SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2001
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Commission File Number 0-9831
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LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2842791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1441 Broadway, New York, New York 10018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
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Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing sale price on the New York Stock Exchange composite
tape on March 20, 2002, the aggregate market value of the registrant's Common
Stock, par value $1 per share, held by non-affiliates of the registrant on such
date was approximately $3,141,543,939.
Number of shares of the registrant's Common Stock, par value $1 per share,
outstanding as of March 20, 2002: 105,560,247 shares.
Documents Incorporated by Reference:
Registrant's Proxy Statement relating to its Annual Meeting of Stockholders
to be held on May 16, 2002-Part III.
PART I
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Item 1. Business.
OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
Liz Claiborne, Inc. designs and markets an extensive range of branded women
and men's apparel, accessories and fragrance products. Our current portfolio of
26 brands spans most apparel and non-apparel categories, reaching consumers
regardless of age, gender, size, attitude, shopping or value preference. Our
products run the full fashion gamut, from classic and traditional to modern and
contemporary, for every wearing occasion. Our brands include CLAIBORNE, CRAZY
HORSE, CURVE, DANA BUCHMAN, ELISABETH, EMMA JAMES, FIRST ISSUE, LAUNDRY BY
SHELLI SEGAL, LIZ CLAIBORNE, LUCKY BRAND, MEG ALLEN, MEXX, MONET, RUSS, SIGRID
OLSEN and VILLAGER. In addition, we hold certain licenses for men's, junior's
and women's sportswear, jeanswear and activewear under the DKNY(R) JEANS and
DKNY(R) ACTIVE trademarks, women's sportswear under the CITY DKNY(R) trademark,
women's apparel products under the KENNETH COLE NEW YORK, UNLISTED.COM and
REACTION KENNETH COLE trademarks, and fragrance, cosmetic and beauty products
under the CANDIE'S trademark.
Under our multi-channel distribution strategy, our brands are available at
over 26,000 different retail locations throughout the world, including virtually
all upscale, mainstream, promotional and chain department stores and the
Company's own specialty and outlet stores, and on our Lucky Brand, Elisabeth and
Mexx E-commerce sites. We believe that we are one of the largest suppliers of
"better" women's branded apparel in the United States.
At March 20, 2002, our order book reflected unfilled customer orders for
approximately $803 million of merchandise, as compared to approximately $610
million at March 20, 2001. We expect that substantially all such orders will be
filled within the 2002 fiscal year. Order book data at any given date is
materially affected by the timing of recording orders and of shipments and
seasonal factors. Accordingly, order book data should not be taken as indicative
of eventual actual shipments or net sales, or as providing meaningful
period-to-period comparisons.
On May 23, 2001, we completed the purchase of the entire equity interest of
Mexx Group B.V. ("Mexx"), a privately held fashion apparel and accessories
company incorporated and existing under the laws of The Netherlands. Mexx
designs and markets a wide range of merchandise for women, men and children
under several trademarks, including MEXX. MEXX products are sold via wholesale
and retail formats in more than 40 countries in Europe, the Asia Pacific region,
Canada and the Middle East.
As used herein, the terms "Company", "we", "us" and "our" refers to Liz
Claiborne, Inc., a Delaware corporation, together with its consolidated
subsidiaries.
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail. In addition, we license to third parties the right to
manufacture, market and sell at wholesale selected products bearing the
Company's trademarks. Wholesale Apparel consists of businesses that design,
manufacture and market to the Company's wholesale customers women's and men's
apparel under various trademarks owned or licensed by the Company. Wholesale
Non-Apparel consists of businesses that design, manufacture and market to our
wholesale customers accessories, cosmetics and jewelry products under various
trademarks owned or licensed by the Company. Retail consists of businesses that
sell merchandise designed and manufactured by the Wholesale Apparel and
Wholesale Non-Apparel segments to the public through Company-operated specialty
retail and outlet stores, and concession stores where our products are sold in
third-party owned locations. In addition, as a result of the acquisition of
Mexx, the Company is also segmenting its results on a geographic basis between
Domestic (wholesale customers and Company retail operations comprised of
specialty retail and outlet stores based in the United States) and International
(wholesale customers and Company retail operations comprised of specialty retail
and outlet stores and concession stores based outside of the United States.)
Wholesale Apparel. We offer a variety of women's and men's apparel
products. Substantially all products in each sportswear collection are sold at
retail as separate items.
The Casual business offers casual sportswear in misses and petite sizes
under three of our trademarks: LIZSPORT, which offers all-American sportswear,
including twill products, for less formal work settings and casual occasions;
LIZWEAR, which offers denim and denim-related sportswear, including twills and
fashion coordinates; and LIZ & CO., our soft dressing concept, which offers
versatile casual knitwear.
2
The LIZ CLAIBORNE WOMAN business (formerly the ELISABETH business) offers
classic careerwear, weekend casual and wardrobe basics in large sizes (including
petite proportions) under our LIZ CLAIBORNE WOMAN trademark. We ceased offering
ELISABETH branded merchandise to department stores in 2001; we continue,
however, to offer a line of ELISABETH products through our ELISABETH retail
stores.
The Mexx business offers a range of men's, women's and children's fashion
apparel and accessories for sale outside of the United States under several
trademarks including MEXX, which offers fully coordinated city and casual wear,
MEXXSPORT, which offers sportswear, and XX BY MEXX, which offers coordinated
separates. See Note 2 of Notes to Consolidated Financial Statements.
The Men's business offers men's business-casual wear, sportswear and dress
shirts under our CLAIBORNE trademark and a line of moderate priced men's wear
under our CRAZY HORSE trademark.
The Career (COLLECTION) business offers professional careerwear with
desk-to-dinner versatility in misses and petite sizes under the LIZ CLAIBORNE
trademark.
The DANA BUCHMAN business offers collections of products for the women's
"bridge" market (the market between the "better" and "designer" markets) with
elegant styling in distinctive fabrics, in misses, large and petite sizes under
our DANA BUCHMAN trademark.
The Special Markets business offers women's updated career and casual
clothing at more moderate prices under the following Company trademarks: EMMA
JAMES (related separates for the casual workplace, sold in department stores
nationally and in Japan), VILLAGER (relaxed separates for soft career and
weekend dressing, sold in regional department stores), FIRST ISSUE (relaxed
career and everyday wear, sold principally in Sears department stores), RUSS
(casual separates, sold principally in Wal-Mart stores), and CRAZY HORSE (casual
separates, sold principally at J.C. Penney stores). We recently announced that
we will phase-out our MEG ALLEN line, currently offered through Target Stores,
in the third quarter of 2002. In January 2002, we introduced a line of
fashion-forward women's apparel under the AXCESS trademark, to be offered at
Mervyn's and Kohl's department stores. See "Competition; Certain Risks" below.
We hold the exclusive license (subject to certain territorial limitations)
to design, produce, market and sell men's, junior's and women's sportswear,
jeanswear and activewear under the DKNY(R) JEANS and DKNY(R) ACTIVE trademarks
and logos for sale in the Western Hemisphere. We also hold the exclusive license
(subject to certain territorial limitations) to design, produce, market and sell
a line of women's career and casual sportswear for the "better" market, under
the CITY DKNY (R) trademark; shipping of this line commenced in January 2001.
Our SIGRID OLSEN business, which we own by virtue of our ownership of 97.5%
of Segrets, Inc. ("Segrets") offers a range of women's sportswear in misses,
large and petite sizes under several trademarks, including SIGRID OLSEN
COLLECTION, which offers classic sportswear with a contemporary influence,
SIGRID OLSEN SPORT, which offers updated casual sportswear with a novelty
inspiration, and SO BLUE BY SIGRID OLSEN, which offers contemporary casual
sportswear with a jeanswear influence.
The LUCKY BRAND business, which we own by virtue of our ownership of 85% of
the equity interest of Lucky Brand Dungarees, Inc. ("Lucky"), offers women's and
men's denim-based sportswear under various Lucky trademarks.
We hold the exclusive license (subject to certain territorial limitations)
to manufacture, design, market and distribute, in North America, a "better"
women's modern sportswear line under the KENNETH COLE NEW YORK label, a women's
status denim and sportswear line under the REACTION KENNETH COLE label (which
commenced shipping in January 2001), and a junior-sized apparel line under the
UNLISTED.COM label (which has not yet commenced shipping). We also hold the
exclusive license to manufacture, design, market and distribute socks and belts
bearing the KENNETH COLE NEW YORK, REACTION KENNETH COLE and UNLISTED.COM
labels.
The LAUNDRY business offers women's modern sportswear and dresses under the
LAUNDRY BY SHELLI SEGAL label, primarily to select department and specialty
stores.
Each of the above businesses presented four seasonal collections during
2001, except DANA BUCHMAN, which presented three collections and LAUNDRY which
presented five collections.
For further information regarding our SIGRID OLSEN, LUCKY BRAND, LAUNDRY
and MEXX businesses, see Note 2 of Notes to Consolidated Financial Statements.
For further information regarding the DKNY and Kenneth Cole licensing
arrangements, see Note 3 of Notes to Consolidated Financial Statements.
3
In 2000, we licensed the right to design, manufacture, market, distribute
and sell dresses under the Liz Claiborne Dresses and Elisabeth DRESSES
trademarks to Leslie Fay Marketing, Inc., a subsidiary of the Leslie Fay
Company. We continue to produce dresses as part of the COLLECTION, ELISABETH,
LIZSPORT, LIZWEAR and LIZ & CO. sportswear lines and under the LIZ CLAIBORNE
WOMAN trademark. See Note 3 of Notes to Consolidated Financial Statements.
Wholesale Non-Apparel. We offer a wide variety of women's accessory
products and men's and women's cosmetic products through its non-apparel
business.
The Accessories business offers an array of handbag/small leather goods and
fashion accessories under the LIZ CLAIBORNE trademark.
The Special Markets Accessories business offers jewelry, handbags and
fashion accessories under our CRAZY HORSE, VILLAGER and FIRST ISSUE trademarks.
The Jewelry business offers a selection of jewelry under the LIZ CLAIBORNE,
MONET, TRIFARI and MARVELLA trademarks. For further information regarding the
Company's acquisition of the MONET, TRIFARI and MARVELLA trademarks, see Note 2
of Notes to Consolidated Financial Statements.
The offerings of our Accessories, Special Markets Accessories and Jewelry
businesses mirror major fashion trends and are intended to complement many of
our other product lines.
Our cosmetics business offers fragrance and bath and body-care products
under our LIZ CLAIBORNE, REALITIES, VIVID, CLAIBORNE FOR MEN, CLAIBORNE SPORT,
CURVE (for women and men), LIZSPORT and LUCKY YOU LUCKY BRAND (for women and
men) trademarks. We commenced shipping a line of cosmetics (for women and men)
under the MAMBO trademark in the third quarter of 2001. In addition, pursuant to
an exclusive license with CANDIE'S, INC., we offer fragrances, cosmetics and
beauty products worldwide under the CANDIE'S trademark.
Retail. We operate specialty retail stores, outlet stores and concession
stores under a variety of Company trademarks. Our United States LIZ CLAIBORNE
flagship store, an approximately 17,000 square foot facility, is located on
Fifth Avenue in New York City; our European LIZ CLAIBORNE flagship store, an
approximately 3,200 square foot facility, is located on Regent Street in London,
England. In addition, we operate stores as described below.
Specialty Retail Stores. As of March 20, 2002, we operated a total of 206
specialty retail stores, comprised of 134 stores within the United States and 72
retail stores outside of the United States, primarily in Western Europe, under
various Company trademarks.
The following table sets forth information with respect to our specialty
retail stores:
U.S. RETAIL SPECIALTY STORES:
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Specialty Store Format Number of Stores Average Size of Each
Store by Square Footage
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Claiborne 1 3,086
Dana Buchman 4 5,537
Elisabeth 44 3,267
Laundry By Shelli Segal 2 1,536
Liz Claiborne 26 5,805
Lucky Brand Dungarees 57 2,270
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FOREIGN RETAIL SPECIALTY STORES:
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Specialty Store Format Number of Stores Average Size of Each
Store by Square Footage
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Liz Claiborne 1 3,921
Mexx 71 2,898
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Outlet Stores. As of March 20, 2002, we operated a total of 217 outlet
stores, comprised of 179 outlet stores within the United States and 38 outlet
stores outside of the Untied States, primarily in Western Europe, under various
Company trademarks.
4
The following table sets forth information with respect to our outlet
stores:
U.S. OUTLET STORES:
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Outlet Store Format Number of Stores Average Size of Each
Store by Square Footage
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Claiborne 8 2,473
Dana Buchman 12 2,242
DKNY Jeans 18 2,941
Elisabeth 22 3,584
Laundry By Shelli Segal 6 2,418
Lucky Brand Dungarees 1 3,971
Liz Claiborne 108 10,949
Sigrid Olsen 2 1,996
Special Brands 2 2,750
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FOREIGN OUTLET STORES:
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Outlet Store Format Number of Stores Average Size of Each
Store by Square Footage
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Liz Claiborne 20 1,690
Mexx 18 2,945
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Concession Stores. We operate concession stores in select retail stores,
under two formats: shop-in-shop stores (where the space is owned and operated by
a department store while we own the inventory) and high street concession stores
(where the store is leased and operated by a specialty retailer while we own the
inventory). As of March 20, 2002, the Company operated a total of 446 concession
stores in Western Europe. We do not operate any concession stores in the United
States.
The following table sets forth information with respect to our concession
stores:
FOREIGN CONCESSIONS:
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Concession Store Format Number of Stores
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Liz Claiborne Apparel 166
Monet Jewelry 141
Mexx 139
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During 2001, we closed seven specialty retail stores and five outlet
stores. See Note 12 of Notes to Consolidated Financial Statements.
Licensing. We license many of our brands to third-parties with specialized
skills, thereby extending each licensed brand's market presence. We currently
have twenty license arrangements pursuant to which third party licensees produce
merchandise under Company trademarks in accordance with designs furnished or
approved by us, the present terms of which (not including renewal terms) expire
at various dates through 2010. Current licenses cover women's career, casual and
sport shoes; dresses; home furnishing products; women's and men's outerwear;
women's and men's slippers; women's swimwear and related merchandise; women's
intimate apparel; women's and men's ophthalmic frames for prescription eyewear;
women's and men's sunglasses and readers; men's accessories; men's dress pants,
casual pants and shorts; men's formalwear and accessories; men's tailored
clothing; men's socks; men's and boys' neckwear; tabletop products; boys'
apparel; children's apparel; and women's sleepwear apparel. Each of the licenses
provides for the payment to the Company of 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.
SALES AND MARKETING
Our products are sold at over 26,000 points of sale worldwide. In 2001,
domestic sales accounted for approximately 88% of our sales. Our domestic
wholesale sales are made primarily to department store chains and specialty
store customers. Retail sales are made through our own retail and outlet stores.
Wholesale sales are also made to international customers, military exchanges and
other outlets.
Internationally, our products are sold in over 100 markets. In 2001, such
international sales accounted for approximately 12% of our sales. In Canada, we
operate an import wholesale business which sells the Company products primarily
to department store chains and specialty stores, while in Western Europe, sales
are made primarily through concession stores. In other international markets, we
operate principally through licenses with third parties which operate
free-standing retail stores and dedicated department store shops. Our
international accounts also purchase fragrances and related products through
third-party distributors.
5
In Japan, the Company distributes LIZ CLAIBORNE and DANA BUCHMAN products
through a joint venture with AEON Co. Ltd. (formerly known as Jusco Co. Ltd). We
have also licensed to AEON the right to manufacture customized EMMA JAMES
branded apparel for sale in Japan, and to operate dedicated department store
shop-in-shops under the EMMA JAMES trademark.
Approximately 82% of 2001 sales were made to our 100 largest customers.
Except for Dillard's Department Stores, Inc., which accounted for approximately
11% of 2001 and 16% of 2000 sales, no single customer accounted for more than 6%
of our 2001 or 2000 sales. However, certain of our customers are under common
ownership; when considered together as a group under common ownership, sales to
the nine department store customers which were owned at year-end 2001 by
Federated Department Stores, Inc. accounted for approximately 17% of 2001 and
18% of 2000 sales, and sales to the eight department store customers which were
owned at year-end 2001 by The May Department Stores Company accounted for
approximately 13% of 2001 and 14% of 2000 sales. See Note 9 of Notes to
Consolidated Financial Statements. 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 sales. Sales to the Company's department and
specialty store customers are made primarily through our New York City
showrooms.
Orders from our 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 its products. We continually monitor retail
sales in order to directly assess consumer response to its products.
We have implemented in-stock reorder programs in several divisions to
enable customers to reorder certain items through electronic means for quick
delivery. See "Manufacturing" below. Many of our retail customers participate in
our in-stock reorder programs through their own internal replenishment systems.
During 2001, 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. The LIZEDGE program services our LIZ CLAIBORNE,
ELISABETH and SIGRID OLSEN apparel brands by training sales associates on
suggested selling, product, merchandise presentation and client development
strategies. Our men's, accessories, jewelry, DANA BUCHMAN, LAUNDRY BY SHELLI
SEGAL, LUCKY BRAND JEANS and licensed DKNY(R) and KENNETH COLE businesses have
service and merchandising programs similar to LIZEDGE.
In 2001, we further expanded our domestic LIZVIEW program, designed to
enhance the presentation of our products on department store selling floors
generally through the use of proprietary fixturing, merchandise presentations
and in-store graphics. At year-end 2001, over 2,064 LIZVIEW shops were installed
in more than 1,240 stores, representing over 185,000 square feet of upgraded
selling space for LIZ CLAIBORNE brands. In addition, at year-end 2001,
approximately 505 accessories, 553 CLAIBORNE, 19 DANA BUCHMAN, 233 EMMA JAMES,
three LAUNDRY, eight LUCKY BRAND, 1,630 DKNY (R) JEANS, 122 CITY (R) DKNY, 158
KENNETH COLE NEW YORK, and 16 SIGRID OLSEN shops were installed in domestic
department stores. Furthermore, at year-end 2001, approximately 1,900 CRAZY
HORSE shops were installed in JC Penney stores and approximately 175 FIRST ISSUE
shops were installed in Sears stores. In 2002, we plan to install, in the
aggregate, approximately 750 additional in-store shops. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Position, Capital Resources and Liquidity."
We spent approximately $45 million on advertising in 2001. This compares
with approximately $43 million spent in 2000.
We maintain five consumer websites: www.elisabeth.com, which offers
ELISABETH branded apparel for sale directly to consumers; www.lizclaiborne.com,
which provides information regarding the Company and our LIZ CLAIBORNE branded
apparel and accessories products; www.luckybrandjeans.com, which provides
information on LUCKY BRAND branded apparel and offers a selection of LUCKY BRAND
apparel for sale directly to consumers; www.mexx.com, which offers MEXX branded
merchandise for sale directly to consumers outside of the United States; and
www.sigridolsen.com, which provides information on SIGRID OLSEN branded apparel.
MANUFACTURING
We do not own any product manufacturing facilities; all of our products are
manufactured in accordance with our specifications through arrangements with
independent suppliers.
6
Products produced mainly in the Far East, the Caribbean and Central America
represent a substantial portion of the Company's sales. We also source in the
United States and other regions. We do not own quota and, therefore, must obtain
quota from our suppliers and vendors. During 2001, several hundred suppliers
manufactured our products. Our products are currently manufactured in 38
different countries, including China, Saipan, Hong Kong, Taiwan, the Dominican
Republic, Sri Lanka, Indonesia and the Philippines. We continually seek
additional suppliers throughout the world for our sourcing needs. Our largest
supplier of finished products manufactured less than 6% of our purchases of
finished products during 2001. In each of 2001, 2000 and 1999, our ten largest
suppliers for each such year manufactured approximately 35% of our purchases of
finished products for each such year. We expect that the percentage of
production represented by our largest suppliers will remain at its current level
in light of the Company's ongoing worldwide factory certification initiative,
under which we allocate large portions of our production requirements to
suppliers appearing to have superior capacity, quality (of product, operation
and human rights compliance) and financial resources. Our purchases from our
suppliers are affected through individual purchase orders specifying the price
and quantity of the items to be produced. We do not have any long-term, formal
arrangements with any of the suppliers which manufacture our products. We
believe that we are the largest customer of many of our manufacturing suppliers
and considers our relations with such suppliers to be satisfactory.
Most of our fabrics, trimmings and other materials are obtained in bulk
from various foreign and domestic suppliers. Where we purchase completed product
"packages" from our contractors, the contractor is responsible to purchase all
necessary raw materials and other product components. Inasmuch as we intend to
continue to move towards purchasing an increasing portion of its products as
"packages," we continue our development of a group of "approved suppliers" to
supply raw materials and other product components to its contractors for use in
"packages"; we anticipate continuing the practice of purchasing a substantial
portion of its products as "packages" in 2002.
During 2001, the raw materials used our products were obtained from
approximately two hundred suppliers, located primarily in the United States,
Taiwan, Korea, Japan, China, Turkey, Italy and Hong Kong. Approximately 36% of
our raw materials during 2001, and 32% during 2000, were obtained from its five
largest raw material suppliers, with no single raw material supplier accounting
for more than 9% of 2001 raw material purchases. We do not have any long-term,
formal arrangements with any supplier of raw materials. To date, we have
experienced little difficulty in satisfying its raw material requirements and
considers our sources of supply adequate.
We operate under substantial time constraints in producing each of our
collections. See "Sales and Marketing" above. 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. However, in order to
secure necessary materials and manufacturing facilities, we must make
substantial advance commitments, often as much as seven months prior to the
receipt of firm orders from customers for the items to be produced. We continue
to seek to reduce the time required to move products from design to the
customer.
If we should misjudge our ability to sell our products, we could be faced
with substantial outstanding fabric and/or manufacturing commitments, resulting
in excess inventories. See "Competition; Certain Risks" below.
Our arrangements with foreign suppliers are subject to the risks of doing
business abroad, including currency fluctuations and revaluations, restrictions
on the transfer of funds, terrorist activities 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 large
portion of our products which are produced abroad, any substantial disruption of
our relationships with our foreign suppliers could adversely affect our
operations.
IMPORT AND IMPORT RESTRICTIONS
Virtually all of the Company's merchandise imported into the United States
is subject to United States duties. In addition, bilateral agreements between
the major exporting countries and the United States impose quotas that limit the
amount of certain categories of merchandise that may be imported into the United
States. The majority of such agreements contain "consultation" clauses which
allow the United States, under certain circumstances, to impose unilateral
restrictions on the importation of certain categories of merchandise that are
not subject to specified limits under the terms of an agreement. These bilateral
agreements have been negotiated under the framework of the MultiFiber
Arrangement ("MFA"), which has been in effect since 1974. The United States, a
participant in international negotiations known as the "Uruguay Round", ratified
legislation enacting and implementing the various agreements of the Uruguay
Round, effective January 1, 1995, including the Uruguay Round Agreement on
Textiles and Clothing which requires World Trade Organization member countries
to phase out textile and apparel quotas in three stages over a ten year period.
In addition, it regulates trade in non-integrated textile and apparel quotas
during the ten-year transition period. However, even with respect to integrated
textile and apparel quota categories, the United States remains free to
establish numerical restraints in response to a particular product being
imported in such increased quantities as to cause (or threaten) serious damage
to the relevant domestic industry. United States legislation implementing the
Uruguay Round also changed the rule of origin for many textiles and apparel
products effective July 1, 1996, with certain minor exceptions. This change now
determines country of origin based on "assembly" for most textile and apparel
products. The Uruguay Round also incorporates modest duty reductions for textile
and apparel products over a ten-year staging schedule. This will likely result
in a modification of current patterns of international trade with respect to
apparel and textiles. See "Competition; Certain Risks" below.
7
In addition, each of the countries in which our products are sold has laws
and regulations regarding import restrictions and quotas. Because the United
States and other countries in which our products are manufactured and sold may,
from time to time, impose new quotas, duties, tariffs, surcharges or other
import controls or restrictions, or adjust presently prevailing quota
allocations or duty or tariff rates or levels, we maintain a program of
intensive monitoring of import and quota-related developments. We seek
continually to minimize our potential exposure to import and quota-related risks
through, among other measures, allocation of production to merchandise
categories that are not subject to quota pressures, adjustments in product
design and fabrication, shifts of production among countries and manufacturers,
as well as through geographical diversification of its sources of supply.
In light of the very substantial portion of our products which are
manufactured by foreign suppliers, the enactment of new legislation or the
administration of current international trade regulations, or executive action
affecting textile agreements, could adversely affect our operations.
DISTRIBUTION
We distribute virtually all of our products through facilities we own or
lease. Our principal distribution facilities are located in Alabama, California,
New Jersey, Pennsylvania and The Netherlands. See "Properties" below.
TRADEMARKS
We own and/or use a variety of trademarks in connection with our businesses
and products, including AXCESS, CLAIBORNE, CLAIBORNE SPORT, CRAZY HORSE, CURVE,
DANA BUCHMAN, DANA BUCHMAN INTUITION, DANA BUCHMAN LUXE, ELISABETH, EMMA JAMES,
FIRST ISSUE, J.H. COLLECTIBLES, LAUNDRY BY SHELLI SEGAL, LEATHER CO., LIZ, LIZ &
CO., LIZ CLAIBORNE, LIZ CLAIBORNE COLLECTION, LIZ CLAIBORNE STUDIO, LIZ
CLAIBORNE WOMAN, LIZSPORT, LIZWEAR, MAMBO, MARVELLA, MEG ALLEN, MEXX, MEXXSPORT,
MONET, REALITIES, RUSS, RUSS WOMAN, TRIFARI, VILLAGER, VIVID, its LC logomark,
our triangular logomark, our triangular-within-a triangle icon and our leaf
design. We have exclusive rights (subject to certain territorial limitations),
under license, to the DKNY(R) JEANS and DKNY(R) ACTIVE trademarks and logos for
men's and women's sportswear, jeanswear and activewear in the Western Hemisphere
and to the CITY DKNY (R) trademark and logo for women's sportswear. We are also
the exclusive licensee of the KENNETH COLE NEW YORK, UNLISTED.COM and REACTION
KENNETH COLE trademarks for women's wear (subject to certain territorial
limitations) in North America, as well as the CANDIE'S trademark for fragrance,
cosmetic and beauty products worldwide. See Note 3 of Notes to Consolidated
Financial Statements. By virtue of our ownership interests, we control the
Segrets' trademarks, which include SIGRID, SIGRID OLSEN SPORT, SIGRID OLSEN
COLLECTION, SO BLUE BY SIGRID OLSEN, SIGRID OLSEN WOMAN and SIGRID OLSEN
PETITES; and the Lucky trademarks, which include HOT PINK, LUCKY BRAND, LUCKY
BABY, LUCKYVILLE, LUCKY YOU LUCKY BRAND, Lucky's four leaf clover design, pocket
design, and fly placement trademarks.
We have registered or applied for registration of a multitude of
trademarks, including those referenced above, for use on apparel and
apparel-related products, including accessories, cosmetics and jewelry in the
United States as well as numerous foreign territories. We also have a number of
design patents. We regard our trademarks and other proprietary rights as
valuable assets and believe that they have significant value in the marketing of
our products. We vigorously protect our trademarks and other intellectual
property rights against infringement.
COMPETITION; CERTAIN RISKS
The apparel and related product markets are highly competitive, both within
the United States and abroad.
Our ability to successfully compete depends on a number of factors,
including our ability to effectively anticipate, gauge and respond to changing
consumer demands and tastes, to translate market trends into appropriate,
saleable product offerings relatively far in advance, and to operate within
substantial production and delivery constraints. In addition, consumer and
customer acceptance and support (especially by our largest customers) depend
upon, among other things, product, value and service.
8
We believe that, based on sales, we are among the largest apparel companies
operating in the United States. Although we are unaware of any comprehensive
trade statistics, we believe, based on our knowledge of the market and available
trade information, that measured by sales, we are the one of the largest
suppliers of "better" women's branded apparel in the United States. Our
principal competitors within the "better" women's sportswear market include
Jones Apparel Group, Inc., Polo Ralph Lauren Corporation and Tommy Hilfiger
Corporation.
In addition to the competitive factors described above, our business,
including our revenues and profitability, is influenced by and subject to a
number of factors which are inherently uncertain and therefore difficult to
predict, including, among others: changes in regional, national and global
microeconomic and macroeconomic conditions, including the levels of consumer
confidence and spending, consumer income growth, higher personal debt levels,
rising energy costs, fluctuations in foreign currency exchange rates, increasing
interest rates and increased stock market volatility; risks associated with
changes in the competitive marketplace, including, the financial condition of
the apparel industry and the retail industry, as well as adverse changes in
retailer or consumer acceptance of the Company's products as a result of fashion
trends or otherwise and the introduction of new products or pricing changes by
the Company's competitors; risks associated with the Company's dependence on
sales to a limited number of large department store customers, including risks
related to customer requirements for vendor margin support and those related to
extending credit to customers; risks associated with consolidations,
restructurings and other ownership changes in the apparel (and related products)
industry and the retail industry; uncertainties relating to the Company's
ability to successfully implement its growth strategies; the Company's ability
to correctly balance the level of its fabric and/or merchandise commitments with
actual orders; the Company's ability to effectively distribute its products
within its targeted markets (including distribution to and through wholesale
accounts and Company operated retail stores and concession locations); risks
related to the Company's ability to establish, defend and protect its trademarks
and other proprietary rights and other risks relating to managing intellectual
property issues; risks associated with the possible inability of the Company's
unaffiliated manufacturers to manufacture and deliver products in a timely
manner, to meet quality standards or to comply with the Company's policies
regarding labor practices or applicable laws or regulations; risks associated
with changes in social, political, economic and other conditions affecting
foreign operations and sourcing, including current rate fluctuations; risks
associated with terrorist activities, including reduced shopping activity as a
result of public safety concerns and disruption in the receipt and delivery of
merchandise; and any significant disruption of the Company's relationships with
its suppliers, manufacturers and employees. See also Note 9 of Notes to
Consolidated Financial Statements.
With respect to foreign sourcing, the Company notes that legislation which
would further restrict the importation and/or increase the cost of textiles and
apparel produced abroad has periodically been introduced in Congress. Although
it is unclear whether any new legislation will be enacted into law, various new
legislative or executive initiatives may be proposed. These initiatives may
include a 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. In
light of the very substantial portion of the Company's products which are
manufactured by foreign suppliers, the enactment of new legislation or the
administration of current international trade regulations, or executive action
affecting international textile agreements, could adversely affect the Company's
operations. See "Import and Import Restrictions" and "Sales and Marketing"
above.
From time to time we review the possible entry into new markets, either
through internal development activities, acquisitions or licensing. The entry
into new markets (including the development and launch of new product categories
and product lines), such as our entry into the moderate market, and our
acquisition of businesses, such as the LAUNDRY, LUCKY, MEXX, MONET and SEGRETS
acquisitions, and the licensing of brands such as DKNY(R) JEANS and DKNY(R)
ACTIVE, CITY DKNY(R), KENNETH COLE NEW YORK, REACTION KENNETH COLE and
UNLISTED.COM, are accompanied by risks inherent in any new business venture and
may require methods of operations and marketing strategies different from those
employed in our other businesses. Moreover, certain new businesses may be lower
margin businesses and may require us to achieve significant cost efficiencies.
In addition, new markets, product categories, product lines and businesses may
involve buyers, store customers and/or competitors different from our historical
buyers, customers and competitors. Furthermore, our acquisition of other
businesses entails the normal risks inherent in such transactions, including,
without limitation, possible difficulties, delays and/or unanticipated costs in
integrating the businesses, operations, personnel, and/or systems of the
acquired entity; risks that projected or satisfactory level of sales, profits
and/or return on investment will not be generated; risks that expenditures
required for capital items or working capital will be higher than anticipated;
risks involving our ability to retain and appropriately motivate key personnel
of the acquired business; and risks associated with unanticipated events and
unknown or uncertain liabilities. In addition, businesses licensed by us are
subject to risks inherent in such transactions, including compliance with terms
set forth in the applicable license agreements, including among other things the
maintenance of certain levels of sales, and the public perception and/or
acceptance of the licensor's brands or other product lines, which are not within
our control.
9
EMPLOYEES
At December 29, 2001, we had approximately 10,400 full-time employees
worldwide, as compared with approximately 8,300 full-time employees at December
30, 2000.
Domestically, we are bound by a national collective bargaining agreement
with the Union of Needletrades, Industrial and Textile Employees (UNITE),
agreements with various locals and a Jobbers Agreement with UNITE. These
agreements cover approximately 1,550 of our full-time employees and expire on
May 31, 2003. Most of the UNITE-represented employees are employed in warehouse
and distribution facilities we operate in Alabama, California, New Jersey and
Pennsylvania. In addition, we are bound by an agreement with the Industrial
Professional & Technical Workers International Union, covering approximately 120
of our full-time employees at our Santa Fe Springs, California facility and
expiring on May 14, 2005.
We consider our relations with our employees to be satisfactory and to date
we have not experienced any interruption of our operations due to labor
disputes.
Item 2. Properties.
Our distribution and administrative functions are conducted in both leased
and owned facilities. We also lease space for our retail specialty, outlet and
concession stores. We believe that our existing facilities are well maintained,
in good operating condition and, upon occupancy of additional space, will be
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. See Note 9 of Notes to Consolidated Financial
Statements.
Our principal executive offices and showrooms, as well as its sales,
merchandising and design staffs, are located at 1441 Broadway, New York, New
York, where we lease approximately 287,000 square feet under a master lease,
which expires at the end of 2012 and contains certain renewal options and rights
of first refusal for additional space. Each Company business segment uses this
facility. The following table sets forth information with respect to our other
key properties:
- -----------------------------------------------------------------------------------------------------
Key Properties:
- -----------------------------------------------------------------------------------------------------
Location(1) Primary Use Approximate Leased/Owned
Square Footage
- ------------------------------- ------------------------------------- ---------------- --------------
Montgomery, Alabama Apparel Warehouse 120,000 Leased
Montgomery, Alabama(2) Apparel Distribution Center 670,000 Leased
Santa Fe Springs, California Apparel Distribution Center 600,000 Leased
Vernon, California Offices/ Apparel Distribution Center 123,000 Leased
Mississauga, Canada Offices/Apparel Distribution Center 183,000 Leased
Dayton, New Jersey Non-Apparel Distribution Center 226,000 Leased
Dayton, New Jersey Non-Apparel Distribution Center 179,000 Leased
Moonachie, New Jersey Apparel Distribution Center 126,000 Leased
North Bergen, New Jersey Offices/Apparel Distribution Center 620,000 Owned
North Bergen, New Jersey Offices 300,000 Owned
Secaucus, New Jersey Apparel Distribution Center 164,000 Leased
Westchester, Ohio Apparel Distribution Center 600,000 Leased
Mt. Pocono, Pennsylvania(3) Apparel Distribution Center 150,000 Leased
Mt. Pocono, Pennsylvania Apparel Distribution Center 1,230,000 Owned
Voorschoten, The Netherlands(4) Offices/Apparel Distribution Center 295,000 Leased
- ------------------------------- ------------------------------------- ---------------- --------------
(1) We also lease showroom, warehouse and office space in various other
domestic and international locations.
(2) This facility, which is located on a 124-acre site, is leased pursuant to
industrial development financing.
(3) This facility is on an 80-acre site we own.
(4) This property is used solely by our Mexx business.
Pursuant to financing obtained through an off-balance sheet arrangement
commonly referred to as a synthetic lease, we have constructed the Westchester,
Ohio facility, and have purchased an approximately 106,506 square foot warehouse
and distribution facility (which includes mezzanine space of approximately
115,000 square feet) in Lincoln, Rhode Island. See Management's Discussion and
Analysis of Financial Condition and Results of Operations: Financial Position,
Capital Resources and Liquidity; and Note 9 of Notes to Consolidated Financial
Statements. We are seeking to sell our approximately 270,000 square foot
facility in Augusta, Georgia (located on a 98-acre site and previously used in
connection with a dyeing and finishing joint venture), which is currently sublet
to a third-party.
10
Item 3. Legal Proceedings.
Various legal actions are pending against the Company. 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 results of operations or financial
position. See Note 9 and Note 23 of Notes to Consolidated Financial Statements.
In January 1999, two actions were filed in California naming as defendants
more than a dozen United States-based apparel companies that source garments
from Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationship with the factories, have violated various federal and state laws.
One action, filed in California Superior Court in San Francisco by a union and
three public interest groups, alleges unfair competition and false advertising
(the "State Court Action"). The State Court Action seeks equitable relief,
unspecified amounts for restitution and disgorgement of profits, interest and an
award of attorney's fees. The second, filed in the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges claims under the civil RICO statute and the Alien Tort Claims
Act, premised on supposed violations of the federal anti-peonage and indentured
servitude statutes, as well as other violations of Saipan and international law,
and seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory defendants
on behalf of a putative class of their workers, alleges violations of federal
and Saipanese wage and employment laws.
The Company sources products in Saipan but was not named as a defendant in
the actions. The Company and certain other apparel companies not named as
defendants were advised in writing, however, that they would be added as parties
if a consensual resolution of the complaint claims could not be reached. In the
wake of that notice, which was accompanied by a draft complaint, the Company
entered into settlement negotiations and subsequently entered into an agreement
to settle all claims that were or could have been asserted in the Federal or
State Court Actions. To date, eighteen other apparel companies have also settled
these claims. As part of the settlement, the Company has since been named as a
defendant, along with certain other settling apparel companies, in a Federal
Court action styled Doe I, et al. v. Brylane, L.P. et al., (the "Brylane
Action"), initially brought in the United States District Court for the District
of Hawaii, that mirror portions of the larger State and Federal Actions but does
not include RICO and certain of the other claims alleged in those Actions. The
action filed against the Company will remain inactive unless the settlement is
not finally approved by the Federal Court. The agreements concluded by the
Company and other retailers are subject to federal court approval, which has
been delayed by virtue of the Hawaii District Court's June 23, 2000 decision to
transfer the Federal Action to Saipan. Plaintiffs petitioned the Ninth Circuit
Court of Appeals for the Writ of Mandamus reversing that ruling. On March 22,
2001, the Court of Appeals denied Plaintiff's petition, and the Federal Action
and the Brylane Action have been transferred to Saipan. The court in Saipan held
a hearing on February 14, 2002 on Plaintiffs' motions to certify the proposed
class and to preliminarily approve the settlement, but reserved decision on both
motions. Under the terms of the settlement agreement, if the settlement does not
receive final federal court approval, the Company will be entitled to a refund
of the entire settlement amount except for funds of up to $10,000 spent on costs
of notice. Because the litigation is at a preliminary stage, with virtually no
merits discovery having taken place, if the settlement is not executed or is not
finally approved by the federal court, we cannot at this juncture determine the
likelihood of a favorable or unfavorable outcome or the magnitude of the latter
if it were to occur. Although the outcome of any such litigation cannot be
determined with certainty, management is of the opinion that the final outcome
should not have a material adverse effect on the Company's financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
11
Executive Officers of the Registrant.
Information as to the executive officers of the Company, as of March 20, 2002,
is set forth below:
Name Age Position(s)
- ---- --- -----------
Paul R. Charron 59 Chairman of the Board and Chief Executive Officer
Michael Scarpa 46 Vice President and Chief Financial Officer
Angela Ahrendts 41 Executive Vice President
Lawrence D. McClure 53 Senior Vice President - Human Resources
Trudy F. Sullivan 52 Executive Vice President
Robert J. Zane 62 Senior Vice President - Manufacturing, Sourcing,
Distribution and Logistics
Executive officers serve at the discretion of the Board of Directors.
Mr. Charron joined the Company as Vice Chairman and Chief Operating
Officer, and became a Director, in 1994. In 1995, Mr. Charron became President
(a position he held until October 1996) and Chief Executive Officer of the
Company. In 1996, Mr. Charron became Chairman of the Board of the Company. Prior
to joining the Company, Mr. Charron served in various executive capacities with
VF Corporation, an apparel manufacturer, from 1988.
Mr. Scarpa joined the Company in 1983 as budget manager and served in
various management positions thereafter. In 1991, Mr. Scarpa was promoted to
Vice President - Divisional Controller and in 1995 he was promoted to Vice
President - Financial Planning and Operations. Effective July 2000, he became
Vice President - Chief Financial Officer.
Ms. Ahrendts joined the Company in 1998 as Vice President - Corporate
Merchandising and Design, and became Senior Vice President Corporate
Merchandising and Group President for Laundry by Shelli Segal, Lucky Brand
Dungarees, the Company's Men's business and the licensed Kenneth Cole New York
and DKNY(R) businesses, and became Executive Vice President in March, 2002.
Prior to joining the Company, Ms. Ahrendts served as Vice President/GMM of Henri
Bendel, an apparel manufacturer, from 1996 to 1998.
Mr. McClure joined the Company in 2000 as Senior Vice President - Human
Resources. Prior to joining the Company, Mr. McClure served as Vice President,
Human Resources of Dexter Corporation, a specialty materials company, from 1995.
Ms. Sullivan joined the Company in 2001 as Group President for the
Company's Casual, Collection and Elisabeth businesses, and became Executive Vice
President in March, 2002. Prior to joining the Company, Ms. Sullivan was
President of J. Crew Group, Inc., an apparel manufacturer from 1995 to 2001.
Mr. Zane joined the Company in 1995 and served from 1995 to 2000 as Senior
Vice President - Manufacturing and Sourcing. In 2000, Mr. Zane became Senior
Vice President - Manufacturing, Sourcing, Distribution and Logistics. Prior to
joining the Company, Mr. Zane owned and operated Medallion Tekstil, a private
label manufacturing company he founded in 1989.
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol LIZ. The table below sets forth the high and low closing sale
prices of the Common Stock (based on the NYSE composite tape) for the periods
indicated. On December 19, 2001, the Company declared a two-for-one stock split
in the form of a stock dividend payable on January 16, 2002 to stockholders of
record on December 31, 2001. All share price data, including historical data,
has been adjusted to reflect the stock split.
12
Calendar Period High Low
2001:
1st Quarter $25.45 $20.88
2nd Quarter 26.34 21.88
3rd Quarter 27.14 18.85
4th Quarter 25.84 18.63
2000:
1st Quarter $23.59 $15.63
2nd Quarter 23.44 17.47
3rd Quarter 22.56 17.72
4th Quarter 22.53 17.53
On March 20, 2002, the closing sale price of the Company's Common Stock was
$29.91. As of March 20, 2002, the approximate number of record holders of Common
Stock was 7,232.
The Company has paid regular quarterly cash dividends since May 1984.
Quarterly dividends for the last two fiscal years were paid as follows:
Calendar Period Dividends Paid per Common Share
2001:
1st Quarter $0.05625
2nd Quarter $0.05625
3rd Quarter $0.05625
4th Quarter $0.05625
2000:
1st Quarter $0.05625
2nd Quarter $0.05625
3rd Quarter $0.05625
4th Quarter $0.05625
The Company currently plans to continue paying quarterly cash dividends on
its Common Stock. The amount of any such dividend will depend on the Company's
earnings, financial position, capital requirements and other relevant factors.
In December 1989, the Board of Directors first authorized the repurchase,
as market and business conditions warranted, of the Company's Common Stock for
cash in open market purchases and privately negotiated transactions. From time
to time thereafter, the Board has authorized additional repurchases. As of March
20, 2002, the Company had expended an aggregate of $1.457 billion of the $1.675
billion authorized under its stock repurchase program, covering approximately
84.8 million shares.
Item 6. Selected Financial Data.
The following table sets forth certain information regarding the Company's
operating results and financial position and is qualified in its entirety by the
consolidated financial statements and notes thereto which appear elsewhere
herein:
13
(All dollar amounts in thousands except per common share data)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Sales $3,448,522 $3,104,141 $2,806,548 $2,535,268 $2,412,601
Gross Profit 1,427,250 1,233,872 1,097,582 997,102 969,658
Net Income 192,057** 184,595** 192,442 169,377** 184,644
Working capital 658,712 552,672 506,298 711,942 729,763
Total assets 1,951,255 1,512,159 1,411,801 1,392,791 1,305,285
Stockholders' equity 1,056,161 834,285 902,169 981,110 921,627
Per common share data*:
Basic earnings 1.85** 1.73** 1.56 1.29** 1.33
Diluted earnings 1.83** 1.72** 1.56 1.29** 1.32
Book value at year end 10.04 8.15 7.95 7.67 6.97
Dividends paid .23 .23 .23 .23 .23
Weighted average common
shares outstanding* 103,993,824 106,813,198 123,046,930 131,005,704 139,238,334
Weighted average common
shares and share equivalents
outstanding* 105,051,035 107,494,886 123,439,182 131,693,552 140,382,230
*Adjusted for a two-for-one stock split of the Company's common stock,
payable in the form of a 100% stock dividend to shareholders of record as
of the close of business on December 31, 2001. The 100% stock dividend was
paid on January 16, 2001.
**Includes the after tax effects of a restructuring charge of $9,632
($15,050 pre-tax) or $.09 per common share in 2001, restructuring charges
of $13,466 ($21,041 pretax) or $.13 per common share and a special
investment gain of $5,606 ($8,760 pretax or $.05 per common share in 2000
and a restructuring charge of $17,100 ($27,000 pretax) or $.13 per common
share in 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
The following table sets forth items in the Consolidated Statements of
Income of Liz Claiborne Inc. and its wholly-owned and majority-owned
subsidiaries (the "Company") as a percent of net sales and the percentage change
of those items as compared to the prior year.
FISCAL YEARS YEAR TO YEAR
PERCENT OF SALES % CHANGE
---------------- --------
2001 2000
vs. vs.
2001 2000 1999 2000 1999
---- ---- ---- ---- ----
NET SALES 100.0% 100.0% 100.0% 11.1% 10.6%
Cost of goods sold 58.6 60.3 60.9 8.1 9.4
GROSS PROFIT 41.4 39.7 39.1 15.7 12.4
Selling, general and
administrative expenses 31.3 29.3 28.4 18.8 14.0
Restructuring charges 0.5 0.7 -- (28.5) --
OPERATING INCOME 9.6 9.8 10.7 9.2 1.3
Other (expense) income-net (0.1) 0.2 -- -- --
Interest (expense) income-net (0.8) (0.7) 0.1 28.3 --
INCOME BEFORE
PROVISION 8.7 9.3 10.7 4.0 (4.4)
FOR INCOME TAXES
Provision for income taxes 3.1 3.3 3.9 4.0 (4.9)
NET INCOME 5.6 5.9 6.9 4.0 (4.1)
14
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail. The Wholesale Apparel segment consists of women's and
men's apparel designed and marketed worldwide under various trademarks owned or
licensed by the Company; this segment includes our career (COLLECTION), casual
(LIZSPORT, LIZWEAR and LIZ & CO.), bridge (DANA BUCHMAN), large size
(ELISABETH), men's (CLAIBORNE), moderate priced special markets (AXCESS, CRAZY
HORSE, EMMA JAMES, FIRST ISSUE, RUSS and VILLAGER), specialty apparel (SIGRID
OLSEN), premium denim (LUCKY BRAND DUNGAREES) and contemporary sportswear and
dress (LAUNDRY) businesses, as well as our licensed DKNY(R) JEANS, DKNY(R)
ACTIVE, and CITY DKNY(R) businesses and our licensed KENNETH COLE NEW YORK and
REACTION KENNETH COLE businesses. The Wholesale Apparel segment also includes
wholesale sales of women's, men's and children's apparel designed and marketed
in Europe, Canada, the Asia-Pacific Region and the Middle East under the MEXX
brand names. The Wholesale Non-Apparel segment consists of accessories, jewelry
and cosmetics designed and marketed worldwide under certain of those and other
owned or licensed trademarks, including our MONET and TRIFARI labels. The Retail
segment operates specialty retail, outlet and concession stores worldwide that
sell most of these apparel and non-apparel products to the public through our
197 specialty retail stores, 211 outlet stores, and 452 concession stores. As a
result of our recent acquisition of Mexx Group B.V. ("MEXX"), we are also
segmenting our results on a geographic basis between Domestic (wholesale
customers and Company retail operations comprised of specialty retail and outlet
stores based in the United States) and International (wholesale customers and
Company specialty retail and outlet stores and concession stores based outside
of the United States). All data and discussion with respect to our specific
segments included within this "Management's Discussion and Analysis" is
presented before applicable intercompany eliminations. Please refer to Note 19
of Notes to Consolidated Financial Statements.
On May 23, 2001, the Company completed its acquisition of all the
outstanding capital stock of MEXX, a privately held fashion apparel company,
incorporated and existing under the laws of the Netherlands. MEXX designs and
markets a wide range of merchandise for women, men and children under the MEXX
brand name. MEXX's products are sold via wholesale and retail formats in more
than 40 countries in Europe, the Asia-Pacific region, Canada and the Middle
East, with MEXX's core markets being the Benelux and Germanic regions. MEXX
products, which are in the mid-price range, are targeted at the 20-40 year old
modern, urban consumer.
MEXX's wholesale business, which accounted for approximately 71% of MEXX's
total net sales for each of fiscal years 2001 and 2000, consists of sales to
approximately 6,000 independent retail stores, 1,100 department store doors and
75 free standing MEXX franchise stores. MEXX's retail business, which accounted
for approximately 29% of MEXX's total net sales in fiscal years 2001 and 2000,
consists of approximately 65 company owned and operated retail stores, 110
concession shop-in-shop stores (where the space is owned and operated by the
department store while MEXX owns the inventory) and 35 high street concession
stores (where the store is leased and operated by the partner while MEXX owns
the inventory). In addition, MEXX operates approximately 18 outlet stores. MEXX
also has licensed a variety of its trademarks for use on a number of non-apparel
items, including fragrances, shoes, handbags, costume jewelry and watches.
2001 VS. 2000
Our net sales for 2001 were $3.45 billion, an increase of 11.1%, compared
to $3.10 billion in 2000 (both periods include 52 weeks). This increase
reflected a 6.8% increase in our Wholesale Apparel segment to $2.54 billion, an
increase of 17.3% in Wholesale Non-Apparel to $496.1 million, and an increase in
Retail of 26.5% to $615.7 million. Our International net sales increased by
250.0% to $417.2 million, and our Domestic net sales increased by 1.6% to $3.03
billion. Our net sales for 2001 and 2000 were not materially impacted by foreign
currency fluctuations.
The increase in net sales of our Wholesale Apparel segment primarily
reflected the inclusion of sales of our MEXX business and our licensed CITY
DKNY(R) business, and the inclusion of a full year of sales of our licensed
KENNETH COLE NEW YORK Women's apparel line, as well as sales increases in our
Special Markets and LUCKY BRAND DUNGAREES businesses, due in each case to higher
unit volume which in certain of our Special Markets brands were partially offset
by lower unit selling prices, our DKNY(R) JEANS Women's business due to higher
unit volume due primarily to higher demand in both our Missy and Junior
businesses and higher average unit selling prices due to a decrease in retailer
support, and our SIGRID OLSEN and DANA BUCHMAN businesses, due in each case to
higher average unit selling prices reflecting increased demand and decreased
retailer support. These increases were partially offset by sales declines in our
Casual, ELISABETH and LAUNDRY businesses due in each case to planned lower unit
volume and lower average unit selling prices. Our Career business and, to a
lesser extent, our Menswear business, also declined due to lower unit volume and
average unit selling prices as a result of weakness in demand.
The increase in our Wholesale Non-Apparel segment was primarily due to the
significant net sales increases in our Jewelry business, due to the inclusion of
a full year of sales from our MONET business acquired in July 2000, and in our
Cosmetics business, due to the launch of our MAMBO fragrance in August 2001, as
well as a slight sales increase in our
15
Handbags business, principally reflecting higher unit volume. These gains were
partially offset by a slight decline in our Fashion Accessories business due to
lower unit volume.
The increase in net sales of our Retail segment principally reflected
increases in our Outlet store sales, primarily due to 33 additional stores
(including 18 MEXX stores) on a period-to-period basis (we ended the year with
211 Outlet stores), and in our Specialty Retail Store sales, primarily due to 25
new LUCKY BRAND DUNGAREES stores, the inclusion of 65 MEXX stores on a
period-to-period basis (we ended the year with a total of 197 Specialty Retail
stores), as well as a LUCKY BRAND DUNGAREES comparable store sales increase. The
increase in net sales also reflected the inclusion of 35 MEXX high street
concession stores and 110 MEXX concession shop-in-shop stores (we ended the year
with a total of 452 concession stores). These increases were partially offset by
a low single-digit comparable store sales decrease in our Outlet stores and a
low single-digit comparable store sales decrease in the balance of our Specialty
Retail stores.
The increase in net sales of our Domestic segment was primarily due to
increases in our Wholesale Non-Apparel segment, resulting from the inclusion of
a full year's sales from our MONET business, and our Retail segment, due to an
additional 33 Outlet and 25 LUCKY BRAND DUNGAREES stores partially offset by a
slight decrease in our Wholesale Apparel segment. Our International segment
increase was due primarily to the inclusion of sales of our recently acquired
MEXX business and the inclusion of a full year of sales of our MONET business
(acquired in July 2000).
Gross profit dollars increased $193.4 million, or 15.7%, in 2001 over 2000.
Gross profit as a percent of sales increased to 41.4% in 2001 from 39.7% in 2000
due to the increased penetration of our relatively higher-margin Wholesale
Non-Apparel segment, primarily due to the inclusion of a full year's sales from
our MONET business and the launch of our MAMBO fragrance, as well as the
increased penetration of our relatively higher-margin Retail segment, driven by
the inclusion of the MEXX stores and the opening of additional stores. The
increase in the gross profit rate also reflected significantly lower unit
sourcing costs as a result of the continued consolidation and optimization of
our worldwide supplier base, combined with the continued improvement in the
matching of our production orders with our customer orders through the use of
systems implemented in late 1999 and revamped business processes. The Company
also benefited from the inclusion of MEXX, which runs at a relatively higher
gross margin rate than the Company average, and higher margins realized in our
DKNY(R) JEANS Women's, DANA BUCHMAN and SIGRID OLSEN businesses. These increases
were partially offset by lower gross margins in our Casual, Career and CRAZY
HORSE Men's businesses, due, in each case, primarily to the liquidation of
excess inventories.
Selling, general and administrative expenses ("SG&A"), before our
restructuring charges (see Note 12 of the Notes to Consolidated Financial
Statements), increased $171.3 million, or 18.8%, in 2001 over 2000. These
expenses as a percent of net sales increased to 31.3% in 2001 from 29.3% in
2000, principally reflecting the increased penetration of our relatively higher
cost Wholesale Non-Apparel segment, which experienced higher marketing costs in
our Cosmetics business associated with the launch of our MAMBO brand and
relatively higher SG&A rates in our recently acquired MONET business. Dollar and
percentage increases in SG&A also reflect our recently acquired MEXX business,
which runs at a relatively higher SG&A rate than the Company average.
Additionally, we experienced increases in our Retail segment due to the opening
of new stores and the inclusion of our recently acquired MEXX stores. Lower
sales in our relatively lower-cost Casual, Career and ELISABETH Wholesale
Apparel businesses also contributed to the increase. Additionally, the Company
incurred higher compensation expenses as a result of the vesting of certain
incentive equity instruments previously granted under the Company's stock
incentive plan, as well as goodwill amortization generated by our recent
acquisitions.
In December 2001, the Company recorded a net restructuring charge of $15.1
million (pretax), representing a charge of $19.0 million, which consisted of
approximately $4.6 million for the closure of seven Specialty Retail stores, due
to a shift to a vertical format for one of our brands which requires positioning
in different locations and the elimination of our large "world" store concept,
and five Outlet stores, due to the elimination of two of our branded store
formats; $3.5 million for the closure of four of our division offices; $3.3
million associated with the strategic closure of two specific facilities; and
$7.6 million in severance related costs associated with the elimination of
approximately 600 jobs, offset by the $3.9 million deemed no longer necessary of
the Company's previous restructuring liability originally recorded in December
2000. The 2001 restructuring charge reduced net income by $9.6 million (after
tax), or $0.09 per common share. The Company anticipates annual savings
associated with this restructuring to be between $15-$18 million. These
restructuring activities are expected to be substantially completed by December
2002. In September 2000, we recorded a net restructuring charge of $5.4 million
(pretax), representing a charge of $6.5 million, principally to cover the
closure of eight under-performing Specialty Retail stores in formats that no
longer fit into our retail strategy, the closure of one of our recently acquired
divisional offices, and severance related costs, offset by the $1.1 million
deemed no longer necessary of the Company's restructuring liability originally
recorded in December 1998. In December 2000, we recorded a restructuring charge
of $15.6 million (pretax) to further maximize business segment synergies. This
charge consisted of $10.6 million for operating and administrative costs
associated with the elimination of 270 jobs and $5.0 million for real estate
consolidations. Significant items included in the charge are estimated contract
termination costs, severance and related benefits for staff reductions,
estimated occupancy costs
16
and asset writedowns. The 2000 restructuring charges reduced net income by $13.5
million, or $0.13 per common share. The Company anticipates annual savings
associated with the 2000 restructuring charges to be between $13-$16 million.
As a result of the factors described above, operating income, before the
current year pre-tax restructuring charge of $15.1 million and the prior year
pre-tax restructuring charges of $21.0 million, increased $22.0 million, or
6.8%, to $346.8 million in 2001. Operating income (before restructuring charges)
as a percent of sales decreased to 10.1% in 2001 compared to 10.5% in 2000, due
to the inclusion of MEXX, which runs at an operating profit margin lower than
the Company average. Segment operating profit in our Wholesale Apparel segment
increased $1.9 million to $288.9 million (11.4% of sales) in 2001 compared to
$287.0 million (12.1% of sales) in 2000, principally reflecting increased profit
dollars in our DKNY(R) JEANS Women's, DANA BUCHMAN, SIGRID OLSEN and Special
Markets businesses and the inclusion of the profits from our recently acquired
MEXX business, partially offset by reduced sales and gross profits in our
Casual, Career and LAUNDRY businesses. Operating profit in our Wholesale
Non-Apparel segment increased $12.6 million to $46.2 million (9.3% of sales) in
2001 compared to $33.6 million (7.9% of sales) in 2000, primarily due to the
inclusion of a full year of profits from our MONET business and, to a lesser
extent, the launch of our MAMBO fragrance and increased profit dollars in our
Handbags business, partially offset by reduced profits in our Fashion
Accessories business. Segment operating profit in our Retail segment increased
$7.5 million to $70.3 million (11.4% of sales) in 2001 compared to $62.8 million
(12.9% of sales) in 2000, principally reflecting the inclusion of the profits
from the Retail stores of our recently acquired MEXX business, an increase in
our Specialty Retail store profits due to higher gross margins overall, and 25
new LUCKY BRAND DUNGAREES stores on a period-to-period basis, partially offset
by higher operating expenses in our Outlet store business. Including the impact
of the current year and prior year restructuring charges, operating income
increased $28.0 million, or 9.2% in 2001 compared to 2000, and decreased to 9.6%
of sales in 2001 from 9.8% in 2000. Segment operating income in our Domestic
segment increased primarily due to an increase in our Wholesale Non-Apparel
segment resulting from the inclusion of profits from our MONET business and
increased sales and gross profit rates in our Cosmetics business. Segment
operating income in our International segment increased primarily due to the
inclusion of our recently acquired MEXX business.
Net other expense in 2001 was $3.5 million, comprised of minority interest
and other non-operating expenses, compared to net other income of $6.7 million
in 2000. Last year's other income included a special investment gain of $8.8
million related to our sale of marketable equity securities, net of associated
expenses, partially offset by minority interest and other non-operating
expenses.
Net interest expense in 2001 was $28.1 million compared to $21.9 million in
2000. This increase of $6.2 million represents the incremental interest cost on
the debt incurred to finance our strategic initiatives including costs
associated with our recently acquired businesses, capital expenditures
(primarily related to the technological upgrading of our distribution facilities
and information systems) and in-store merchandise shop expenditures.
The provision for income taxes increased $4.2 million in 2001 and decreased
as a percent of net sales to 3.1% in 2001 from 3.3% in 2000, primarily
reflecting a higher pretax income for 2001 as compared to 2000. Our 2001
effective income tax rate remained unchanged from 2000 at 36.0%.
Due to the factors described above, net income (excluding the effect of
this year's after-tax restructuring charge of $9.6 million and last year's
after-tax restructuring charges of $13.5 million and an after-tax special
investment gain of $5.6 million) increased $9.2 million to $201.7 million in
2001 and declined as a percent of net sales to 5.8% in 2001 from 6.2% in 2000.
Net income (including this year's restructuring charge and last year's
restructuring charges and special investment gain) increased $7.5 million in
2001 to $192.1 million from $184.6 million and declined as a percent of net
sales to 5.6% in 2001 from 5.9% in 2000. Diluted earnings per share ("EPS")
(adjusted for a two-for-one stock split in the form of a one hundred percent
stock dividend payable on January 16, 2002 to shareholders of record as of
December 31, 2001 (the "stock dividend")), excluding this year's restructuring
charge and last year's restructuring charges and special investment gain,
increased 7.3% to $1.92 in 2001 from $1.79 in 2000, reflecting higher net income
and a lower number of average outstanding common shares and share equivalents in
2001. Diluted EPS, including the restructuring charges and special investment
gain was $1.83 in 2001 compared to $1.72 in 2000. Our average diluted shares
outstanding declined by 2.4 million in 2001 on a period-to-period basis, to
105.1 million, as a result of our stock repurchase program. We purchased 155,000
shares during 2001 for $2.9 million and 12.3 million shares during 2000 for
$247.7 million.
2000 VS. 1999
Our net sales for 2000 were $3.10 billion, an increase of 10.6%, compared
to $2.81 billion in 1999 (both periods include 52 weeks). This increase
reflected an 8.1% increase in our Wholesale Apparel segment to $2.37 billion, an
increase of 24.0% in Wholesale Non-Apparel to $423.0 million, and an increase in
Retail of 9.3% to $486.5 million. Our International net sales
17
increased by 13.2% (to $119.2 million), due primarily to the inclusion of sales
of our MONET business acquired in July 2000, and our Domestic net sales
increased by 10.5% (to $2.98 billion).
The increase in net sales of our Wholesale Apparel segment primarily
reflected continued strength in our Special Markets business due to higher unit
volume and higher net average unit selling prices, and the inclusion of a full
year's sales of our SIGRID OLSEN, LUCKY BRAND DUNGAREES and LAUNDRY businesses,
all acquired in 1999 (hereinafter referred to as our "1999 acquisitions"), our
CRAZY HORSE Men's apparel line (launched in March 2000), and our licensed
KENNETH COLE NEW YORK women's apparel line (launched in August 2000), which
together accounted for $162 million, or 54%, of our 2000 total net sales
increase. The increase also reflected sales increases in our CLAIBORNE men's
business due to higher unit volume partially offset by lower net average unit
selling prices. These gains were partially offset by sales decreases resulting
from the licensing of our Dress business in February 2000; sales declines in our
DANA BUCHMAN business due to lower net average unit selling prices reflecting
increased retailer support partially offset by slightly higher unit volume; and
slight sales declines in our Casual business due to lower unit volume, as well
as sales declines in our Career business due to lower unit volume and lower net
average unit selling prices.
The increase in our Wholesale Non-Apparel segment was due to significant
net sales increases in our Cosmetics business, due primarily to the inclusion of
sales for a full year of our licensed CANDIE'S(R) fragrance, as well as the
launch of our LUCKY YOU fragrance in August 2000. The increase also reflected
gains in our Jewelry business, due primarily to the inclusion of the sales of
our MONET business which we acquired in July 2000. We also experienced modest
gains in our Handbags business due to higher unit volume partially offset by
lower net average unit selling prices. These gains were partially offset by a
decline in our Fashion Accessories business due primarily to lower net average
unit selling prices partially offset by higher unit volume.
The increase in net sales of our Retail segment reflected increased Outlet
store sales, primarily due to an increase (net after store closings) of 20
stores in the year partially offset by a low single-digit comparable store sales
decrease. Our Specialty Retail store sales increased slightly, due to an
increase (net after store closings) of 14 stores, with a significant increase
due to the inclusion of the sales of 17 additional LUCKY BRAND DUNGAREES stores,
offset by a low single-digit decline in comparable store sales in the balance of
our Specialty Retail stores. The decline in comparable store sales in our Outlet
and Specialty Retail stores reflects the challenging retail apparel environment
and the specialty stores' heavy reliance on better-priced women's apparel.
The increase in our Domestic segment net sales for 2000 reflected the
inclusion of a full year's sales of our 1999 acquisitions. Our International
segment increased due primarily to the inclusion of sales of our MONET business
acquired in July 2000.
Gross profit dollars increased $136.3 million, or 12.4%, in 2000 over 1999.
Gross profit margins increased to 39.7% in 2000, from 39.1% in 1999. This
increase in gross profit rate reflected lower initial unit costs as a result of
lower cost global sourcing, reflecting continued consolidation, configuration
and certification of our supplier base, combined with our improved matching of
production orders with customer orders at the SKU level through the use of new
systems and revamped business processes implemented in late 1999. These
processes also enabled us to better manage our inventories and continue to
improve margins on the sale of excess inventories. Our gross profit rate also
benefited from the licensing of our lower margin Dress business and the purchase
of the higher margin MONET business, as well as increased penetration of our
1999 acquisitions, which generally run at relatively higher gross margin rates
than the Company average. These increases were partially offset by increased
financial support paid to our retail customers across our better-priced apparel
businesses, significantly lower margins in our DKNY(R) JEANS Women's business,
and lower margins within, and increased penetration of, our Special Markets
business, which runs at a lower gross profit rate than the Company average.
SG&A, before our 2000 restructuring charges (see Note 12 of the Notes to
Consolidated Financial Statements), increased $111.3 million, or 14.0%, in 2000
over 1999. These expenses, before the 2000 restructuring charges, increased to
29.3% of net sales in 2000 from 28.4% in 1999. These results principally reflect
relatively higher SG&A rates in our 1999 acquisitions and our MONET business,
the planned dilution from the start-up costs of the new KENNETH COLE and CITY
DKNY(R) licenses, and the planned increase in distribution costs resulting from
the start-up of our new automated facility constructed in Mt. Pocono, PA, as
well as the increase in depreciation and amortization of leasehold improvements
at our New York offices and the significant investment over the past several
years in the technological upgrading of our distribution facilities and
information systems. The reduced sales penetration of our relatively lower cost
Casual apparel business also contributed to the rate increase. These factors
were partially offset by increased penetration of our Special Markets business,
which is supported by relatively lower SG&A levels.
In September 2000, we recorded a net restructuring charge of $5.4 million
(pretax), and in December 2000, we recorded a restructuring charge of $15.6
million (pretax). The 2000 restructuring charges reduced net income by $13.5
million (after tax), or $0.13 per diluted common share.
18
As a result of the factors described above, operating income, before the
impact of the 2000 restructuring charges of $21.0 million, increased $25.0
million, or 8.3%, to $324.7 million, and operating income as a percent of sales
decreased to 10.5%, compared to 10.7% in 1999. Segment operating income in our
Wholesale Apparel segment increased to $287.0 million (12.1% of sales) in 2000
compared to $276.7 million (12.6% of sales) in 1999, primarily due to the
inclusion of a full year's profits from our 1999 acquisitions and increased
sales in our Special Markets business. Segment operating income in our Wholesale
Non-Apparel segment increased to $33.6 million (7.9% of sales) in 2000 compared
to $25.9 million (7.6% of sales) in 1999, primarily due to the inclusion of the
profits from our MONET business and increased sales and gross profit rates in
our Cosmetics business. Segment operating income in our Retail segment increased
to $62.8 million (12.9% of sales) in 2000 compared to $55.4 million (12.4% of
sales) in 1999, primarily due to the opening of new stores and the inclusion of
a full year's profits from the stores of our 1999 acquisitions. Including the
impact of the 2000 restructuring charges, operating income increased $3.9
million, or 1.3%, in 2000 compared to 1999, and decreased to 9.8% of sales in
2000 from 10.7% in 1999. Segment operating income in our Domestic segment
increased primarily due to inclusion of a full year's profits of our 1999
acquisitions. Segment operating income in our International segment increased
primarily due to increases in our European Retail profits.
Other income, net in 2000 was $6.7 million compared to other expense, net
of $1.0 million in 1999. This year's other income includes a special investment
gain of $8.8 million related to our sale of marketable equity securities, net of
associated expenses, partially offset by minority interest and other
non-operating expenses.
Net interest expense for 2000 was $21.9 million compared to interest income
of $2.8 million in 1999. This $24.7 million change reflects higher net interest
costs incurred to finance our strategic initiatives including the repurchase of
common stock, capital expenditures (primarily related to the technological
upgrading of our distribution facilities and information systems), in-store
merchandise shop expenditures and costs associated with our 1999 acquisitions.
The provision for income taxes decreased $5.3 million in 2000 and decreased
as a percent to sales to 3.3% in 2000 from 3.9% in 1999, primarily reflecting a
lower pretax income and a lower effective tax rate of 36.0% for 2000 as compared
to 36.2% in 1999.
Due to the factors described above, 2000 net income before the impact of
the 2000 restructuring charges and special investment gain was virtually flat
against 1999 and decreased as a percentage of sales to 6.2% from 6.9% in 1999.
Including the impact of the 2000 restructuring charges and special investment
gain, 2000 net income was $7.8 million lower than in 1999, and decreased as a
percentage of net sales to 5.9% in 2000. Diluted EPS (adjusted for the stock
dividend), excluding the 2000 restructuring charges and special investment gain,
increased 14.7% to $1.79 in 2000. Diluted EPS, including the restructuring
charges and special investment gain, increased 9.9% to $1.72 in 2000 from $1.56
in 1999. Diluted EPS reflected a lower number of average outstanding common
shares and share equivalents in 2000 as a result of our repurchase of
approximately 12.3 million shares in 2000 for $247.7 million.
FORWARD OUTLOOK
The economic and retail environments continue to be uncertain and
challenging. Accordingly, we are proceeding prudently and conservatively in
planning our business going forward. For fiscal 2002, current visibility and
prudent business management indicates that we forecast a sales increase of 4 -
6% and diluted EPS in the range of $2.08 - $2.13, which reflects the adoption of
Statement of Financial Accounting Standards ("SFAS") No.142, "Accounting for
Goodwill and Other Intangibles." The diluted EPS accretion in 2002 as a result
of the adoption of SFAS No. 142 is projected to be $0.09. For the first quarter
of 2002, we are optimistic that we can achieve a sales increase of 5 - 7% and
diluted EPS in the range of $0.43 - $0.46. For the second quarter of 2002, we
are optimistic that we can achieve a sales increase of 5 - 7% and EPS in the
range of $0.32 - $0.34. Refer to "PART II - ITEM 5. STATEMENT REGARDING
FORWARD-LOOKING DISCLOSURE" for a discussion of the risks and uncertainties
relating to the foregoing forward-looking statements.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
Our primary ongoing cash requirements are to fund growth in working capital
(primarily accounts receivable and inventory) to support projected increased
sales, investment in the technological upgrading of our distribution centers and
information systems and other expenditures related to retail store expansion,
in-store merchandise shops and normal maintenance activities. In 2001 and 2000,
we also required cash to fund our acquisition program and in 2000, we also
required cash to fund our ongoing stock repurchase program. Sources of liquidity
to fund ongoing cash requirements include cash flows from operations, cash and
cash equivalents, securities on hand and bank lines of credit; in 2001, we
issued Euro-denominated bonds (the "Eurobonds") to fund our acquisition of MEXX.
19
2001 VS. 2000
We ended 2001 with $160.6 million in cash and marketable securities,
compared to $54.6 million at the end of 2000, and $387.3 million of debt
compared to $269.2 million of debt outstanding at the end of 2000. This $12.1
million change in our cash and debt position over the last twelve months is
primarily attributable to our expenditure of $274.1 million, net of cash
acquired, for purchase price payments in connection with the acquisitions of
MEXX and MONET, $107.0 million for capital expenditures (primarily related to
the technological upgrading of our distribution facilities and information
systems) and in-store merchandise shop expenditures and $2.9 million for the
repurchase of common stock, offset by $309.6 million in proceeds from the
Eurobonds and the reclassification of $26.3 million of the Company's ownership
of Kenneth Cole Productions, Inc. Class A stock (see Note 4 of Notes to
Consolidated Financial Statements for information regarding this investment).
Our borrowings under the commercial paper program peaked at $449.7 million
during the year; at December 29, 2001, our borrowings under the program were
$77.7 million.
Net cash provided by operating activities was $329.2 million in 2001,
compared to $268.0 million in 2000. This $61.2 million change in cash flow was
primarily due to $24.5 million of higher depreciation expense in 2001 and cash
generated from a $4.8 million decrease in net working capital in 2001 compared
to a $27.5 million use of cash for working capital in 2000, driven primarily by
year over year changes in the accounts receivable, inventory and accrued expense
balances.
Accounts receivable increased $94.4 million, or 35.3%, at year end 2001
compared to year end 2000. This increase primarily reflected the assumption of
the accounts receivable of our recently acquired MEXX business, which accounted
for approximately 62% of the increase.
Inventories increased $8.1 million, or 1.7%, at year end 2001 compared to
2000 primarily due to our recently acquired MEXX business. Excluding the
inventories of MEXX, our inventories were down 11.7%. The majority of this
decrease was driven by improved processes and procedures put in place during the
second half of 2001 to help adjust the flow of replenishment product and
seasonal essential programs into our warehouses. Our average inventory turnover
rate decreased to 4.0 times (4.1 times excluding MEXX) in 2001 from 4.3 times in
2000. The Company continues to take a conservative approach to inventory
management in 2002.
Net cash used in investing activities was $384.7 million in 2001, compared
to $147.5 million in 2000. The 2001 net cash used primarily reflected purchase
price payments of $274.1 million, net of cash acquired, in connection with our
acquisition of the MEXX business, along with capital and in-store merchandise
shop expenditures of $107.0 million, compared to 2000 capital and in-store
merchandise shop expenditures of $88.1 million and purchase price payments of
$58.9 million in connection with the acquisitions of our MONET, LAUNDRY, LUCKY
BRAND DUNGAREES, SIGRID OLSEN and licensed KENNETH COLE businesses.
Net cash provided by financing activities was $131.1 million in 2001,
compared to $99.4 million used in financing activities in 2000. The $230.5
million year over year increase primarily reflected the issuance of $309.6
million of Eurobonds to finance the May 2001 purchase of MEXX, a decrease of
$244.8 million expended for stock purchases, and an increase in net proceeds
from the exercise of stock options of $20.0 million, partially offset by a net
repayment under our commercial paper program of $191.5 million during 2001
compared to net borrowings of $153.1 million in 2000.
Our anticipated capital expenditures for 2002 approximate $76 million.
These expenditures consist primarily of in-store merchandise shops, the
continued technological upgrading and expansion of our management information
systems and distribution facilities (including certain building and equipment
expenditures) and the planned opening of an additional total of 48 stores in
2002. Capital expenditures and working capital cash needs will be financed with
net cash provided by operating activities and our revolving credit, trade letter
of credit and other credit facilities.
The following table summarizes as of December 29, 2001 the Company's
contractual cash obligations by future period (please refer to Notes 2, 3 and 9
of Notes to Consolidated Financial Statements):
Payments due by period
-----------------------------------------------
Contractual cash obligations Less than After
(In thousands) 1 year 1-3 years 4-5 years 5 years Total
- -------------------------------- --------- --------- --------- -------- --------
Operating leases $97,569 $173,174 $136,758 $296,780 $704,281
Purchase commitments 506,328 -- -- -- 506,328
Eurobonds -- -- 309,619 -- 309,619
Minimum royalties 10,076 47,076 32,000 81,000 170,152
Commercial paper 77,726 -- -- -- 77,726
Synthetic lease 1,189 2,378 61,433 -- 65,000
Other obligations -- 15,000 -- -- 15,000
20
On May 22, 2001, the Company received a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day credit facility (the
"Bridge Loan") from Citicorp North America, Inc. and Chase Manhattan Bank. The
proceeds were primarily used to finance the acquisition of MEXX on May 23, 2001.
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million
based on the exchange rate in effect on such date) of 6.625% notes due in 2006
(the "Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to repay
the outstanding balance of the Bridge Loan, which expired on November 16, 2001.
On November 15, 2001, the Company received a $500 million 364-day unsecured
financing commitment under a bank revolving credit facility replacing its
previously existing $500 million facility. This bank facility, as well as the
Company's $250 million bank facility that matures in November 2003
(collectively, the "Agreement"), have received a credit rating of BBB from
Standard & Poor's and Baa2 from Moody's Investor Services, and may be either
drawn upon or used as a liquidity facility to support the issuance of A2/P2
rated commercial paper. The Agreement supports the Company's $750 million
commercial paper program, which is used to fund working capital and other
general corporate requirements. The carrying amount of the Company's borrowings
under the commercial paper program approximate fair value because the interest
rates are based on floating rates, which are determined by prevailing market
rates. The commercial paper is classified as long-term debt as of December 29,
2001 as it is the Company's intent and ability to refinance such obligations on
a long-term basis. At December 29, 2001, the Company had approximately $77.7
million outstanding under the Agreement, all of which supported the issuance of
commercial paper, with a weighted average interest rate of 3.1%. The Agreement
contains certain customary covenants, including financial covenants requiring
the Company to maintain certain specified debt leverage and fixed charge
coverage ratios, and covenants restricting the Company's ability to, among other
things, incur indebtedness, grant liens, make investments and acquisitions, and
sell assets. The Company believes it is in compliance with such covenants. The
Company's ability to obtain funding through its commercial paper program is
subject to, among other things, the Company maintaining an investment-grade
credit rating.
On May 22, 2001, the Company entered into an off-balance sheet arrangement
(synthetic lease) to acquire various land and building equipment and construct
real property improvements associated with warehouse and distribution facilities
in Ohio and Rhode Island. The lease terms are each five years, with up to four
renewal periods of five years each with the consent of the lessor. The operating
lease arrangements are with a lessor who through a limited partnership has
contributed equity in excess of 3 1/2% of the total value of the estimated cost
to complete these facilities, which is expected to be approximately $65 million.
The leases include guarantees by the Company for a substantial portion of the
financing and options to purchase the facilities at original cost. The Company
selected this financing arrangement to take advantage of the favorable financing
rates that it offered. The lessor financed the acquisition of the facilities
through equity funded by third-party financial institutions. The third-party
financial institutions who hold the equity are partners of the lessor. The
Company's transactions with the lessor are limited to the operating lease
agreements and the associated rent expense that will be included in Selling,
General and Administrative Expense in the consolidated Statements of Income. The
Company has not entered into any other off-balance sheet arrangements other than
normal operating leases.
MEXX has short-term credit facilities available of approximately 22.0
million Euros (or $19.5 million based on the exchange rate in effect on such
date) as of December 29, 2001, which remained undrawn as of March 1, 2002.
As of December 29, 2001, the Company had lines of credit aggregating $410
million, which were primarily available to cover trade letters of credit. At
December 29, 2001 and December 30, 2000, the Company had letters of credit of
$228 million and $271 million, respectively. These letters of credit, which have
terms ranging from one to ten months, primarily collateralize the Company's
obligations to third parties for the purchase of inventory. The fair value of
these letters of credit approximates contract values.
We anticipate that our cash flows from operations, commercial paper program
and bank and letter of credit facilities will be sufficient to fund our future
liquidity requirements and that we will be able to adjust the amounts available
under these facilities if necessary. Such sufficiency and availability may be
adversely affected by a variety of factors, including, without limitation,
retailer and customer acceptance of the Company's products, which may impact the
Company's financial performance, maintenance of the Company's investment grade
credit rating, as well as interest rate and exchange rate fluctuations.
21
2000 VS. 1999
We ended 2000 with cash and cash equivalents of $54.6 million compared to
$37.9 million of cash and cash equivalents at year end 1999, and $269.2 million
of debt at year end 2000 compared to $116.1 million of debt outstanding at year
end 1999. This $136.4 million change in our cash and debt position was due
primarily to $247.7 million for the repurchase of common stock, $88.1 million
for capital expenditures (primarily related to the technological upgrading of
our distribution facilities and information systems) and in-store merchandise
shop expenditures and $55.2 million for purchase price payments in connection
with acquisitions, offset by cash provided from operating activities.
Net cash provided by operating activities was $268.0 million in 2000,
compared to $301.0 million in 1999. This $33.0 million decrease was due
primarily to a $27.5 million use of cash for working capital in 2000, compared
to cash generated from a $23.0 million decrease in net working capital
investment in 1999 and the $21.0 million restructuring charge recorded in 2000.
Accounts receivable decreased $31.2 million, or 10.4%, at year end 2000
compared to year end 1999. This decrease in accounts receivable primarily
reflected our continued focus on working capital management along with the
acceleration of Holiday shipments within the fourth quarter.
Inventory increased $61.5 million, or 14.7%, at year end 2000 compared to
year end 1999. This increase was primarily due to inventories of our recently
acquired and launched businesses, incremental in-transit wholesale inventories
for Spring 2001, and an increase in Outlet inventories to support our additional
store base. Our average inventory turnover rate improved slightly to 4.3 times
in 2000, compared to 4.2 times in 1999.
Net cash used in investing activities was $147.5 million in 2000, compared
to $240.9 million in 1999. The 2000 net cash used primarily reflected capital
and in-store merchandise shop expenditures of $88.1 million, $40.2 million for
the purchase of MONET and $15.0 million in additional payments related to the
purchase of our interests in LUCKY BRAND DUNGAREES and SIGRID OLSEN, compared to
the 1999 acquisition costs of $177.8 million for our interests in our 1999
acquisitions and capital and in-store merchandise shop expenditures of $98.0
million, as well as $29.0 million for an equity investment in Kenneth Cole
Productions, Inc. partially offset by disposals of investments of $65.5 million.
Net cash used in financing activities was $99.4 million in 2000, compared
to $187.7 million in 1999. This $88.3 million decrease primarily reflected a
decrease of $33.5 million in stock repurchase expenditures in 2000 over 1999,
partially offset by net borrowings of $153.1 million compared to $116.1 million
in 1999 and an increase in net proceeds from the exercise of stock options of
$14.0 million. As of March 7, 2001, we have expended approximately $1.454
billion of the $1.675 billion authorized to date under our stock repurchase
program. Our borrowings peaked at $482.3 million during the year.
At year end 2000, we had $269.2 million outstanding under our commercial
paper program and $271.5 million outstanding under letter of credit facilities
in place primarily to support our merchandise purchasing requirements.
CERTAIN INTEREST RATE AND FOREIGN CURRENCY RISKS
We finance our capital needs through available cash and marketable
securities, operating cash flow, letter of credit, synthetic lease and bank
revolving credit facilities, other credit facilities and commercial paper
issuances. Our floating rate bank revolving credit facility, bank lines and
commercial paper program expose us to market risk for changes in interest rates.
As of December 29, 2001, we have not employed interest rate hedging to mitigate
such risks with respect to our floating rate facilities. We believe that our
recent Eurobond offering, which is a fixed rate obligation, partially mitigates
the risks with respect to our variable rate financing. We anticipate using
interest rate hedging instruments to further mitigate such risks during 2002.
The acquisition of MEXX, which transacts business in foreign currencies,
has increased the Company's exposure to exchange rate fluctuations. We mitigate
the risks associated with changes in foreign currency rates through foreign
exchange forward contracts and collars to hedge transactions denominated in
foreign currencies for periods of less than one year and to hedge expected
payment of intercompany transactions with our non-U.S. subsidiaries, which now
include MEXX. Gains and losses on contracts, which hedge specific foreign
currency denominated commitments, are recognized in the period in which the
transaction is completed.
22
The table below presents the amount of contracts outstanding, the contract
rate and unrealized gain or (loss), as of December 29, 2001:
U.S. Dollar British Pound Contract Unrealized
Currency in thousands Amount Sterling Amount Rate Gain (Loss)
- --------------------------------- ------------- ----------------- ----------------- ------------
Forward Contracts:
Canadian dollars $ 4,421 0.6316 $22
British pound sterling 700 1.4005 (24)
Euros 26,033 0.9099 752
Euros (pound) 2,400 0.6206 (71)
Average Rate Collar Contracts:
Euros $55,000 0.8582 to 0.9378 $ (290)
As part of the European Economic and Monetary Union, a single currency (the
"Euro") has replaced the national currencies of the principal European countries
(other than the United Kingdom) in which the Company conducts business and
manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. Under the regulations
governing the transition to a single currency, there is a "no compulsion, no
prohibition" rule, which states that no one can be prevented from using the Euro
after January 1, 2002 and no one is obliged to use the Euro before July 2002. In
keeping with this rule, the Company expects to begin using the Euro for
invoicing and payments by the end of the second quarter of 2002. Based upon the
information currently available, the Company does not expect that the transition
to the Euro will have a material adverse effect on the business or consolidated
financial condition of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2001, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 01-9
(formerly EITF Issue 00-25), "Accounting for Consideration Given to a Customer
or a Reseller of the Vendor's Products." This issue addresses the recognition,
measurement and income statement classification of consideration from a vendor
to a customer in connection with the customer's purchase or promotion of the
vendor's products. This consensus is expected to only impact revenue and expense
classifications and not change reported net income. In accordance with the
consensus reached, the Company will adopt the required accounting beginning
December 30, 2001, the first day of fiscal year 2002. The Company believes that
the impact of this required accounting will not have a material impact on the
revenue and expense classifications in the Company's Consolidated Statements of
Income.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 are to be accounted for
using the purchase method and specifies the criteria for the recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives are to no longer be amortized but rather be tested at
least annually for impairment. SFAS No. 142 also requires that intangible assets
with definite useful lives will continue to be amortized over their respective
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company adopted the provisions of SFAS No. 141
immediately and SFAS No. 142 effective December 30, 2001. The Company estimates
that diluted earnings per share will increase by approximately $0.09 in 2002 as
the majority of amortization of goodwill and other intangible assets will be
eliminated as a result of the adoption of SFAS No. 142. The amortization expense
of goodwill and intangibles for the twelve months ended December 29, 2001
totaled $21.3 million.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
also extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held-for-sale. The Company has adopted the provisions of SFAS No.
144 effective December 30, 2001, and we do not expect that such adoption will
have a significant effect on the Company's results of operations or financial
position.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the period. Significant accounting policies employed by the Company,
including the use of estimates, are presented in the Notes to Consolidated
Financial Statements.
23
Critical accounting policies are those that are most important to the
portrayal of the Company's financial condition and the 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, accounts receivable - trade, net,
inventories, accrued expenses and derivative instruments. In applying such
policies management must use some amounts that are based upon its informed
judgments and best estimates. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the
critical accounting policies. The Company is not aware of any reasonably likely
events or circumstances, which would result in different amounts being reported
that would materially affect its financial condition or results of operations.
Revenue Recognition
Revenue within our wholesale operations is recognized at the time when
merchandise is shipped from the Company's distribution centers, or if shipped
direct from contractor to customer, when title passes. Wholesale revenue is net
of returns, discounts and allowances. Discounts and allowances are recognized
when the related revenues are recognized. Retail store revenues are recognized
at the time of sale. Retail revenues are net of returns.
Accounts Receivable - Trade, Net
In the normal course of business, the Company extends credit to customers,
which 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 historic trends 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 unsaleable products as
well as allowable customer markdowns and operational charge backs, net of
historical recoveries, are included as a reduction to net sales and are part of
the provision for allowances included in Accounts Receivable - Trade, Net. These
provisions result from divisional seasonal negotiations as well as historic
deduction trends net of historic recoveries and the evaluation of current market
conditions.
Inventories
Inventories are stated at lower of cost (using the first-in, first-out
method) or market. The Company continually evaluates the composition of its
inventories assessing slow-turning, ongoing product as well as prior seasons
fashion product. Market value of distressed inventory is valued 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.
Accrued Expenses
Accrued expenses for employee insurance, workers' compensation, profit
sharing, contracted advertising, professional fees, and other outstanding
Company obligations are assessed based on statistical trends, open contractual
obligations, and estimates based on projections and current requirements.
Derivative Instruments and Foreign Currency Risk Management Programs
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133," which require that every derivative instrument
(including certain derivative instruments imbedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. These statements also require that changes in the derivative's fair
value be recognized currently in earnings in either income (loss) from
continuing operations or accumulated other comprehensive income (loss),
depending on the timing and designated purpose of the derivative. The impact on
the Company's financial condition, results of operations and cash flows, upon
the adoption of these pronouncements, was immaterial.
The Company uses foreign currency forward contracts and collars for the
specific purpose of hedging the exposure to variability in expected future cash
flows associated with inventory purchases and sales collections from
transactions associated primarily with our Canadian and European entities. These
instruments are designated as cash flow hedges and, in accordance with SFAS Nos.
133 and 138, any unrealized gains or losses are included in accumulated other
comprehensive income (loss), net of related tax effects, with the corresponding
asset or liability recorded in the balance sheet. The ineffective portion of the
cash flow hedge, if any, is recognized in current-period earnings. Other
comprehensive income (loss) is reclassified to current-period earnings when the
hedged transaction affects earnings. At December 29, 2001, the Company had
entered into foreign currency collars with a net notional amount of $55 million
with maturity dates in May 2002 and August 2002.
Occasionally, the Company purchases short-term foreign currency contracts
and options outside of the cash flow hedging program to neutralize month-end
balance sheet exposures. These derivative instruments do not qualify as cash
flow hedges under SFAS Nos. 133 and 138 and are recorded at fair value with all
gains or losses, which have not been significant, recognized in current period
earnings immediately.
24
As of December 29, 2001, the Company had forward contracts maturing through
April 2002 to sell 7.0 million Canadian dollars, 0.5 million British pounds
sterling, and 32.5 million European Euros. The aggregate U.S. dollar value of
the foreign exchange contracts was approximately $34.6 million at year end 2001,
as compared with approximately $12.6 million at year end 2000. Unrealized gains
and losses for outstanding foreign exchange forward contracts were not material
at December 29, 2001 and December 30, 2000.
INFLATION
The rate of inflation over the past few years has not had a significant
impact on our sales or profitability.
FORWARD-LOOKING STATEMENTS
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases,
and in oral statements made by, or with the approval of, authorized personnel
that relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations or
level of business for 2002, or any other future period, are forward-looking
statements within the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements, which are indicated by words or
phrases such as "plan", "anticipate", "estimate", "project", "management
expects", "the Company believes", "remains optimistic" or "currently envisions"
and similar phrases are based on current expectations only, and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected.
Among the factors that could cause actual results to materially differ
include changes in regional, national, and global microeconomic and
macroeconomic conditions, including the levels of consumer confidence and
spending, consumer income growth, higher personal debt levels, rising energy
costs, fluctuations in foreign currency exchange rates, increasing interest
rates and increased stock market volatility; risks related to retailer and
consumer acceptance of the Company's products; risks associated with competition
and the marketplace, including the financial condition of, and consolidations,
restructurings and other ownership changes in, the apparel (and related
products) industry and the retail industry, the introduction of new products or
pricing changes by the Company's competitors, and the Company's ability to
effectively remain competitive with respect to product, value and service; risks
associated with the Company's dependence on sales to a limited number of large
department store customers, including risks related to customer requirements for
vendor margin support, and those related to extending credit to customers; risks
relating to retailers' buying patterns and purchase commitments for apparel
products in general and the Company's products specifically; the Company's
ability to correctly balance the level of its fabric and/or merchandise
commitments with actual customer orders; the Company's ability to effectively
distribute its product within its targeted markets; risks related to the
Company's ability to establish, defend and protect its trademarks and other
proprietary rights and other risks relating to managing intellectual property
issues; uncertainties relating to the Company's ability to successfully
implement its growth strategies, integrate recent or future acquisitions,
maintain product licenses, or successfully launch new products and lines; risks
associated with the entry into new markets, either through internal development
activities or acquisitions; risks associated with the possible failure of the
Company's unaffiliated manufacturers to manufacture and deliver products in a
timely manner, to meet quality standards or to comply with the Company's
policies regarding labor practices or applicable laws or regulations; risks
associated with changes in social, political, economic and other conditions
affecting foreign operations and sourcing, including currency rate fluctuations;
risks associated with terrorist activities, including reduced shopping activity
as a result of public safety concerns and disruption in the receipt and delivery
of merchandise; and any significant disruption in the Company's relationships
with its suppliers, manufacturers and employees.
The apparel and related product markets are highly competitive, both within
the United States and abroad. The Company's ability to successfully compete
depends on a number of factors, including the Company's ability to effectively
anticipate, gauge and respond to changing consumer demands and tastes, to
translate market trends into appropriate, saleable product offerings relatively
far in advance, and to operate within substantial production and delivery
constraints. In addition, consumer and customer acceptance and support
(especially by the Company's largest customers) depend upon, among other things,
product, value and service.
25
With respect to foreign sourcing, the Company notes that U.S. legislation
which would further restrict the importation into the U.S. and/or increase the
cost of textiles and apparel produced abroad has been periodically introduced in
Congress. Although it is unclear whether any new legislation will be enacted
into law, it appears likely that various new legislative or executive
initiatives will be proposed. These initiatives may include a 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. In light of the very substantial
portion of the Company's products, which are manufactured by foreign suppliers,
the enactment of new legislation or the administration of current international
trade regulations, or executive action affecting international textile
agreements could adversely affect the Company's operations.
The Company from time to time reviews its possible entry into new markets,
either through internal development activities, acquisitions or licensing. The
entry into new markets (including the development and launch of new product
categories and product lines), such as the Company's entry into the moderate
market, the acquisition of businesses, such as the Company's acquisitions of
MEXX, SIGRID OLSEN, LUCKY BRAND DUNGAREES, LAUNDRY and MONET, and the licensing
of brands such as CANDIES(R), DKNY(R) JEANS and DKNY(R) ACTIVE, CITY DKNY(R),
KENNETH COLE NEW YORK, REACTION KENNETH COLE and UNLISTED.COM, are accompanied
by risks inherent in any such new business venture and may require methods of
operations and marketing and financial strategies different from those employed
in the Company's other businesses. Moreover, certain new businesses may be lower
margin businesses and may require the Company to achieve significant cost
efficiencies. In addition, new markets, product categories, product lines and
businesses may involve buyers, store customers and/or competitors different from
the Company's historical buyers, customers and competitors. Furthermore, the
Company's acquisition of other businesses entails the normal risks inherent in
such transactions, including, without limitation, possible difficulties, delays
and/or unanticipated costs in integrating the business, operations, personnel,
and/or systems of the acquired entity; risks that projected or satisfactory
level of sales, profits and/or return on investment will not be generated; risks
that expenditures required for capital items or working capital will be higher
than anticipated; risks involving the Company's ability to retain and
appropriately motivate key personnel of the acquired business; and risks
associated with unanticipated events and unknown or uncertain liabilities. In
addition, businesses licensed by the Company are subject to risks inherent in
such transactions, including compliance with terms set forth in the applicable
license agreements, including among other things the maintenance of certain
levels of sales, and the public perception and/or acceptance of the licensor's
brands or other product lines, which are not within the Company's control.
Reference is also made to the other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices as are set forth in our Annual Reports on Form 10-K,
including, without limitation, those set forth under the heading
"Business-Competition; Certain Risks".
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 8. Financial Statements and Supplementary Data.
See the "Index to Consolidated Financial Statements and Schedules"
appearing at the end of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
With respect to Executive Officers of the Company, see Part I of this
Annual Report on Form 10-K .
Information with respect to Directors of the Company which is called for by
this Item 10 is incorporated by reference to the information set forth under the
heading "Election of Directors" in the Company's Proxy Statement relating to its
2002 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A (the
"Company's 2002 Proxy Statement").
Item 11. Executive Compensation.
Information called for by this Item 11 is incorporated by reference to the
information set forth under the heading "Executive Compensation" in the
Company's 2002 Proxy Statement.
26
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information called for by this Item 12 is incorporated by reference to the
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's 2002
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors" and "Executive
Compensation-Employment Arrangements" in the Company's 2002 Proxy Statement.
27
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements. PAGE REFERENCE
2001 FORM 10-K
--------------
MANAGEMENT'S REPORT AND
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 to F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 29, 2001 and December 30, 2000 F-4
Consolidated Statements of Income for the
Three Fiscal Years Ended December 29, 2001 F-5
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital
Accounts for the Three Fiscal Years Ended December 29, 2001 F-6 to F-7
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended December 29, 2001 F-8
Notes to Consolidated Financial Statements F-9 to F-29
2. Schedules.
SCHEDULE II - Valuation and Qualifying Accounts F-30
NOTE: Schedules other than those referred to above and parent company
condensed 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.
27
3. Exhibits.
Exhibit
No. Description
2 - Share Purchase Agreement, dated as of May 15, 2001, among Liz
Claiborne, Inc., Liz Claiborne 2 B.V., LCI Acquisition U.S., and
the other parties signatory thereto (incorporated herein by
reference from Exhibit 2.1 to Registrant's Form 8-K dated May 23,
2001 and amended on July 20, 2001).
3(a) - Restated Certificate of Incorporation of Registrant (incorporated
herein by reference from Exhibit 3(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended June 26, 1993).
3(b) - By-laws of Registrant, as amended (incorporated herein by
reference from Exhibit 3(b) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1992 [the "1992
Annual Report"]).
4(a) - Specimen certificate for Registrant's Common Stock, par value
$1.00 per share (incorporated herein by reference from Exhibit
4(a) to the 1992 Annual Report).
4(b) - Rights Agreement, dated as of December 4, 1998, between
Registrant and First Chicago Trust Company of New York
(incorporated herein by reference from Exhibit 1 to Registrant's
Form 8-A dated as of December 4, 1998).
4(b)(i) - Amendment to the Rights Agreement, dated November 11, 2001,
between Registrant and The Bank of New York, appointing The Bank
of New York as Rights Agent (incorporated herein by reference
from Exhibit 1 to Registrant's Form 8-A12B/A dated as of January
30, 2002).
4(c) - Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and
Dexia Banque Internationale A. Luxembourg (incorporated herein by
reference from Exhibit 10 to Registrant's Form 10-Q for the
period ended June 30, 2001)
10(a) - Reference is made to Exhibit 4(b) filed hereunder, which is
incorporated herein by this reference.
10(b)+ - Liz Claiborne Savings Plan (the "Savings Plan"), as amended and
restated (incorporated herein by reference from Exhibit 10(f) to
Registrant's Annual report on Form 10-K for the fiscal year ended
December 30, 1989 [the "1989 Annual Report"]).
10(b)(i)+ - Trust Agreement dated as of July 1, 1994, between Liz Claiborne,
Inc. and IDS Trust Company (incorporated herein by reference from
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for
the period ended July 2, 1994).
10(c)+ - Amendment Nos. 1 and 2 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g) to the 1992 Annual Report).
10(c)(i)+ - Amendment Nos. 3 and 4 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g)(i) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 26, 1993 [the
"1993 Annual Report"]).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
29
Exhibit
No. Description
10(c)(ii)+ - Amendment No. 5 to the Savings Plan (incorporated herein by
reference from Exhibit 10(a) to Registrant's Quarterly Report on
Form 10-Q for the period ended July 2, 1994).
10(c)(iii)+ - Amendment No. 6 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e) (iii) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996 [the
"1996 Annual Report"]).
10(c)(iv)+ - Amendment No. 7 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(iv) to the 1996 Annual Report).
10(c)(v)+ - Amendment No. 8 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(v) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998 [the "1997
Annual Report"].
10(c)(vi)+ - Amendment No. 9 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(vi) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999 [the "1998
Annual Report"]).
10(d)+ - Amended and Restated Liz Claiborne Profit-Sharing Retirement Plan
(the "Profit-Sharing Plan") (incorporated herein by reference
from Exhibit 10(h) to the 1992 Annual Report).
10(e)+ - Trust Agreement related to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(jj) to the 1983 Annual
Report).
10(e)(i)+ - Amendment Nos. 1 and 2 to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(i)(i) to the 1993 Annual
Report).
10(e)(ii)+ - Amendment No. 3 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended October 1, 1994).
10(e)(iii)+ - Amendment No. 4 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended July 1, 1995).
10(e)(iv)+ - Amendment No. 5 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(iv) to the 1996 Annual Report).
10(e)(v)+ - Amendment No. 6 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(v) to the 1998 Annual Report).
10(f)+ - Merger Amendment to the Profit-Sharing Plan, the Lucky Brand
Employee Retirement Plan and Trust, the Segrets, Inc. 401(k)
Profit Sharing Plan, and the Savings Plan (incorporated herein by
reference from Exhibit 10(h) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 2000 [the "1999
Annual Report"]).
10(g)+ - The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as
amended and restated (incorporated herein by reference from
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 30, 2000 [the "2000 Annual Report"]).
10(g)(i)+* - Amendment No. 1 to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(g)(ii)+* - Amendment No. 2 to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
30
Exhibit
No. Description
10(h)+ - National Collective Bargaining Agreement, made and entered into
as of June 1, 2000, by and between Liz Claiborne, Inc. and the
Union of Needletrades, Industrial and Textile Employees (UNITE)
for the period June 1, 2000 through May 31, 2003 (incorporated
herein by reference from Exhibit 10(h) to the 2000 Annual
Report).
10(h)(i)+ - Jobbers Agreement, made and entered into as of June 1, 2000, by
and between Liz Claiborne, Inc. and the Union of Needletrades,
Industrial and Textile Employees (UNITE) for the period June 1,
2000 through May 31, 2003 (incorporated herein by reference from
Exhibit 10(h)(i) to the 2000 Annual Report).
10(i)+* - Description of Liz Claiborne, Inc. 2001 Salaried Employee
Incentive Bonus Plan.
10(j) - Lease, dated as of January 1, 1990 (the "1441 Lease"), for
premises located at 1441 Broadway, New York, New York between
Registrant and Lechar Realty Corp. (incorporated herein by
reference from Exhibit 10(n) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990).
10(j)(i) - First Amendment: Lease Extension and Modification Agreement,
dated as of January 1, 1998, to the 1441 Lease (incorporated
herein by reference from Exhibit 10(k) (i) to the 1999 Annual
Report).
10(j)(ii) - Second Amendment to Lease, effective as of September 19, 1998, to
the 1441 Lease (incorporated herein by reference from Exhibit
10(k) (i) to the 1999 Annual Report).
10(j)(iii) - Third Amendment to Lease, dated as of September 24, 1999, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(j)(iv)* - Fourth Amendment to Lease, dated as of July 1, 2000, to the 1441
Lease.
10(k)+ - Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991
Stock Ownership Plan (the "Outside Directors' 1991 Plan")
(incorporated herein by reference from Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 [the "1995 Annual Report"]).
10(k)(i)+ - Form of Option Agreement under the Outside Directors' 1991 Plan
(incorporated herein by reference from Exhibit 10(m)(i) to the
1996 Annual Report).
10(l)+ - Liz Claiborne, Inc. 1992 Stock Incentive Plan (the "1992 Plan")
(incorporated herein by reference from Exhibit 10(p) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10(l)(i)+ - Amendment No. 1 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(p)(i) to the 1993 Annual Report).
10(l)(ii)+ - Amendment No. 2 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(ii) to the 1997 Annual Report).
10(l)(iii)+ - Amendment No. 3 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(iii) to the 1998 Annual Report).
10(m)+ - Form of Option Agreement under the 1992 Plan (incorporated herein
by reference from Exhibit 10(r) to the 1992 Annual Report).
10(n)+ - Form of Option Grant Certificate under the 1992 Plan
(incorporated herein by reference from Exhibit 10(q) to the 1996
Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
31
Exhibit
No. Description
10(o)+ - Form of Restricted Career Share Agreement under the 1992 Plan
(incorporated herein by reference from Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995).
10(p)+ - Form of Restricted Transformation Share Agreement under the 1992
Plan (incorporated herein by reference from Exhibit 10(s) to the
1997 Annual Report).
10(q)+ - Description of Supplemental Life Insurance Plans (incorporated
herein by reference from Exhibit 10(q) to the 2000 Annual
Report).
10(r)+ - Description of unfunded death/disability benefits for certain
executives (incorporated herein by reference from Exhibit 10(u)
to the 1992 Annual Report).
10(s)+ - Amended and Restated Liz Claiborne section 162(m) Cash Bonus Plan
(incorporated herein by reference from Exhibit 10(t) to the 1999
Annual Report).
10(t)+* - Liz Claiborne, Inc. Supplemental Executive Retirement Plan
effective as of January 1, 2002, constituting an amendment,
restatement and consolidation of the Liz Claiborne, Inc.
Supplemental Executive Retirement Plan and the Liz Claiborne,
Inc. Bonus Deferral Plan.
10(t)(i)+* - Trust Agreement dated as of January 1, 2002, between Liz
Claiborne, Inc. and Wilmington Trust Company.
10(u)+ - Employment Agreement dated as of May 9, 1994, between Registrant
and Paul R. Charron (the "Charron Agreement") (incorporated
herein by reference from Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended April 2, 1994).
10(u)(i)+ - Amendment to the Charron Agreement, dated as of November 20, 1995
(incorporated herein by reference from Exhibit 10(x)(i) to the
1995 Annual Report).
10(u)(ii)+ - Amendment to the Charron Agreement, dated as of September 19,
1996, (including the Liz Claiborne Retirement Income Accumulation
Plan for the benefit of Mr. Charron [the "Accumulation Plan"])
(incorporated herein by reference from Exhibit 10(y)(ii) to the
1996 Annual Report).
10(u)(iii)+* - Amendment to the Accumulation Plan, dated January 3, 2002.
10(u)(iv)+ - Change of Control Agreement, between Registrant and Paul R.
Charron (incorporated herein by reference from Exhibit 10(v)(iii)
to the 2000 Annual Report).
10(v) - Three Year Revolving Credit Agreement, dated as of November 16,
2000, among Registrant, various lending parties and The Chase
Manhattan Bank (as administrative agent) (incorporated herein by
reference from Exhibit (x) to the 2000 Annual Report).
10(w)* - 364-Day Revolving Credit Agreement, dated as of November 15,
2001, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent).
10(x)+ - Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan")
(incorporated herein by reference from Exhibit 4(e) to
Registrant's Form S-8 dated as of January 25, 2001.)
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
32
Exhibit
No. Description
10(x)(i)+ - Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit 10(z)(i) to the
2000 Annual Report).
10(x)(ii) - Form of Executive Team Leadership Restricted Share Agreement
under the Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
"2000 Plan")(incorporated herein by reference from Exhibit 10(a)
to Registrant's Form 10-Q for the period ended September 29, 2001
[the "3rd Quarter 2001 10-Q"] ).
10(x)(iii) - Form or Restricted Key Associates Performance Shares Agreement
under the 2000 Plan (incorporated herein by reference from
Exhibit 10(b) to the 3rd Quarter 2001 10-Q).
21* - List of Registrant's Subsidiaries.
23* - Consent of Independent Public Accountants.
99* - Undertakings.
99(i)* - Letter to Commission pursuant to Temporary Note 3T.
(b) - Reports on Form 8-K.
Not Applicable.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
33
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 March 25, 2002.
LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
-------------------------------- ------------------------------------
Michael Scarpa, Elaine H. Goodell,
Vice President and Vice President-Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(principal financial 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 March 25, 2002.
Signature Title
/s/ Paul R. Charron Chairman of the Board, Chief Executive Officer and
- ------------------------- Director (principal executive officer)
Paul R. Charron
/s/ Bernard W. Aronson Director
- -------------------------
Bernard W. Aronson
/s/ Raul J. Fernandez Director
- -------------------------
Raul J. Fernandez
/s/ J. James Gordon Director
- -------------------------
J. James Gordon
/s/ Nancy J. Karch Director
- -------------------------
Nancy J. Karch
/s/ Kenneth P. Kopelman Director
- -------------------------
Kenneth P. Kopelman
/s/ Kay Koplovitz Director
- -------------------------
Kay Koplovitz
/s/ Arthur C. Martinez Director
- -------------------------
Arthur C. Martinez
/s/ Paul E. Tierney, Jr. Director
- -------------------------
Paul E. Tierney, Jr.
34
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Number
------
MANAGEMENT'S REPORT AND
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 to F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
December 29, 2001 and December 30, 2000 F-4
Consolidated Statements of Income for the
Three Fiscal Years Ended December 29, 2001 F-5
Consolidated Statements of Retained Earnings,
Comprehensive Income and Changes in Capital Accounts
for the Three Fiscal Years Ended December 29, 2001 F-6 to F-7
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended December 29, 2001 F-8
Notes to Consolidated Financial Statements F-9 to F-29
SCHEDULE II - Valuation and Qualifying Accounts F-30
NOTE: Schedules other than those referred to above and parent company
condensed 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.
F-1
MANAGEMENT'S REPORT
The management of Liz Claiborne, 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 and include some amounts that are based on
management's informed judgments and best estimates.
To help assure that financial information is reliable and assets are
safeguarded, management maintains a system of internal controls and procedures
which we believe is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.
The independent public accountants have audited our consolidated financial
statements as described in their report. In the course of their audits, the
independent public accountants have developed an overall understanding of the
Company's accounting and financial controls and have conducted other tests as
they considered necessary to support their opinion on the financial statements.
The independent public accountants report their findings and recommendations to
management and the Audit Committee of the Board of Directors. Control procedures
are implemented or revised as appropriate to respond to these recommendations.
There have not been any material control weaknesses brought to the attention of
management or the Audit Committee during the periods covered by the report of
the independent public accountants. However, in as much as the independent
public accountants' audits consisted of selected tests of control policies and
procedures and did not cover the entire system of internal control, they would
not necessarily disclose all weaknesses which might exist.
The Audit Committee, which consists solely of non-management directors, meets
with the independent public accountants, internal auditors and management
periodically to review their respective activities and the discharge of their
respective responsibilities. Both the independent public accountants 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.
/s/ Paul R. Charron /s/ Michael Scarpa
- ---------------------------- --------------------------------
Paul R. Charron Michael Scarpa
Chairman of the Board Vice President and
and Chief Executive Officer Chief Financial Officer
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited the accompanying consolidated balance sheets of Liz Claiborne,
Inc. (a Delaware corporation) and subsidiaries as of December 29, 2001 and
December 30, 2000, and the related consolidated statements of income, retained
earnings, comprehensive income and changes in capital accounts and cash flows
for each of the three fiscal years ended December 29, 2001. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liz Claiborne, Inc.
and subsidiaries as of December 29, 2001 and December 30, 2000, and the results
of its operations and its cash flows for each of the three fiscal years ended
December 29, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
February 19, 2002
F-3
CONSOLIDATED BALANCE SHEETS
Liz Claiborne, Inc. and Subsidiaries
All amounts in thousands except share data December 29, 2001 December 30, 2000
- ------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 127,635 $ 47,020
Marketable securities 32,993 7,610
Accounts receivable - trade, net 362,189 267,772
Inventories 487,923 479,845
Deferred income taxes 37,386 27,698
Other current assets 57,900 80,631
----------- -----------
Total current assets 1,106,026 910,576
Property and Equipment - Net 352,001 297,424
Goodwill and Intangibles - Net 455,113 276,213
Other Assets 38,115 27,946
----------- -----------
$ 1,951,255 $ 1,512,159
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 236,906 $ 199,254
Accrued expenses 199,772 151,280
Income taxes payable 10,636 7,370
----------- -----------
Total current liabilities 447,314 357,904
Long-Term Debt 387,345 269,219
Other Non-Current Liabilities 15,000 15,000
Deferred Income Taxes 37,314 31,019
Commitments and Contingencies (Note 9)
Minority Interest 8,121 4,732
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- --
Common stock, $1 par value, authorized shares - 250,000,000,
issued shares - 176,437,234 176,437 176,437
Capital in excess of par value 89,266 83,808
Retained earnings 2,061,033 1,896,873
Accumulated other comprehensive loss (5,346) (7,656)
------------ ------------
2,321,390 2,149,462
Common stock in treasury, at cost - 71,212,310 shares in
2001 and 74,018,800 shares in 2000 (1,265,229) (1,315,177)
------------ ------------
Total stockholders' equity 1,056,161 834,285
----------- -----------
$ 1,951,255 $ 1,512,159
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
CONSOLIDATED STATEMENTS OF INCOME
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
----------------- ------------------- ------------------
All dollar amounts in thousands except per common share data December 29, 2001 December 30, 2000 January 1, 2000
- ----------------------------------------------------------------------- ----------------- ------------------- ------------------
Net Sales
$ 3,448,522 $ 3,104,141 $ 2,806,548
Cost of goods sold 2,021,272 1,870,269 1,708,966
----------- ----------- -----------
Gross Profit 1,427,250 1,233,872 1,097,582
Selling, general and administrative expenses 1,080,483 909,142 797,829
Restructuring charge 15,050 21,041 --
----------- ----------- -----------
Operating Income 331,717 303,689 299,753
Other (expense) income - net (3,511) 6,658 (956)
Interest (expense) income - net (28,117) (21,917) 2,789
------------ ------------ -----------
Income Before Provision for Income Taxes 300,089 288,430 301,586
Provision for income taxes 108,032 103,835 109,144
----------- ----------- -----------
Net Income $ 192,057 $ 184,595 $ 192,442
=========== =========== ===========
Net Income per Common Share:
Basic $ 1.85 $ 1.73 $ 1.56
=========== =========== ===========
Diluted $ 1.83 $ 1.72 $ 1.56
=========== =========== ===========
Dividends Paid per Common Share $ .23 $ .23 $ .23
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
COMMON STOCK Accumulated TREASURY SHARES
--------------------- Capital in Other -------------------------
Number of Excess of Retained Comprehensive Number of Amount Total
All dollar amounts in thousands Shares Amount Par Value Earnings Income (Loss) Shares
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 2, 1999 176,437,234 $176,437 $ 50,428 $1,574,017 $ (2,721) 48,535,914 $ (817,051) $981,110
Net income -- -- -- 192,442 -- -- -- 192,442
Other comprehensive income
(loss), net of tax:
Translation adjustment -- -- -- -- (431) -- -- (431)
Adjustment to unrealized
(losses) on available
for sale securities -- -- -- -- (111) -- -- (111)
---------
Total comprehensive income 191,900
Exercise of stock options and
related tax benefits -- -- 1,031 (2,799) -- (438,612) 7,976 6,208
Cash dividends declared -- -- -- (27,821) -- -- -- (27,821)
Exercise of put warrants -- -- (1,996) -- -- -- 1,996 --
Reclassification of put
warrant obligations, net -- -- 30,794 -- -- -- -- 30,794
Purchase of common stock -- -- -- -- -- 14,776,600 (281,167) (281,167)
Issuance of common stock
under restricted stock and
employment agreements, net -- -- -- 3,663 -- 123,252 (2,518) 1,145
----------- -------- ---------- ------------ ------------- ----------- ------------ ---------
BALANCE, JANUARY 1, 2000 176,437,234 $176,437 $ 80,257 $1,739,502 $ (3,263) 62,997,154 $(1,090,764) $902,169
Net income -- -- -- 184,595 -- -- -- 184,595
Other comprehensive income
(loss), net of tax:
Translation adjustment -- -- -- -- (3,625) -- -- (3,625)
Adjustment to unrealized
(losses) on available
for sale securities -- -- -- -- (768) -- -- (768)
--------
Total comprehensive income 180,202
Exercise of stock options and
related tax benefits -- -- 3,551 (4,517) -- (1,318,188) 23,718 22,752
Cash dividends declared -- -- -- (24,027) -- -- -- (24,027)
Purchase of common stock -- -- -- -- -- 12,310,610 (247,670) (247,670)
Issuance of common stock
under restricted stock and
employment agreements, net -- -- -- 1,320 -- 29,224 (461) 859
----------- -------- ---------- ----------- ------------- ----------- ------------ ---------
BALANCE, DECEMBER 30, 2000 176,437,234 $176,437 $ 83,808 $1,896,873 $ (7,656) 74,018,800 $(1,315,177) $834,285
F-6
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME AND CHANGES
IN CAPITAL ACCOUNTS (continued)
Liz Claiborne, Inc. and Subsidiaries
COMMON STOCK Accumulated TREASURY SHARES
--------------------- Capital in Other -------------------------
Number of Excess of Retained Comprehensive Number of Amount Total
All dollar amounts in thousands Shares Amount Par Value Earnings Income (Loss) Shares
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 30, 2000 176,437,234 $176,437 $ 83,808 $1,896,873 $ (7,656) 74,018,800 $(1,315,177) $834,285
Net income -- -- -- 192,057 -- -- -- 192,057
Other comprehensive income
(loss), net of tax:
Translation adjustment -- -- -- -- 4,928 -- -- 4,928
Gains (losses) on cash flow
hedging derivatives -- -- -- -- (250) -- -- (250)
Adjustment to unrealized
(losses) on available
for sale securities -- -- -- -- (2,368) -- -- (2,368)
---------
Total comprehensive income 194,367
Exercise of stock options and
related tax benefits -- -- 5,458 -- -- (2,363,076) 38,561 44,019
Cash dividends declared -- -- -- (23,317) -- -- -- (23,317)
Purchase of common stock -- -- -- -- -- 155,000 (2,854) (2,854)
Issuance of common stock under
restricted stock and
employment agreements, net -- -- -- (4,580) -- (598,414) 14,241 9,661
----------- -------- ---------- ----------- ------------- ------------ ------------ ---------
BALANCE, DECEMBER 29, 2001 176,437,234 $176,437 $ 89,266 $2,061,033 $ (5,346) 71,212,310 $(1,265,229) $1,056,161
=========== ======== ========== =========== ============= =========== ============ ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Liz Claiborne, Inc. and Subsidiaries
Fiscal Years Ended
----------------- ------------------- ------------------
All dollar amounts in thousands December 29, 2001 December 30, 2000 January 1, 2000
- ----------------------------------------------------------------------- ----------------- ------------------- ------------------
Cash Flows from Operating Activities:
Net income $ 192,057 $ 184,595 $ 192,442
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 101,491 77,033 67,836
Deferred income taxes-net 11,925 8,418 9,839
Restructuring charge 15,050 21,041 --
Other-net 13,442 4,410 7,797
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable - trade, net (44,957) 29,245 (39,996)
Decrease (increase) in inventories 37,535 (46,408) 80,438
Decrease in other current assets 10,813 16,811 17,771
Increase (decrease) in accounts payable 13,249 9,834 (43,489)
(Decrease) increase in accrued expenses (22,115) (36,849) 11,822
Increase (decrease) in income taxes payable 723 (165) (3,499)
----------- ------------ -----------
Net cash provided by operating activities 329,213 267,965 300,961
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of investment instruments (83) (14,654) --
Disposals of investment instruments -- 14,573 65,459
Purchases of property and equipment (82,236) (66,711) (75,130)
Purchases of trademarks and licenses -- (3,683) (6,400)
Purchase of restricted equity investment -- -- (29,000)
Payments for acquisitions, net of cash acquired (274,142) (55,178) (177,825)
Payments for in-store merchandise shops (24,718) (21,381) (22,879)
Other-net (3,496) (496) 4,924
----------- ----------- -----------
Net cash used in investing activities (384,675) (147,530) (240,851)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from Eurobond issue 309,619 -- --
Commercial paper - net (191,492) 153,134 116,085
Proceeds from exercise of common stock options 39,193 19,201 5,177
Dividends paid (23,317) (24,027) (27,821)
Purchase of common stock, net of put warrant premiums (2,854) (247,670) (281,167)
----------- ----------- -----------
Net cash provided by (used in) financing activities 131,149 (99,362) (187,726)
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash 4,928 (3,625) (431)
----------- ----------- -----------
Net Change in Cash and Cash Equivalents 80,615 17,448 (128,047)
Cash and Cash Equivalents at Beginning of Year 47,020 29,572 157,619
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 127,635 $ 47,020 $ 29,572
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Liz Claiborne Inc. is engaged primarily in the design and marketing of a broad
range of apparel, accessories and fragrances.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Liz Claiborne Inc.
and its wholly-owned and majority-owned subsidiaries (the "Company"). All
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent gains and losses at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and receivables approximates their
carrying value due to their short-term maturities. The fair value of long-term
debt instruments approximates the carrying value and is estimated based on the
current rates offered to the Company for debt of similar maturities.
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.
MARKETABLE SECURITIES
Investments are stated at market. The estimated fair value of the marketable
securities is based on quoted prices in an active market. Gains and losses on
investment transactions are determined using the specific identification method
and are recognized in income based on settlement dates. Unrealized gains and
losses are included in accumulated other comprehensive income (loss) until
realized. Dividends on equity securities are recorded in income based on payment
dates. Interest is recognized when earned. All marketable securities are
available-for-sale investments.
ACCOUNTS RECEIVABLE - TRADE, NET
In the normal course of business, the Company extends credit to customers, which
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 historic trends 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 unsaleable products as
well as allowable customer markdowns and operational charge backs, net of
historical recoveries, are included as a reduction to net sales and are part of
the provision for allowances included in Accounts Receivable - Trade, Net. These
provisions result from divisional seasonal negotiations as well as historic
deduction trends net of historic recoveries and the evaluation of current market
conditions.
INVENTORIES
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning ongoing product as well as prior seasons fashion product.
Market value of distressed inventory is valued 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.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
PROPERTY AND EQUIPMENT
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 amortized over the shorter of the remaining lease
term or the estimated useful lives of the assets.
GOODWILL AND INTANGIBLES
Goodwill and intangibles consist principally of goodwill, which is amortized
using the straight-line method over a period of 20 to 25 years. Goodwill was
$404.7 million, net of accumulated amortization of $29.1 million as of December
29, 2001. As of December 30, 2000, goodwill was $220.7 million, net of
accumulated amortization of $12.7 million. Also included are trademarks that are
owned or licensed. Trademarks that are owned are amortized using the
straight-line method over a period of 20 to 25 years. Trademarks that are
licensed are amortized over the individual terms of the respective license
agreements, which range from 5 to 15 years. Intangibles amounted to $50.4
million in 2001 and $55.5 million in 2000, net of accumulated amortization of
$11.5 million as of December 29, 2001 and $6.5 million as of December 30, 2000.
The recoverability of the carrying values of all long-lived assets is evaluated
periodically based on a review of forecasted operating cash flows and the
profitability of the related business. For the three-year period ended December
29, 2001, there were no material adjustments to the carrying values of all
long-lived assets resulting from these evaluations.
ACCRUED EXPENSES
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on trends, open contractual obligations, and
estimates based on projections and current requirements.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. subsidiaries have been translated at year-end
exchange rates. Revenues and expenses have been translated at average rates of
exchange in effect during the year. Resulting translation adjustments have been
included in accumulated other comprehensive income (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' equity.
FOREIGN EXCHANGE FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts to hedge transactions
denominated in foreign currencies for periods of less than one year and to hedge
expected payment of intercompany transactions with its non-U.S. subsidiaries.
Gains and losses on contracts which hedge specific foreign currency denominated
commitments are recognized in the period in which the transaction is complete
and are accounted for as part of the underlying transaction. Transaction gains
and losses included in income were not significant in 2001, 2000 and 1999.
REVENUE RECOGNITION
Revenue within our wholesale operations is recognized at the time when
merchandise is shipped from the Company's distribution centers, or if shipped
direct from contractor to customer, when title passes. Wholesale revenue is net
of returns, discounts and allowances. Retail store revenues are recognized at
the time of sale. Retail revenues are net of returns. Returns, discounts and
allowances are recognized when the related revenues are recognized.
ADVERTISING AND PROMOTION
All costs associated with advertising and promoting products are expensed during
the periods when the advertising takes place. Costs associated with cooperative
advertising programs, under which the Company, at its discretion, agrees to
share costs under negotiated contracts, of customers' advertising and
promotional expenditures, are expensed when the related revenues are recognized.
Advertising and promotion expenses were $115.2 million in 2001, $116.9 million
in 2000 and $104.3 million in 1999.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31. The 2001,
2000 and 1999 fiscal years each reflected a 52-week period.
STOCK DIVIDEND
On December 19, 2001, the Board of Directors authorized a two-for-one stock
split of the Company's common stock, payable in the form of a stock dividend to
stockholders of record as of the close of business on December 31, 2001. The
100% stock dividend was paid on January 16, 2002. All share data and earnings
per share amounts presented have been restated to reflect this stock dividend.
PRIOR YEARS' RECLASSIFICATION
Certain items previously reported in specific captions in the accompanying
financial statements and notes have been reclassified to conform with the
current year's classifications.
NOTE 2: ACQUISITIONS
On May 23, 2001, the Company completed the purchase of 100 percent of the equity
interest of Mexx Group B.V. ("Mexx"), a privately held fashion apparel company
incorporated and existing under the laws of the Netherlands, for a purchase
price of approximately 295 million Euros (or $255.1 million based on the
exchange rate in effect on such date), in cash at closing (including the
assumption of debt), plus an earnout designed to equal 28% of future implied
equity value, payable at either party's option with respect to the year ended
2003, 2004 or 2005. Mexx designs and markets a wide range of merchandise for
women, men and children under the Mexx brand name. Mexx products are sold via
wholesale and retail formats in more than 40 countries in Europe, the
Asia-Pacific region, Canada and the Middle East. The acquisition of Mexx,
included in operating results from the acquisition date, was accounted for using
the purchase method of accounting. The excess purchase price over fair market
value of the underlying net assets acquired was $199.7 million. The purchase
price includes an adjustment for estimated transaction fees associated with the
acquisition and the estimated expenses associated with the closure of certain
under-performing retail stores as well as the elimination of certain other
duplicate support functions within the Mexx enterprise, which were decided prior
to the consummation of the transaction. The aggregate of the above items amounts
to $32.6 million. Goodwill is being amortized on a straight-line basis over 20
years. The fair market value of assets acquired was $179.2 million and
liabilities assumed were $91.2 million.
The following unaudited pro forma information assumes the Mexx acquisition had
occurred on January 2, 2000. The pro forma information, as presented below, is
not indicative of the results that would have been obtained had the transaction
occurred on January 2, 2000, nor is it indicative of the Company's future
results.
Fiscal Year Ended
-------------------------
December 29, December 30,
(Dollars in thousands except per common share data) 2001 2000
- --------------------------------------------------- ------------ ------------
Net sales $3,591,273 $3,456,863
Net income 180,297 177,063
Basic earnings per share $1.73 $1.66
Diluted earnings per share $1.72 $1.65
The above amounts reflect adjustments for interest expense from additional
borrowings necessary to finance the acquisition, amortization of goodwill, and
income tax effect based upon a pro forma effective tax rate of 36%. The
unaudited pro forma information gives effect only to adjustments described above
and does not reflect management's estimate of any anticipated cost savings or
other benefits as a result of the acquisition.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
On July 26, 2000, the Company completed the purchase of the majority of the
assets of the Monet Group ("Monet") for a total purchase price of $40.2 million.
Monet is a leading designer and marketer of branded fashion jewelry sold through
department stores, popular priced merchandisers and internationally under the
Monet, Monet Pearl, Monet Signature, Monet2, Trifari and Marvella brands. Excess
purchase price over fair market value of the underlying net assets was allocated
to goodwill and property based on estimates of fair values. Goodwill is being
amortized on a straight-line basis over 20 years. The fair value of assets
acquired was $46.4 million and liabilities assumed were $16.0 million. Annual
net sales of Monet in 1999 were approximately $96 million. Unaudited pro forma
information related to this acquisition is not included, as the impact of this
transaction is not material to the consolidated results of the Company.
On November 2, 1999, the Company completed the purchase of the entire equity
interest of Podell Industries, Inc., whose core business consists of the Laundry
by Shelli Segal apparel line ("Laundry"). Laundry is marketed primarily to
select department and specialty stores. The acquisition was accounted for using
the purchase method of accounting. The total purchase price of Laundry,
including the repayment of indebtedness, was approximately $44.7 million. The
excess purchase price over the fair market value of the underlying net assets
was allocated to goodwill and property based on estimates of fair values. The
estimated fair value of assets acquired was $6.5 million, and estimated
liabilities assumed were $5.3 million. Goodwill is being amortized on a
straight-line basis over 20 years. Annual net sales of Laundry in 1998 were
approximately $76 million. Unaudited pro forma information related to this
acquisition is not included, as the impact of this transaction is not material
to the consolidated results of the Company.
On June 8, 1999, the Company completed the purchase of 85.0 percent of the
equity interest of Lucky Brand Dungarees, Inc., whose core business consists of
the Lucky Brand line of women's and men's denim-based sportswear. The
acquisition was accounted for using the purchase method of accounting. The total
purchase price consisted of a cash payment made at the closing date of
approximately $85 million, and a payment to be made on March 31, 2003 of at
least $15 million, which may be increased to a maximum of $45 million based on
the achievement of certain earnings targets. An additional payment of $12.7
million was made in 2000 for tax-related purchase price adjustments. The excess
purchase price over the fair market value of the underlying net assets of $8.1
million was allocated to goodwill and property based on estimates of fair
values. The estimated fair value of assets acquired was $16.1 million and
estimated liabilities assumed was $8.0 million. Goodwill is being amortized on a
straight-line basis over 25 years. After a 5-year period, the Company may be
required to purchase the remaining equity interest at an amount equal to its
then fair market value, or elect to purchase the remaining equity interest at
its then fair market value, or under certain circumstances at a 20% premium on
such value. Annual net sales of Lucky Brand Dungarees, Inc. in 1998 were
approximately $60 million. Unaudited pro forma information related to this
acquisition is not included, as the impact of this transaction is not material
to the consolidated results of the Company.
On February 12, 1999, the Company completed the purchase of 84.5 percent of the
equity interest of Segrets, Inc., whose core business consists of the Sigrid
Olsen women's apparel lines. In the fourth quarter of 1999, the Company
purchased an approximately 3.0 percent additional equity interest. In November
2000, the Company increased its equity interest to 97.5 percent. The acquisition
was accounted for using the purchase method of accounting. The excess purchase
price over the fair market value of the underlying net assets of $13.1 million
was allocated to goodwill and property based on estimates of fair values.
Goodwill is being amortized on a straight-line basis over 25 years. The total
amount of funds required to acquire the interest and refinance certain
indebtedness was approximately $56 million. The fair value of assets acquired
was $23.3 million and liabilities assumed was $10.2 million. After a 5-year
period, the Company may elect to, or be required to, purchase the remaining
equity interest at an amount equal to its then fair market value. Annual net
sales of Segrets, Inc. in 1998 were approximately $60 million. Unaudited pro
forma information related to this acquisition is not included, as the impact of
this transaction is not material to the consolidated results of the Company.
NOTE 3: LICENSING COMMITMENTS
In August 1999, March 2000 and April 2000, the Company consummated exclusive
license agreements (with certain territorial restrictions) with Kenneth Cole
Productions, Inc. to manufacture, design, market and distribute women's apparel
products under the trademarks "Kenneth Cole New York," "Reaction Kenneth Cole"
and "Unlisted.com" (the "Kenneth Cole Marks"). Under the agreements, the Company
is obligated to pay a royalty equal to a percentage of net sales of products
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
bearing the Kenneth Cole Marks. The initial term of the license agreements run
through December 31, 2004 with an option to renew for three additional 5-year
periods if certain sales thresholds are met.
In February 2000, the Company consummated an exclusive license agreement with
Leslie Fay Marketing, Inc. ("Leslie Fay"), a subsidiary of Leslie Fay Company,
Inc. to design, manufacture, market, distribute and sell dresses under the Liz
Claiborne Dresses and Elisabeth Dresses labels. Not included in the agreement
are dresses sold as part of the Liz Claiborne Collection, Lizsport, Lizwear, Liz
& Co. and Elisabeth sportswear lines. Under the agreements Leslie Fay is
obligated to pay a royalty equal to a percentage of net sales of the Company's
products. The initial term of the license agreement runs through February 28,
2005, with an option to renew for two additional 5-year terms if certain sales
thresholds are met by the licensee.
In July 1998, the Company consummated an exclusive license agreement with
Candie's, Inc. to manufacture, market, distribute and sell a line of fragrances
for men and women using the "Candie's" marks and logos. Under the agreement, the
Company is obligated to pay a royalty equal to a percentage of net sales of the
"CANDIE'S(R)" products. The initial term of the license agreement runs through
December 31, 2013, with an option to renew for an additional 10-year period if
certain sales thresholds are met.
In January 1998, the Company consummated an exclusive license agreement (with
certain territorial restrictions) with an affiliate of Donna Karan
International, Inc. to design, produce, market and sell men's and women's
sportswear, jeanswear and activewear products under the "DKNY(R) Jeans" and
"DKNY(R) Active" marks and logos. Under the agreement, the Company is obligated
to pay a royalty equal to a percentage of net sales of the "DKNY(R) Jeans" and
"DKNY(R) Active" products. The initial term of the license agreement runs
through December 31, 2012, with an option to renew for an additional 15-year
period, if certain sales thresholds are met. Subject to the terms of the license
agreement, aggregate minimum royalties for the initial 15 year term total $152
million. In December 1999, the Company consummated an additional exclusive
license agreement (with certain territorial restrictions) with an affiliate of
Donna Karan International, Inc. to design, produce, market and sell a new line
of career and casual sportswear for the "better" market under the trademark CITY
DKNY(R). Under the agreement, the Company is obligated to pay a royalty equal to
a percentage of net sales of the licensed products. The initial term of the
license agreement runs through December 31, 2005, with an option to renew for
two additional 5-year periods if certain sales thresholds are met.
Certain of the above licenses are subject to minimum guarantees deemed not
material.
NOTE 4: MARKETABLE SECURITIES
In August 1999, the Company, in conjunction with the consummation of a license
agreement with Kenneth Cole Productions, Inc. (see Note 3 of Notes to
Consolidated Financial Statements), purchased one million shares of Kenneth Cole
Productions, Inc. Class A stock at a price of $29 per share. In March 2000, a
three-for-two stock split increased the number of shares owned by the Company to
1.5 million shares. This amount, $29 million, was recorded at cost as a
component of other current assets as of December 30, 2000. Certain restrictions
applicable to the Company's stock ownership expired on August 24, 2001. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
December 29, 2001, the investment was recorded as an available-for-sale
marketable security at fair market value with unrealized losses net of taxes
reported as a component of accumulated other comprehensive loss.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The following is a summary of available-for-sale marketable securities at
December 29, 2001 and December 30, 2000:
Gross Unrealized
---------------- Estimated
December 29, 2001 (in thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------------------------
Equity securities $ 29,000 $ -- $ 2,705 $ 26,295
Other holdings 8,599 -- 1,901 6,698
-------- ------- ------- ----------
Total $ 37,599 $ -- $ 4,606 $ 32,993
======== ======= ======= ==========
Gross Unrealized
---------------- Estimated
December 30, 2000 (in thousands) Ct Gains Losses Fair Value
- ------------------------------------------------------------------------
Other holdings $ 8,516 $ -- $ 906 $ 7,610
-------- ------- ------- ----------
Total $ 8,516 $ -- $ 906 $ 7,610
======== ======= ======= ==========
For 2001, 2000 and 1999, gross realized gains on sales of available-for-sale
securities totaled $0, $10,044,000 and $1,793,000, respectively.
NOTE 5: INVENTORIES
Inventories are summarized as follows:
In thousands December 29, 2001 December 30, 2000
- --------------------------------------------------------------------------------
Raw materials $ 29,649 $ 21,181
Work in process 7,061 6,233
Finished goods 451,213 452,431
----------- -----------
$ 487,923 $ 479,845
=========== ===========
NOTE 6: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
In thousands December 29, 2001 December 30, 2000
- --------------------------------------------------------------------------------
Land and buildings $ 144,299 $ 133,342
Machinery and equipment 215,747 267,004
Furniture and fixtures 185,741 74,794
Leasehold improvements 198,446 165,827
----------- -----------
744,233 640,967
Less: Accumulated depreciation
and amortization 392,232 343,543
----------- -----------
$ 352,001 $ 297,424
=========== ===========
Depreciation and amortization expense of property and equipment was $61.9
million, $51.7 million and $45.5 million for fiscal years 2001, 2000 and 1999,
respectively.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 7: ACCRUED EXPENSES
Accrued expenses consisted of the following:
In thousands December 29, 2001 December 30, 2000
- --------------------------------------------------------------------------------
Payroll and bonuses $ 37,406 $ 29,539
Taxes, other than taxes on income 17,865 16,009
Employee benefits 31,396 23,982
Advertising 14,790 15,505
Restructuring reserve 15,748 19,438
Other 82,567 46,807
----------- -----------
$ 199,772 $ 151,280
=========== ===========
NOTE 8: INCOME TAXES
The provisions for income taxes are as follows:
Fiscal Year Ended
----------------------------------------------------------
In thousands December 29, 2001 December 30, 2000 January 1, 2000
- -------------------- ------------------- ------------------- ------------------
Current:
Federal $ 89,237 $ 78,396 $ 81,512
Foreign 10,131 5,708 2,717
State & local 10,800 10,750 10,400
----------- ----------- -----------
$ 110,168 $ 94,854 $ 94,629
Deferred:
Federal $ 10,899 $ 7,974 $ 13,005
Foreign (14,155) 158 117
State & local 1,120 849 1,393
----------- ----------- -----------
$ 108,032 $ 103,835 $ 109,144
=========== =========== ===========
Liz Claiborne, Inc. and its U.S. subsidiaries file a consolidated federal income
tax return. Deferred income tax benefits and deferred income taxes 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 current income tax provisions exclude $4,511,000 in 2001, $3,551,000 in 2000
and $1,031,000 in 1999 arising from the exercise of nonqualified stock options.
These amounts have been credited to capital in excess of par value. In addition,
the current income tax provision does not reflect the deferred tax liability
from our acquisition of Mexx of approximately $475,000 and the valuation
allowance against the net operating loss carryforwards acquired as part of the
acquisition of Mexx.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The effective income tax rate differs from the statutory federal income tax rate
as follows:
Fiscal Year Ended
---------------------------------------------------
December 29, 2001 December 30, 2000 January 1, 2000
- ---------------------------- ----------------- ----------------- ---------------
Federal tax provision at
statutory rate 35.0% 35.0% 35.0%
State and local income
taxes, net of federal
benefit 2.3 2.4 2.2
Other-net (1.3) (1.4) (1.0)
------- ------- -------
36.0% 36.0% 36.2%
======= ======= =======
The components of net deferred taxes arising from temporary differences as of
December 29, 2001 and December 30, 2000 are as follows:
December 29, 2001 December 30, 2000
----------------------------------------------------------------------
In thousands Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Asset Liability Asset Liability
- ----------------------------------------------------------------------------------------------------------
Inventory valuation $ 10,236 $ -- $ 12,524 $ --
Unremitted earnings from foreign
subsidiaries -- 16,419 -- 16,419
Restructuring charge 10,593 -- 9,958 --
Deferred compensation -- 10,207 -- 9,405
Nondeductible accruals 14,867 -- 7,734 --
Unrealized investment losses
(gains) 2,624 -- (326) --
Net operating loss carryforwards 13,286 -- -- --
Valuation allowance (5,829) -- -- --
Depreciation 2,582 -- -- (432)
Other-net (10,973) 10,688 (2,192) 5,627
--------- --------- --------- ---------
$ 37,386 $ 37,314 $ 27,698 $ 31,019
========= ========= ========= =========
As of December 29, 2001, Mexx had net operating loss carryforwards of
approximately $13,286,000 that begin to expire in 2005 available to reduce
future foreign taxable income. A deferred tax asset has been established,
however, a valuation allowance of $5,829,000 has reduced the deferred tax assets
because it is more likely than not that certain of these assets will not be used
to reduce future tax payments. Management believes that the deferred tax
benefits will be fully realized through future taxable income and reversals of
deferred tax liabilities.
The Company has provided Federal income taxes on unremitted earnings from its
international subsidiaries that may be remitted back to the United States.
Federal income taxes were not provided on unremitted earnings expected to be
permanently reinvested internationally of approximately $4,000,000.
NOTE 9: COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company leases office, showroom, warehouse/distribution and retail space and
computers and other equipment under various noncancelable operating lease
agreements which expire through 2023. Rental expense for 2001, 2000 and 1999 was
approximately $100,748,000, $71,523,000 and $67,113,000, respectively. The above
rental expense amounts exclude associated costs such as real estate taxes and
common area maintenance.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
At December 29, 2001, the minimum aggregate rental commitments are as follows:
Fiscal (In thousands) Fiscal (In thousands)
Year Operating Leases Year Operating Leases
- ------------------------------------------------------------
2002 $ 97,569 2005 $ 73,321
2003 90,904 2006 63,437
2004 82,270 Thereafter 296,780
Certain rental commitments have renewal options extending through the fiscal
year 2031. 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.
At December 29, 2001 and December 30, 2000, the Company had entered into
short-term commitments for the purchase of raw materials and for the production
of finished goods totaling approximately $506,328,000 and $526,151,000,
respectively.
In the normal course of business, the Company extends credit, on open account,
to its retail customers, after a credit analysis is performed based on a number
of financial and other criteria. In the past, a number of corporate groups which
include certain of the Company's largest department store customers were
involved in highly leveraged financial transactions and certain of these
customers filed for protection under Chapter 11 of the Federal Bankruptcy Code.
Subsequently, certain customers have emerged from protection under Chapter 11.
Three corporate groups of department store customers accounted for 17%, 13% and
11%, respectively, of wholesale net sales in 2001, 18%, 14% and 16%,
respectively, of wholesale net sales in 2000 and 17%, 16%, and 15%,
respectively, of wholesale net sales in 1999. The Company does not believe that
this concentration of sales and credit risk represents a material risk of loss
with respect to its financial position as of December 29, 2001.
At December 29, 2001, approximately 14% of the Company's work force was covered
by collective bargaining agreements. One of these agreements currently in effect
expires in May 2005; all other agreements currently in effect will expire in May
2003. The Company considers its relations with its employees to be satisfactory
and to date has not experienced any interruption of operations due to labor
disputes.
On May 22, 2001, the Company entered into an off-balance sheet arrangement
(synthetic lease) to acquire and construct various land, building equipment and
real property improvements associated with warehouse and distribution facilities
in Ohio and Rhode Island. The lease terms are each five years, with up to four
renewal periods of five years each with the consent of the lessor. The operating
lease arrangements are with a lessor who through a limited partnership has
contributed equity in excess of 3 1/2% of the total value of the estimated
aggregate cost to complete these facilities, which is expected to be
approximately $65 million. The leases include guarantees by the Company for a
substantial portion of the financing and options to purchase the facilities at
original cost. The Company selected this financing arrangement to take advantage
of the favorable financing rates that it offered. The lessor financed the
acquisition of the facilities through equity funded by third-party financial
institutions. The third-party financial institutions who hold the equity are
partners of the lessor. The Company's transactions with the lessor are limited
to the operating lease agreements and the associated rent expense that will be
included in Selling, General and Administrative Expense in the Consolidated
Statements of Income. The Company has not entered into any other off-balance
sheet arrangements other than normal operating leases.
The Company is a party to several 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 should not have a material adverse effect
on the Company's results of operations or financial position (see Note 23 of
Notes to Consolidated Financial Statements).
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 10: DEBT AND LINES OF CREDIT
On May 22, 2001, the Company entered into a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day unsecured credit
facility (the "Bridge Loan") from Citicorp North America, Inc. and Chase
Manhattan Bank. The Bridge Loan has two borrowing options, an "Alternative Base
Rate" option and a Eurodollar rate option, each as defined in the Bridge Loan.
The proceeds of the Bridge Loan were primarily used to finance the Company's
acquisition of Mexx on May 23, 2001 (see Note 2 of Notes to Consolidated
Financial Statements).
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date), of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to repay
the outstanding balance of the Bridge Loan, which expired on November 16, 2001.
On November 15, 2001, the Company received a $500 million 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
expiring $500 million 364-day unsecured credit facility. This bank facility, as
well as the Company's $250 million bank facility that matures in November 2003
(collectively, the "Agreement") may be either drawn upon or used as a liquidity
facility to support the issuance of A2/P2 rated commercial paper. Repayment of
the 364-day facility can be extended for one year after the maturity date. The
Agreement has two borrowing options, an "Alternative Base Rate" option, as
defined in the Agreement, and a Eurodollar rate option with a spread based on
the Company's long-term credit rating.
The Agreement contains certain customary covenants, including financial
covenants requiring the Company to maintain specified debt leverage and fixed
charge coverage ratios, and covenants restricting the Company's ability to,
among other things, incur indebtedness, grant liens, make investments and
acquisitions, and sell assets. The Company believes it is in compliance with
such covenants.
The Agreement may be directly drawn upon, or used, to support the Company's $750
million commercial paper program, which is used from time to time to fund
working capital and other general corporate requirements. At December 29, 2001,
approximately $77.7 million was outstanding under the commercial paper program,
with a weighted average interest rate of 3.1%. The carrying amount of the
Company's borrowings under the commercial paper program approximate fair value
because the interest rates are based on floating rates, which are determined by
prevailing market rates. The commercial paper is classified as long-term debt as
of December 29, 2001 as it is the Company's intent and ability to refinance such
obligations on a long-term basis.
As of December 29, 2001, the Company had lines of credit aggregating $410
million, which were primarily available to cover trade letters of credit. At
December 29, 2001 and December 30, 2000, the Company had letters of credit of
$228 million and $271 million, respectively. These letters of credit, which have
terms ranging from one to ten months, primarily collateralize the Company's
obligations to third parties for the purchase of inventory. The fair value of
these letters of credit approximates contract values.
NOTE 11: DERIVATIVE INSTRUMENTS AND FOREIGN CURRENCY RISK MANAGEMENT PROGRAMS
As of December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
FASB Statement No. 133," which require that every derivative instrument
(including certain derivative instruments imbedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized currently in earnings in either income (loss) from
continuing operations or accumulated other comprehensive income (loss),
depending on the timing and designated purpose of the derivative. The impact on
the Company's financial condition, results of operations and cash flows, upon
the adoption of these pronouncements, was immaterial.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The Company uses foreign currency forward contracts and collars for the specific
purpose of hedging the exposure to variability in expected future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with our Canadian and European entities. These instruments
are designated as cash flow hedges and, in accordance with SFAS Nos. 133 and
138, any unrealized gains or losses are included in accumulated other
comprehensive income (loss), net of related tax effects, with the corresponding
asset or liability recorded in the balance sheet. The ineffective portion of the
cash flow hedge, if any, is recognized in current-period earnings. Other
comprehensive income (loss) is reclassified to current-period earnings when the
hedged transaction affects earnings. At December 29, 2001, the Company had
entered into foreign currency collars with a net notional amount of $55 million
with maturity dates in May 2002 and August 2002.
Occasionally, the Company purchases short-term foreign currency contracts and
options outside of the cash flow hedging program to neutralize month-end balance
sheet exposures. These derivative instruments do not qualify as cash flow hedges
under SFAS Nos. 133 and 138 and are recorded at fair value with all gains or
losses, which have not been significant, recognized in current period earnings
immediately.
As of December 29, 2001, the Company had forward contracts maturing through
April 2002 to sell 7.0 million Canadian dollars, 0.5 million British pounds
sterling, and 32.5 million European Euros. The aggregate U.S. dollar value of
the foreign exchange contracts was approximately $34.6 million at year end 2001,
as compared with approximately $12.6 million at year end 2000. Unrealized gains
and losses for outstanding foreign exchange forward contracts were not material
at December 29, 2001 and December 30, 2000.
NOTE 12: RESTRUCTURING CHARGES
In December 2001, the Company recorded a net restructuring charge of $15.1
million (pretax), representing a charge of $19.0 million, which consisted of
approximately $4.6 million for the closure of seven Specialty Retail stores, due
to a shift to a vertical format for one of our brands which requires positioning
in different locations and the elimination of our large "world" store concept,
and five Outlet stores, due to the elimination of two of our branded store
formats; $3.5 million for the closure of four of our division offices; $3.3
million associated with the strategic closure of two specific facilities; and
$7.6 million in severance related costs associated with the elimination of
approximately 600 jobs, offset by the $3.9 million deemed no longer necessary of
the Company's previous restructuring liability originally recorded in December
2000. The remaining balance of the restructuring liability as of December 29,
2001 was $15.7 million. The Company expects that these activities will be
substantially complete by December 2002.
In September 2000, the Company recorded a net restructuring charge of $5.4
million (pretax), representing a charge of $6.5 million, principally to cover
the closure of eight under-performing Specialty Retail stores in formats that no
longer fit into our retail strategy, the closure of one of our recently acquired
divisional offices, and severance related costs, offset by the $1.1 million
deemed no longer necessary of the Company's previous restructuring liability
originally recorded in December 1998.
In December 2000, the Company recorded a restructuring charge of $15.6 million
(pretax) to further maximize business segment synergies. This charge consisted
of $10.6 million for operating and administrative costs associated with the
elimination of nearly 270 jobs and $5.0 million for real estate consolidations.
Significant items included in the charge are estimated contract termination
costs, severance and related benefits for staff reductions, estimated occupancy
costs and asset writedowns. Asset writedowns of $2.4 million consist principally
of showrooms and administrative offices deemed no longer necessary in our
Wholesale Apparel segment. These restructuring activities are substantially
complete as of December 29, 2001. The fiscal 2000 restructuring charges reduced
net income by $13.5 million, or $0.13 per common share.
During the 1999 fiscal year, $2.7 million of the Company's previous
restructuring liability originally recorded in December 1998 was deemed to be no
longer necessary. This amount was taken as a reduction to the restructuring
charge through earnings and was offset with a restructuring reserve of an equal
amount to recognize the anticipated exit cost associated with the closure of
seven additional under-performing retail stores.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
A summary of the changes in the restructuring reserves is as follows:
Estimated
Store Operating and Occupancy Costs
Closure Administrative and Asset Write
In millions Costs Exit Costs Downs Total
- --------------------------------------------------------------------------------
Original Reserve $ 14.4 $ 12.6 $ -- $ 27.0
1999 spending (11.2) (10.7) -- (21.9)
1999 reserve reduction (0.8) (1.9) -- (2.7)
1999 exit costs charge 2.7 -- -- 2.7
------ ------ ------ -------
Balance at January 1, 2000 $ 5.1 $ -- $ -- $ 5.1
------ ------ ------ -------
2000 reserve 5.4 11.8 5.0 22.2
2000 spending (3.9) (0.4) (2.4) (6.7)
2000 reserve reduction (1.1) -- -- (1.1)
------ ------ ------ --------
Balance at December 30, 2000 $ 5.5 $ 11.4 $ 2.6 $ 19.5
------ ------ ------ -------
2001 reserve 4.6 7.6 6.8 19.0
2001 spending (2.1) (9.7) (7.1) (18.9)
2001 reserve reduction (2.4) (1.5) -- (3.9)
------ ------ ------ ------
Balance at December 29, 2001 $ 5.6 $ 7.8 $ 2.3 $ 15.7
====== ====== ====== =======
NOTE 13: OTHER (EXPENSE) INCOME - NET
Other (expense) income - net consists of the following:
Fiscal Year Ended
-----------------------------------------------------
In thousands December 29, 2001 December 30, 2000 January 1, 2000
- -------------------- ------------------ ----------------- ----------------
Investment gain $ -- $ 8,760 $ --
Minority interest (3,645) (2,218) (1,402)
Other 134 116 446
------- ------- -------
$(3,511) $ 6,658 $ (956)
======== ======= ========
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 14: STOCK PLANS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans, which are described below. Accordingly, no
compensation cost has been recognized for its fixed stock option grants. Had
compensation costs for the Company's stock option grants been determined based
on the fair value at the grant dates for awards under these plans in accordance
with SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma amounts
as follows:
Fiscal Year Ended
In thousands except for ----------------------------------------------------
per common share data December 29, 2001 December 30, 2000 January 1, 2000
- --------------------------- ----------------- ----------------- ----------------
Net income:
As reported $ 192,057 $ 184,595 $ 192,442
Pro forma $ 178,721 $ 175,281 $ 185,814
Basic earnings per share:
As reported $ 1.85 $ 1.73 $ 1.56
Pro forma $ 1.72 $ 1.64 $ 1.51
Diluted earnings per share:
As reported $ 1.83 $ 1.72 $ 1.56
Pro forma $ 1.70 $ 1.63 $ 1.51
For this purpose, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2001, 2000 and 1999,
respectively: dividend yield of 0.9%, 1.1% and 1.3%, expected volatility of 46%,
40% and 37%, risk free interest rates of 4.4%, 5.0% and 5.3%, and expected lives
of five years for all periods.
In March 1992 and March 2000, the Company adopted the "1992 Plan" and "2000
Plan," respectively, under which nonqualified options to acquire shares of
common stock may be granted to officers, other key employees and directors
selected by the plans' administrative 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. 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. The grantee of a stock appreciation right has the
right, with the consent of the committee, to receive either in cash or in shares
of common stock, an amount equal to the appreciation in the fair market value of
the covered shares from the date of grant to the date of exercise. Options and
rights are exercisable over a period of time designated by the committee and are
subject to such other terms and conditions as the committee determines. Vesting
schedules will be accelerated upon merger of the Company or the happening of
certain other change of control events. Options and rights may not be
transferred during the lifetime of a holder.
Awards under the 2000 Plan may also be made in the form of incentive stock
options, dividend equivalent rights, restricted stock, unrestricted stock and
performance shares. Exercise prices for awards under the 2000 Plan are
determined by the committee; to date, all stock options have been granted at an
exercise price not less than the quoted market value of the underlying shares on
the date of grant.
The 2000 Plan provides for the issuance of up to 10,000,000 shares of common
stock with respect to options, stock appreciation rights and other awards
granted under the 2000 Plan. At December 29, 2001, there were available for
future grant 5,509,984 shares under the 2000 Plan. The 2000 Plan expires in
2010. Upon shareholder approval of the 2000 Plan in May 2000, the Company ceased
issuing grants under the 1992 Plan; awards made thereunder prior to its
termination remain in effect in accordance with their terms.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Since January 1990, the Company has delivered treasury shares upon the exercise
of stock options. The difference between the cost of the treasury shares, on a
first-in, first-out basis, and the exercise price of the options has been
reflected in retained earnings.
Changes in common shares under option for the three fiscal years in the period
ended December 29, 2001 are summarized as follows:
2001 2000 1999
----------------------------- ---------------------------------- ------------------------------
Shares Weighted Average Shares Weighted Average Shares Weighted Average
Exercise Price Exercise Price Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
Beginning of year 7,228,550 $ 18.23 5,668,942 $ 17.38 4,681,188 $ 17.73
Granted 3,851,000 22.08 3,762,400 18.47 2,584,400 16.41
Exercised (2,363,076) 18.20 (1,318,188) 14.57 (438,612) 11.81
Cancelled (1,131,992) 18.90 (884,604) 19.28 (1,158,034) 18.79
----------- ------- ------------ ------- ------------ -------
End of year 7,584,482 $ 20.10 7,228,550 $ 18.23 5,668,942 $ 17.38
========== ======= =========== ======= =========== =======
Exercisable at end of year 1,179,594 $ 18.73 1,711,674 $ 18.46 1,842,690 $ 16.32
========== ======= =========== ======= =========== =======
Weighted average fair value of
options granted during the year $ 9.49 $ 7.21 $ 6.11
The following table summarizes information about options outstanding at December
29, 2001:
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ---------------------------------------
Range of Outstanding at Weighted Average Weighted Average Exercisable at Weighted Average
Remaining Contractual
Exercise Prices Dec. 29, 2001 Life Exercise Price Dec. 29, 2001 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8.50 - $ 17.50 1,005,354 7.2 years $ 16.04 270,454 $ 15.37
17.51 - 22.50 6,099,928 8.4 years 20.63 881,190 19.57
22.51 - 35.50 479,200 8.8 years 27.67 27,950 24.76
$ 8.50 - $ 35.50 7,584,482 8.2 years $ 20.47 1,179,594 $ 18.73
On January 24, 2002, nonqualified options to acquire approximately 3,300,000
shares of common stock were granted to officers and other key employees with an
exercise price of $25.94.
In January 2001 and May 2001, the committee authorized the grant of 84,966
shares of restricted stock issued under the 2000 Plan; these shares are subject
to restrictions on transfer and risk of forfeiture until earned by continued
service and vest as follows: 20% on each of the third, fourth and fifth grant
date anniversary, and the remaining 40% on the sixth grant date anniversary,
with acceleration of vesting upon the achievement of certain financial and
non-financial goals. The unearned compensation is being amortized over a period
equal to the anticipated vesting period.
In January 2001, the committee authorized the grant of 1,034,000 shares of
common stock to a group of key executives. As of December 29, 2001, 736,000 of
these shares remained outstanding. These shares are subject to restrictions on
transfer and subject to risk of forfeiture until earned by continued employment.
The restrictions expire in January 2007. The expiration of restrictions may be
accelerated if the total return on the Company's common stock exceeds that of a
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
predetermined group of competitors or upon the occurrence of certain other
events. The unearned compensation is being amortized over a period equal to the
anticipated vesting period.
In 1998, the committee granted 733,300 shares of common stock to a group of key
executives. As of December 29, 2001, 68,464 of these shares remained
outstanding. These shares are subject to restrictions on transfer and subject to
risk of forfeiture until earned by continued employment. The restrictions expire
on July 6, 2007. Given that the total return on the Company's common stock
exceeded that of a predetermined group of competitors for the period of January
1, 1998 through March 1, 2001, the expiration of the restrictions on 80% of such
shares was accelerated as of March 1, 2001. During the first quarter of 2001,
the Company recorded a charge to operating income of approximately $5 million as
compensation expense to reflect such accelerations. The shares that did not vest
on an accelerated basis remain restricted; the expiration of restrictions may be
accelerated if the total return of the Company's common stock exceeds that of a
predetermined group of competitors or upon the occurrence of certain other
events. The unearned compensation on such unvested shares is being amortized
over a period equal to the anticipated vesting period.
The unearned compensation related to all restricted stock grants as of December
29, 2001, December 30, 2000, and January 1, 1999 is $16,704,000, $7,635,000, and
$9,097,000, respectively, and is included in retained earnings.
The Company's outside directors' stock ownership plan provides non-employee
directors, as part of their annual retainer, shares of common stock with a value
of $15,000 on the first business day of each fiscal year. The shares so issued
are nontransferable for a period of three years following the grant date,
subject to certain exceptions. In 2001, 63,000 shares of common stock were
issued under this plan. This plan also provides each non-employee director a
grant of options to purchase 2,000 shares of common stock on the first business
day of each fiscal year. Not more than one half of one percent (0.50%) of the
shares of common stock outstanding from time to time may be issued under the
plan, which will expire in ten years. Additionally, effective July 2000, each
non-employee director is entitled to receive on the first business day of each
fiscal year a grant of options to purchase 4,000 shares under the 2000 Plan.
NOTE 15: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains a qualified defined contribution plan (the "401(k)/Profit
Sharing Plan") for eligible U.S. employees of the Company and adopting
affiliates, which has two component parts: a cash or deferred arrangement under
section 401(k) of the Internal Revenue Code and a profit sharing portion. To be
eligible to participate in either portion of the 401(k)/Profit Sharing Plan,
employees must be at least age 21 and not covered by a collective bargaining
agreement; there are additional eligibility and vesting rules for each of the
401(k)/Profit Sharing Plan components. As of January 1, 2002 full-time employees
may begin to make pre-tax contributions and to receive employer matching
contributions to the 401(k) portion of the 401(k)/Profit Sharing Plan after six
months of employment with the Company, while part-time employees must complete a
12-month period in which they are credited with 1000 hours of service. The
1000-hour rule applies to all eligible employees for purposes of entering the
profit sharing portion of the 401(k)/Profit Sharing Plan; in addition, a
participant generally must be credited with 1000 hours of service during, and be
employed by the Company or one of its affiliates on the last day of, the
calendar year to share in the profit sharing contribution for that year.
Company matching contributions vest (i.e., become nonforfeitable) on a schedule
of 20% for the first two years of elapsed service with the Company and its
affiliates and 20% for each year of service thereafter. Profit sharing
contributions, if any, are made annually at the discretion of the Board of
Directors, and vest 100% after five years of elapsed service (except for
pre-1997 participants who were grandfathered under the previous 2-6 year graded
schedule).
Under the 401(k) portion of the 401(k)/Profit Sharing Plan, participants may,
subject to applicable IRS limitations, contribute from 1% to 15% of their
salaries on a pretax basis; the 401(k)/Profit Sharing Plan provides for
automatic enrollment (at a contribution rate of 3%) when an eligible employee
first becomes entitled to participate in the 401(k) portion of the 401(k)/Profit
Sharing Plan, unless the employee elects otherwise. Participants' pretax
contributions are matched at the rate of $.50 for each dollar contributed by the
participant that does not exceed 6% of eligible compensation.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The Company's aggregate 401(k)/Profit Sharing Plan contribution expense for
2001, 2000 and 1999, which is included in selling, general and administrative
expenses, was $7,731,000, $6,888,000 and $6,515,000, respectively.
The Company has a supplemental retirement plan for certain highly compensated
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 executive under the tax-qualified plan
absent such limitations and the actual contribution under that plan. The
supplemental plan also allows participants to defer up to 15% of their base
salary and up to 100% of their annual bonus. Supplemental benefits attributable
to participant deferrals are fully vested at all times and the balance of a
participant's benefits vests on the same basis as the matching contribution
under the 401(k)/Profit Sharing Plan. This supplemental plan is not funded. As
of January 1, 2002, the Company established an irrevocable "rabbi" trust to
which the Company plans to make contributions to provide a source of funds to
assist in meeting its obligations under the 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. The Company's
expenses (recoveries) related to these plans, which are included in selling,
general and administrative expenses, were $13,000, ($224,000) and $2,223,000 in
2001, 2000 and 1999, respectively.
The Company has established an unfunded deferred compensation arrangement for a
senior executive which accrues over an eight year period as of the first day of
each fiscal year beginning in 1996, based on an amount equal to 15% of the sum
of the senior executive's base salary and bonus. The accrued amount plus
earnings will become fully vested on January 1, 2005, provided the senior
executive is the Chairman of the Board and Chief Executive Officer of the
Company on such date. This arrangement also provides for the deferral of an
amount equal to the portion of the executive's base salary that exceeds $1
million. The deferred amount plus earnings will be fully vested at all times.
NOTE 16: STOCKHOLDER RIGHTS PLAN
In December 1998, the Company adopted a new Stockholder Rights Plan to replace
the then expiring plan originally adopted in December 1988. Under the new Plan,
one preferred stock purchase right is attached to each share of common stock
outstanding. The rights are nominally exercisable under certain circumstances,
to buy 1/100 share of a newly created Series A Junior Participating Preferred
Stock for $150. If any person or group (referred to as an "Acquiring Person")
becomes the beneficial owner of 15% or more of the Company's common stock (20%
or more in the case of certain acquisitions by institutional investors), each
right, other than rights held by the Acquiring Person which become void, will
become exercisable for common stock having a market value of twice the exercise
price of the right. If anyone becomes an Acquiring Person and afterwards the
Company or 50% or more of its assets is acquired in a merger, sale or other
business combination, each right (other than voided rights) will become
exercisable for common stock of the acquirer having a market value of twice the
exercise price of the right. The rights, which expire on December 21, 2008 and
do not have voting rights, may be amended by the Company's Board of Directors
and redeemed by the Company at $0.01 per right at any time before any person or
group becomes an Acquiring Person.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 17: EARNINGS PER COMMON SHARE
The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with SFAS No. 128 "Earnings per Share."
Fiscal Year Ended
----------------- ----------------- ----------------
In thousands December 29, 2001 December 30, 2000 January 1, 2000
- -------------------------------------------- ----------------- ----------------- ----------------
Net income $ 192,057 $ 184,595 $ 192,442
Weighted average common shares outstanding 103,994 106,813 123,047
Effect of dilutive securities:
Stock options and restricted stock grants 1,057 682 378
Put warrants -- -- 14
Weighted average common shares and common
share equivalents 105,051 107,495 123,439
NOTE 18: CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During fiscal 2001, 2000, and 1999, the Company made income tax payments of
$83,851,000, $94,742,000, and $89,374,000, respectively. The Company made
interest payments of $15,093,000, $20,438,000, and $2,186,000 in 2001, 2000, and
1999, respectively. Other non-cash investing activities in 1999 included a
future payment of $15.0 million associated with the Lucky Brand Dungarees, Inc.
acquisition and $3.5 million contingent payment for the Laundry acquisition (see
Note 2 of Notes to Consolidated Financial Statements).
NOTE 19: SEGMENT REPORTING
The Company has three segments: Wholesale Apparel, Wholesale Non-Apparel and
Retail. The Wholesale Apparel segment consists of women's and men's apparel
designed and marketed under various trademarks owned or licensed by the Company.
The Wholesale Non-Apparel segment consists of accessories, jewelry and cosmetics
designed and marketed under certain of those and other trademarks. The Retail
segment operates specialty retail and outlet stores that sell these apparel and
non-apparel products to the public.
The Company evaluates performance and allocates resources based on operating
profits or losses. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies.
Intersegment sales are recorded at cost. There is no intercompany profit or loss
on intersegment sales, however, the wholesale segments are credited with their
proportionate share of the operating profit generated by the Retail segment. The
profit credited to the wholesale segments from the Retail segment is eliminated
in consolidation.
The Company's segments are business units that offer either different products
or distribute similar products through different distribution channels. The
segments are each managed separately because they either manufacture and
distribute distinct products with different production processes or distribute
similar products through different distribution channels.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
December 29, 2001
-----------------------------------------------------------------------------------------
In thousands Wholesale Wholesale Retail Corporate/ Totals
Apparel Non-Apparel Eliminations
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 2,345,925 $ 473,562 $ 615,714 $ 13,321 $ 3,448,522
Intercompany sales 190,310 22,518 -- (212,828) --
Depreciation and amortization expense 70,318 6,795 20,476 3,902 101,491
Segment operating profit (loss) 288,865 46,150 70,263 (73,561) 331,717
Segment assets 1,512,923 166,721 358,677 189,339 2,227,660
Expenditures for long-lived assets 143,341 2,180 126,484 -- 272,605
December 30, 2000
-----------------------------------------------------------------------------------------
In thousands Wholesale Wholesale Retail Corporate/ Totals
Apparel Non-Apparel Eliminations
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 2,203,358 $ 399,710 $ 486,547 $ 14,526 $ 3,104,141
Intercompany sales 170,799 23,252 -- (194,051) --
Depreciation and amortization expense 57,448 5,497 11,339 2,749 77,033
Segment operating profit (loss) 287,039 33,561 62,786 (79,697) 303,689
Segment assets 1,295,046 161,768 151,575 193,928 1,802,317
Expenditures for long-lived assets 70,762 42,288 16,010 -- 129,060
January 1, 2000
-----------------------------------------------------------------------------------------
In thousands Wholesale Wholesale Retail Corporate/ Totals
Apparel Non-Apparel Eliminations
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 2,032,205 $ 320,338 $ 445,212 $ 8,793 $ 2,806,548
Intercompany sales 163,879 20,813 -- (184,692) --
Depreciation and amortization expense 47,024 4,130 10,608 6,074 67,836
Segment operating profit (loss) 276,732 25,887 55,377 (58,243) 299,753
Segment assets 1,311,090 86,549 121,613 200,121 1,719,373
Expenditures for long-lived assets 243,786 1,615 31,851 -- 277,252
In the "Corporate/Eliminations" column of each period presented, the segment
assets consists primarily of corporate buildings, machinery and equipment and
licenses and trademarks purchased by the Company. The segment operating loss
consists primarily of the elimination of the profit transfer from the Retail
segment to the wholesale segments, and $15,050,000 and $21,041,000 of
restructuring charges in 2001 and 2000, respectively.
December 29, 2001 December 30, 2000 January 1, 2000
------------------------------------------------------------------------------------------
In thousands Domestic International Domestic International Domestic International
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 3,031,318 $ 417,204 $ 2,984,927 $ 119,214 $ 2,701,272 $ 105,276
Depreciation and amortization expense 87,498 13,993 74,907 2,126 66,771 1,065
Segment operating profit 290,357 41,360 295,276 8,413 294,936 4,817
Segment assets 1,746,660 481,000 1,748,935 53,382 1,662,230 57,143
Expenditures for long-lived assets 44,070 228,535 127,063 1,997 276,171 1,081
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
A reconciliation to adjust segment assets to consolidated assets follows:
In thousands December 29, 2001 December 30, 2000 January 1, 2000
- --------------------------------------------------------------------------------
Total segment assets $ 2,227,660 $ 1,802,317 $ 1,719,373
Intercompany receivables (18,200) (12,859) (24,640)
Investments in wholly-
owned subsidiaries (298,128) (290,869) (292,249)
Other 39,923 13,570 9,317
----------- ----------- -----------
Total consolidated assets $ 1,951,255 $ 1,512,159 $ 1,411,801
=========== =========== ===========
NOTE 20: OTHER COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign currency
translation and changes in unrealized gains and losses on securities.
In thousands December 29, 2001 December 30, 2000 January 1, 2000
- -------------------------------------------------------------------------------------------------------
Comprehensive income, net of tax:
Net income $ 192,057 $ 184,595 $ 192,442
Foreign currency translation 4,928 (3,625) (431)
(Losses) on cash flow hedging derivatives (250) -- --
Changes in unrealized losses on securities (2,368) (768) (111)
------------ ------------ ------------
Comprehensive income, net of tax: $ 194,367 $ 180,202 $ 191,900
=========== =========== ===========
The following table contains the components of the adjustment to unrealized
(losses) on available for sale securities included in the Consolidated
Statements of Retained Earnings, Comprehensive Income and Changes in Capital
Accounts.
In thousands December 29, 2001 December 30, 2000 January 1, 2000
- ----------------------------------------------------------------------------------------------------------
Unrealized (loss) on available for sale
securities, net of tax:
Unrealized holding (loss) $ (2,368) $ (1,212) $ (166)
Reclassification adjustment -- 444 55
----------- ----------- -----------
Net unrealized (loss) $ (2,368) $ (768) $ (111)
============ ============ ============
NOTE 21: RECENT ACCOUNTING PRONOUNCEMENTS
In November 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") reached a consensus on Issue No. 01-9 (formerly EITF
Issue 00-25), "Accounting for Consideration Given to a Customer or a Reseller of
the Vendor's Products." This issue addresses the recognition, measurement and
income statement classification of consideration from a vendor to a customer in
connection with the customer's purchase or promotion of the vendor's products.
This consensus is expected to only impact revenue and expense classifications
and not change reported net income. In accordance with the consensus reached,
the Company will adopt the required accounting beginning December 30, 2001, the
first day of fiscal year 2002. The Company believes that the impact of this
required accounting will not have a material impact on the revenue and expense
classifications in the Company's Consolidated Statements of Income.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 are to be accounted for
using the purchase method and specifies the criteria for the recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives are to no longer be amortized but rather be tested at
least annually for impairment. SFAS No. 142 also requires that intangible assets
with definite useful lives will continue to be amortized over their respective
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company adopted the provisions of SFAS No. 141
immediately and SFAS No. 142 effective December 30, 2001. The amortization
expense of goodwill and intangibles for the twelve months ended December 29,
2001 totaled $21.3 million.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Statement
also extends the reporting requirements to report separately as discontinued
operations, components of an entity that have either been disposed of or
classified as held for sale. The Company has adopted the provisions of SFAS No.
144 effective December 30, 2001 and such adoption is not expected to have a
significant effect on its financial statements.
NOTE 22: RELATED PARTY TRANSACTIONS
The law firm, Kramer Levin Naftalis & Frankel LLP, of which Kenneth P. Kopelman
(a Director of the Company) is a partner, provided legal services to the Company
during 2001, 2000 and 1999. The Company paid legal fees to that firm in the
amounts of $872,000, $1.55 million and $1.61 million, respectively, for those
services. It is anticipated that such firm will continue to provide such
services in 2002.
During fiscal years 2001, 2000 and 1999 the Company and certain of its
contractors purchased, in the ordinary course of their business for use in the
manufacture of Company products, fabric from certain European textile mills for
which Gordon Textiles International, Ltd. ("GTIL") acts as sales agent in the
United States. J. James Gordon, a Director of the Company, is the sole
shareholder of GTIL. Such fabric purchases during each year aggregated
approximately $1.5 million, $3.0 million and $4.0 million, respectively. GTIL
received commissions from its client mills, at customary industry rates, in
respect to such sales aggregating to $79,000, $150,000 and $207,000,
respectively.
During 2001, Liz Claiborne, Inc. leased a certain office facility from Amex
Property B.V. ("Amex"), a company whose principal owner is Rattan Chadha,
President and Chief Executive Officer of Mexx, under a 20 year lease agreement.
The space houses the principal headquarters of Mexx Group B.V. in Voorschoten,
Netherlands. The rental paid to Amex for the period of May 23, 2001 through
December 29, 2001 was 365,000 Euros (or $324,000 based on the exchange rate in
effect during such period).
The transactions between the Company and these related parties were effected on
an arm's-length basis, with services provided at fair market value. The Company
believes that such transactions were effected on terms no less favorable to the
Company than those that would have been realized in transactions with other
entities.
NOTE 23: LEGAL PROCEEDINGS
In January 1999, two actions were filed in California naming as defendants more
than a dozen United States-based apparel companies that source garments from
Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationships with the factories, have violated various federal and state laws.
One action, filed in California Superior Court in San Francisco by a union and
three public interest groups, alleges unfair competition and false advertising
(the "State Court Action"). The State Court Action seeks equitable relief,
unspecified amounts for restitution and disgorgement of profits, interest and an
award of attorney's fees. The second, filed in Federal Court for the Central
District of California and later transferred to the
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
District of Hawaii, and, in Spring 2001, to the United States District Court for
the District of the Northern Mariana Islands, is brought on behalf of a
purported class consisting of the Saipan factory workers (the "Federal Action").
The Federal Action alleges claims under the civil RICO statute and the Alien
Tort Claims Act, premised on supposed violations of the federal anti-peonage and
indentured servitude statutes, as well as other violations of Saipan and
international law, and seeks equitable relief and unspecified damages, including
treble and punitive damages, interest and an award of attorney's fees. A third
action, brought in Federal Court in Saipan solely against the garment factory
defendants on behalf of a putative class of their workers, alleges violations of
federal and Saipanese wage and employment laws. The Company sources products in
Saipan but was not named as a defendant in the actions. The Company and certain
other apparel companies not named as defendants were advised in writing,
however, that they would be added as parties if a consensual resolution of the
complaint claims could not be reached. In the wake of that notice, which was
accompanied by a draft complaint, the Company entered into settlement
negotiations and subsequently entered into an agreement to settle all claims
that were or could have been asserted in the Federal or State Court Action. To
date, eighteen other apparel companies have also settled these claims. As part
of the settlement, the Company has since been named as a defendant, along with
certain other settling apparel companies, in a Federal Court action styled Doe
I, et al. v. Brylane, L.P. et al. (the "Brylane Action"), initially brought in
the United States District Court for the District of Hawaii, that mirror
portions of the larger State and Federal Actions but does not include RICO and
certain of the other claims alleged in those Actions. The newly filed action
against the Company will remain inactive unless the settlement is not finally
approved by the Federal Court. The agreements concluded by the Company and other
retailers are subject to federal court approval, which has been delayed by
virtue of the Hawaii District Court's June 23, 2000 decision to transfer the
Federal Action to Saipan. Plaintiffs have petitioned the Ninth Circuit Court of
Appeals for a Writ of Mandamus reversing that ruling. On March 22, 2001 the
Court of Appeals denied Plaintiff's petition, and the Federal Action and the
Brylane Action have been transferred to Saipan. The court in Saipan held a
hearing on February 14, 2002 on Plaintiffs' motions to certify the proposed
class and to preliminarily approve the settlement, but reserved decision on both
motions. Under the terms of the settlement agreement, if the settlement does not
receive final federal court approval, the Company will be entitled to a refund
of the entire settlement amount except for funds of up to $10,000 spent on costs
of notice. Because the litigation is at a preliminary stage, with virtually no
merits discovery having taken place, if the settlement is not executed or is not
finally approved by the federal court, we cannot at this juncture determine the
likelihood of a favorable or unfavorable outcome or the magnitude of the latter
if it were to occur. Although the outcome of any such litigation cannot be
determined with certainty, management is of the opinion that the final outcome
should not have a material adverse effect on the Company's financial position or
results of operations.
NOTE 24: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2001 and 2000 is set forth in the
table below:
March June September December
In thousands except for --------------------------------------------------------------------------------------------------
per common share data 2001 2000 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $826,650 $809,459 $727,035 $661,667 $1,008,356 $879,025 $886,481 $753,990
Gross profit 322,862 302,874 308,239 267,754 423,329 350,655 372,820 312,589
Net income 45,500 46,492 (1) 32,467 31,452 72,611 67,072 (2) 41,479 (3) 39,579 (4)
Basic earnings per share $ .44 $ .42 (1) $ .31 $ .29 $ .70 $ .64 (2) $ .40 (3) $ .38 (4)
Diluted earnings per share $ .44 $ .42 (1) $ .31 $ .29 $ .69 $ .63 (2) $ .39 (3) $ .38 (4)
Dividends paid per common share $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06 $ .06
(1) Includes the after tax effect of a special investment gain of $2,122
($3,316 pretax) or $.02 per share.
(2) Includes the after tax effect of a special investment gain of $3,484
($5,444 pretax) or $.03 per share and the after tax effect of a
restructuring charge of $3,457 ($5,402 pretax) or $.03 per common share.
(3) Includes the after tax effect of a restructuring charge of $9,632 ($15,050
pretax) or $.09 per share.
(4) Includes the after tax effect of a restructuring charge of $10,009 ($15,639
pretax) or $.10 per share.
F-29
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
Column A Column B Column C Column D Column E
Additions
--------------------------------------
(In thousands) Balance at (1) Charged (2) Charged to
Beginning to Costs and Other Accounts - Deductions - Balance at
Description of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 29, 2001
Accounts Receivable - allowance for
doubtful accounts $ 2,695 $ 2,391 $ -- $ 913 (A) $ 4,173
--------- --------- --------- --------- ---------
Restructuring Reserve $ 19,438 $ 18,950 $ (3,900)(C) $ 18,740 (B) $ 15,748
--------- --------- ---------- --------- ---------
YEAR ENDED DECEMBER 30, 2000
Accounts Receivable - allowance for
doubtful accounts $ 2,255 $ 1,438 $ -- $ 998 (A) $ 2,695
--------- --------- --------- --------- ---------
Restructuring Reserve $ 5,056 $ 22,115 $ (1,074)(C) $ 6,659 (B) $ 19,438
--------- --------- ---------- --------- ---------
YEAR ENDED JANUARY 1, 2000
Accounts Receivable - allowance for
doubtful accounts $ 2,165 $ 1,025 $ -- $ 935 (A) $ 2,255
--------- --------- --------- --------- ---------
Restructuring Reserve $ 26,300 $ 2,700 $ (2,700)(C) $ 21,244 (B) $ 5,056
--------- --------- ---------- --------- ---------
Notes:
(A) Uncollectible accounts written off, less recoveries.
(B) Charges to the restructuring reserve are for the purposes for which the
reserve was created.
(C) This amount of the restructuring reserve was deemed to no longer be
necessary. As a result, this amount was taken as a reduction to the
restructuring charge through earnings for the applicable fiscal year.
INDEX TO EXHIBITS
Exhibit
No. Description
2 - Share Purchase Agreement, dated as of May 15, 2001, among Liz
Claiborne, Inc., Liz Claiborne 2 B.V., LCI Acquisition U.S., and
the other parties signatory thereto (incorporated herein by
reference from Exhibit 2.1 to Registrant's Form 8-K dated May 23,
2001 and amended on July 20, 2001).
3(a) - Restated Certificate of Incorporation of Registrant (incorporated
herein by reference from Exhibit 3(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended June 26, 1993).
3(b) - By-laws of Registrant, as amended (incorporated herein by
reference from Exhibit 3(b) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1992 [the "1992
Annual Report"]).
4(a) - Specimen certificate for Registrant's Common Stock, par value
$1.00 per share (incorporated herein by reference from Exhibit
4(a) to the 1992 Annual Report).
4(b) - Rights Agreement, dated as of December 4, 1998, between
Registrant and First Chicago Trust Company of New York
(incorporated herein by reference from Exhibit 1 to Registrant's
Form 8-A dated as of December 4, 1998).
4(b)(i) - Amendment to the Rights Agreement, dated November 11, 2001,
between Registrant and The Bank of New York, appointing The Bank
of New York as Rights Agent (incorporated herein by reference
from Exhibit 1 to Registrant's Form 8-A12B/A dated as of January
30, 2002).
4(c) - Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and
Dexia Banque Internationale A. Luxembourg (incorporated herein by
reference from Exhibit 10 to Registrant's Form 10-Q for the
period ended June 30, 2001)
10(a) - Reference is made to Exhibit 4(b) filed hereunder, which is
incorporated herein by this reference.
10(b)+ - Liz Claiborne Savings Plan (the "Savings Plan"), as amended and
restated (incorporated herein by reference from Exhibit 10(f) to
Registrant's Annual report on Form 10-K for the fiscal year ended
December 30, 1989 [the "1989 Annual Report"]).
10(b)(i)+ - Trust Agreement dated as of July 1, 1994, between Liz Claiborne,
Inc. and IDS Trust Company (incorporated herein by reference from
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for
the period ended July 2, 1994).
10(c)+ - Amendment Nos. 1 and 2 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g) to the 1992 Annual Report).
10(c)(i)+ - Amendment Nos. 3 and 4 to the Savings Plan (incorporated herein
by reference from Exhibit 10(g)(i) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 26, 1993 [the
"1993 Annual Report"]).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
10(c)(ii)+ - Amendment No. 5 to the Savings Plan (incorporated herein by
reference from Exhibit 10(a) to Registrant's Quarterly Report on
Form 10-Q for the period ended July 2, 1994).
10(c)(iii)+ - Amendment No. 6 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e) (iii) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1996 [the
"1996 Annual Report"]).
10(c)(iv)+ - Amendment No. 7 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(iv) to the 1996 Annual Report).
10(c)(v)+ - Amendment No. 8 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(v) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998 [the "1997
Annual Report"].
10(c)(vi)+ - Amendment No. 9 to the Savings Plan (incorporated herein by
reference from Exhibit 10(e)(vi) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999 [the "1998
Annual Report"]).
10(d)+ - Amended and Restated Liz Claiborne Profit-Sharing Retirement Plan
(the "Profit-Sharing Plan") (incorporated herein by reference
from Exhibit 10(h) to the 1992 Annual Report).
10(e)+ - Trust Agreement related to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(jj) to the 1983 Annual
Report).
10(e)(i)+ - Amendment Nos. 1 and 2 to the Profit-Sharing Plan (incorporated
herein by reference from Exhibit 10(i)(i) to the 1993 Annual
Report).
10(e)(ii)+ - Amendment No. 3 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended October 1, 1994).
10(e)(iii)+ - Amendment No. 4 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the period ended July 1, 1995).
10(e)(iv)+ - Amendment No. 5 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(iv) to the 1996 Annual Report).
10(e)(v)+ - Amendment No. 6 to the Profit-Sharing Plan (incorporated herein
by reference from Exhibit 10(g)(v) to the 1998 Annual Report).
10(f)+ - Merger Amendment to the Profit-Sharing Plan, the Lucky Brand
Employee Retirement Plan and Trust, the Segrets, Inc. 401(k)
Profit Sharing Plan, and the Savings Plan (incorporated herein by
reference from Exhibit 10(h) to Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 2000 [the "1999
Annual Report"]).
10(g)+ - The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as
amended and restated (incorporated herein by reference from
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 30, 2000 [the "2000 Annual Report"]).
10(g)(i)+* - Amendment No. 1 to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
10(g)(ii)+* - Amendment No. 2 to the Liz Claiborne 401(k) Savings and Profit
Sharing Plan.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
10(h)+ - National Collective Bargaining Agreement, made and entered into
as of June 1, 2000, by and between Liz Claiborne, Inc. and the
Union of Needletrades, Industrial and Textile Employees (UNITE)
for the period June 1, 2000 through May 31, 2003 (incorporated
herein by reference from Exhibit 10(h) to the 2000 Annual
Report).
10(h)(i)+ - Jobbers Agreement, made and entered into as of June 1, 2000, by
and between Liz Claiborne, Inc. and the Union of Needletrades,
Industrial and Textile Employees (UNITE) for the period June 1,
2000 through May 31, 2003 (incorporated herein by reference from
Exhibit 10(h)(i) to the 2000 Annual Report).
10(i)+* - Description of Liz Claiborne, Inc. 2001 Salaried Employee
Incentive Bonus Plan.
10(j) - Lease, dated as of January 1, 1990 (the "1441 Lease"), for
premises located at 1441 Broadway, New York, New York between
Registrant and Lechar Realty Corp. (incorporated herein by
reference from Exhibit 10(n) to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1990).
10(j)(i) - First Amendment: Lease Extension and Modification Agreement,
dated as of January 1, 1998, to the 1441 Lease (incorporated
herein by reference from Exhibit 10(k) (i) to the 1999 Annual
Report).
10(j)(ii) - Second Amendment to Lease, effective as of September 19, 1998, to
the 1441 Lease (incorporated herein by reference from Exhibit
10(k) (i) to the 1999 Annual Report).
10(j)(iii) - Third Amendment to Lease, dated as of September 24, 1999, to the
1441 Lease (incorporated herein by reference from Exhibit 10(k)
(i) to the 1999 Annual Report).
10(j)(iv)* - Fourth Amendment to Lease, dated as of July 1, 2000, to the 1441
Lease.
10(k)+ - Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991
Stock Ownership Plan (the "Outside Directors' 1991 Plan")
(incorporated herein by reference from Exhibit 10(m) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 [the "1995 Annual Report"]).
10(k)(i)+ - Form of Option Agreement under the Outside Directors' 1991 Plan
(incorporated herein by reference from Exhibit 10(m)(i) to the
1996 Annual Report).
10(l)+ - Liz Claiborne, Inc. 1992 Stock Incentive Plan (the "1992 Plan")
(incorporated herein by reference from Exhibit 10(p) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 28, 1991.
10(l)(i)+ - Amendment No. 1 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(p)(i) to the 1993 Annual Report).
10(l)(ii)+ - Amendment No. 2 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(ii) to the 1997 Annual Report).
10(l)(iii)+ - Amendment No. 3 to the 1992 Plan (incorporated herein by
reference from Exhibit 10(n)(iii) to the 1998 Annual Report).
10(m)+ - Form of Option Agreement under the 1992 Plan (incorporated herein
by reference from Exhibit 10(r) to the 1992 Annual Report).
10(n)+ - Form of Option Grant Certificate under the 1992 Plan
(incorporated herein by reference from Exhibit 10(q) to the 1996
Annual Report).
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
10(o)+ - Form of Restricted Career Share Agreement under the 1992 Plan
(incorporated herein by reference from Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1995).
10(p)+ - Form of Restricted Transformation Share Agreement under the 1992
Plan (incorporated herein by reference from Exhibit 10(s) to the
1997 Annual Report).
10(q)+ - Description of Supplemental Life Insurance Plans (incorporated
herein by reference from Exhibit 10(q) to the 2000 Annual
Report).
10(r)+ - Description of unfunded death/disability benefits for certain
executives (incorporated herein by reference from Exhibit 10(u)
to the 1992 Annual Report).
10(s)+ - Amended and Restated Liz Claiborne section 162(m) Cash Bonus Plan
(incorporated herein by reference from Exhibit 10(t) to the 1999
Annual Report).
10(t)+* - Liz Claiborne, Inc. Supplemental Executive Retirement Plan
effective as of January 1, 2002, constituting an amendment,
restatement and consolidation of the Liz Claiborne, Inc.
Supplemental Executive Retirement Plan and the Liz Claiborne,
Inc. Bonus Deferral Plan.
10(t)(i)+* - Trust Agreement dated as of January 1, 2002, between Liz
Claiborne, Inc. and Wilmington Trust Company.
10(u)+ - Employment Agreement dated as of May 9, 1994, between Registrant
and Paul R. Charron (the "Charron Agreement") (incorporated
herein by reference from Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the period ended April 2, 1994).
10(u)(i)+ - Amendment to the Charron Agreement, dated as of November 20, 1995
(incorporated herein by reference from Exhibit 10(x)(i) to the
1995 Annual Report).
10(u)(ii)+ - Amendment to the Charron Agreement, dated as of September 19,
1996, (including the Liz Claiborne Retirement Income Accumulation
Plan for the benefit of Mr. Charron [the "Accumulation Plan"])
(incorporated herein by reference from Exhibit 10(y)(ii) to the
1996 Annual Report).
10(u)(iii)+* - Amendment to the Accumulation Plan, dated January 3, 2002.
10(u)(iv)+ - Change of Control Agreement, between Registrant and Paul R.
Charron (incorporated herein by reference from Exhibit 10(v)(iii)
to the 2000 Annual Report).
10(v) - Three Year Revolving Credit Agreement, dated as of November 16,
2000, among Registrant, various lending parties and The Chase
Manhattan Bank (as administrative agent) (incorporated herein by
reference from Exhibit (x) to the 2000 Annual Report).
10(w)* - 364-Day Revolving Credit Agreement, dated as of November 15,
2001, among Registrant, various lending parties and JPMorgan
Chase Bank (as administrative agent).
10(x)+ - Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan")
(incorporated herein by reference from Exhibit 4(e) to
Registrant's Form S-8 dated as of January 25, 2001.)
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.
Exhibit
No. Description
10(x)(i)+ - Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit 10(z)(i) to the
2000 Annual Report).
10(x)(ii) - Form of Executive Team Leadership Restricted Share Agreement
under the Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
"2000 Plan")(incorporated herein by reference from Exhibit 10(a)
to Registrant's Form 10-Q for the period ended September 29, 2001
[the "3rd Quarter 2001 10-Q"] ).
10(x)(iii) - Form or Restricted Key Associates Performance Shares Agreement
under the 2000 Plan (incorporated herein by reference from
Exhibit 10(b) to the 3rd Quarter 2001 10-Q).
21* - List of Registrant's Subsidiaries.
23* - Consent of Independent Public Accountants.
99* - Undertakings.
99(i)* - Letter to Commission pursuant to Temporary Note 3T.
(b) - Reports on Form 8-K.
Not Applicable.
+ Compensation plan or arrangement required to be noted as provided in Item
14(a)(3).
* Filed herewith.