPenney in the US and Puerto Rico and the arrangement with QVC. Net sales increased in our KATE SPADE, LUCKY BRAND and our ongoing Adelington Design Group segments, partially offset by a decline in net sales within our JUICY COUTURE segment.
Net sales results for our segments are provided below:
•JUICY COUTURE net sales were $530.7 million, a 6.4% decrease compared to 2010, which primarily reflected decreases in our wholesale apparel, wholesale non-apparel and specialty retail operations, partially offset by increases in our e-commerce and outlet operations.
We ended 2011 with 78 specialty retail stores, 51 outlet stores and 5 concessions, reflecting the net addition over the last 12 months of 4 specialty retail stores and the net closure of 1 outlet store. Key operating metrics for our JUICY COUTURE retail operations included the following:
-Average retail square footage in 2011 was approximately 419 thousand square feet, a 13.4% increase compared to 2010;
-Sales productivity was $674 per average square foot as compared to $745 for 2010; and
-Comparable direct-to-consumer net sales, inclusive of e-commerce and concessions, decreased 7.1% in 2011. Until September 2010, the JUICY COUTURE website was operated by a third party, and our sales to that third party were reflected as wholesale sales. JUICY COUTURE e-commerce comparable sales calculations for the first nine months of 2010 were based on the retail sales data provided by the third party operator.
•LUCKY BRAND net sales were $418.2 million, an 8.1% increase compared to 2010, reflecting increases in specialty retail, e-commerce, wholesale apparel, outlet and licensing operations, partially offset by a decrease in our wholesale non-apparel operations.
We ended 2011 with 179 specialty retail stores and 42 outlet stores, reflecting the net closure over the last 12 months of 10 specialty retail stores and the net addition of 4 outlet stores. Key operating metrics for our LUCKY BRAND retail operations included the following:
-Average retail square footage in 2011 was approximately 565 thousand square feet, a 3.6% decrease compared to 2010;
-Sales productivity was $420 per average square foot as compared to $365 for 2010; and
-Comparable direct-to-consumer net sales increased by 15.6% in 2011.
•KATE SPADE net sales were $312.9 million, a 69.8% increase compared to 2010, reflecting increases across all operations in the segment.
We ended 2011 with 50 specialty retail stores and 29 outlet stores, reflecting the net addition over the last 12 months of 6 specialty retail stores. Key operating metrics for our KATE SPADE retail operations included the following:
-Average retail square footage in 2011 was approximately 148 thousand square feet, a 4.5% increase compared to 2010;
-Sales productivity was $934 per average square foot as compared to $666 for 2010; and
-Comparable direct-to-consumer net sales increased by 68.9% in 2011.
•Adelington Design Group net sales were $256.9 million, a decrease of $228.4 million, or 47.1%, compared to 2010, reflecting the following:
-A $234.0 million, or 48.2%, decrease due to brands that have been licensed or exited, related principally to remaining wholesale sales that concluded in the first half of 2010 for the LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the former arrangement with JCPenney in the US and Puerto Rico and the arrangement with QVC; and
-A net $5.6 million, or 1.1%, increase related to sales of our ongoing Adelington Design Group business.
Gross Profit
Gross profit in 2011 was $809.4 million (53.3% of net sales), compared to $791.3 million (48.7% of net sales) in 2010. The increase in gross profit is primarily due to increased direct-to-consumer net sales in our KATE SPADE, LUCKY BRAND and JUICY COUTURE segments, partially offset by decreases in net sales in our Adelington Design Group segment and JUICY COUTURE wholesale operations. The gross profit rate improved in our Adelington Design Group segment due to our transition of the LIZ CLAIBORNE family of brands to a licensing model, which remained in effect until the sale of the global trademark rights to the LIZ CLAIBORNE family of brands to JCPenney in November 2011.
Selling, General & Administrative Expenses
SG&A increased $54.7 million, or 6.4%, to $904.7 million in 2011 compared to 2010. The change in SG&A reflected the following:
•A $27.3 million increase in expenses associated with our streamlining initiatives and brand-exiting activities, including (i) charges of $42.0 million related to the then-planned closure of our Ohio Facility and (ii) other contractual commitments primarily related our LIZ CLAIBORNE operations, including litigation charges, legal fees and severance;
•A $22.9 million increase in expenses associated with retail store expansion, primarily at KATE SPADE and JUICY COUTURE, inclusive of increased advertising expenses;
•An $18.1 million increase in e-commerce fees primarily related to our KATE SPADE and JUICY COUTURE operations due to increased volume;
•An increase of $6.1 million in retail impairment charges primarily related to JUICY COUTURE specialty stores; and
•A $19.7 million decrease primarily associated with our Adelington Design Group segment as we transitioned to the licensing model under the former arrangement with JCPenney in the US and Puerto Rico and the arrangement with QVC.
SG&A as a percentage of net sales was 59.6%, compared to 52.4% in 2010, primarily reflecting increased SG&A in our KATE SPADE, JUICY COUTURE and LUCKY BRAND segments to support direct-to-consumer growth and decreased net sales in our Adelington Design Group segment, which exceeded the proportionate reduction in SG&A.
Impairment of Intangible Assets
In 2011, we recorded aggregate non-cash impairment charges of $1.0 million within our Adelington Design Group segment, primarily related to the merchandising rights of our MONET and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.
In 2010, we recorded non-cash impairment charges of $2.6 million primarily within our Adelington Design Group segment, principally related to merchandising rights of our LIZ CLAIBORNE and former licensed DKNY® Jeans brands.
Operating Loss
Operating loss for 2011 was $96.3 million ((6.3)% of net sales), compared to an operating loss of $61.3 million ((3.8)% of net sales) in 2010.
Other Income, Net
Other income, net amounted to $0.2 million in 2011 and $26.6 million in 2010. Other income, net consisted primarily of (i) foreign currency transaction gains and losses, including the impact of the partial dedesignation of the hedge of our investment in certain euro-denominated functional currency
subsidiaries, which resulted in the recognition of foreign currency translation gains and losses on our Euro Notes within earnings; and (ii) equity in the earnings of our equity investees.
Gain on Sales of Trademarks, Net
In 2011, we recorded a $287.0 million gain on the sale of trademark rights related to the sale of: (i) the global trademark rights for the LIZ CLAIBORNE family of brands; (ii) the trademark rights in the US and Puerto Rico for MONET; (iii) the DANA BUCHMAN trademark; and (iv) the trademark rights related to our former Curve brand and selected other smaller fragrance brands.
Gain on Extinguishment of Debt, Net
In 2011, we recorded a $5.2 million gain on the extinguishment of debt in connection with the repurchase of 228.5 million euro aggregate principal amount of our Euro Notes and the conversion of $20.8 million of our Convertible Notes into 6.2 million shares of our common stock.
Interest Expense, Net
Interest expense, net increased to $57.2 million in 2011 from $55.7 million in 2010, reflecting $17.0 million of interest expense related to the Senior Notes, which were issued in April 2011. The change in interest expense also reflected a $9.8 million reduction in amortization of deferred financing costs, including a $6.9 million write-off of debt issuance costs in 2010 as a result of a reduction in the size of our Amended Facility, and a $6.3 million reduction in interest expense due to the redemption of the Euro Notes discussed above.
(Benefit) Provision for Income Taxes
In 2011, we recorded a benefit for income taxes of $(5.8) million, compared to a provision for income taxes of $9.0 million in 2010. The income tax provision primarily represented decreases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and a decrease in the accrual for uncertain tax positions. We did not record income tax benefits for substantially all losses incurred during 2011 and 2010, as it is not more likely than not that we will utilize such benefits due to the combination of our history of pretax losses and our ability to carry forward or carry back tax losses or credits.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations in 2011 was $144.7 million, or 9.5% of net sales, compared to $(99.4) million in 2010, or (6.1)% of net sales. EPS, Basic from continuing operations attributable to Fifth & Pacific Companies, Inc. was $1.53 in 2011 and $(1.05) in 2010. EPS, Diluted from continuing operations attributable to Fifth & Pacific Companies, Inc. was $1.28 in 2011 and $(1.05) in 2010.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in 2011 was $316.4 million, compared to $152.9 million in 2010, reflecting a loss on disposal of discontinued operations of $222.2 million and a $94.2 million loss from discontinued operations in 2011, as compared to a loss on disposal of discontinued operations of $27.5 million and a $125.4 million loss from discontinued operations in 2010. EPS, Basic from discontinued operations attributable to Fifth & Pacific Companies, Inc. was $(3.34) in 2011 and $(1.62) in 2010. EPS, diluted from discontinued operations attributable to Fifth & Pacific Companies, Inc. was $(2.63) in 2011 and $(1.62) in 2010.
Net Loss Attributable to Fifth & Pacific Companies, Inc.
Net loss attributable to Fifth & Pacific Companies, Inc. in 2011 decreased to $171.7 million from $251.5 million in 2010. EPS, Basic was $(1.81) in 2011 and $(2.67) in 2010. EPS, Diluted was $(1.35) in 2011 and $(2.67) in 2010.
Segment Adjusted EBITDA
Segment Adjusted EBITDA for our reportable segments and Unallocated Corporate costs are provided below.
(a)Amounts include equity in the earnings of equity method investees of $1.7 million and $1.0 million in 2011 and 2010, respectively.
(b)Excludes amortization included in Interest expense, net.
(c)See Note 13 of Notes to Consolidated Financial Statements for a discussion of streamlining charges. A discussion of Segment Adjusted EBITDA of our reportable segments and Unallocated Corporate costs for 2011 and 2010 follows:
•JUICY COUTURE Adjusted EBITDA in 2011 was $64.2 million (12.1% of net sales), compared to Adjusted EBITDA of $106.9 million (18.9% of net sales) in 2010. The period-over-period change reflected (i) an increase in SG&A related to direct-to-consumer expansion, including an increase in professional fees and advertising expenses; and (ii) decreased gross profit, as discussed above.
•LUCKY BRAND Adjusted EBITDA in 2011 was $25.4 million (6.1% of net sales), compared to Adjusted EBITDA of $13.4 million (3.5% of net sales) in 2010. The period-over-period change primarily reflected an increase in gross profit.
•KATE SPADE Adjusted EBITDA in 2011 was $57.4 million (18.3% of net sales), compared to $25.4 million (13.8% of net sales) in 2010. The period-over-period increase reflected an increase in gross profit, as discussed above, partially offset by an increase in SG&A related to direct-to-consumer expansion, including an increase in payroll related expenses, professional fees and advertising expenses.
•Adelington Design Group Adjusted EBITDA in 2011 was $38.9 million (15.1% of net sales), in 2011, compared to Adjusted EBITDA of $40.0 million (8.2% of net sales) in 2010. The decrease in Adjusted EBITDA reflected reduced SG&A and gross profit, including a reduction related to the LIZ CLAIBORNE family of brands as we transitioned to a licensing model, which remained in effect until the sale of the global trademark rights to the LIZ CLAIBORNE family of brands to JCPenney in November 2011, as discussed above.
Unallocated Corporate costs include costs for corporate finance, investor relations, communications, legal, human resources and information technology shared services and costs of executive offices and corporate facilities. Unallocated Corporate costs increased to $90.2 million in 2011 from $84.3 million in 2010 due to increased payroll expenses, occupancy costs and professional fees.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores and normal maintenance activities; (iii) fund remaining efforts associated with our streamlining initiatives, which include continued evolution of our distribution strategy, reconfiguration of corporate support functions, consolidation of office space and reductions in staff; (iv) invest in our information systems; (v) fund operational and contractual obligations, including the refund of a $20.0 million advance from JCPenney in February 2013; and (vi) potentially repurchase or retire debt obligations. We expect that our streamlining initiatives will provide long-term cost savings.
Sources and Uses of Cash
Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents, as well as borrowings through our lines of credit.
6.0% Convertible Senior Notes. The Convertible Notes are convertible during any fiscal quarter if the last reported sale price of our common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or exceeds $4.2912 (which is 120% of the applicable conversion price). As a result of stock price performance, the Convertible Notes were convertible during the fourth quarter of 2012 and are convertible during the first quarter of 2013. If the Convertible Notes are surrendered for conversion, we 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 our discretion.
During 2012 and early 2013, holders of $60.4 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 17.4 million shares of our common stock, leaving approximately $8.8 million of Convertible Notes outstanding as of the date of this report.
10.5% Senior Secured Notes. We used the net proceeds of $212.9 million from the April 7, 2011 issuance of 10.5% Senior Secured Notes due April 15, 2019 (the "Original Notes," together with the Additional Notes, the "Senior Notes") primarily to fund a tender offer (the "Tender Offer") to repurchase 128.5 million euro aggregate principal amount of our then-outstanding Euro Notes. The remaining
proceeds were used for general corporate purposes. On June 8, 2012, we completed the offering of the Additional Notes. We used a portion of the net proceeds of the offering of the Additional Notes to repay outstanding borrowings under our Amended Facility and to fund the redemption of 52.9 million euro aggregate principal of Euro Notes on July 12, 2012. We used the remaining proceeds to fund a portion of the purchase of a 51.0% interest in KSJ and 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 offering of Original Notes, we agreed, on or before April 7, 2012, (i) to use reasonable best efforts to consummate an offer to issue new Senior Notes (having terms substantially identical to those of the Original Notes) whose issuance is registered with the SEC in exchange for the Original Notes (the "Original Notes Exchange Offer"); and (ii) if required, to have a shelf registration statement declared effective with respect to resales of the Original Notes.
We filed and had declared effective a registration statement on Form S-4 (the "Form S-4 Registration Statement") registering the Original Notes Exchange Offer and on February 13, 2013 commenced the Original Notes Exchange Offer (which is scheduled to expire on March 15, 2013). Nevertheless, as a result of not having complied with the above-described registration requirements, pursuant to the terms of the registration rights agreement relating to the Original Notes, we are required to pay additional interest on the Original Notes until the Original Notes Exchange Offer is completed. Additional interest on the Original Notes began accruing on April 10, 2012 at a rate of 0.25% per annum and continued to accrue at that rate through (and including) July 8, 2012. On July 9, 2012, additional interest on the Original Notes began accruing at a rate of 0.50% per annum and continued to accrue at that rate through (and including) October 6, 2012. On October 7, 2012, additional interest on the Original Notes began accruing at a rate of 0.75% per annum and continued to accrue at that rate through (and including) January 4, 2013. On January 5, 2013, the rate of additional interest on the Original Notes increased to the maximum of 1.00% per annum. Accrued additional interest has been paid on the Original Notes through October 15, 2012. Accrued additional interest will next be paid on the Original Notes (or the corresponding Senior Notes issued in the Original Notes Exchange Offer, as the case may be) on April 15, 2013 to holders of record on April 1, 2013.
Pursuant to a registration rights agreement executed as part of the offering of Additional Notes, the Company agreed, on or before October 15, 2012, (i) to use reasonable best efforts to consummate an offer to issue new Senior Notes (having terms substantially identical to those of the Additional Notes) whose issuance is registered with the SEC in exchange for the Additional Notes (the "Additional Notes Exchange Offer"); (ii) if required, to have a shelf registration statement declared effective with respect to resales of the Additional Notes; and (iii) complete the Original Notes Exchange Offer.
The Form S-4 Registration Statement also covers the Additional Notes Exchange Offer, which commenced on February 13, 2013 and is scheduled to expire on March 15, 2013. Nevertheless, as a result
of not having complied with the above-described registration requirements, pursuant to the terms of the registration rights agreement relating to Additional Notes, the Company is required to pay additional interest on the Additional Notes until the Original Notes Exchange Offer and the Additional Notes Exchange Offer are completed. Additional interest on the Additional Notes began accruing on October 16, 2012 at a rate of 0.25% per annum and continued to accrue at that rate through (and including) January 13, 2013. On January 14, 2013, additional interest on the Additional Notes began to accrue at a rate of 0.50% per annum. The rate of additional interest will increase by 0.25% per annum for each 90 days elapsed after January 14, 2013 that the Original Notes Exchange Offer and the Additional Notes Exchange Offer are not completed, up to a maximum of 1.00% per annum. Additional interest will be paid to holders of the Additional Notes (or the corresponding Senior Notes issued in the Additional Notes Exchange Offer, as the case may be) on April 15, 2013 to holders of record on April 1, 2013.
Amended Facility. Under the Amended Facility, availability is the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of our eligible accounts receivable and inventory. The Amended Facility will expire in August 2014, provided that in the event that our remaining $8.8 million of 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. We are subject to various covenants and other requirements, such as financial requirements, reporting requirements and negative covenants. We are required to maintain minimum aggregate borrowing availability of not less than $45.0 million and must 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 commitments. Our borrowing availability under the Amended Facility is determined primarily by the level of our eligible accounts receivable and inventory balances.
Based on our forecast of borrowing availability under the Amended Facility, we anticipate that cash flows from operations and the projected borrowing availability under our Amended Facility will be sufficient to fund our liquidity requirements for at least the next 12 months.
There can be no certainty that availability under the Amended Facility will be sufficient to fund our liquidity needs. Should we be unable to comply with the requirements in the Amended Facility, we would be unable to borrow under such agreement and any amounts outstanding would become immediately due and payable, unless we were able to secure a waiver or an amendment under the Amended Facility. Should we be unable to borrow under the Amended Facility, or if outstanding borrowings thereunder become immediately due and payable, our liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations. In addition, an acceleration of amounts outstanding under the Amended Facility would likely cause cross-defaults under our other outstanding indebtedness, including the Convertible Notes and the Senior Notes.
The sufficiency and availability of our projected sources of liquidity may be adversely affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which will be impacted by retailer and consumer acceptance of our products, general economic conditions and the level of consumer discretionary spending; (ii) the status of, and any adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing availability under the Amended Facility and to comply with other covenants included in our debt and credit facilities; (iv) the financial wherewithal of our larger department store and specialty retail store customers; and (v) interest rate and exchange rate fluctuations.
Because of the continuing uncertainty and risks relating to future economic conditions, we may, from time to time, explore various initiatives to improve our liquidity, including issuance of debt securities, sales of various assets, additional cost reductions and other measures. In addition, where conditions permit, we may also, from time to time, seek to retire, exchange or purchase our outstanding debt in privately-negotiated transactions or otherwise. We may not be able to successfully complete any such actions.
Cash and Debt Balances. We ended 2012 with $59.5 million in cash and cash equivalents and marketable securities, compared to $180.6 million at the end of 2011 and with $406.3 million of debt outstanding, compared to $446.3 million at the end of 2011. The $81.1 million increase in our net debt primarily reflected: (i) the funding of $85.8 million of capital and in-store shop expenditures over the last 12 months; (ii) the use of $41.0 million for the KSJ Buyout; and (iii) the conversion of $49.4 million aggregate principal amount of our Convertible Notes into 14.2 million shares of our common stock. We generated $24.6 million in cash from continuing operations over the past 12 months.
Accounts Receivable increased $2.0 million, or 1.7%, at year-end 2012 compared to year-end 2011, primarily due to increased wholesale sales in our KATE SPADE and LUCKY BRAND segments and an increase resulting from the KSJ acquisition, partially offset by (i) brands that have been exited in our Adelington Design Group segment and (ii) decreased wholesale sales in our JUICY COUTURE segment.
Inventories increased $27.2 million, or 14.1% at year-end 2012 compared to year-end 2011, primarily due to an increase in KATE SPADE inventory, to support growth initiatives and the impact of the acquisition of KSJ, partially offset by the impact of brands that have been exited in our Adelington Design Group segment.
Borrowings under our Amended Facility peaked at $65.5 million during 2012, compared to a peak of $234.8 million in 2011. There were no outstanding borrowings under this facility at December 29, 2012 and December 31, 2011.
Net cash provided by operating activities of our continuing operations was $24.6 million in 2012, compared to $119.2 million in 2011. This $94.6 million period-over-period change was primarily due to a $160.6 million decrease related to working capital items, partially offset by improved earnings in 2012 compared to 2011 (excluding depreciation and amortization, foreign currency gains and losses, impairment charges and other non-cash items). The operating activities of our discontinued operations used $13.2 million and $136.2 million of cash in the fiscal years ended December 29, 2012 and December 31, 2011, respectively.
Net cash (used in) provided by investing activities of our continuing operations was $(131.1) million in 2012, compared to $230.5 million in 2011. Net cash used in investing activities in 2012 primarily reflected the use of $85.8 million for capital and in-store shop expenditures, $41.0 million for the KSJ Buyout, and $5.0 million for investments in and advances to KS China Co., Limited ("KSC"), our equity investee. Net cash provided by investing activities in 2011 primarily reflected the receipt of net proceeds of $309.7 million in connection with the sales of: (i) 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; (ii) the DANA BUCHMAN trademark; and (iii) the trademarks for our former Curve fragrance brands and selected other smaller fragrance brands. The proceeds we received from dispositions in 2011 were partially offset by the use of $77.1 million for capital and in-store shop expenditures, inclusive of $23.0 million for the purchase of the Ohio distribution center and $2.5 million for investments in and advances to KSC. The investing activities of our discontinued operations provided $77.4 million of cash and 2011.
Net cash provided by (used in) financing activities of our continuing operations was $1.1 million in 2012, compared to $(125.4) million in 2011. The $126.5 million period-over-period change primarily reflected a net increase of $95.6 million from issuances and repayments of long term debt, a $20.4 million decrease in net cash used in borrowing activities under our Amended Facility, a $5.9 million increase in proceeds received from the exercise of stock options and a decrease of $4.0 million related to payments of deferred financing fees. The financing activities of our discontinued operations used $2.7 million of cash in 2011.
Commitments and Capital Expenditures
During the first quarter of 2009, we entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as our buying/sourcing agent for
all of our brands and products (other than jewelry) and we 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. Our 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. We are also obligated to use Li & Fung as our buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The 2009 licensing arrangements with JCPenney in the US and Puerto Rico and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we 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 our agreement with Li & Fung, we refunded $1.8 million of the closing payment received from Li & Fung in the second quarter of 2012. In addition, our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.
In connection with the disposition of the LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain MEXX Canada retail stores, an aggregate of 153 store leases were assigned to third parties, for which we remain secondarily liable for the remaining obligations on 130 such leases. As of December 29, 2012, the future aggregate payments under these leases amounted to $190.0 million and extended to various dates through 2025.
In the second quarter of 2011, we initiated actions to close the Ohio Facility, which was expected to result in the termination of all or a significant portion of our union employees (see Note 13 of Notes to Consolidated Financial Statements). During the third quarter of 2011, we 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. We incurred such a liability in the second quarter of 2011 and recorded a $17.6 million charge to SG&A related to our estimate of the withdrawal liability. Under applicable statutory rules, this withdrawal liability is payable over a period of time, and we previously estimated that we would pay such liability in equal quarterly installments over a period of eight to 12 years. In February 2012, we were notified by the Fund that the Fund calculated our 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. As of December 29, 2012, the accrued withdrawal liability was $14.3 million, which was included in Accrued expenses and Other non-current liabilities on the accompanying Consolidated Balance Sheet.
In June 2011, we established KSC, 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 KSC for an initial 10 year period and commenced operations in the fourth quarter of 2011. We account for our 40.0% interest in KSC under the equity method of accounting. We made capital contributions to KSC of $5.0 million and $2.5 million in 2012 and 2011, respectively and are required to make capital contributions 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 Kate Spade HK Limited ("Globalluxe").
Additionally, we agreed that we or one of our 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 June 27, 2012, we received notification of Gores' calculation of the working capital adjustments related to the MEXX Transaction, pursuant to the terms of the agreement. We have disputed such calculation and have notified Gores that the adjustment should result instead in a payment to us. We do not expect that any amount that may be payable to Gores related to such adjustments will have a material adverse impact on our financial position, results of operations, liquidity or cash flows.
On January 25, 2013, Gores Malibu Holdings (Luxembourg) S.a.r.l. filed a complaint in the United States District Court for the Southern District of New York against Fifth and Pacific Companies, Inc. and Fifth & Pacific Companies Foreign Holdings, Inc. (amended on February 5, 2013). The complaint claims $15.0 million in damages for alleged breaches of the Merger Agreement related to the sale of the global MEXX business, including breaches of tax and tax-related covenants, breaches of interim operating covenants and breaches of reimbursement obligations related to employee bonuses. In addition, as previously disclosed, we and Gores Malibu are currently in dispute resolution proceedings with respect to working capital adjustments that are required to be made under the Merger Agreement. We cannot currently predict the outcomes of these proceedings although we do not believe any such amount will be material to our financial position or results of operations.
We will continue to closely manage spending, with a slight increase in projected 2013 capital expenditures to approximately $105.0-$115.0 million, compared to $85.8 million in 2012. These expenditures primarily relate to our plan to open 80-85 Company-owned retail stores globally, the continued technological upgrading of our management information systems and costs associated with the refurbishment of selected specialty retail and outlet stores. We expect capital expenditures and working capital cash needs to be financed with cash provided by operating activities and our amended and restated revolving credit facility.
The following table summarizes as of December 29, 2012 our contractual cash obligations by future period (see Notes 1, 9 and 10 of Notes to Consolidated Financial Statements):
*The table above does not include our secondary liability for assigned leases and amounts recorded for uncertain tax positions. We cannot estimate the amounts or timing of payments related to uncertain tax positions as we have not yet entered into substantive settlement discussions with taxing authorities.
(a)Includes $11.2 million aggregate principal amount of 6.0% Convertible Senior Notes that were converted in January 2013.
(b)Interest is fixed per annum.
(c)Does not include estimated additional interest of $1.3 million.
(d)Includes interest of $1.7 million.
(e)We agreed that the Company or one of our 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. That amount is not included as it is not determinable.
Debt consisted of the following:
(a)The change in the balance of these euro-denominated notes reflected the redemption or repurchase of the remaining Euro Notes since December 31, 2011.
(b)The balance at December 29, 2012 and December 31, 2011 represented principal of $19.9 million and $69.2 million, respectively, and an unamortized debt discount of $1.6 million and $8.9 million, respectively.
(c)The increase in the balance reflected the issuance of $152.0 million aggregate principal amount of Additional Notes at 108.25% of par value on June 8, 2012.
For information regarding our debt and credit instruments, refer to Note 10 of Notes to Consolidated Financial Statements.
As discussed in Note 10 of Notes to Consolidated Financial Statements, in May 2010, we completed a second amendment to and restatement of our revolving credit agreement. Availability under the Amended Facility shall be the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of our 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.
As of December 29, 2012, availability under our Amended Facility was as follows:
(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.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Hedging Activities
Our operations are exposed to risks associated with fluctuations in foreign currency exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates, we use foreign currency collars, forward contracts and swap contracts to hedge specific exposure to variability in forecasted cash flows associated primarily with inventory purchases and intercompany loans mainly of our recently acquired KATE SPADE business in Japan.
We may use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated intercompany loans. In order to mitigate currency exposure related to such loans, we entered into forward contracts to sell 4.0 billion yen for $47.5 million. Transaction gains of $1.0 million related to these derivative instruments were reflected within Other (expense) income, net for the year ended December 29, 2012.
In prior years, we hedged our net investment position in certain euro-denominated functional currency subsidiaries by designating a portion of the outstanding Euro Notes as the hedging instrument in a net investment hedge. To the extent the hedge was effective, related foreign currency translation gains and losses were recorded within Other comprehensive loss. Translation gains and losses related to the ineffective portion of the hedge were recognized in current operations within Other (expense) income, net.
In connection with the sale of an 81.25% interest in the global MEXX business on October 31, 2011, we dedesignated the remaining amount of the Euro Notes that had been previously designated as a hedge of the Company's net investment in certain euro-denominated functional currency subsidiaries. Accordingly, all foreign currency transaction gains or losses related to the remaining Euro Notes were recorded in earnings beginning on November 1, 2011 until the Euro Notes were fully retired in the third quarter of 2012.
We recognized the following foreign currency translation (losses) gains related to the net investment hedge:
Also, as a result of the sale of the interest in the global MEXX business, our net investment in certain euro-denominated functional currency subsidiaries was substantially liquidated, and the cumulative translation adjustment recognized on our Euro Notes through October 31, 2011 was written off and included within Loss on disposal of discontinued operations, net of income taxes on the accompanying Consolidated Statement of Operations (see Note 19 of Notes to Consolidated Financial Statements).
We occasionally use short-term foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with certain expected transactions. In order to mitigate the exposure related to the Tender Offer, we entered into forward contracts to sell $182.0 million for 128.0 million euro, which settled in the second quarter of 2011. During the second quarter of 2011, we entered into forward contracts designated as non-hedging derivative instruments maturing in July 2011 to sell $15.7 million for 11.0 million euro. The transaction gains of $2.5 million related to these derivative instruments were reflected within Other (expense) income, net for the year ended December 31, 2011.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements. These estimates and assumptions also affect the reported amounts of revenues and expenses.
Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies, discussed below, pertain to revenue recognition, income taxes, accounts receivable - trade, inventories, intangible assets, accrued expenses and share-based compensation. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Due to the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.
Estimates by their nature are based on judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.
For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends as well as an evaluation of economic conditions and the financial positions of our customers. For inventory, we review the aging and salability of our inventory and estimate the amount of inventory that we will not be able to sell in the normal course of business. This distressed inventory is written down to the expected recovery value to be realized through off-price channels. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. We utilize various valuation methods to determine the fair value of acquired tangible and intangible assets. For inventory, the method uses the expected selling prices of finished goods. Intangible assets acquired are valued using a discounted cash flow model. Should any of the assumptions used in these projections differ significantly from actual results, material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. For accrued expenses related to items such as employee insurance, workers' compensation and similar items, accruals are assessed based on outstanding obligations, claims experience and statistical trends; should these trends change significantly, actual results would likely be impacted. Changes in such estimates, based on more accurate information, may affect amounts reported in future periods. We are not aware of any reasonably likely events or circumstances, which would result in different amounts being reported that would materially affect our financial condition or results of operations.
Revenue Recognition
Revenue is recognized from our wholesale, retail and licensing operations. Revenue within our wholesale operations is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end-of-season allowances are based on historical trends, seasonal results, an evaluation of current economic conditions and retailer performance. We review and refine these estimates on a monthly basis based on current experience, trends and retailer performance. Our historical estimates of these costs have not differed materially from actual results. Retail store revenues are recognized net of estimated returns at the time of sale to consumers. Sales tax collected from customers is excluded from revenue. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. We do not recognize revenue for estimated gift card breakage. Licensing revenues are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. We also assess the likelihood of the realization of deferred tax assets and adjust the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe it more likely than not that all or a portion of the deferred tax assets will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the worldwide provision for income taxes. Changes in estimates may create volatility in our effective tax rate in future periods for various reasons including changes in tax laws or rates, changes in forecasted amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is our policy to recognize the impact of an uncertain income tax position on our income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.
Accounts Receivable - Trade, Net
In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria. Accounts receivable - trade, net, as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on an evaluation of historical and anticipated trends, the financial condition of our customers and an evaluation of the impact of economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to sales and are part of the provision for allowances included in Accounts receivable - trade, net. These provisions result from seasonal negotiations with our customers as well as historical deduction trends, net of expected recoveries, and the evaluation of current market conditions. Should circumstances change or economic or distribution channel conditions deteriorate significantly, we may need to increase our provisions. Our historical estimates of these costs have not differed materially from actual results.
Inventories, Net
Inventories for seasonal, replenishment and on-going merchandise are recorded at the lower of actual average cost or market value. We continually evaluate the composition of our inventories by assessing slow-turning, ongoing product as well as prior seasons' fashion product. Market value of distressed inventory is estimated based on historical sales trends for this category of inventory of our individual product lines, the impact of market trends and economic conditions and the value of current orders in-house relating to the future sales of this type of inventory. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. We review our inventory position on a monthly basis and adjust our estimates based on revised
projections and current market conditions. If economic conditions worsen, we incorrectly anticipate trends or unexpected events occur, our estimates could be proven overly optimistic and required adjustments could materially adversely affect future results of operations. Our historical estimates of these costs and our provisions have not differed materially from actual results.
Intangibles, Net
Intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. Our annual impairment test is performed as of the first day of the third fiscal quarter.
The fair values of purchased intangible assets with indefinite lives, primarily trademarks and tradenames, are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
The recoverability of the carrying values of all intangible assets with finite lives is re-evaluated when events or changes in circumstances indicate an asset's value may be impaired. Impairment testing is based on a review of forecasted operating cash flows and the profitability of the related brand. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to our Consolidated Statement of Operations.
Intangible assets with finite lives are amortized over their respective lives to their estimated residual values. Trademarks with finite lives are amortized over their estimated useful lives. Intangible merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over periods ranging from 12 to 14 years.
As a result of the impairment analysis performed in connection with our purchased trademarks with indefinite lives, no impairment charges were recorded during 2012, 2011 or 2010.
During 2011, we recorded non-cash impairment charges of $1.0 million primarily within our Adelington Design Group segment principally related to merchandising rights of our MONET and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.
During 2010, we recorded non-cash impairment charges of $2.6 million primarily within our Adelington Design Group segment principally related to merchandising rights of our LIZ CLAIBORNE and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.
Accrued Expenses
Accrued expenses for employee insurance, workers' compensation, contracted advertising and other outstanding obligations are assessed based on claims experience and statistical trends, open contractual obligations and estimates based on projections and current requirements. If these trends change significantly, then actual results would likely be impacted.
Share-Based Compensation
We recognize compensation expense based on the fair value of employee share-based awards, including stock options and restricted stock, net of estimated forfeitures. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will
be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.
Inflation
The rate of inflation over the past few years has not had a significant impact on our sales or profitability.
ACCOUNTING PRONOUNCEMENTS
For a discussion of recently adopted and recent accounting pronouncements, see Notes 1 and 21 of Notes to Consolidated Financial Statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We finance our capital needs through available cash and cash equivalents and marketable securities, operating cash flows, letters of credit and our Amended Facility. Our floating rate Amended Facility exposes us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates.
We do not speculate on the future direction of interest rates. As of December 29, 2012 and December 31, 2011, we did not have exposure to changing market rates as there were no amounts outstanding under our Amended Facility.
As of December 29, 2012, we have not employed interest rate hedging to mitigate such risks with respect to our floating rate facility. We believe that our Convertible Notes and Senior Notes, which are fixed rate obligations, partially mitigate the risks with respect to our variable rate financing.
We transact business in multiple currencies, resulting in exposure to exchange rate fluctuations. We mitigate the risks associated with changes in foreign currency exchange rates through the use of foreign exchange forward contracts and collars to hedge transactions denominated in foreign currencies for periods of generally less than one year. Gains and losses on contracts which hedge specific foreign currency denominated commitments are recognized in the period in which the underlying hedged item affects earnings.
As of December 29, 2012, we had forward contracts with net notional amounts of $47.5 million. Unrealized gains for outstanding foreign currency forward contracts were $1.0 million. A sensitivity analysis to changes in foreign currency exchange rates indicated that if the yen weakened by 10.0% against the US dollar, the fair value of these instruments would increase by $5.2 million at December 29, 2012. Conversely, if the yen strengthened by 10.0% against the US dollar, the fair value of these instruments would decrease by $4.2 million at December 29, 2012. Any resulting changes in the fair value of the instruments would be partially offset by changes in the underlying balance sheet positions. We do not hedge all transactions denominated in foreign currency.
We are exposed to credit related losses if the counterparties to our derivative instruments fail to perform their obligations. We systemically measure and assess such risk as it relates to the credit ratings of these counterparties, all of which currently have satisfactory credit ratings and therefore we do not expect to realize losses associated with counterparty default.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See the "Index to Consolidated Financial Statements and Schedule" appearing at the end of this Annual Report on Form 10-K for information required under this Item 8.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures at the end of each of our fiscal quarters. Our Chief Executive Officer and Chief Financial Officer concluded that, as of December 29, 2012, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934 ("the Exchange Act") is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Management has excluded from its assessment the internal control over financial reporting at KSJ, which was acquired on October 31, 2012 and whose financial statements constitute 4.7% of Total assets and 1.0% of Net sales as of and for the year ended December 29, 2012. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 29, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
See "Index to Consolidated Financial Statements and Schedule" appearing at the end of this Annual Report on Form 10-K for Management's Report on Internal Control Over Financial Reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
With respect to our Executive Officers, see "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K.
Information regarding Section 16(a) compliance, the Audit Committee (including membership and Audit Committee Financial Experts but excluding the "Audit Committee Report"), our code of ethics and background of our Directors appearing under the captions "Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance," "Additional Information-Company Code of Ethics and Business Practices" and "Election of Directors" in our Proxy Statement for the 2013 Annual Meeting of Shareholders (the "2013 Proxy Statement") is hereby incorporated by reference.
Item 11.
Item 11. Executive Compensation.
Information called for by this Item 11 is incorporated by reference to the information set forth under the headings "Compensation Discussion and Analysis" and "Executive Compensation" (other than the Board Compensation Committee Report) in the 2013 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
EQUITY COMPENSATION
The following table summarizes information about the stockholder approved Fifth & Pacific Companies, Inc. Outside Directors' 1991 Stock Ownership Plan (the "Outside Directors' Plan"); Fifth & Pacific Companies, Inc. 1992 Stock Incentive Plan; Fifth & Pacific Companies, Inc. 2000 Stock Incentive Plan (the "2000 Plan"); Fifth & Pacific Companies, Inc. 2002 Stock Incentive Plan (the "2002 Plan"); Fifth & Pacific Companies, Inc. 2005 Stock Incentive Plan (the "2005 Plan"); and Fifth & Pacific Companies, Inc. 2011 Stock Incentive Plan (the "2011 Plan"), which together comprise all of our existing equity compensation plans, as of December 29, 2012. In January 2006, we adopted the Fifth & Pacific Companies, Inc. Outside Directors' Deferral Plan, which amended and restated the Outside Directors' Plan by eliminating equity grants under the Outside Directors' Plan, including the annual grant of shares of Common Stock. The last grant under the Outside Directors' Plan was made on January 10, 2006. All subsequent Director stock grants have been made under the remaining shareholder approved plans.
(a)Includes (i) 835,816 shares of Common Stock issuable under the 2002, 2005 and 2011 Plans pursuant to participants' elections thereunder to defer certain director compensation; and (ii) 1,164,500 performance shares granted to a group of key executives, of which the number of shares earned will be determined by the achievement of the performance criteria set forth in the performance share arrangement and range from 0 - 225% of target.
(b)Performance Shares and shares of Common Stock issuable under the 2000, 2002, 2005 and 2011 Plans pursuant to participants' election thereunder to defer certain director compensation were not included in calculating the Weighted Average Exercise Price.
(c)In addition to options, warrants and rights, the 2000 Plan, the 2002 Plan, the 2005 Plan and the 2011 Plan authorize the issuance of restricted stock, unrestricted stock and performance stock. Each of the 2000 and the 2002 Plans contains a sub-limit on the aggregate number of shares of restricted Common Stock, which may be issued; the sub-limit under the 2000 Plan is set at 1,000,000 shares and the sub-limit under the 2002 Plan is set at 1,800,000 shares. The 2005 Plan contains an aggregate 2,000,000 shares sub-limit on the number of shares of restricted stock, restricted stock units, unrestricted stock and performance shares that may be awarded. The 2011 Plan contains an aggregate 1,500,000 shares sub-limit on the number of shares of restricted stock, restricted stock units, unrestricted stock and performance shares that may be awarded. For purposes of computing the number of shares available for grant, awards other than stock options and stock appreciation rights will be counted against the 2011 Plan maximum in a 1.6-to-1.0 ratio. Security ownership information of certain beneficial owners and management as called for by this Item 12 is incorporated by reference to the information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 2013 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information called for by this Item 13 is incorporated by reference to the information set forth under the headings "Certain Relationships and Related Transactions" in the 2013 Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services.
Information called for by this Item 14 is incorporated by reference to the information set forth under the heading "Ratification of the Appointment of the Independent Registered Public Accounting Firm" in the 2013 Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a)
1. Financial Statements
Refer to Index to Consolidated
Financial Statements on Page
(a)
2. Schedule
SCHEDULE II - Valuation and Qualifying Accounts
NOTE: Schedules other than those referred to above and parent company financial statements have been omitted as inapplicable or not required under the instructions contained in Regulation S-X or the information is included elsewhere in the financial statements or the notes thereto.
(a)
3. Exhibits
Exhibit No.
Description
10(v)(i)
-
Second Amended and Restated Credit Agreement, dated May 6, 2010, among the Company, Mexx Europe B.V., Juicy Couture Europe Limited, and Liz Claiborne Canada Inc., as Borrowers, the several subsidiary guarantors party thereto, the several lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Collateral Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent, J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, Bank of America, N.A., as Syndication Agent, General Electric Capital Corporation, as Documentation Agent, and J.P. Morgan Securities Inc., Banc of America Securities LLC, Wells Fargo Capital Finance, LLC and SunTrust Robinson Humphrey, Inc., as Joint Lead Arrangers and Joint Bookrunners (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated May 6, 2010).
10(v)(ii)
-
The First Amendment and Consent to the Second Amended and Restated Credit Agreement and Second Amendment to the US Pledge and Security Agreement, dated as of March 25, 2011, among Registrant, Liz Claiborne Canada, Inc., Mexx Europe B.V. and Juicy Couture Europe Limited, as Borrowers, the several lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Collateral Agent, J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent (incorporated herein by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the period ended April 2, 2011).
10(v)(iii)
-
Third Amendment and Consent, dated as of September 21, 2011, to the Second Amendment and Restated Credit Agreement, among Registrant, Mexx Europe B.V., Liz Claiborne Canada Inc., Juicy Couture Europe Limited, the several lenders thereto, JPMorgan Chase bank N.A., as Administrative Agent and US Collateral Agent, J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, JPMorgan Chase bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent. (incorporated herein by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the period ended October 1, 2011).
10(v)(iv)
-
Fourth Amendment to the Second Amended and Restated Credit Agreement, dated May 6, 2010, among the Company, the guarantors party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Collateral Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent, J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, Bank of America, N.A., as Syndication Agent, General Electric Capital Corporation, as Documentation Agent, and J.P. Morgan Securities Inc., Banc of America Securities LLC, Wells Fargo Capital Finance, LLC and SunTrust Bank, as Documentation Agents (incorporated herein by reference to Exhibit 10(z)(iv) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2011).
10(v)(v)
-
Fifth Amendment and Consent to the Second Amended and Restated Credit Agreement and Second Amendment to the US Pledge and Security Agreement, dated as of June 5, 2012, among Registrant, the Guarantors party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and US Collateral Agent, J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent, Bank of America, N.A., as Syndication Agent, and Wells Fargo Capital Finance, LLC, SunTrust Bank and General Electric Capital Corporation, as Documentation Agents (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed for the period ended June 30, 2012).
+Compensation plan or arrangement required to be noted as provided in Item 14(a)(3).
*Filed herewith.
DCertain portions of this exhibit have been omitted in connection with the grant of confidential treatment therefore.
#A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 21, 2013.
FIFTH & PACIFIC COMPANIES, INC.
FIFTH & PACIFIC COMPANIES, INC
By:
/s/ George M. Carrara
By:
/s/ Michael Rinaldo
George M. Carrara,
Michael Rinaldo,
Chief Financial Officer
(principal financial officer)
Vice President - Corporate Controller
and Chief Accounting Officer
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on February 21, 2013.
Signature
Title
/s/ William L. McComb
William L. McComb
Chief Executive Officer and Director
(principal executive officer)
/s/ Bernard W. Aronson
Bernard W. Aronson
Director
/s/ Lawrence Benjamin
Lawrence Benjamin
Director
/s/ Raul J. Fernandez
Raul J. Fernandez
Director
/s/ Kenneth B. Gilman
Kenneth B. Gilman
Director
/s/ Nancy J. Karch
Nancy J. Karch
Director
/s/ Kenneth P. Kopelman
Kenneth P. Kopelman
Director
/s/ Kay Koplovitz
Kay Koplovitz
Director and Chairman of the Board
/s/ Arthur C. Martinez
Arthur C. Martinez
Director
/s/ Doreen A. Toben
Doreen A. Toben
Director
FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Number
MANAGEMENT'S REPORTS AND REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
to
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 29, 2012 and December 31, 2011
Consolidated Statements of Operations for the Three Fiscal Years Ended December 29, 2012
Consolidated Statements of Comprehensive Loss for the Three Fiscal Years Ended December 29, 2012
Consolidated Statements of Retained Earnings, Accumulated Comprehensive Loss and Changes in Capital Accounts for the Three Fiscal Years Ended December 29, 2012
Consolidated Statements of Cash Flows for the Three Fiscal Years Ended December 29, 2012
Notes to Consolidated Financial Statements
to
SCHEDULE II - Valuation and Qualifying Accounts
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a - 15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company's system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of the Company's internal control over financial reporting as of December 29, 2012 based upon criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Management has excluded from its assessment the internal control over financial reporting at Kate Spade Japan Co., Ltd., which was acquired on October 31, 2012 and whose financial statements constitute 4.7% of Total assets and 1.0% of Net sales as of and for the year ended December 29, 2012. Based on our evaluation, management determined that the Company's internal control over financial reporting was effective as of December 29, 2012 based on the criteria in Internal Control - Integrated Framework issued by COSO.
The Company's internal control over financial reporting as of December 29, 2012 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report which appears herein.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Fifth & Pacific Companies, Inc. is responsible for the preparation, objectivity and integrity of the consolidated financial statements and other information contained in this Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include some amounts that are based on management's informed judgments and best estimates.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed herein their unqualified opinion on those financial statements.
The Audit Committee of the Board of Directors, which oversees all of the Company's financial reporting process on behalf of the Board of Directors, consists solely of independent directors, meets with the independent registered public accounting firm, internal auditors and management periodically to review their respective activities and the discharge of their respective responsibilities. Both the independent registered public accounting firm and the internal auditors have unrestricted access to the Audit Committee, with or without management, to discuss the scope and results of their audits and any recommendations regarding the system of internal controls.
February 21,
/s/ William L. McComb
/s/ George M. Carrara
William L. McComb
George M. Carrara
Chief Executive Officer
Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fifth & Pacific Companies, Inc.
We have audited the internal control over financial reporting of Fifth & Pacific Companies, Inc. and subsidiaries (the "Company") as of December 29, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
As described in Management's Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Kate Spade Japan Co., Ltd ("KSJ"), which was acquired on October 31, 2012 and whose financial statements constitute 5% of total assets and less than 1% of revenues of the consolidated financial statement amounts as of and for the year ended December 29, 2012. Accordingly, our audit did not include the internal control over financial reporting at KSJ.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 29, 2012 of the Company and our report dated February 21, 2013 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 21, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fifth & Pacific Companies, Inc.
We have audited the accompanying consolidated balance sheets of Fifth & Pacific Companies, Inc. and subsidiaries (the "Company") as of December 29, 2012 and December 31, 2011, and the related consolidated statements of operations, statements of comprehensive loss, statements of retained earnings, accumulated comprehensive loss and changes in capital accounts, and cash flows for each of the three years in the period ended December 29, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Fifth & Pacific Companies, Inc. and subsidiaries as of December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 21, 2013
Fifth & Pacific Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Fifth & Pacific Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Fifth & Pacific Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Fifth & Pacific Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, ACCUMULATED COMPREHENSIVE LOSS AND
CHANGES IN CAPITAL ACCOUNTS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Fifth & Pacific Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Fifth & Pacific Companies, Inc. and its wholly-owned and majority-owned subsidiaries (the "Company") are engaged primarily in the design and marketing of a broad range of apparel and accessories. The Company's segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company's businesses across multiple functional areas including specialty retail, retail outlets, concessions, wholesale apparel, wholesale non-apparel, e-commerce and licensing. 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, KATE SPADE SATURDAY 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 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.
(*)Our agreement to supply DANA BUCHMAN branded jewelry to Kohl's Corporation ("Kohl's) expires on October 11, 2013. The operations of the Company's AXCESS brand concluded with 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 segment.
On November 2, 2011, the Company sold the global trademark rights for the LIZ CLAIBORNE family of brands and the trademark rights in the US and Puerto Rico for the MONET brand to J.C. Penney Corporation, Inc. ("JCPenney") for $267.5 million. The transaction provided for the sale of domestic and international trademark rights for LIZ CLAIBORNE, CLAIBORNE, LIZ, LIZ & CO., CONCEPTS BY CLAIBORNE, LC, ELISABETH, LIZGOLF, LIZSPORT, LIZ CLAIBORNE NEW YORK and LIZWEAR and the sale of the trademark rights in the US and Puerto Rico for MONET. The LIZ CLAIBORNE NEW YORK and LIZWEAR trademarks are licensed back royalty-free to the Company until July 2020. Further, the Company serves as the exclusive supplier of jewelry to JCPenney for the LIZ CLAIBORNE and MONET brands. In connection with this transaction, the Company entered into an agreement with JCPenney to develop exclusive brands for JCPenney, pursuant to which JCPenney paid the Company a $20.0 million refundable advance. The agreement terminated by its terms 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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 held an 18.75% interest and affiliates of Gores held an 81.25% interest, for cash consideration, subject to working capital adjustments, of $85.0 million, including revolving credit facility debt that was assumed by NewCo. The operating loss associated with the Company's former International-Based Direct Brands segment included allocated corporate expenses that could not be reported as discontinued operations and therefore were reported in the Company's segment results.
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.
In January 2010, the Company entered into an agreement with Laura's Shoppe (Canada) Ltd. and Laura's Shoppe (P.V.) Inc. (collectively, "Laura Canada"), which included the assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and equipment to Laura Canada in exchange for a net fee of approximately $7.9 million.
The activities of the Company's global MEXX business, its KENSIE, 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 3 - Discontinued Operations.
On October 31, 2012, the Company acquired the 51.0% interest ("KSJ Buyout") held by Sanei International Co., Ltd ("Sanei") in Kate Spade Japan Co., Ltd. ("KSJ"). KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009. KSJ operated the KATE SPADE and JACK SPADE businesses in Japan, and KATE SPADE will continue to operate such businesses in Japan through its Japanese subsidiary. The purchase price for the KSJ Buyout was $41.0 million, net of $0.4 million of cash acquired.
On June 8, 1999, the Company acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. ("Lucky Brand"), whose core business consists of the Lucky Brand Dungarees line of women and men's denim-based sportswear. The total purchase price consisted of aggregate cash payments of $126.2 million and
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
additional payments made from 2005 to 2010 totaling $70.0 million for 12.7% of the remaining equity of Lucky Brand. The aggregate purchase price for the remaining 2.3% of the original shares consisted of the following two installments: (i) a payment made in 2008 of $15.7 million that was based on a multiple of Lucky Brand's 2007 earnings and (ii) a 2011 payment based on a multiple of Lucky Brand's 2010 earnings, net of the 2008 payment. Based on Lucky Brand's 2010 earnings, no final payment was required, and LUCKY BRAND became a wholly-owned subsidiary in January 2011.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company. All inter-company balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements. These estimates and assumptions also affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.
Critical accounting policies are those that are most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's most critical accounting policies, discussed below, pertain to revenue recognition, income taxes, accounts receivable - trade, inventories, intangible assets, accrued expenses and share-based compensation. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Due to the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.
Revenue Recognition
The Company recognizes revenue from its wholesale, retail and licensing operations. Revenue within the Company's wholesale operations is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end-of-season allowances are based on historical trends, seasonal results, an evaluation of current economic conditions and retailer performance. The Company reviews and refines these estimates on a monthly basis based on current experience, trends and retailer performance. The Company's historical estimates of these costs have not differed materially from actual results. Retail store revenues are recognized net of estimated returns at the time of sale to consumers. Sales tax collected from customers is excluded from revenue. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. The Company does not recognize revenue for estimated gift card breakage. Licensing revenues, which amounted to $43.1 million, $80.7 million and $61.2 million during 2012, 2011 and 2010, respectively, are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. The Company also assesses the likelihood of the realization of deferred tax assets and adjusts the carrying amount of these deferred tax assets by a valuation allowance to the extent the Company believes it more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the worldwide provision for income taxes. Changes in estimates may create volatility in the Company's effective tax rate in future periods for various reasons including changes in tax laws or rates, changes in forecasted amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is the Company's policy to recognize the impact of an uncertain income tax position on its income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. The Company records interest expense and penalties payable to relevant tax authorities as income tax expense.
Accounts Receivable - Trade, Net
In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable - trade, net, as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on an evaluation of historical and anticipated trends, the financial condition of the Company's customers and an evaluation of the impact of economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to sales and are part of the provision for allowances included in Accounts receivable - trade, net. These provisions result from seasonal negotiations with the Company's customers as well as historical deduction trends, net of expected recoveries, and the evaluation of current market conditions. The Company's historical estimates of these costs have not differed materially from actual results.
Inventories, Net
Inventories for seasonal, replenishment and on-going merchandise are recorded at the lower of actual average cost or market value. The Company continually evaluates the composition of its inventories by assessing slow-turning, ongoing product as well as prior seasons' fashion product. Market value of distressed inventory is estimated based on historical sales trends for this category of inventory of the Company's individual product lines, the impact of market trends and economic conditions and the value of
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
current orders in-house relating to the future sales of this type of inventory. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. The Company's historical estimates of these costs and its provisions have not differed materially from actual results.
In the first quarter of 2009, the Company entered into a ten-year, buying/sourcing agency agreement with Li & Fung Limited ("Li & Fung") (see Note 9 - Commitments and Contingencies). Pursuant to the agreement, the Company received a payment of $75.0 million at closing, which was recorded within Accrued expenses and Other non-current liabilities on the accompanying Consolidated Balance Sheets. Under the terms of the buying/sourcing agency agreement, the Company is subject to minimum purchase requirements based on the value of inventory purchased each year under the agreement. The 2009 licensing agreements with JCPenney and QVC, Inc. ("QVC") (see Note 17 - Additional Financial Information) resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing agreement. As a result, the Company refunded $24.3 million of the closing payment received from Li & Fung during the second quarter of 2010. The 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. The Company will reclassify up to $4.9 million per contract year of the $48.9 million net payment as a reduction of inventory cost as inventory is purchased using the buying/sourcing agent, up to the minimum requirement for the initial term of the agreement and subsequently reflect a reduction of Cost of goods sold as the inventory is sold.
Intangibles, Net
Intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. The Company's annual impairment test is performed as of the first day of the third fiscal quarter.
The fair values of purchased intangible assets with indefinite lives, primarily trademarks and tradenames, are estimated and compared to their carrying values. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
The recoverability of the carrying values of all intangible assets with finite lives is re-evaluated when events or changes in circumstances indicate an asset's value may be impaired. Impairment testing is based on a review of forecasted operating cash flows. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Consolidated Statement of Operations.
Intangible assets with finite lives are amortized over their respective lives to their estimated residual values. Trademarks with finite lives are amortized over their estimated useful lives. Intangible merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over periods ranging from 12 to 14 years.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result of the impairment analysis performed in connection with the Company's purchased trademarks with indefinite lives, no impairment charges were recorded during 2012, 2011 or 2010.
During 2011, the Company recorded non-cash impairment charges of $1.0 million primarily within its Adelington Design Group segment principally related to merchandising rights of its MONET and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.
During 2010, the Company recorded non-cash impairment charges of $2.6 million primarily within its Adelington Design Group segment principally related to merchandising rights of its LIZ CLAIBORNE and former licensed DKNY® Jeans brands due to decreased use of such intangible assets.
Accrued Expenses
Accrued expenses for employee insurance, workers' compensation, contracted advertising and other outstanding obligations are assessed based on claims experience and statistical trends, open contractual obligations and estimates based on projections and current requirements. If these trends change significantly, then actual results would likely be impacted.
Share-Based Compensation
The Company recognizes compensation expense based on the fair value of employee share-based awards, including stock options and restricted stock, net of estimated forfeitures. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value Measurements
The Company applies the relevant accounting guidance on fair value measurements to (i) all financial instruments that are being measured and reported on a fair value basis; (ii) non-financial assets and liabilities measured and reported at fair value on a non-recurring basis; and (iii) disclosures of fair value of certain financial assets and liabilities.
The following fair value hierarchy is used in selecting inputs for those instruments measured at fair value that distinguishes between assumptions based on market data (observable) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels.
Level 1 - Quoted market prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 - Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.
Fair value measurement for the Company's assets assumes the highest and best use (the use that generates the highest returns individually or as a group) for the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. This applies even if the intended use of the asset by the Company is different.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair value measurement for the Company's liabilities assumes that the liability is transferred to a market participant at the measurement date and that the nonperformance risk relating to the liability is the same before and after the transaction. Nonperformance risk refers to the risk that the obligation will not be fulfilled and includes the Company's own credit risk.
The Company has chosen not to elect the fair value measurement option for any instruments not required to be measured at fair value on a recurring basis.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less at the date of purchase are classified as cash equivalents.
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and amortization. Buildings and building improvements are depreciated using the straight-line method over their estimated useful lives of 20 to 39 years. Machinery and equipment and furniture and fixtures are depreciated using the straight-line method over their estimated useful lives of three to seven years. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful lives of the assets. Improvements are capitalized and depreciated in accordance with the Company's policies; costs for maintenance and repairs are expensed as incurred. Leased property meeting certain capital lease criteria is capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is recorded on the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The Company recognizes a liability for the fair value of an asset retirement obligation ("ARO") if the fair value can be reasonably estimated. The Company's ARO's are primarily associated with the removal and disposal of leasehold improvements at the end of a lease term when the Company is contractually obligated to restore a facility to a condition specified in the lease agreement. Amortization of ARO's is recorded on a straight-line basis over the lease term.
The Company capitalizes the costs of software developed or obtained for internal use. Capitalization of software developed or obtained for internal use commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis over five years, when such software is substantially ready for use.
The Company evaluates the recoverability of property and equipment if circumstances indicate an impairment may have occurred. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows to be generated from such assets, on an undiscounted basis. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of the impaired assets is reduced to fair value through a charge to the Company's Consolidated Statement of Operations.
The Company recorded pretax charges of $39.7 million in 2012, $26.5 million in 2011 and $10.5 million in 2010 to reduce the carrying values of certain property and equipment to their estimated fair values (see Note 11 - Fair Value Measurements).
Goodwill
Goodwill is not amortized but rather tested for impairment at least annually. The Company's annual impairment test is performed as of the first day of the third fiscal quarter.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A two-step impairment test is performed on goodwill. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the market approach, as is typically used for companies providing products where the value of such a company is more dependent on the ability to generate earnings than the value of the assets used in the production process. Under this approach, the Company estimates fair value based on market multiples of revenues and earnings for comparable companies. The Company also uses discounted future cash flow analyses to corroborate these fair value estimates. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. The activities in the second step include valuing the tangible and intangible assets of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets.
As a result of the impairment analysis performed in connection with the Company's goodwill, no impairment charges were recorded during 2012 or 2011.
During 2012, the Company recorded additional goodwill as a result of the KSJ acquisition (see Note 2 - Acquisition).
Operating Leases
The Company leases office space, retail stores and distribution facilities. Many of these operating leases provide for tenant improvement allowances, rent increases and/or contingent rent provisions. Rental expense is recognized on a straight-line basis commencing with the possession date of the property, which is the earlier of the lease commencement date or the date when the Company takes possession of the property. Certain store leases include contingent rents that are based on a percentage of retail sales over stated thresholds. Tenant allowances are amortized on a straight-line basis over the life of the lease as a reduction of rent expense and are included in Selling, general & administrative expenses ("SG&A").
The Company leases retail stores under leases with terms that are typically five or ten years. The Company amortizes rental abatements, construction allowances and other rental concessions classified as deferred rent on a straight-line basis over the initial term of the lease. The initial lease term can include one renewal under limited circumstances if the renewal is reasonably assured, based on consideration of all of the following factors: (i) a written renewal at the Company's option or an automatic renewal; (ii) there is no minimum sales requirement that could impair the Company's ability to renew; (iii) failure to renew would subject the Company to a substantial penalty; and (iv) there is an established history of renewals in the format or location.
Derivative Instruments
The Company's derivative instruments are recorded in the Consolidated Balance Sheets as either an asset or liability and measured at their fair value. The changes in a derivative's fair value are recognized either currently in earnings or Accumulated other comprehensive loss, depending on whether the derivative qualifies for hedge accounting treatment. The Company tests each derivative for effectiveness at inception of each hedge and at the end of each reporting period.
From time to time, the Company uses foreign currency forward contracts and options for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
purchases. These instruments are designated as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the changes in fair value are included in Accumulated other comprehensive loss, net of income taxes, with the corresponding asset or liability recorded in the Consolidated Balance Sheet. The ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods sold in current period earnings. Amounts recorded in Accumulated other comprehensive loss are reflected in current period earnings when the hedged transaction affects earnings. If fluctuations in the relative value of the currencies involved in the hedging activities were to move dramatically, such movement could impact the Company's results of operations.
Prior to the sale of the global MEXX business, the Company hedged its net investment position in certain euro-denominated functional currency subsidiaries by borrowing directly in foreign currency and designating a portion of foreign currency debt as a hedge of net investments. The foreign currency transaction gain or loss recognized for the effective portion of a foreign currency denominated debt instrument that was designated as the hedging instrument in a net investment hedge was recorded as a translation adjustment.
Occasionally, the Company purchases short-term foreign currency contracts to neutralize balance sheet and other expected exposures. These derivative instruments do not qualify as cash flow hedges and are recorded at fair value with all gains or losses recognized as a component of SG&A or Other (expense) income, net in current period earnings (see Note 12 - Derivative Instruments).
Foreign Currency Translation
Assets and liabilities of non-US subsidiaries are translated at period-end exchange rates. Revenues and expenses for each month are translated using that month's average exchange rate and then are combined for the period totals. Resulting translation adjustments are included in Accumulated other comprehensive loss. Gains and losses on translation of intercompany loans with foreign subsidiaries of a long-term investment nature are also included in this component of Stockholders' deficit.
Foreign Currency Transactions
Outstanding balances in foreign currencies are translated at the end of period exchange rates. The resulting exchange differences are recorded in the Consolidated Statements of Operations or Accumulated other comprehensive loss, as appropriate.
Cost of Goods Sold
Cost of goods sold for wholesale operations includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, import costs, third party inspection activities, buying/sourcing agent commissions and provisions for shrinkage. For retail operations, in-bound freight from the Company's warehouse to its own retail stores is also included. Warehousing activities including receiving, storing, picking, packing and general warehousing charges are included in SG&A and, as such, the Company's gross profit may not be comparable to others who may include these expenses as a component of Cost of goods sold.
Advertising, Promotion and Marketing
All costs associated with advertising, promoting and marketing of Company products are expensed during the periods when the activities take place. Costs associated with cooperative advertising programs involving agreements with customers, whereby customers are required to provide documentary evidence of specific performance and when the amount of consideration paid by the Company for these services is at or
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
below fair value, are charged to SG&A. Costs associated with customer cooperative advertising allowances without specific performance guidelines are recorded as a reduction of sales. The Company incurred expenses of $60.5 million, $49.3 million and $53.4 million for advertising, marketing & promotion for all brands in 2012, 2011 and 2010, respectively.
Shipping and Handling Costs
Shipping and handling costs, which are mostly comprised of warehousing activities, are included as a component of SG&A in the Consolidated Statements of Operations. In fiscal years 2012, 2011 and 2010, shipping and handling costs were $32.4 million, $38.8 million and $46.3 million, respectively.
Investments in Unconsolidated Subsidiaries
The Company uses the equity method of accounting for its investments in and its proportionate share in earnings of affiliates that it does not control, but over which it exerts significant influence (see Note 20 - Related Party Transactions). The Company considers whether the fair value of its equity method investments has declined below carrying value whenever adverse events or changes in circumstances indicate the recorded value may not be recoverable.
The Company uses the cost method of accounting for its investment in an affiliate that it does not control and over which the Company does not exert significant influence (see Note 20 - Related Party Transactions). The Company evaluates such investment for other-than-temporary impairment due to changes in circumstances and if such changes are likely to have a significant adverse effect which may indicate an impairment of the investment. If an impairment indicator is present, the Company estimates the fair value of the cost method investment to determine whether the investment is actually impaired. If the investment is impaired, the Company determines whether the impairment is considered other-than-temporary.
Cash Dividends and Common Stock Repurchases
On December 16, 2008, the Board of Directors announced the suspension of the Company's quarterly cash dividend indefinitely.
The Company's amended and restated revolving credit agreement currently restricts its ability to pay dividends and repurchase stock (see Note 10 - Debt and Lines of Credit).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31. The 2012, 2011 and 2010 fiscal years, which ended on December 29, 2012, December 31, 2011 and January 1, 2011, respectively, reflected 52-week periods.
Subsequent Events
The Company's policy is to evaluate all events or transactions that occur from the balance sheet date through the date of the issuance of its financial statements. The Company has evaluated events or transactions that occurred from the balance sheet date through the date the Company issued these financial statements (see Note 25 - Subsequent Events).
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 11 - Fair Value Measurements).
NOTE 2: ACQUISITION
On October 31, 2012, a subsidiary of the Company acquired the remaining 51.0% interest in KSJ held by Sanei. KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009. KSJ operated the KATE SPADE, KATE SPADE SATURDAY and JACK SPADE businesses in Japan, and the Company will continue to operate such businesses in Japan through its Japanese subsidiary.
The purchase price for the KSJ, including post-closing adjustments was 3.308 billion yen or $41.4 million.
As of December 29, 2012, KSJ distributes its products mainly through 54 points of sale, including owned retail stores, concessions and e-commerce. These direct-to-consumer channels made up over 90% of KSJ's total net sales for the twelve months ending August 31, 2012. The Company intends to realize synergies from the KSJ Buyout by leveraging its global retail expertise with KSJ's continued growth and its strategic marketing and sales positions in the rest of Asia.
Prior to obtaining control on October 31, 2012, the Company accounted for the investment in KSJ under the equity method. Upon obtaining control, the transaction was accounted for as an "acquisition achieved in stages," in accordance with US GAAP. Accordingly, the Company re-measured the previously held equity interest in KSJ and adjusted it to fair value utilizing an income approach based on expected future after tax cash flows of KSJ discounted to reflect risk associated with those cash flows and a market approach based on earnings and revenue multiples that other purchasers in the market would have paid for that business. The fair value of the Company's equity interest at the acquisition date was $47.2 million. The difference between the fair value of the Company's ownership in KSJ and the Company's carrying value of its investment of $7.1 million resulted in the recognition of a gain of $40.1 million. The gain was included on the accompanying Consolidated Statement of Operations as Gain on acquisition of subsidiary for the year ended December 29, 2012. The results of operations for KSJ have been included in the Company's consolidated results since October 31, 2012. KSJ generated $16.0 million of sales and $0.7 million of net income since the acquisition date. Transaction costs related to the acquisition were not significant.
The allocation of the purchase price to the assets acquired and liabilities assumed is 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 $63.4 million of goodwill, which is reflected in the KATE SPADE reporting segment. None of the recorded goodwill is deductible for income tax purposes.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the acquisition date:
The following table presents details of the acquired intangible assets:
The following unaudited pro forma financial information for the years ended December 29, 2012 and December 31, 2011 reflects the results of continuing operations of the Company as if the KSJ Buyout had been completed on January 1, 2012 and January 2, 2011, respectively. Pro forma adjustments have been made for changes in depreciation and amortization expenses related to the valuation of the acquired tangible and intangible assets at fair value, the elimination of non-recurring items and the addition of incremental costs related to debt used to finance the acquisition.
(a)Convertible Notes interest expense of $9.2 million was excluded from the computation of 2011 diluted income per share. The unaudited pro forma financial information is presented for information purposes only. It is not necessarily indicative of what the Company's financial position or results of operations actually would have been if the Company completed the acquisition at the dates indicated, nor does it purport to project the Company's future financial position or operating results.
NOTE 3: 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
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 Company recorded pretax charges of $11.9 million, $236.1 million and $30.9 million ($11.9 million, $222.2 million and $27.5 million, after tax) in 2012, 2011 and 2010, 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:
For the years ended December 29, 2012, December 31, 2011 and January 1, 2011, the Company recorded charges of $5.2 million, $40.7 million and $31.1 million, respectively, related to its streamlining initiatives within Discontinued operations, net of income taxes.
NOTE 4: INVENTORIES, NET
Inventories, net consisted of the following:
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
(a)The decrease in the balance compared to December 31, 2011 primarily reflected aggregate non-cash impairment charges of $26.3 million related to the Company's Ohio distribution center and New Jersey corporate office.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and amortization expense on property and equipment for the years ended December 29, 2012, December 31, 2011 and January 1, 2011, was $58.7 million, $66.0 million and $65.6 million, respectively, which included depreciation for property and equipment under capital leases of $2.9 million, $3.8 million and $4.8 million, respectively. Machinery and equipment under capital leases was $22.6 million as of December 29, 2012 and December 31, 2011.
NOTE 6: GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all intangible assets:
(a)The increase in the balance compared to December 31, 2011 reflected the KSJ Buyout (see Note 2 - Acquisition). Amortization expense of intangible assets was $4.1 million, $4.4 million and $5.6 million for the years ended December 29, 2012, December 31, 2011 and January 1, 2011, respectively.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The estimated amortization expense of intangible assets for the next five years is as follows:
The changes in carrying amount of goodwill for the years ended December 29, 2012 and December 31, 2011 were as follows:
In the second quarter of 2011, the Company paid $1.6 million of additional purchase price related to its contingent earn-out obligation to the former owners of MAC & JAC.
NOTE 7: ACCRUED EXPENSES
Accrued expenses consisted of the following:
(a)The long-term portion of deferred income of $74.5 million at December 31, 2011 is included within Other non-current liabilities on the accompanying Consolidated Balance Sheets.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8: INCOME TAXES
(Loss) income before provision (benefit) for income taxes consisted of the following:
The provision (benefit) for income taxes was as follows:
Fifth & Pacific Companies, Inc. and its US subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities represent the tax effects of revenues, costs and expenses, which are recognized for tax purposes in different periods from those used for financial statement purposes.
The effective income tax rate differed from the statutory federal income tax rate as follows:
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of net deferred taxes arising from temporary differences were as follows:
As of December 29, 2012, the Company and its domestic subsidiaries had net operating loss and foreign tax credit carryforwards of $554.8 million (federal tax effected amount of $194.2) and $53.5 million, respectively, for federal income tax purposes that may be used to reduce future federal taxable income. The net operating loss and foreign tax credit carryforwards for federal income tax purposes will begin to expire in 2029 and 2016, respectively.
As of December 29, 2012, the Company and certain of its domestic subsidiaries recorded a $60.9 million deferred tax asset related to net operating loss carryforwards for state income tax purposes that may be used to reduce future state taxable income. The net operating loss carryforwards for state income tax purposes begin to expire in 2013.
As of December 29, 2012, certain of the Company's foreign subsidiaries recorded a $11.7 million deferred tax asset related to net operating loss carryforwards for foreign income tax purposes that may be used to reduce future foreign taxable income. The net operating loss carryforwards for foreign income tax purposes begin to expire in 2015.
As of December 29, 2012, the Company had total deferred tax assets related to net operating loss carryforwards of $266.8 million, of which $194.2 million, $60.9 million and $11.7 million were attributable to federal, domestic state and local, and foreign subsidiaries, respectively.
As of December 29, 2012, the Company and its subsidiaries recorded valuation allowances in the amount of $545.6 million against its net operating loss and other deferred tax assets due to of its history of pretax losses and inability to carry back tax losses or credits for refunds. This represents a total increase in the valuation allowance of $50.8 million compared to the balance at December 31, 2011.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has not provided for deferred taxes on the outside basis difference in its investments in foreign subsidiaries that are essentially permanent in duration. As of December 29, 2012, there were no unremitted earnings. It is not practicable to determine the amount of income taxes that would be payable in the event such outside basis differences reverse or unremitted earnings are repatriated.
Changes in the amounts of unrecognized tax benefits are summarized as follows:
(a)As of December 29, 2012 and December 31, 2011, liabilities associated with the amounts are included within Income taxes payable and Other non-current liabilities on the accompanying Consolidated Balance Sheets. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. For the year ended December 29, 2012, the Company increased its accruals for interest and penalties by $3.3 million and $0.2 million, respectively. For the year ended December 31, 2011, the Company increased its accrual for interest by $1.2 million and decreased its accrual for penalties $0.1 million. For the year ended January 1, 2011, the Company increased its accruals for interest and penalties by $2.3 million and $1.5 million, respectively. At December 29, 2012 and December 31, 2011, the accrual for interest and penalties was $9.9 million and $6.6 million and $2.6 million and $2.4 million, respectively.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $86.0 million. The Company expects to reduce the liability for unrecognized tax benefits by an amount between $1.5 million and $3.2 million within the next 12 months due to either settlement or the expiration of the statute of limitations.
The Company files tax returns in the US Federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is audited and finally resolved. While it is difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that the unrecognized tax benefits reflect the most likely outcome. These unrecognized tax benefits, as well as the related interest, are adjusted in light of changing facts and circumstances. Favorable resolution would be recognized as a reduction to the effective tax rate in the period of resolution.
The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax jurisdictions include the US, 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 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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, showroom, warehouse/distribution, retail space and computers and other equipment under various non-cancelable operating lease agreements, which extend through 2024. Rental expense for 2012, 2011 and 2010 was $132.2 million, $128.2 million and $127.4 million, respectively, excluding certain costs such as real estate taxes and common area maintenance.
At December 29, 2012, minimum aggregate rental commitments under non-cancelable operating and capital leases were as follows:
Certain rental commitments have renewal options extending through the fiscal year 2024. Some of these renewals are subject to adjustments in future periods. Many of the leases call for additional charges, some of which are based upon various escalations, and, in the case of retail leases, the gross sales of the individual stores above base levels. Future rental commitments for leases have not been reduced by minimum non-cancelable sublease rentals aggregating $17.3 million.
In connection with the disposition of the LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain MEXX Canada retail stores (see Note 3 - Discontinued Operations), an aggregate of 153 store leases were assigned to third parties, for which the Company remains secondarily liable for the remaining obligations on 130 such leases. As of December 29, 2012, the future aggregate payments under these leases amounted to $190.0 million and extended to various dates through 2025.
Buying/Sourcing
During the first quarter of 2009, the Company entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as the Company's buying/sourcing agent for all of the Company's brands and products (other than jewelry) and the Company received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction. The Company's agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the divestiture of any current brand, or certain termination events. The Company is also obligated to use Li & Fung as its buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The 2009 licensing arrangements with JCPenney in the US and Puerto Rico and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under its agreement with Li & Fung, the Company refunded $24.3 million of the closing payment received from Li & Fung in the second quarter of 2010. The 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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other
No single customer accounted for 10.0% of net sales in 2012. As of December 29, 2012, Nordstrom's Inc., and The TJX Companies Inc., each accounted for greater than 10.0% of total accounts receivable, with a combined total of 29.7%.
In the second quarter of 2011, the Company initiated actions to close its Ohio distribution center, which was expected to result in the termination of all or a significant portion of its union employees (see Note 13 - Streamlining Initiatives and Note 25 - Subsequent Events). 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. As of December 29, 2012, the accrued withdrawal liability was $14.3 million, which was included in Accrued expenses and Other non-current liabilities on the accompanying Consolidated Balance Sheet.
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 20 - Related Party Transactions).
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.
At December 29, 2012, the Company had entered into short-term commitments for the purchase of raw materials and for the production of finished goods totaling $205.1 million.
The Company is a party to several pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company's financial position, results of operations, liquidity or cash flows (see Note 22 - Legal Proceedings).
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10: DEBT AND LINES OF CREDIT
Long-term debt consisted of the following:
(a)The change in the balance of these euro-denominated notes reflected the repurchase of the remaining Euro Notes since December 31, 2011.
(b)The balance at December 29, 2012 and December 31, 2011 represented principal of $19.9 million and $69.2 million, respectively, and an unamortized debt discount of $1.6 million and $8.9 million, respectively.
(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 December 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 December 29, 2012 and December 31, 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 and Significant Accounting Policies), 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 12 - Derivative Instruments).
On April 8, 2011, the Company completed a tender offer (the "Tender Offer"), whereby it repurchased 128.5 million euro aggregate principal amount of the Euro Notes for total early tender and consent consideration of 123.1 million euro, plus accrued interest. The Company recognized a $6.5 million pretax gain on the extinguishment of debt in the second quarter of 2011. On December 15, 2011, the Company repurchased 100.0 million euro aggregate principal amount of the Euro Notes in a privately-negotiated transaction for total consideration of 100.5 million euro, plus accrued interest and recognized a $0.8 million pretax loss on extinguishment of debt in the fourth quarter of 2011.
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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 fourth quarter of 2012 and are convertible during the first quarter of 2013.
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 $4.7 million, $9.2 million and $8.8 million for the years ended December 29, 2012, December 31, 2011 and January 1, 2011, respectively.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On December 21, 2011, a holder of $20.8 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 6,163,221 shares of the Company's common stock. The Company paid accrued interest on the holder's Convertible Notes through the settlement date in cash. The Company allocated $18.3 million of the consideration to the liability component and $5.2 million to the equity component. The Company recognized a $0.5 million pretax loss on the extinguishment of debt in the fourth quarter of 2011.
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.
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.
On November 30, 2012, a holder of $8.0 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 2,287,765 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 $8.0 million of the consideration to the liability component and $0.6 million to the equity component. The Company recognized a $0.7 million pretax loss on the extinguishment of debt in the fourth quarter of 2012.
On December 21, 2012, a holder of $3.8 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 1,069,821 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 $3.8 million of the consideration to the liability component and $0.3 million to the equity component. The Company recognized a $0.4 million pretax loss on the extinguishment of debt in the fourth 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 "Original Notes," together with 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 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 used the remaining proceeds to fund a portion of the KSJ Buyout.
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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The indenture governing the Senior Notes contains provisions that may require the Company to offer to repurchase the Senior Notes at 101% of their aggregate principal amount upon certain defined "Change of Control" events. In addition, the indenture may require that the proceeds from sales of the Company's assets (subject to various exceptions and the ability of the Company to apply the proceeds to repay indebtedness or reinvest in its business) be used to offer to repurchase the Senior Notes at 100% of their aggregate principal amount. The indenture also contains other standard high-yield debt covenants, which limit the Company's ability to incur additional indebtedness, incur additional liens, make asset sales, make dividend payments and investments, make payments and other transfers between itself and its subsidiaries, enter into affiliate transactions and merge or consolidate with other entities.
Pursuant to a registration rights agreement executed as part of the offering of Original Notes, the Company agreed, on or before April 7, 2012, (i) to use reasonable best efforts to consummate an offer to issue new Senior Notes (having terms substantially identical to those of the Original Notes) whose issuance is registered with the SEC in exchange for the Original Notes (the "Original Notes Exchange Offer"); and (ii) if required, to have a shelf registration statement declared effective with respect to resales of the Original Notes.
The Company filed and had declared effective a registration statement on Form S-4 (the "Form S-4 Registration Statement") registering the Original Notes Exchange Offer and on February 13, 2013 commenced the Original Notes Exchange Offer (which is scheduled to expire on March 15, 2013). Nevertheless, as a result of not having complied with the above-described registration requirements, pursuant to the terms of the registration rights agreement relating to the Original Notes, the Company is required to pay additional interest on the Original Notes until the Original Notes Exchange Offer is completed. Additional interest on the Original Notes began accruing on April 10, 2012 at a rate of 0.25% per annum and continued to accrue at that rate through (and including) July 8, 2012. On July 9, 2012, additional interest on the Original Notes began accruing at a rate of 0.50% per annum and continued to accrue at that rate through (and including) October 6, 2012. On October 7, 2012, additional interest on the Original Notes began accruing at a rate of 0.75% per annum and continued to accrue at that rate through (and including) January 4, 2013. On January 5, 2013, the rate of additional interest on the Original Notes increased to the maximum of 1.00% per annum. Accrued additional interest has been paid on the Original Notes through October 15, 2012. Accrued additional interest will next be paid on the Original Notes (or the corresponding Senior Notes issued in the Original Notes Exchange Offer, as the case may be) on April 15, 2013 to holders of record on April 1, 2013.
Pursuant to a registration rights agreement executed as part of the offering of Additional Notes, the Company agreed, on or before October 15, 2012, (i) to use reasonable best efforts to consummate an offer to issue new Senior Notes (having terms substantially identical to those of the Additional Notes) whose issuance is registered with the SEC in exchange for the Additional Notes (the "Additional Notes Exchange Offer"); (ii) if required, to have a shelf registration statement declared effective with respect to resales of the Additional Notes; and (iii) complete the Original Notes Exchange Offer.
The Form S-4 Registration Statement also covers the Additional Notes Exchange Offer, which commenced on February 13, 2013 and is scheduled to expire on March 15, 2013. Nevertheless, as a result of not having complied with the above-described registration requirements, pursuant to the terms of the registration rights agreement relating to Additional Notes, the Company is required to pay additional interest on the Additional Notes until the Original Notes Exchange Offer and the Additional Notes Exchange Offer are completed. Additional interest on the Additional Notes began accruing on October 16, 2012 at a rate of 0.25% per annum and continued to accrue at that rate through (and including) January 13, 2013. On January 14, 2013, additional interest on the Additional Notes began to accrue at a rate of 0.50% per annum. The rate of additional interest will increase by 0.25% per annum for each
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
90 days elapsed after January 14, 2013 that the Original Notes Exchange Offer and the Additional Notes Exchange Offer are not completed, up to a maximum of 1.00% per annum. Additional interest will be paid to holders of the Additional Notes (or the corresponding Senior Notes issued in the Additional Notes Exchange Offer, as the case may be) on April 15, 2013 to holders of record on April 1, 2013.
Amended Facility
In May 2010, the Company completed a second amendment to and restatement of its amended and restated revolving credit facility (as amended to date, the "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 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, permitted 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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 December 29, 2012, availability under the Company's Amended Facility was as follows:
(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. NOTE 11: FAIR VALUE MEASUREMENTS
As discussed in Note 1 - Basis of Presentation and Significant Accounting Policies, the Company utilizes a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.
The following table presents the financial assets and liabilities the Company measures at fair value on a recurring basis, based on such fair value hierarchy:
The fair values of the Company's Level 2 derivative instruments were primarily based on observable forward exchange rates. Unobservable quantitative inputs used in the valuation of the Company's derivative instruments included volatilities, discount rates and estimated credit losses.
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2012, based on such fair value hierarchy:
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 a decline in respective future anticipated cash flows of certain retail locations of JUICY COUTURE and LUCKY BRAND and the decisions to exit certain retail locations of JUICY COUTURE and LUCKY
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
BRAND, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Operations.
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2011, based on such fair value hierarchy:
As a result of the decisions to close the Company's Ohio distribution center and exit certain JUICY COUTURE and LUCKY BRAND retail locations, as well as a decline in respective future anticipated cash flows of certain retail locations of JUICY COUTURE and LUCKY BRAND, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Operations.
During 2011, the Company recorded a pretax charge of $222.2 million in Discontinued operations, net of income taxes on the accompanying Consolidated Statement of Operations to reduce the net carrying value primarily of the MEXX, MAC & JAC and Adelington Design Group assets and liabilities to fair value, less costs to dispose.
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2010, based on such fair value hierarchy:
As a result of the decisions to exit the LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico and certain LUCKY BRAND retail locations, cease use of certain corporate assets and close a distribution center in 2010, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Operations.
In the second quarter of 2010, the Company recorded non-cash pretax impairment charges of $2.6 million primarily within the Adelington Design Group segment principally related to merchandising rights of the LIZ CLAIBORNE and former licensed DKNY® Jeans brands.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In the third quarter of 2010, the Company determined that the carrying value of the assets held for sale related to its closed Mt. Pocono distribution center exceeded the estimated fair value and recorded a non-cash pretax impairment charge of $8.0 million.
The fair values of the Company's Level 3 Property and equipment, Intangible assets and Assets held for sale are based on either a market approach or an income approach using the Company's forecasted cash flows over the estimated useful lives of such assets, as appropriate.
The fair values and carrying values of the Company's debt instruments are detailed as follows:
(a)Carrying values include unamortized debt discount or premium. The fair values of the Company's debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values. The fair values of cash and cash equivalents, receivables and accounts payable approximate their carrying values due to the short-term nature of these instruments.
NOTE 12: DERIVATIVE INSTRUMENTS
In order to reduce exposures related to changes in foreign currency exchange rates, the Company previously utilized foreign currency collars, forward contracts and swap contracts for purposes of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by the Company's European, Asian and Canadian entities and mitigating exposure to intercompany loans.
The Company may use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated intercompany loans. In order to mitigate currency exposure related to such loans, the Company entered into forward contracts to sell 4.0 billion yen for $47.5 million. Transaction gains of $1.0 million related to these derivative instruments were reflected within Other (expense) income, net for the year ended December 29, 2012.
The following table summarizes the fair value and presentation in the Consolidated Financial Statements for derivatives not designated as hedging instruments:
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the effect of foreign currency exchange contracts on the Consolidated Financial Statements:
The Company hedged its net investment position in certain euro-denominated functional currency subsidiaries by designating a portion of the outstanding Euro Notes as the hedging instrument in a net investment hedge. To the extent the hedge was effective, related foreign currency translation gains and losses were recorded within Other comprehensive loss. Translation gains and losses related to the ineffective portion of the hedge were recognized in current operations within Other (expense) income, net.
In connection with the sale of an 81.25% interest in the global MEXX business on October 31, 2011, the Company dedesignated the remaining amount of the Euro Notes that had been previously designated as a hedge of the Company's net investment in certain euro-denominated functional currency subsidiaries. Accordingly, all foreign currency transaction gains or losses related to the remaining Euro Notes were recorded in earnings beginning on November 1, 2011 until the Euro Notes were fully repurchased by the Company in the third quarter of 2012.
The Company recognized the following foreign currency translation (losses) gains related to the net investment hedge:
Also, as a result of the sale of an 81.25% interest in the global MEXX business, the Company's net investment in certain euro-denominated functional currency subsidiaries was substantially liquidated, and the cumulative translation adjustment recognized on the Company's Euro Notes through October 31, 2011 was written off and included within Loss on disposal of discontinued operations, net of income taxes on the accompanying Consolidated Statement of Operations (see Note 19 - Accumulated Other Comprehensive Loss).
The Company occasionally uses short-term foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with certain expected transactions. In order to mitigate the exposure related to the Tender Offer, the Company entered into forward contracts to sell $182.0 million for 128.0 million euro, which settled in the second quarter of 2011. During the second quarter of 2011, the Company entered into forward contracts designated as non-hedging derivative instruments maturing in July 2011 to sell $15.7 million for 11.0 million euro. The transaction gains of
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$2.5 million related to these derivative instruments were reflected within Other (expense) income, net for the year ended December 31, 2011.
NOTE 13: STREAMLINING INITIATIVES
2012 Actions
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 concluded in the fourth quarter of 2012.
2011 Actions
In the fourth quarter of 2011, the Company commenced additional streamlining initiatives that impacted all of its reportable segments and included rationalization of office space, which are expected to be completed in the first quarter of 2013 and staff reductions, which were 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, which was completed in the fourth quarter of 2012. In the second quarter of 2011, the Company initiated actions to close its Ohio distribution center, which was expected to be completed in the fourth quarter of 2012 (see Note 25 - Subsequent Events). In the first quarter of 2011, the Company initiated actions to reduce staff at JUICY COUTURE. These actions resulted in charges related to contract terminations, severance, asset impairments and other charges.
In the fourth quarter of 2011, the company agreed to terminate its agreement with an affiliate of DKI, which ended the exclusive license agreement for the DKNY® Jeans and DKNY® Active brands. These actions included contract terminations and staff reductions and concluded in the first quarter of 2012.
2010 Actions
During 2010, the Company continued to consolidate its warehouse operations, which included the closure of its Vernon, California distribution facility in September 2010, the closure of its leased Santa Fe Springs, California distribution facility in January 2010 and the closure of its Rhode Island distribution facility in May 2010.
In April 2010, the Company completed an agreement with an affiliate of DKI to terminate its former licensed DKNY® Mens Sportswear operations and close, transfer or repurpose its DKNY® Jeans outlet stores (see Note 17 - Additional Financial Information). These actions included contract terminations, staff reductions and consolidation of office space and were substantially completed by the end of 2010.
In connection with the license agreements with JCPenney and QVC executed in October of 2009, the Company consolidated office space and reduced staff in certain support functions. As a result, the Company incurred charges related to the reduction of leased space, impairments of property and equipment and other assets, severance and other restructuring costs. These actions were completed in the second quarter of 2010.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company expects to pay approximately $12.4 million of accrued streamlining costs during 2013. A summary rollforward and components of the Company's streamlining initiatives were as follows:
Expenses associated with the Company's streamlining actions were primarily recorded in SG&A in the Consolidated Statements of Operations and impacted reportable segments and Corporate as follows:
NOTE 14: SHARE-BASED COMPENSATION
The Company issues stock options, restricted shares, restricted share units and shares with performance features to employees under share-based compensation plans, which are described herein. The Company recognized share-based compensation expense of $7.8 million, $5.8 million and $6.3 million,
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
excluding amounts related to discontinued operations, for the fiscal years ended December 29, 2012, December 31, 2011 and January 1, 2011, respectively.
Compensation expense for stock options and restricted stock awards is measured at fair value on the date of grant based on the number of shares granted. The fair value of stock options is estimated based on the Binomial lattice pricing model; the fair value of restricted shares is based on the quoted market price on the date of the grant. Stock option expense is recognized using the straight-line attribution basis over the entire vesting period of the award. Restricted share, restricted share unit and performance share expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Expense is recognized net of estimated forfeitures. In March 2012, the Company's Compensation Committee approved the accelerated vesting of a former executive officer's unvested 2010 and 2011 semiannual option grants, as well as his sign-on restricted stock and special retention stock awards, upon his separation from the Company.
Stock Plans
In March 1992, March 2000, March 2002, March 2005 and May 2011, the Company adopted the "1992 Plan," the "2000 Plan," the "2002 Plan," the "2005 Plan" and the "2011 Plan," respectively, under which options (both nonqualified options and incentive stock options) to acquire shares of common stock may be granted to officers, other key employees, consultants and outside directors, in each case as selected by the Company's Compensation Committee (the "Committee"). Payment by option holders upon exercise of an option may be made in cash or, with the consent of the Committee, by delivering previously acquired shares of Company common stock or any other method approved by the Committee. If previously acquired shares are tendered as payment, the shares are subject to a six-month holding period, as well as specific authorization by the Committee. To date, this type of exercise has not been approved or transacted. The Committee has the authority under all of the plans to allow for a cashless exercise option, commonly referred to as a "broker-assisted exercise." Under this method of exercise, participating employees must make a valid exercise of their stock options through a designated broker. Based on the exercise and information provided by the Company, the broker sells the shares on the open market. The employees receive cash upon settlement, some of which is used to pay the purchase price. Neither the stock-for-stock nor broker-assisted cashless exercise option are generally available to executive officers or directors of the Company. Although there are none currently outstanding, stock appreciation rights may be granted in connection with all or any part of any option granted under the plans and may also be granted without a grant of a stock option. Vesting schedules will be accelerated upon a change of control of the Company. Options and stock appreciation rights generally may not be transferred during the lifetime of a holder.
Awards under the 2002 and 2005 Plans may also be made in the form of dividend equivalent rights, restricted stock, unrestricted stock performance shares and restricted stock units. Exercise prices for awards under the 2000, 2002 and 2005 Plans are determined by the Committee; to date, all stock options have been granted at an exercise price not less than the closing market value of the underlying shares on the date of grant.
Awards granted under plans no longer in use by the Company, including the 2000 and 1992 Plans, remain in effect in accordance with their terms. The 2002 Plan provided for the issuance of up to 9.0 million shares of common stock with respect to options, stock appreciation rights and other awards. The 2002 Plan expired in 2012. The 2005 Plan provides for the issuance of up to 5.0 million shares of common stock with respect to options, stock appreciation rights and other awards. The 2005 Plan expires in 2015. The 2011 Plan provides for the issuance of up to 3.0 million shares of common stock, of which no more than 1.5 million shares may be awarded pursuant to grants of restricted stock, restricted stock units,
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
unrestricted stock and performance shares. The 2011 Plan expires in 2021. As of December 29, 2012, 0.3 million shares were available for future grant under the 2002, 2005 and 2011 Plans.
The Company delivers treasury shares upon the exercise of stock options and vesting of restricted shares. The difference between the cost of the treasury shares and the exercise price of the options has been reflected on a first-in, first-out basis.
Stock Options
The Company grants stock options to certain domestic and international employees. These options are subject to transfer restrictions and risk of forfeiture until earned by continuing employment. Stock options are issued at the current market price and have a three-year vesting period and a contractual term of 7-10 years.
The Company utilizes the Binomial lattice pricing model to estimate the fair value of options granted. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates and to allow for actual exercise behavior of option holders.
Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option. The Company utilizes historical optionee behavioral data to estimate the option exercise and termination rates that are used in the valuation model. The expected term represents an estimate of the period of time options are expected to remain outstanding. The expected term provided in the above table represents an option weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2012, 2011 and 2010. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.
A summary of award activity under the Company's stock option plans as of December 29, 2012 and changes therein during the fiscal year then ended are as follows:
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total intrinsic value of options exercised was $7.46 for the fiscal year ended December 29, 2012 and was insignificant for the fiscal years ended December 31, 2011 and January 1, 2010.
As of December 29, 2012, there were approximately 2.4 million nonvested stock options with a weighted average exercise price of $6.99 and there was $5.9 million of total unrecognized compensation cost related to nonvested stock options granted under the Company's stock option plans. That expense is expected to be recognized over a weighted average period of 1.3 years. The total fair value of shares vested for the years ended December 29, 2012, December 31, 2011 and January 1, 2011 was $4.1 million, $5.9 million and $3.4 million, respectively.
Restricted Stock
The Company grants restricted shares and restricted share units to certain domestic and international employees. These shares are subject to transfer restrictions and risk of forfeiture until earned by continued employment. These shares generally vest 50% on the second anniversary date from the date of grant and 50% on the third anniversary date from the date of grant.
The Company grants performance shares to certain of its employees, including the Company's executive officers. Performance shares are earned based on the achievement of certain profit return on capital targets aligned with the Company's strategy.
In 2010, the Committee granted 855,000 performance shares to a group of key executives. The performance criteria include certain earnings metrics for consecutive periods through July 2013 with the number of shares to be earned ranging from 0 to 100% of the target amount.
In 2012, the Company granted 535,000 performance share units with a two year performance period and a three year service period, subject to a market condition adjustment, to a group of key executives. The performance criteria include certain earnings metrics for consecutive periods through December 2013 with the number of shares to be earned ranging from 0 to 150% of the target amount. At December 31, 2014, the total units earned, if any, will be adjusted by applying a modifier, ranging from 50%-150%. The amount of such modifier will be determined by comparing the Company's total shareholder return ("TSR") to the relative TSR of the S&P SmallCap 600 companies over the three year period, where the Company's TSR is based on the change in its stock price.
The fair value for the performance share units granted is calculated using the Monte Carlo simulation model for the TSR modifier market condition. For the year ended December 29, 2012, the following assumptions were used in determining fair value:
Each of the Company's non-employee Directors receives an annual grant of shares of common stock with a value of $100,000 as part of an annual retainer for serving on the Board of Directors, with the exception of the Chairman of the Board, who receives an annual grant of shares of common stock with a value of $175,000. Retainer shares are non-transferable until the first anniversary of the grant, with 25% becoming transferable on each of the first and second anniversary of the grant and 50% becoming transferable on the third anniversary, subject to certain exceptions.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of award activity under the Company's restricted stock plans as of December 29, 2012 and changes therein during the fiscal year then ended are as follows:
(a)Includes performance shares granted to a group of key executives with certain performance conditions measured through July 2013.
(b)Includes performance shares granted to a group of key executives with certain performance conditions, measured through December 2013 and a market and service condition through December 2014. The weighted average grant date fair value of restricted shares granted in the years ended December 29, 2012, December 31, 2011 and January 1, 2011 was $11.91, $5.29 and $6.44, respectively.
As of December 29, 2012, there was $1.2 million of total unrecognized compensation cost related to nonvested stock awards granted under the restricted stock plans. That expense is expected to be recognized over a weighted average period of 1.5 years. The total fair value of shares vested during the years ended December 29, 2012, December 31, 2011 and January 1, 2011 was $2.3 million, $4.8 million and $8.5 million, respectively.
NOTE 15: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains a qualified defined contribution plan for its eligible employees. This plan allows deferred arrangements under section 401(k) of the Internal Revenue Code and provides for employer-matching contributions. The plan contains provisions for a discretionary profit sharing component, although such a contribution was not made for 2012, 2011 or 2010.
The Company's aggregate 401(k)/Profit Sharing Plan contribution expense, which is included in SG&A in the accompanying Consolidated Statements of Operations, was $2.5 million in 2012, $2.1 million in 2011 and was not significant in 2010.
The Company has a non-qualified supplemental retirement plan for certain employees whose benefits under the 401(k)/Profit Sharing Plan are expected to be constrained by the operation of certain Internal Revenue Code limitations. The supplemental plan provides a benefit equal to the difference between the contribution that would be made for an employee under the tax-qualified plan absent such limitations and the actual contribution under that plan. The supplemental plan also allows certain employees to defer up to 50% of their base salary and up to 100% of their annual bonus. The Company established an irrevocable "rabbi" trust to which the Company makes periodic contributions to provide a source of funds to assist in meeting its obligations under the supplemental plan. The principal of the trust and earnings thereon, are to be used exclusively for the participants under the plan, subject to the claims of the Company's general creditors.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16: EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per common share:
(a)Because the Company incurred a loss from continuing operations for the years ended December 29, 2012 and January 1, 2011, approximately 12.3 million and 10.4 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 $9.2 million and approximately 25.0 million shares issuable upon conversion of the Convertible Notes were reflected in the computation of dilutive loss per share for the fiscal year ended December 31, 2011.
(c)Excludes approximately 1.2 million, 0.8 million and 1.0 million nonvested shares for the years ended December 29, 2012, December 31, 2011 and January 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 years ended December 29, 2012 and January 1, 2011, outstanding stock options and nonvested shares are antidilutive. Accordingly, for the years ended December 29, 2012 and January 1, 2011, approximately 5.8 million and 6.9 million outstanding stock options, respectively, and approximately 0.5 million and 0.7 million outstanding nonvested shares, respectively, were excluded from the computation of diluted loss per share.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17: 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 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 year ended December 31, 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.
In April 2010, the Company entered into an agreement with DKI, which included the termination of the DKNY® Mens Sportswear license and the transfer of certain outlet stores of its former licensed DKNY® Jeans brand to DKI. In connection with the termination of the DKNY® Mens Sportswear license, the Company recorded a pretax charge of $9.9 million in the year ended January 1, 2011.
Other (Expense) Income, Net
Other (expense) income, net primarily consisted of (i) foreign currency transaction gains (losses) of $1.2 million, $(1.4) million and $25.4 million for the years ended December 29, 2012, December 31, 2011 and January 1, 2011, respectively, including the impact of the dedesignation of the hedge of the Company's investment in certain euro-denominated functional currency subsidiaries, which resulted in the recognition of foreign currency translation gains and losses on the Company's Euro Notes within earnings for the years ended December 31, 2011 and January 1, 2011; and (ii) equity in earnings of investments in equity investees.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidated Statements of Cash Flows Supplementary Disclosures
During the year ended December 29, 2012, the Company made net income tax payments of $1.1 million. During the years ended December 31, 2011 and January 1, 2011, the Company received net income tax refunds of $1.3 million and $166.2 million, respectively. During the years ended December 29, 2012, December 31, 2011 and January 1, 2011, the Company made interest payments of $38.7 million, $49.3 million and $33.2 million, respectively. As of December 29, 2012, December 31, 2011 and January 1, 2011, the Company accrued capital expenditures totaling $7.7 million, $6.4 million and $7.6 million, respectively.
Depreciation and amortization expense in 2012, 2011 and 2010 includes $10.3 million, $11.6 million and $21.2 million, respectively, related to amortization of deferred financing costs.
During 2012, the Company entered into agreements with holders of $49.4 million aggregate principal amount of the Convertible Notes, pursuant to which the holders converted all of such outstanding Convertible Notes into 14,197,106 shares of the Company's common stock.
During 2011, the Company entered into an agreement with a holder of $20.8 million aggregate principal amount of the Convertible Notes, pursuant to which the holder converted all of such outstanding Convertible Notes into 6,163,221 shares of the Company's common stock.
During 2011, the Company received net proceeds of $309.7 million in connection with the sales of: (i) 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; (ii) the DANA BUCHMAN trademark; and (iii) the sale of the trademarks for the Company's former Curve fragrance brands and selected other smaller fragrance brands, which are reflected as Proceeds from dispositions on the accompanying Consolidated Statement of Cash Flows.
During 2010, the Company paid $24.3 million to Li & Fung related to a buying/sourcing agreement, which is included within (Decrease) increase in accrued expenses and other non-current liabilities on the accompanying Consolidated Statement of Cash Flows.
During 2012 and 2010, the Company made business acquisition payments of $41.0 million and $5.0 million related to the KSJ Buyout and the LUCKY BRAND acquisition, respectively.
NOTE 18: 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. 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.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•KATE SPADE segment - consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of the KATE SPADE, KATE SPADE SATURDAY 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 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; (iv) the licensed LIZ CLAIBORE NEW YORK brand.
The Company's Chief Executive Officer has been identified as the CODM. During the fourth quarter of 2012, the Company determined that its 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 is also a key metric utilized in the Company's annual bonus and long-term incentive plans. Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives and brand-exiting activities; 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 executive offices and corporate facilities, 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 equity method investees. 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 and Significant Accounting Policies. 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
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
(a)For the years ended December 29, 2012, December 31, 2011 and January 1, 2011, $9.7 million, $13.6 million and $19.6 million, respectively, of Corporate depreciation and amortization was recorded within Interest expense, net on the accompanying Consolidated Statements of Operations.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables provide a reconciliation to (Loss) income from continuing operations:
(a)Amounts include equity in the (losses) earnings of equity method investees of $(1.2) million, $1.7 million and $1.0 million in 2012, 2011 and 2010, respectively.
(b)Excludes amortization included in Interest expense, net.
(c)See Note 13 - Streamlining Initiatives for a discussion of streamlining charges.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
GEOGRAPHIC DATA
NOTE 19: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is comprised of the effects of foreign currency translation, losses on cash flow hedging derivatives (prior to December 31, 2011) and changes in unrealized gains on securities, as detailed below:
As discussed in Note 12 - 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 then-outstanding Euro Notes as the hedging instrument in a net investment hedge. As discussed in Note 1 - Basis of Presentation and Significant Accounting Policies, 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, the Company recorded a charge of $62.2 million within Loss on disposal of discontinued operations on the accompanying Consolidated Statement of Operations for the fiscal year ended December 31, 2011, to write off the cumulative translation adjustment related to the liquidated subsidiaries, the Euro Notes and other instruments.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 20: 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 a $2.5 million capital contribution to KSC in the fourth quarter of 2011 and $5.0 million in 2012. The Company is required to make capital contributions 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 a joint venture under the name of KSJ. During the fourth quarter of 2012, the Company acquired the remaining 51.0% interest in KSJ (see Note 2 - Acquisition).
Subsequent to the MEXX Transaction (see Note 1 - Basis of Presentation and Significant Accounting Policies), the Company retains a noncontrolling ownership interest in NewCo and accounts for such investment at cost. The Company is required to provide certain transition services to NewCo for a period of up to 24 months and recognized $4.6 million and $0.7 million of fees related to such services in 2012 and 2011, respectively. The Company's cost investment was valued at $10.0 million as of December 29, 2012 and December 31, 2011 and was included in Other assets on the accompanying Consolidated Balance Sheets.
Kenneth P. Kopelman (a Director of the Company) is a partner in the law firm Kramer, Levin, Naftalis & Frankel LLP, which provided legal services to the Company in 2012, 2011 and 2010. The fees for such services were not significant in 2012 or 2011 and amounted to $1.2 million in 2010. The 2012 amount represents less than one percent of such firm's 2012 fee revenue. The foregoing transactions between the Company and this entity were effected on an arm's-length basis, with services provided at fair market value.
The Company believes that each of the transactions described above was effected on terms no less favorable to the Company than those that would have been realized in transactions with unaffiliated entities or individuals.
NOTE 21: RECENT ACCOUNTING PRONOUNCEMENTS
In July 2012, new accounting guidance on testing indefinite-lived intangible assets for impairment was issued, which provides an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The new accounting guidance is effective at the start of the Company's 2013 fiscal year beginning on December 30, 2012 and will not affect the Company's financial position, results of operations or cash flows.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In February 2013, new accounting guidance on comprehensive income was issued, which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. The new accounting guidance is effective at the start of the Company's 2013 fiscal year beginning on December 30, 2012 and will not affect the Company's financial position, results of operations or cash flows.
NOTE 22: LEGAL PROCEEDINGS
A lawsuit captioned LC Footwear, L.L.C., et al. v. L.C. Licensing, Inc., et al., was filed on November 2, 2010 in the Supreme Court of the State of New York, County of New York. The complaint asserted that the Company had, among other things, allegedly breached a license by and among the Company, L.C. Licensing, Inc. and L.C. Footwear, L.L.C. (the "Footwear License Agreement"). The Company sent plaintiffs a notice of default under the Footwear License Agreement on October 11, 2010. On December 22, 2010, the Company moved to dismiss the complaint in its entirety. In response, plaintiffs filed an amended complaint on January 14, 2011. The amended complaint asserted claims for breach of the Footwear License Agreement and the implied covenant of good faith and fair dealing therein, fraud and brand dilution. Plaintiffs sought both declaratory and injunctive relief, as well as damages of not less than $125.0 million. On February 17, 2011, the Company moved to dismiss the amended complaint in its entirety. On November 16, 2011, the Court granted in part and denied in part the Company's motion to dismiss.
Additionally, on November 4, 2010, plaintiffs moved for a preliminary injunction to enjoin the Company from: (i) interfering with plaintiffs' purported right to sell merchandise bearing the LIZ CLAIBORNE family of trademarks; (ii) selling (or permitting any third party from selling) merchandise under the LIZ & CO. trademark; and (iii) terminating the Footwear License Agreement. On November 16, 2011, the Court granted in part and denied in part plaintiffs' motion for a preliminary injunction. On December 2, 2011, plaintiffs again moved for a temporary restraining order and a preliminary injunction to prevent the termination of the Footwear License Agreement. On December 16, 2011, the Court denied plaintiffs' motion for a temporary restraining order.
On December 15, 2011, the Company appealed the Court's November 16, 2011 ruling. On January 5, 2012, plaintiffs appealed the Court's November 16, 2011 ruling.
On March 21, 2012, the parties entered into a settlement agreement disposing of all disputes in connection with the lawsuit. On April 2, 2012, the parties filed with the Court a stipulation of discontinuance of the lawsuit with prejudice. Both parties have withdrawn their respective appeals.
On January 25, 2013, Gores Malibu Holdings (Luxembourg) S.a.r.l. filed a complaint in the United States District Court for the Southern District of New York against Fifth and Pacific Companies, Inc. and Fifth & Pacific Companies Foreign Holdings, Inc. (amended on February 5, 2013). The complaint claims $15.0 million in damages for alleged breaches of the Merger Agreement related to the sale of the global MEXX business, including breaches of tax and tax-related covenants, breaches of interim operating covenants and breaches of reimbursement obligations related to employee bonuses. In addition, as previously disclosed, the Company and Gores Malibu are currently in dispute resolution proceedings with respect to working capital adjustments that are required to be made under the Merger Agreement. The Company cannot currently predict the outcomes of these proceedings, although management does not believe any such outcome will be material to its financial position, results of operations, liquidity or cash flows.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company is a party to several other pending legal proceedings and claims. Although the outcome of such actions cannot be determined with certainty, management is of the opinion that the final outcome of these actions should not have a material adverse effect on the Company's financial position, results of operations, liquidity or cash flows.
NOTE 23: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2012 and 2011 is set forth in the table below.
(a)Because the Company incurred a loss from continuing operations in the first three quarters of 2012 and the first two quarters of 2011, outstanding stock options, nonvested shares and potentially dilutive shares issuable upon conversion of the Convertible Notes are antidilutive for such periods. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
(b)Interest expense of $0.8 million and approximately 8.0 million shares issuable upon conversion of the Convertible Notes for the fourth quarter of 2012 and $2.3 million and approximately 24.5 million shares issuable upon conversion of the Convertible Notes for the fourth quarter of 2011 were reflected in the computation of dilutive income (loss) per share. Interest expense of $2.3 million and 25.2 million shares issuable upon conversion of the Convertible Notes in the third quarter of 2011 were considered antidilutive and were excluded from the computation of dilutive income (loss) per share.
(c)Included pretax expenses related to streamlining initiatives of $10.3 million.
(d)Included pretax expenses related to streamlining initiatives of $3.7 million.
(e)Included pretax expenses related to streamlining initiatives of $27.0 million.
(f)Included pretax expenses related to streamlining initiatives of $34.2 million.
(g)Included pretax expenses related to streamlining initiatives of $5.8 million.
(h)Included (i) a pretax gain of $15.6 million on the sale of the former Curve fragrance brand and selected other smaller fragrance brands and (ii) pretax expense related to streamlining initiatives of $11.7 million.
(i)Included pretax expenses related to streamlining initiatives of $4.7 million.
(j)Included (i) a pretax gain of $271.4 million on the sales of the global trademark rights for the LIZ CLAIBORNE family of brands, the trademark rights in the US and Puerto Rico for MONET and the DANA BUCHMAN trademark and (ii) pretax expenses related to streamlining initiatives of $40.0 million (excluding a non-cash impairment charge of $0.6 million related to former licensed DKNY® Jeans merchandising rights).
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 24: SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On April 7, 2011 and June 8, 2012, the Company completed its offerings of Senior Notes. The Senior Notes are jointly and severally, fully and unconditionally guaranteed on a senior secured basis by certain of the Company's current and future domestic subsidiaries, each of which is 100% owned by Fifth & Pacific Companies, Inc. (the "Parent Company Issuer"). 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, which secure the Company's Amended Facility on a first-priority basis.
The following tables present the Condensed Consolidating Balance Sheets, the Condensed Consolidating Statements of Operations, the Condensed Consolidating Statements of Comprehensive Loss and the Condensed Consolidating Statements of Cash Flows, in each instance for the Parent Company Issuer, its guarantor subsidiaries and its non-guarantor subsidiaries.
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 and Article 10. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Parent Company Issuer, guarantor or non-guarantor subsidiaries operated as independent entities.
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Balance Sheets
December 29, 2012
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Balance Sheets
December 31, 2011
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Operations
Fiscal Year Ended December 29, 2012
(In thousands)
Condensed Consolidating Statements of Comprehensive Loss
Fiscal Year Ended December 29, 2012
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Operations
Fiscal Year Ended December 31, 2011
(In thousands)
Condensed Consolidating Statements of Comprehensive Loss
Fiscal Year Ended December 31, 2011
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Operations
Fiscal Year Ended January 1, 2011
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Comprehensive Loss
Fiscal Year Ended January 1, 2011
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended December 29, 2012
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended December 31, 2011
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Consolidating Statements of Cash Flows
Fiscal Year Ended January 1, 2011
(In thousands)
Fifth & Pacific Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 25: SUBSEQUENT EVENTS
On January 22, 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 paid accrued interest on the holder's Convertible Notes through the settlement date in cash.
In connection with the January 31, 2013 expiration of an agreement with Li & Fung to provide distribution services in the US, the Company has discontinued the migration of its distribution function to Li & Fung and has decided to continue to utilize the Ohio Facility for such function. On February 5, 2013, the Company, which operated its Ohio Facility with an extended collective bargaining agreement, entered into a contract with a third-party facility operations management company to provide distribution operations services at the Ohio Facility with a variable cost structure. The third-party facility operations management company has informed the Company that it intends to employ the Company's prior employees at the facility. The Company has notified the employees covered by the CBA of the completion of layoffs on March 31, 2013, at which time the Agreement and CBA terminate.
Fifth & Pacific Companies, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a)Uncollectible accounts written off, less recoveries.
(b)Deductions for the year ended December 31, 2011 reflect the sale of an 81.25% interest in the global MEXX business.