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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

September 28, 2013

or

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

 

For the transition period from

 

 to

 

 

Commission file number:   1-10689 

 

     FIFTH & PACIFIC COMPANIES, INC.     

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-2842791

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

 

 

 

 

1441 Broadway, New York, New York

 

10018

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

(212) 354-4900

 

 

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares of the Company’s Common Stock, par value $1.00 per share, outstanding at October 25, 2013 was 122,743,809.

 



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FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 28, 2013

(Unaudited)

 

 

 

PAGE
NUMBER

 

 

 

 

PART I -

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 28, 2013, December 29, 2012 and September 29, 2012

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Nine and Three Month Periods Ended September 28, 2013 and September 29, 2012

 

5

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Nine and Three Month Periods Ended September 28, 2013 and September 29, 2012

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 28, 2013 and September 29, 2012

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8 – 42

 

 

 

 

Item 2.

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

 

43 – 61

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

61 – 62

 

 

 

 

Item 4.

Controls and Procedures

 

62

 

 

 

 

PART II -

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

62 – 63

 

 

 

 

Item 1A.

Risk Factors

 

63 – 66

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66 - 67

 

 

 

 

Item 5.

Other Information

 

67

 

 

 

 

Item 6.

Exhibits

 

67

 

 

 

 

SIGNATURES

 

68

 



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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

 

·

our ability to continue to have the necessary liquidity, through cash flows from operations and availability under our amended and restated revolving credit facility, may be adversely impacted by a number of factors, including the level of our operating cash flows, our ability to maintain established levels of availability under, and to comply with the financial and other covenants included in, our amended and restated revolving credit facility and the borrowing base requirement in our amended and restated revolving credit facility that limits the amount of borrowings we may make based on a formula of, among other things, eligible cash, accounts receivable and inventory and the minimum availability covenant in our amended and restated revolving credit facility that requires us to maintain availability in excess of an agreed upon level;

 

·

general economic conditions in the United States, Asia, Europe and other parts of the world, including the impact of income tax changes and debt reduction efforts in the United States;

 

·

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

 

·

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

 

·

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

 

·

our ability to successfully implement our long-term strategic plans, including the continued growth of our KATE SPADE brand, our ability to sustain the recent improved performance in our LUCKY BRAND business and our ability to expand into markets outside of the US such as China, Japan and Brazil and the risks associated with such expansion;

 

·

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

 

·

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

 

·

whether we will be successful operating the KATE SPADE business in Japan and the risks associated with such operation;

 

·

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

 

·

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

 

·

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

 

·

our ability to successfully develop or acquire new product lines, such as the KATE SPADE SATURDAY line, or enter new markets, such as China, Japan and Brazil or product categories, and risks related to such new lines, markets or categories;

 

·

risks associated with the dependence of our ADELINGTON DESIGN GROUP business on third party arrangements and partners;

 



Table of Contents

 

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

our exposure to currency fluctuations;

 

·

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

 

·

risks associated with privacy breaches;

 

·

risks associated with credit card fraud and identity theft;

 

·

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

 

·

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

 

·

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

 

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

 

Forward-looking statements are based on current expectations only and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions, including those described in “Item 1A Risk Factors” in this report as well as in our 2012 Annual Report on Form 10-K. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition, some factors are beyond our control. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 



Table of Contents

 

4

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

 

(Unaudited)

 

 

 

 

September 28,
2013

 

 

 

December 29,
2012

 

 

 

September 29,
2012

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,832

 

 

$

59,402

 

 

$

31,221

 

Accounts receivable - trade, net

 

 

121,833

 

 

 

121,591

 

 

 

126,655

 

Inventories, net

 

 

310,638

 

 

 

220,538

 

 

 

245,578

 

Deferred income taxes

 

 

806

 

 

 

1,259

 

 

 

170

 

Other current assets

 

 

58,846

 

 

 

49,466

 

 

 

47,917

 

Total current assets

 

 

498,955

 

 

 

452,256

 

 

 

451,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Equipment, Net

 

 

244,471

 

 

 

219,963

 

 

 

224,587

 

Goodwill

 

 

52,679

 

 

 

60,223

 

 

 

1,574

 

Intangibles, Net

 

 

122,602

 

 

 

131,350

 

 

 

116,623

 

Deferred Income Taxes

 

 

64

 

 

 

65

 

 

 

--

 

Other Assets

 

 

38,241

 

 

 

38,666

 

 

 

49,027

 

Total Assets

 

$

957,012

 

 

$

902,523

 

 

$

843,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

137,440

 

 

$

4,345

 

 

$

4,681

 

Convertible Senior Notes

 

 

--

 

 

 

18,287

 

 

 

28,687

 

Accounts payable

 

 

217,754

 

 

 

174,705

 

 

 

168,849

 

Accrued expenses

 

 

209,370

 

 

 

217,464

 

 

 

215,001

 

Income taxes payable

 

 

1,326

 

 

 

932

 

 

 

794

 

Deferred income taxes

 

 

--

 

 

 

116

 

 

 

16

 

Total current liabilities

 

 

565,890

 

 

 

415,849

 

 

 

418,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

391,279

 

 

 

383,662

 

 

 

384,841

 

Other Non-Current Liabilities

 

 

198,878

 

 

 

208,916

 

 

 

216,957

 

Deferred Income Taxes

 

 

21,680

 

 

 

21,026

 

 

 

15,724

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

--

 

 

 

--

 

 

 

--

 

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

 

 

176,437

 

 

 

176,437

 

 

 

 

176,437

 

Capital in excess of par value

 

 

151,572

 

 

 

147,018

 

 

 

147,137

 

Retained earnings

 

 

838,027

 

 

 

1,071,551

 

 

 

1,094,421

 

Accumulated other comprehensive loss

 

 

(17,201

)

 

 

(10,074

)

 

 

(5,854

)

 

 

 

1,148,835

 

 

 

1,384,932

 

 

 

1,412,141

 

Common stock in treasury, at cost – 53,750,374, 59,851,190 and 63,237,133 shares

 

 

(1,369,550

)

 

 

(1,511,862

)

 

 

 

(1,604,339

)

Total stockholders’ deficit

 

 

(220,715

)

 

 

(126,930

)

 

 

(192,198

)

Total Liabilities and Stockholders’ Deficit

 

$

957,012

 

 

$

902,523

 

 

$

843,352

 

 

 

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

 



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5

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

 

(Unaudited)

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

September 28,
2013
(39 Weeks)

 

September 29,
2012
(39 Weeks)

 

September 28,
2013
(13 Weeks)

 

September 29,
2012
(13 Weeks)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

1,184,367

 

$

1,018,561

 

$

430,604

 

$

364,556

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

521,357

 

445,620

 

187,460

 

161,439

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

663,010

 

572,941

 

243,144

 

203,117

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

701,289

 

643,707

 

242,167

 

203,398

 

 

 

 

 

 

 

 

 

 

 

Impairment of intangible asset

 

3,300

 

--

 

3,300

 

--

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

(41,579

)

(70,766

)

(2,323

)

(281

)

 

 

 

 

 

 

 

 

 

 

Other (expense) income, net

 

(1,462

)

1,479

 

1,361

 

(1,038

)

 

 

 

 

 

 

 

 

 

 

Impairment of cost investment

 

(6,109

)

--

 

--

 

--

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

(1,707

)

(8,669

)

(599

)

(3,023

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(36,062

)

(37,836

)

(12,087

)

(13,228

)

 

 

 

 

 

 

 

 

 

 

Loss Before Provision for Income Taxes

 

(86,919

)

(115,792

)

(13,648

)

(17,570

)

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

3,862

 

4,882

 

1,253

 

1,823

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

(90,781

)

(120,674

)

(14,901

)

(19,393

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes

 

(21,396

)

(10,865

)

(1,965

)

592

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(112,177

)

$

(131,539

)

$

(16,866

)

$

(18,801

)

 

 

 

 

 

 

 

 

 

 

Earnings per Share:

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

$

(0.75

)

$

(1.12

)

$

(0.12

)

$

(0.17

)

Net Loss

 

$

(0.93

)

$

(1.22

)

$

(0.14

)

$

(0.17

)

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares, Basic and Diluted

 

120,480

 

107,692

 

122,396

 

113,109

 

 

 

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

 



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6

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

 

(Unaudited)

 

 

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

 

September 28,
2013
(39 Weeks)

 

 

September 29,
2012
(39 Weeks)

 

 

September 28,
2013
(13 Weeks)

 

 

September 29,
2012
(13 Weeks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

$

(112,177

)

 

$

(131,539

)

 

$

(16,866

)

 

$

(18,801

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(7,671

)

 

229

 

 

257

 

 

247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

--

 

 

(159

)

 

--

 

 

(114

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges, net of income tax expense (benefit) of $333, $0, $(288) and $0, respectively

 

 

544

 

 

--

 

 

(469

)

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss

 

 

$

(119,304

)

 

$

(131,469

)

 

$

(17,078

)

 

$

(18,668

)

 

 

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

 



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7

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine Months Ended

 

 

 

September 28,
2013
(39 Weeks)

 

 

September 29,
2012
(39 Weeks)

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net loss

 

$

(112,177

)

 

$

(131,539

)

Adjustments to arrive at loss from continuing operations

 

21,396

 

 

10,865

 

Loss from continuing operations

 

(90,781

)

 

(120,674

)

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Depreciation and amortization

 

52,295

 

 

54,783

 

Impairment of intangible asset

 

3,300

 

 

--

 

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

 

9,392

 

 

31,378

 

Share-based compensation

 

5,206

 

 

7,157

 

Loss on extinguishment of debt

 

1,707

 

 

8,669

 

Foreign currency losses (gains), net

 

6,870

 

 

(174

)

Other, net

 

1,051

 

 

112

 

Changes in assets and liabilities:

 

 

 

 

 

 

Increase in accounts receivable – trade, net

 

(1,290

)

 

(6,851

)

Increase in inventories, net

 

(92,665

)

 

(51,950

)

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

 

(12,918

)

 

5,187

 

Increase in accounts payable

 

44,812

 

 

26,944

 

Decrease in accrued expenses and other non-current liabilities

 

(27,070

)

 

(29,933

)

Net change in income tax assets and liabilities

 

2,982

 

 

3,844

 

Net cash used in operating activities of discontinued operations

 

(25,065

)

 

(15,773

)

Net cash used in operating activities

 

(122,174

)

 

(87,281

)

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

20,264

 

 

--

 

Purchases of property and equipment

 

(77,787

)

 

(55,180

)

Payments for in-store merchandise shops

 

(2,479

)

 

(1,767

)

Investments in and advances to equity investees

 

(5,500

)

 

(5,000

)

Net proceeds from disposition

 

4,000

 

 

--

 

Other, net

 

101

 

 

236

 

Net cash used in investing activities of discontinued operations

 

(2,234

)

 

--

 

Net cash used in investing activities

 

(63,635

)

 

(61,711

)

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from borrowings under revolving credit agreement

 

495,696

 

 

113,389

 

Repayment of borrowings under revolving credit agreement

 

(359,543

)

 

(113,389

)

Proceeds from issuance of Senior Secured Notes

 

--

 

 

164,540

 

Repayment of Euro Notes

 

--

 

 

(158,027

)

Proceeds from capital lease

 

8,673

 

 

--

 

Principal payments under capital lease obligations

 

(3,747

)

 

(3,331

)

Proceeds from exercise of stock options

 

2,326

 

 

6,049

 

Payment of deferred financing fees

 

(5,271

)

 

(6,064

)

Net cash provided by financing activities

 

138,134

 

 

3,167

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(4,895

)

 

(2,890

)

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

(52,570

)

 

(148,715

)

Cash and Cash Equivalents at Beginning of Period

 

59,402

 

 

179,936

 

Cash and Cash Equivalents at End of Period

 

$

6,832

 

 

$

31,221

 

 

 

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

 



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8

FIFTH & PACIFIC COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

 

1.    BASIS OF PRESENTATION

 

The Condensed Consolidated Financial Statements of Fifth & Pacific Companies, Inc. and its wholly-owned and majority-owned subsidiaries (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that its disclosures are adequate to make the information presented not misleading. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K. Information presented as of December 29, 2012 is derived from audited financial statements.

 

The Company’s segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s businesses across multiple functional areas including specialty retail, retail outlets, concessions, wholesale apparel, wholesale non-apparel, e-commerce and licensing. The four reportable segments described below represent the Company’s brand-based activities for which separate financial information is available and which is utilized on a regular basis by the Company’s chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying the Company’s reportable segments, the Company considered economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, the Company reports its operations in four reportable segments, as follows:

 

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

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

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

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


 

(*) The Company’s agreement to supply DANA BUCHMAN branded jewelry to Kohl’s Corporation (“Kohl’s”) expired on October 11, 2013.

 

The operations of the Company’s former licensed DKNY ® Jeans family of brands concluded in January 2012 and were included in the results of the Adelington Design Group segment.

 

The activities of the Company’s former global Mexx business, its KENSIE, KENSIE GIRL and MAC & JAC brands, closed LIZ CLAIBORNE concessions in Europe and closed MONET concessions in Europe have been segregated and reported as discontinued operations for all periods presented. The Company continues activities with the LIZ CLAIBORNE family of brands, MONET brand and DANA BUCHMAN brand until the expiration of the supply agreement with Kohl’s on October 11, 2013 and therefore the activities of those brands have not been presented as discontinued operations.

 

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

 



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9

On October 31, 2012, the Company acquired the 51.0% interest (“KSJ Buyout”) held by Sanei International Co., Ltd (“Sanei”) in Kate Spade Japan Co., Ltd. (“KSJ”). KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009. KSJ operated the KATE SPADE, KATE SPADE SATURDAY and JACK SPADE businesses in Japan, and KATE SPADE will continue to operate such businesses in Japan through its Japanese subsidiary. The purchase price for the KSJ Buyout was $41.0 million, net of $0.4 million of cash acquired (see Note 2 – Acquisition).

 

In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year. Management has evaluated events or transactions that have occurred from the balance sheet date through the date the Company issued these financial statements (see Note 21 – Subsequent Events).

 

NATURE OF OPERATIONS

 

Fifth & Pacific Companies, Inc. is engaged primarily in the design and marketing of a broad range of apparel and accessories. The Company’s fiscal year ends on the Saturday closest to December 31. The 2013 fiscal year, ending December 28, 2013, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter. The 2012 fiscal year, ending December 29, 2012, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter.

 

PRINCIPLES OF CONSOLIDATION

 

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

 

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

 

The Company’s critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations in conformity with US GAAP. These critical accounting policies are applied in a consistent manner. The Company’s critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

 

The application of critical accounting policies requires that the Company make estimates and assumptions about future events and apply judgments that affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. The Company continues to monitor the critical accounting policies to ensure proper application of current rules and regulations. During the third quarter of 2013, there were no significant changes in the critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

On December 30, 2012, the first day of the Company’s 2013 fiscal year, the Company adopted new accounting guidance on testing indefinite-lived intangible assets for impairment, which provides an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The adoption of the new accounting guidance did not affect the Company’s financial position, results of operations or cash flows.

 

On December 30, 2012, the Company adopted new accounting guidance on comprehensive income, which requires an entity to prospectively provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. The adoption of the new accounting guidance

 



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10

did not affect the Company’s financial position, results of operations or cash flows, but required additional disclosure (see Note 4 – Stockholders’ Deficit).

 

 

2.    ACQUISITION

 

On October 31, 2012, a subsidiary of the Company acquired the remaining 51.0% interest in KSJ held by Sanei. KSJ was a joint venture that was formed between Sanei and KATE SPADE in August 2009. KSJ operated the KATE SPADE, KATE SPADE SATURDAY and JACK SPADE businesses in Japan, and the Company continues to operate such businesses in Japan through its Japanese subsidiary.

 

The purchase price for KSJ, including post-closing adjustments was 3.308 billion yen or $41.4 million.

 

Prior to obtaining control on October 31, 2012, the Company accounted for the investment in KSJ under the equity method. Upon obtaining control, the transaction was accounted for as an “acquisition achieved in stages,” in accordance with US GAAP. Accordingly, the Company re-measured the previously held equity interest in KSJ and adjusted it to fair value utilizing an income approach based on expected future after tax cash flows of KSJ discounted to reflect risk associated with those cash flows and a market approach based on earnings and revenue multiples that other purchasers in the market would have paid for that business. The fair value of the Company’s equity interest at the acquisition date was $47.2 million. The difference between the fair value of the Company’s ownership in KSJ and the Company’s carrying value of its investment of $7.1 million resulted in the recognition of a gain of $40.1 million in the fourth quarter of 2012. The results of operations for KSJ have been included in the Company’s consolidated results since October 31, 2012. KSJ generated $72.4 million of net sales and $2.2 million of net loss for the nine months ended September 28, 2013 and $24.9 million of net sales and $0.7 million of net loss for the three months ended September 28, 2013. KSJ also generated $5.2 million and $3.0 million of incremental Adjusted EBITDA for the nine and three months ended September 28, 2013. Adjusted EBITDA is the Company’s measure of segment profitability, as discussed in Note 15 – Segment Reporting.

 

The allocation of the purchase price to the assets acquired and liabilities assumed was based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the net tangible and identifiable intangible assets is reflected as goodwill. Accordingly, the Company recorded $63.4 million of goodwill, which is reflected in the KATE SPADE reportable segment. None of the recorded goodwill is deductible for income tax purposes.

 

The following unaudited pro forma financial information for the nine and three months ended September 29, 2012 reflects the results of continuing operations of the Company as if the KSJ Buyout had been completed on January 1, 2012. Pro forma adjustments have been made for changes in depreciation and amortization expenses related to the valuation of the acquired tangible and intangible assets at fair value, the elimination of non-recurring items and the addition of incremental costs related to debt used to finance the acquisition.

 

 

 

Nine Months Ended

 

 

Three Months Ended

 

In thousands, except per share amounts

 

September 29, 2012
(39 Weeks)

 

 

September 29, 2012
(13 Weeks)

 

 

 

 

 

 

 

 

Net sales

 

$ 1,084,329

 

 

$ 387,086

 

Gross profit

 

616,541

 

 

217,865

 

Operating (loss) income

 

(67,284

)

 

56

 

Loss before provision for income taxes

 

(112,723

)

 

(17,350

)

Loss from continuing operations

 

(119,016

)

 

(19,236

)

Diluted loss per share from continuing operations

 

(1.11

)

 

(0.17

)

 

The unaudited pro forma financial information is presented for information purposes only. It is not necessarily indicative of what the Company’s financial position or results of operations actually would have been if the Company completed the acquisition at the dates indicated, nor does it purport to project the Company’s future financial position or operating results.

 



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11

3.    DISCONTINUED OPERATIONS

 

The Company has completed various disposal transactions including: (i) the closure of the LIZ CLAIBORNE concessions in Europe in the first quarter of 2011; (ii) the closure of the MONET concessions in Europe in December 2011; (iii) the sale of an 81.25% interest in the former global Mexx business in October 2011; and (iv) the sale of the KENSIE, KENSIE GIRL and MAC & JAC trademarks in October 2011.

 

The Company recorded pretax charges (income) of $19.2 million and $7.9 million during the nine months ended September 28, 2013 and September 29, 2012, respectively, and $1.5 million and $(1.0) million during the three months ended September 28, 2013 and September 29, 2012, respectively, to reflect the estimated difference between the carrying value of the net assets disposed and their estimated fair value, less costs to dispose, including transaction costs.

 

Summarized results of discontinued operations are as follows:

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

 

September 28,
2013
(39 Weeks)

 

September 29,
2012
(39 Weeks)

 

September 28,
2013
(13 Weeks)

 

September 29,
2012
(13 Weeks)

 

In thousands

 

 

 

 

 

 

 

 

 

Net sales

 

$

(23

)

$

1,615

 

$

(1

)

$

(159

)

 

 

 

 

 

 

 

 

 

 

Loss before (benefit) provision for income taxes

 

$

(2,275

)

$

(4,837

)

$

(443

)

$

(364

)

(Benefit) provision for income taxes

 

(128

)

(1,867

)

14

 

20

 

Loss from discontinued operations, net of income taxes

 

$

(2,147

)

$

(2,970

)

$

(457

)

$

(384

)

 

 

 

 

 

 

 

 

 

 

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

 

$

(19,249

)

$

(7,895

)

$

(1,508

)

$

976

 

 

For the nine months ended September 28, 2013 and September 29, 2012, the Company recorded charges of $0.5 million and $5.1 million, respectively, and $0.4 million for the three months ended September 28, 2013, related to its streamlining initiatives within Discontinued operations, net of income taxes.

 

 

4.    STOCKHOLDERS’ DEFICIT

 

Activity for the nine months ended September 28, 2013 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts was as follows:

 

In thousands

 

Capital in Excess
of Par Value

 

Retained
Earnings

 

Common Stock in
Treasury, at Cost

 

Balance as of December 29, 2012

 

$

147,018

 

$

1,071,551

 

$

(1,511,862

)

Net loss

 

--

 

(112,177

)

--

 

Exercise of stock options

 

--

 

(3,773

)

6,099

 

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

 

--

 

(5,344

)

3,212

 

Share-based compensation

 

5,206

 

--

 

--

 

Exchanges of Convertible Senior Notes, net

 

(652

)

(112,230

)

133,001

 

Balance as of September 28, 2013

 

$

151,572

 

$

838,027

 

$

(1,369,550

)

 



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12

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

 

In thousands

 

Capital in Excess
of Par Value

 

Retained
Earnings

 

Common Stock in
Treasury, at Cost

 

Balance as of December 31, 2011

 

$

302,330

 

$

1,246,063

 

$

(1,827,892

)

Net loss

 

--

 

(131,539

)

--

 

Exercise of stock options

 

(10,642

)

(2,197

)

18,888

 

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

 

(3,951

)

(142

)

2,772

 

Share-based compensation

 

7,157

 

--

 

--

 

Dividend equivalent units vested

 

--

 

(2

)

2

 

Exchange of Convertible Senior Notes, net

 

(147,757

)

(17,762

)

201,891

 

Balance as of September 29, 2012

 

$

147,137

 

$

1,094,421

 

$

(1,604,339

)

 

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

 

In thousands

 

September 28,
2013

 

December 29,
2012

 

September 29,
2012

 

Cumulative translation adjustment

 

$

(17,745

)

$

(10,074

)

$

(5,855

)

Unrealized gains on cash flow hedging derivatives, net of income tax expense of $333

 

544

 

--

 

--

 

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

 

--

 

--

 

1

 

Accumulated other comprehensive loss, net of income taxes

 

$

(17,201

)

$

(10,074

)

$

(5,854

)

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the nine months ended September 28, 2013:

 

In thousands

 

Cumulative Translation
Adjustment

 

Unrealized Gains on
Cash Flow Hedging
Derivatives

 

Balance as of December 29, 2012

 

$

(10,074

)

 

$

--

 

Other comprehensive (loss) income before reclassification

 

(7,671

)

 

1,099

 

Amounts reclassified from accumulated other comprehensive income

 

--

 

 

(555

)

Net current-period other comprehensive (loss) income

 

(7,671

)

 

544

 

Balance as of September 28, 2013

 

$

(17,745

)

 

$

544

 

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended September 28, 2013:

 

 

In thousands

 

Cumulative Translation
Adjustment

 

Unrealized Gains on
Cash Flow Hedging
Derivatives

 

Balance as of June 29, 2013

 

$

(18,002

)

 

$

1,013

 

Other comprehensive income (loss) before reclassification

 

257

 

 

(101

)

Amounts reclassified from accumulated other comprehensive income

 

--

 

 

(368

)

Net current-period other comprehensive (loss) income

 

257

 

 

(469

)

Balance as of September 28, 2013

 

$

(17,745

)

 

$

544

 

 



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13

5.    INVENTORIES, NET

 

Inventories, net consisted of the following:

 

In thousands

 

September 28, 2013

December 29, 2012

September 29, 2012

Raw materials and work in process

 

 

$

1,999

 

 

$

299

 

 

$

195

 

Finished goods

 

 

308,639

 

 

220,239

 

 

245,383

 

Total inventories, net

 

 

$

310,638

 

 

$

220,538

 

 

$

245,578

 

 

 

6.    PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

In thousands

 

September 28, 2013

December 29, 2012

September 29, 2012

Land and buildings (a)

 

 

$

9,300

 

 

$

45,988

 

 

$

48,893

 

Machinery and equipment

 

 

209,196

 

 

233,742

 

 

229,686

 

Furniture and fixtures

 

 

142,707

 

 

131,181

 

 

137,839

 

Leasehold improvements

 

 

269,515

 

 

258,527

 

 

257,969

 

 

 

 

630,718

 

 

669,438

 

 

674,387

 

Less: Accumulated depreciation and amortization

 

 

386,247

 

 

449,475

 

 

449,800

 

Total property and equipment, net

 

 

$

244,471

 

 

$

219,963

 

 

$

224,587

 


 

(a)              The decrease in the balance compared to September 29, 2012 reflected the sale and leaseback of the Company’s North Bergen, NJ office and West Chester, OH distribution center (the “Ohio Facility”).

 

Depreciation and amortization expense on property and equipment for the nine months ended September 28, 2013 and September 29, 2012 was $42.7 million and $42.9 million, respectively, which included depreciation for property and equipment under capital leases of $1.7 million and $2.2 million, respectively. Depreciation and amortization expense on property and equipment for the three months ended September 28, 2013 and September 29, 2012 was $14.4 million and $13.2 million, respectively, which included depreciation for property and equipment under capital leases of $0.7 million and $0.7 million, respectively. Property and equipment under capital leases was $31.9 million as of September 28, 2013 and $22.6 million as of December 29, 2012 and September 29, 2012.

 

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

 

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

 



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14

7.     GOODWILL AND INTANGIBLES, NET

 

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

 

In thousands

 

Weighted
Average
Amortization
Period

 

September 28, 2013

 

December 29, 2012

 

September 29, 2012

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

Gross carrying amount:

 

 

 

 

 

 

 

 

 

 

Owned trademarks (a)

 

5 years

 

 

$

3,479

 

$

1,479

 

$

1,479

 

Customer relationships

 

12 years

 

 

7,335

 

7,457

 

6,439

 

Merchandising rights

 

4 years

 

 

17,188

 

19,174

 

17,578

 

Reacquired rights (b)

 

3 years

 

 

12,131

 

13,797

 

--

 

Other

 

4 years

 

 

2,322

 

2,322

 

2,322

 

Subtotal

 

 

 

 

42,455

 

44,229

 

27,818

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

 

(1,475

)

(1,356

)

(1,316

)

Customer relationships

 

 

 

 

(3,843

)

(3,138

)

(2,927

)

Merchandising rights

 

 

 

 

(10,974

)

(13,131

)

(12,548

)

Reacquired rights

 

 

 

 

(3,707

)

(812

)

--

 

Other

 

 

 

 

(2,054

)

(1,942

)

(1,904

)

Subtotal

 

 

 

 

(22,053

)

(20,379

)

(18,695

)

Net:

 

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

 

2,004

 

123

 

163

 

Customer relationships

 

 

 

 

3,492

 

4,319

 

3,512

 

Merchandising rights

 

 

 

 

6,214

 

6,043

 

5,030

 

Reacquired rights

 

 

 

 

8,424

 

12,985

 

--

 

Other

 

 

 

 

268

 

380

 

418

 

Total amortized intangible assets, net

 

 

 

 

20,402

 

23,850

 

9,123

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

Owned trademarks (c)

 

 

 

 

102,200

 

107,500

 

107,500

 

Total intangible assets

 

 

 

 

$

122,602

 

$

131,350

 

$

116,623

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (b)

 

 

 

 

$

52,679

 

$

60,223

 

$

1,574

 


 

(a)

The increase in the balance compared to September 29, 2012 reflected the reclassification of the fair value of the TRIFARI trademark, which was classified as an unamortized intangible asset prior to September 28, 2013.

(b)

The increase in the balance compared to September 29, 2012 reflected the KSJ Buyout (see Note 2 – Acquisition).

(c)

The decrease in the balance compared to September 29, 2012 reflected a non-cash impairment charge of $3.3 million in the Company’s Adelington Design Group segment related to the TRIFARI trademark and the reclassification of the remaining carrying value of such trademark to an amortized intangible asset as of September 28, 2013.

 

Amortization expense of intangible assets was $5.7 million and $2.4 million for the nine months ended September 28, 2013 and September 29, 2012, respectively, and $1.9 million and $0.7 million for the three months ended September 28, 2013 and September 29, 2012, respectively.

 

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

 

Fiscal Year

 

Amortization Expense

 

(In millions)

 

 

 

2013

 

$         6.2

 

2014

 

6.4

 

2015

 

5.2

 

2016

 

1.9

 

2017

 

1.1

 

 



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15

The changes in carrying amount of goodwill for the nine months ended September 28, 2013 were as follows:

 

In thousands

 

KATE SPADE

 

Adelington
Design Group

 

Total

Balance as of December 29, 2012

 

 

$

58,669

 

 

 

$

1,554

 

 

 

$

60,223

 

   Translation adjustment

 

 

(7,493

)

 

 

(51

)

 

 

(7,544

)

Balance as of September 28, 2013

 

 

$

51,176

 

 

 

$

1,503

 

 

 

$

52,679

 

 

The changes in carrying amount of goodwill for the nine months ended September 29, 2012 were as follows:

 

 

In thousands

Adelington
Design Group

 

Total

Balance as of December 31, 2011

 

$

1,519

 

 

 

$

1,519

 

Translation adjustment

 

55

 

 

 

55

 

Balance as of September 29, 2012

 

$

1,574

 

 

 

$

1,574

 

 

The Company completed its annual goodwill impairment tests as of the first day of the third quarter of 2013. No impairment was recognized as of that date.

 

 

8.    INCOME TAXES

 

During 2013 and 2012, the Company continued to record a full valuation allowance on deferred tax assets in most jurisdictions due to the combination of its history of pretax losses and its inability to carry back tax losses or credits.

 

The Company’s provision for income taxes for the nine and three months ended September 28, 2013 and September 29, 2012 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.

 

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

 

The Company expects a reduction in the liability for unrecognized tax benefits by an amount between $1.2 million and $2.6 million within the next 12 months due to the expiration of the statute of limitations and various potential tax settlements. As of September 28, 2013, uncertain tax positions of $84.9 million exist, which would provide an effective rate impact in the future, if subsequently recognized.

 

 

9.    DEBT AND LINES OF CREDIT

 

Long-term debt consisted of the following:

 

In thousands

September 28, 2013

December 29, 2012

September 29, 2012

 

 

 

 

 

 

 

 

 

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

 

$

--

 

$

18,287

 

$

28,687

 

10.5% Senior Secured Notes, due April 2019

 

382,588

 

383,662

 

384,033

 

Revolving credit facility

 

136,233

 

--

 

--

 

Capital lease obligations (b)

 

9,898

 

4,345

 

5,489

 

Total debt

 

528,719

 

406,294

 

418,209

 

Less: Short-term borrowings (c)

 

137,440

 

4,345

 

4,681

 

Convertible Notes (d)

 

--

 

18,287

 

28,687

 

Long-term debt

 

$

391,279

 

$

383,662

 

$

384,841

 


 



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16

(a)

The decrease in the balance compared to September 29, 2012 reflected the exchange of the remaining aggregate principal amount of the $90.0 million Convertible Senior Notes (the “Convertible Notes”) during the last 12 months. The balance at December 29, 2012 and September 29, 2012 represented principal of $19.9 million and $31.6 million, respectively and an unamortized debt discount of $1.6 million and $2.9 million, respectively.

(b)

The increase in the balance compared to September 29, 2012 primarily reflected the sale-leaseback for the office building in North Bergen, NJ during the second quarter of 2013.

(c)

At September 28, 2013, the balance consisted of outstanding borrowings under the Company’s amended and restated revolving credit facility (as amended to date, the “Amended Facility”) and obligations under capital leases. At December 29, 2012 and September 29, 2012, the balance consisted of obligations under capital leases.

(d)

The Convertible Notes were reflected as a current liability since they were convertible at December 29, 2012 and September 29, 2012.

 

Euro Notes

On July 6, 2006, the Company completed the issuance of the 350.0 million euro (or $446.9 million based on the exchange rate in effect on such date) 5.0% Notes due July 2013 (the “Euro Notes”), of which the Company repurchased 228.5 million euro aggregate principal amount of such notes prior to December 31, 2011.

 

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

 

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

 

On July 12, 2012, the Company completed the optional redemption of the remaining 52.9 million euro aggregate principal amount of Euro Notes for 55.4 million euro, plus accrued interest. The redemption was funded by a portion of the net proceeds from the Company’s issuance of $152.0 million aggregate principal amount of 10.5% Senior Secured Notes (the “Additional Notes”) in June 2012. The Company recognized a $3.0 million pretax loss on the extinguishment of debt in the third quarter of 2012.

 

Convertible Notes

On June 24, 2009, the Company issued the Convertible Notes. The Convertible Notes bore interest at a rate of 6.0% per year and were scheduled to mature on June 15, 2014. The Company used the net proceeds from this offering to repay $86.6 million of outstanding borrowings under the Amended Facility.

 

The Convertible Notes were convertible at an initial conversion rate of 279.6421 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (representing an initial conversion price of $3.576 per share of common stock), subject to adjustment in certain circumstances.

 

The Company separately accounted for the liability and equity components of the Convertible Notes in a manner that reflected the Company’s nonconvertible debt borrowing rate when interest was recognized in subsequent periods. The Company allocated $20.6 million of the $90.0 million principal amount of the Convertible Notes to the equity component and to debt discount. The debt discount was amortized into interest expense using the effective interest method. The Company’s effective interest rate on the Convertible Notes was 12.25%. Interest expense associated with the semi-annual interest payment and non-cash amortization of the debt discount was $0.6 million and $3.9 million for the nine months ended September 28, 2013 and September 29, 2012, respectively, and was $0.9 million for the three months ended September 29, 2012.

 

In 2012, holders of $49.4 million aggregate principal amount of the Convertible Notes entered agreements with the Company to convert all such outstanding Convertible Notes into 14,197,106 shares of the Company’s common stock. The Company paid accrued interest on the holders’ Convertible Notes through the settlement date in cash. The Company allocated $48.2 million of the aggregate consideration to the liability component and $6.2 million to the equity component.

 

On January 22, 2013, a holder of $11.2 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 3,171,670 shares of the Company’s common stock. The Company paid accrued interest on the holder’s Convertible Notes through the settlement date in cash. The Company allocated $11.3 million of the consideration to the liability component and $0.7 million to the equity component.

 



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17

In July 2013, holders of the remaining $8.8 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 2,462,509 shares of the Company’s common stock. The Company paid accrued interest on the holders’ Convertible Notes through the settlement date in cash. The Company allocated $8.8 million of the consideration to the liability component and $0.3 million to the equity component. As of September 28, 2013, all of such Convertible Notes were converted into shares of the Company’s common stock and no Convertible Notes remained outstanding.

 

The Company recognized $1.7 million and $3.6 million pretax losses on the extinguishment of debt related to the Convertible Notes for the nine months ended September 28, 2013 and September 29, 2012, respectively, and a $0.6 million pretax loss on the extinguishment of debt related to the Convertible Notes for the three months ended  September 28, 2013.

 

Senior Notes

On April 7, 2011, the Company completed an offering of $220.0 million principal amount of 10.5% Senior Secured Notes (the “Original Notes,” together with the Additional Notes, the “Senior Notes”). The Company used the net proceeds of $212.9 million from such issuance of the Original Notes primarily to fund a tender offer of 128.5 million euro aggregate principal amount of Euro Notes on April 8, 2011. The remaining proceeds were used for general corporate purposes. On June 8, 2012, the Company completed the offering of the Additional Notes, at 108.25% of par value. The Company used a portion of the net proceeds of $160.6 million from the offering of the Additional Notes to repay outstanding borrowings under its Amended Facility and to fund the redemption of 52.9 million euro aggregate principal amount of Euro Notes on July 12, 2012. The Company used the remaining proceeds to fund a portion of the KSJ Buyout.

 

The Senior Notes mature on April 15, 2019 and are guaranteed on a senior secured basis by certain of the Company’s current and future domestic subsidiaries. The Senior Notes and the guarantees are secured on a first-priority basis by a lien on certain of the Company’s trademarks and on a second-priority basis by the other assets of the Company and of the guarantors that secure the Company’s Amended Facility.

 

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

 

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

 

The Company filed and had declared effective a registration statement on Form S-4 (the “Form S-4 Registration Statement”) registering the Original Notes Exchange Offer and on February 13, 2013 commenced the Original Notes Exchange Offer, which expired on March 15, 2013. Nevertheless, as a result of not having complied with the above-described registration requirements, pursuant to the terms of the registration rights agreement relating to the Original Notes, the Company was required to pay additional interest on the Original Notes until the Original Notes Exchange Offer was completed on March 20, 2013. Additional interest on the Original Notes began accruing on April 10, 2012 at a rate of 0.25% per annum, then increased by an incremental 0.25% per annum every 90 days thereafter, up to the maximum of 1.00% per annum and ceased accruing on March 20, 2013, when the Original Notes Exchange Offer was completed. All accrued and unpaid additional interest was paid on the Senior Notes issued in the Original Notes Exchange Offer on April 15, 2013 to holders of record on April 1, 2013.

 

Pursuant to a registration rights agreement executed as part of the offering of Additional Notes, the Company agreed, on or before October 15, 2012, (i) to use reasonable best efforts to consummate an offer to issue new Senior Notes (having terms substantially identical to those of the Additional Notes) whose issuance is registered with the SEC in exchange for the Additional Notes (the “Additional Notes Exchange Offer”); (ii) if required, to have a shelf

 



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18

registration statement declared effective with respect to resales of the Additional Notes; and (iii) complete the Original Notes Exchange Offer.

 

The Form S-4 Registration Statement also covered the Additional Notes Exchange Offer, which commenced on February 13, 2013 and expired on March 15, 2013. Nevertheless, as a result of not having complied with the above-described registration requirements, pursuant to the terms of the registration rights agreement relating to Additional Notes, the Company was required to pay additional interest on the Additional Notes until the Original Notes Exchange Offer and the Additional Notes Exchange Offer were completed. Additional interest on the Additional Notes began accruing on October 16, 2012 at a rate of 0.25% per annum and continued to accrue at that rate, then increased to 0.50% per annum after 90 days until the Additional Notes Exchange Offer was completed on March 20, 2013. All accrued and unpaid additional interest was paid on the Senior Notes issued in the Additional Notes Exchange Offer on April 15, 2013 to holders of record on April 1, 2013.

 

Amended Facility

In April 2013, the Company completed a third amendment to and restatement of the Amended Facility, which extended the maturity date from August 2014 to April 2018. Availability under the Amended Facility shall be the lesser of $350.0 million and a borrowing base that is computed monthly and comprised of the Company’s eligible cash, accounts receivable and inventory. The Amended Facility also includes a swingline subfacility of $55.0 million, a multicurrency subfacility of $100.0 million and the option to expand the facility by up to $100.0 million under certain specified conditions. A portion of the facility provided under the Amended Facility of up to $200.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $65.0 million in the aggregate. The Amended Facility allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the Amended Facility, with a spread based on the aggregate availability under the Amended Facility.

 

The Amended Facility is guaranteed by substantially all of the Company’s domestic subsidiaries and certain of the Company’s foreign subsidiaries and secured by a first priority lien on substantially all of the assets of the Company and the other borrowers and guarantors (other than certain trademark collateral in which the holders of the Company’s Senior Notes have a first priority lien, which trademark collateral secures the obligations under the Amended Facility on a second priority lien basis).

 

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

 

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

 

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

 



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19

As of September 28, 2013, availability under the Company’s Amended Facility was as follows:

 

In thousands

 

Total
Facility
(a)

 

Borrowing
Base
(a)

 

Outstanding
Borrowings

 

Letters of
Credit Issued

 

Available
Capacity

 

Excess
Capacity
(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility (a)

 

$350,000

 

$341,329

 

$136,233

 

$19,513

 

$185,583

 

$150,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

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

(b)

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

 

Capital Lease Obligations

In the second quarter of 2013, the Company entered into a sale-leaseback agreement for its office building in North Bergen, NJ, which included a sale price of $8.7 million and total lease payments of $26.9 million over a 12-year lease term. As of September 28, 2013, the Company’s capital lease obligations of $9.9 million included $1.2 million of short-term debt.

 

 

10.     FAIR VALUE MEASUREMENTS

 

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

 

Level 1 –

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

Level 2 –

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

Level 3 –

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

 

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

 

 

Level 2

In thousands

September 28, 2013

 

December 29, 2012

Financial Assets:

 

 

 

 

 

 

 

Derivatives

 

$

525

 

 

 

$

1,037

 

Financial Liabilities:

 

 

 

 

 

 

 

Derivatives

 

$

(373

)

 

 

$

--

 

 

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

 

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

 

 

 

 

 

 

 

Total Losses

 

 

 

Net Carrying
Value as of
September 28,
2013

 

Fair Value Measured and Recorded at
Reporting Date Using:

 

Nine Months
Ended
September 28,
2013

 

Three Months
Ended
September 28,
2013

 

In thousands

 

 

 

Level 1 

 

 

Level 2 

 

 

Level 3 

 

 

 

Property and equipment

 

$

--

 

$

--

 

$

--

 

$

--

 

$

667

 

$

--

 

Intangibles, net

 

 

2,000

 

 

--

 

 

--

 

 

2,000

 

 

3,300

 

 

3,300

 

Other assets

 

 

--

 

 

--

 

 

--

 

 

--

 

 

6,109

 

 

--

 

 

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

 



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20

In the third quarter of 2013, the Company recorded a non-cash impairment charge of $3.3 million, which reflects the difference in the estimated fair value and carrying value of the TRIFARI trademark. The Company estimated the fair value of the trademark using the income-based relief-from-royalty valuation method which assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use a comparable asset. The Company assumed a market royalty rate of 3.5%, a discount rate of 14.0% and a long term growth rate of 2.0%.

 

Subsequent to the sale of its former global Mexx business, the Company retained a noncontrolling ownership interest in such business and accounted for its investment at cost included within other assets (see Note 14 – Additional Financial Information and Note 18 – Legal Proceedings). In the second quarter of 2013, the Company performed an impairment test based on market multiples of comparable transactions and determined that the carrying value of the investment exceeded its fair value, resulting in an impairment charge, which was recorded in Impairment of cost investment on the accompanying Condensed Consolidated Statement of Operations.

 

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

 

 

 

 

 

 

 

 

 

 

 

Total Losses

 

 

 

Net Carrying
Value as of

 

Fair Value Measured and Recorded at
Reporting Date Using:

 

Nine Months
Ended

 

Three Months
Ended

 

In thousands

 

September 29,
2012

 

Level 1

 

Level 2

 

Level 3

 

September 29,
2012

 

September 29,
2012

 

Property and equipment

 

  $

23,687   

 

$   --

 

$   --

 

   $

23,687   

 

  $

27,905   

 

$   --

 

 

In connection with a change in the pattern of use and then likely disposal of the Company’s New Jersey corporate office, an impairment analysis was performed on the associated property and equipment. As a result of a decline in the estimated fair value of the Ohio Facility, as well as the decisions to exit certain retail locations of JUICY COUTURE and LUCKY BRAND, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Condensed Consolidated Statements of Operations.

 

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

 

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

 

 

 

September 28, 2013

 

December 29, 2012

 

September 29, 2012

 

In thousands

 

 Fair Value

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

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

 

  $

--

 

 $

--

 

 $

69,088

 

 $

18,287

 

 $

115,374

 

 $

28,687

 

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

 

405,480

 

382,588

 

410,828

 

383,662

 

420,128

 

384,033

 

Revolving credit facility (b)

 

136,233

 

136,233

 

--

 

--

 

--

 

--

 

 

 

 

 

 

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

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

 

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

 



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21

11.    COMMITMENTS AND CONTINGENCIES

 

Buying/Sourcing

During the first quarter of 2009, the Company entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung Limited (“Li & Fung”), whereby Li & Fung was appointed as the Company’s buying/sourcing agent for all of the Company’s brands and products (other than jewelry) and the Company received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction. The Company’s agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the divestiture of any current brand, or certain termination events. The Company is also obligated to use Li & Fung as its buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The 2009 licensing arrangements with J.C. Penney Corporation, Inc. (“JCPenney”) in the US and Puerto Rico and QVC, Inc. (“QVC”) resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under its agreement with Li & Fung, the Company refunded $24.3 million of the closing payment received from Li & Fung in the second quarter of 2010. The 2011 sales of the KENSIE, KENSIE GIRL and MAC & JAC trademarks resulted in the removal of buying/sourcing for such products sold from the Li & Fung buying/sourcing arrangement. As a result, under its agreement with Li & Fung, the Company refunded $1.8 million of the closing payment received from Li & Fung in the second quarter of 2012. In addition, the Company’s agreement with Li & Fung is not exclusive; however, the Company is required to source a specified percentage of product purchases from Li & Fung.

 

Leases

In connection with the disposition of the LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 153 store leases were assigned to third parties, for which the Company remains secondarily liable for the remaining obligations on 119 such leases. As of September 28, 2013, the future aggregate payments under these leases amounted to $156.6 million and extended to various dates through 2025.

 

During the second quarter of 2013, the Company entered into a sale-leaseback agreement for its North Bergen, NJ office with a 12-year term and two five-year renewal options. This leaseback was classified as a capital lease and recorded at fair value. As of September 28, 2013, the estimated future minimum lease payments under the noncancelable capital lease were as follows:

 

In millions

 

 

 

2013

 

$

0.6

 

2014

 

2.0

 

2015

 

2.0

 

2016

 

2.1

 

2017

 

2.1

 

Thereafter

 

17.5

 

Total

 

26.3

 

Less: Amounts representing interest and executory costs

 

(17.2

)

Net present values

 

9.1

 

Less: Capital lease obligations included in short-term debt

 

(0.4

)

Long-term capital lease obligations

 

$

 8.7

 

 

Other

In the second quarter of 2011, the Company initiated actions to close its Ohio Facility, which was expected to result in the termination of all or a significant portion of its union employees (see Note 12 – Streamlining Initiatives). During the third quarter of 2011, the Company ceased contributing to a union-sponsored multi-employer defined benefit pension plan (the “Fund”), which is regulated by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Under ERISA, cessation of employer contributions to a multi-employer defined benefit pension plan is likely to trigger an obligation by such employer for a “withdrawal liability” to such plan, with the amount of such withdrawal liability representing the portion of the plan’s underfunding allocable to the withdrawing employer. The Company incurred such a liability in the second quarter of 2011 and recorded a $17.6 million charge to SG&A related to its estimate of the withdrawal liability. In February 2012, the Company was notified by the Fund that the Fund calculated the total withdrawal liability to be $19.1 million, a difference of approximately $1.5 million,

 



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and that 17 quarterly payments of $1.2 million would commence on March 1, 2012, and continue for four years, with a final payment of $1.0 million on June 1, 2016.  As of September 28, 2013, the accrued withdrawal liability was $11.1 million, which was included in Accrued expenses and Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheet.

 

In June 2011, the Company entered into an agreement with Globalluxe Kate Spade HK Limited (“Globalluxe”) to, among other things, reacquire the existing KATE SPADE businesses in Southeast Asia from Globalluxe (see Note 14 – Additional Financial Information).

 

 

12.    STREAMLINING INITIATIVES

 

2012 Actions

 

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

 

2011 Actions

 

In the fourth quarter of 2011, the Company commenced additional streamlining initiatives that impacted all of its reportable segments and included rationalization of office space, which were completed in the first quarter of 2013 and staff reductions, which were completed by the end of 2012. In connection with this initiative, in the second quarter of 2012, the Company commenced a reduction of the workforce in its corporate centers in New Jersey and New York, which was completed in the fourth quarter of 2012.

 

In the fourth quarter of 2011, the Company agreed to terminate its agreement with an affiliate of Donna Karan International, Inc. (“DKI”), which ended the exclusive license agreement for the DKNY® Jeans and DKNY® Active brands. These actions included contract terminations and staff reductions and concluded in the first quarter of 2012.

 

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

 

For the nine months ended September 28, 2013, the Company recorded pretax charges totaling $5.3 million related to these initiatives. The Company expects to pay approximately $6.3 million of accrued streamlining costs in the next 12 months. For the nine months ended September 29, 2012, the Company recorded pretax charges of $43.2 million related to these initiatives, including $2.7 million of contract termination costs, $24.6 million of asset write-downs and disposals, $12.1 million of payroll and related costs and $3.8 million of other costs. Approximately $1.5 million and $24.6 million of these charges were non-cash during the nine months ended September 28, 2013 and September 29, 2012, respectively.

 



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For the nine and three months ended September 28, 2013 and September 29, 2012, expenses (adjustments to previously recorded estimates) associated with the Company’s streamlining actions were primarily recorded in SG&A on the accompanying Condensed Consolidated Statements of Operations and impacted reportable segments and Corporate as follows:

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

 

September 28,
2013
(39 Weeks)

 

 

September 29,
2012
(39 Weeks)

 

 

September 28,
2013
(13 Weeks)

 

 

September 29,
2012
(13 Weeks)

 

JUICY COUTURE

 

  $

2,354

 

  $

6,333

 

$

(513

)

$

2,193

 

LUCKY BRAND

 

 

750

 

 

2,758

 

 

(587

)

 

183

 

KATE SPADE

 

 

528

 

 

2,384

 

 

(383

)

 

110

 

Adelington Design Group

 

 

163

 

 

3,026

 

 

(227

)

 

297

 

Corporate

 

 

1,544

 

 

28,656

 

 

662

 

 

3,046

 

Total

 

  $

5,339

 

  $

43,157

 

$

(1,048)

 

$

5,829

 

 

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

 

In thousands

 

 

Payroll and
Related Costs

 

Contract
Termination
Costs

 

Asset
Write-Downs

 

Other Costs

 

Total

 

Balance at December 29, 2012

 

 $

5,468

 

$

4,248

 

$

--

 

$

15,930

 

$

25,646

 

2013 provision (a)

 

2,002

 

(84

)

1,502

 

1,919

 

5,339

 

2013 asset write-downs

 

--

 

--

 

(1,502

)

--

 

(1,502

)

Translation difference

 

(18

)

7

 

--

 

4

 

(7

)

2013 spending

 

(6,941

)

(1,666

)

--

 

(5,588

)

(14,195

)

Balance at September 28, 2013

 

 $

511

 

$

2,505

 

$

--

 

$

12,265

 

$

15,281

 


(a)               Payroll and related costs and contract termination costs include changes to previously recorded estimates.

 

13.    EARNINGS PER COMMON SHARE

 

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

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

September 28,
2013
(39 Weeks)

 

September 29,
2012
(39 Weeks)

 

September 28,
2013
(13 Weeks)

 

September 29,
2012
(13 Weeks)

 

Loss from continuing operations

 

 $

(90,781

)

$

(120,674

)

$

 (14,901

)

 $

(19,393

)

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

 

(21,396

)

(10,865

)

(1,965

)

592

 

Net loss

 

 $

(112,177

)

$

(131,539

)

$

 (16,866

)

 $

(18,801

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

120,480

 

107,692

 

122,396

 

113,109

 

Stock options and nonvested shares (a)(b)

 

--

 

--

 

--

 

--

 

Convertible Notes (c)

 

--

 

--

 

--

 

--

 

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

 

120,480

 

107,692

 

122,396

 

113,109

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 $

(0.75

)

$

 (1.12

)

$

 (0.12

)

 $

(0.17

)

(Loss) income from discontinued operations

 

 $

(0.18

)

$

 (0.10

)

$

 (0.02

)

 $

--

 

Net loss

 

 $

(0.93

)

$

 (1.22

)

$

 (0.14

)

 $

(0.17

)


(a)               Because the Company incurred a loss from continuing operations for the nine and three months ended September 28, 2013 and September 29, 2012, all outstanding stock options and nonvested shares are antidilutive for such periods. Accordingly, for the nine and three months ended September 28, 2013 and September 29, 2012, approximately 5.7 million and 5.9 million

 



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24

outstanding stock options, respectively, and approximately 0.6 million and 0.5 million outstanding nonvested shares, respectively, were excluded from the computation of diluted loss per share.

(b)               Excludes approximately 0.5 million nonvested shares for the nine and three months ended September 28, 2013 and 1.2 million nonvested shares for the nine and three months ended September 29, 2012, for which the performance criteria have not yet been achieved.

(c)               Because the Company incurred a loss from continuing operations for the nine and three months ended September 28, 2013 and September 29, 2012, approximately 2.0 million and 13.7 million potentially dilutive shares issuable upon conversion of the Convertible Notes, respectively and approximately 0.3 million and 8.9 million potentially dilutive shares issuable upon conversion of the Convertible Notes, respectively, were considered antidilutive for such periods, and were excluded from the computation of diluted loss per share.

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