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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  
           October 2, 2010    
     
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 
       LIZ CLAIBORNE, 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 o       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. (Check one):
 
Large accelerated filer o   Accelerated filer x   Non-accelerated filer o  Smaller reporting company o     
        (Do not check if a smaller reporting company)    
       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, 2010 was 94,474,513.


 

 

LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
October 2, 2010
         
        PAGE
        NUMBER
PART I -      
   
 
   
Item 1.      
   
 
   
      4
   
 
   
      5
   
 
   
      6
   
 
   
      7 – 29
   
 
   
Item 2.     30 – 49
   
 
   
Item 3.     49 – 50
   
 
   
Item 4.     50
   
 
   
PART II -      
   
 
   
Item 1.     50
   
 
   
Item 1A.     51 – 53
   
 
   
Item 2.     53
   
 
   
Item 5.     53
   
 
   
Item 6.     54
   
 
   
SIGNATURES   55
 EX-10.1
 EX-31.A
 EX-31.B
 EX-32.A
 EX-32.B


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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,” “project,” “expect,” “believe,” “we are optimistic that we can,” “current visibility indicates that we forecast” or “currently envisions” and similar phrases. Forward-looking statements include statements regarding, among other items:
   
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 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 accounts receivable and inventory; 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 and whether holders of our Convertible Notes issued in June 2009 will, if and when such notes are convertible, elect to convert a substantial portion of such notes, the par value of which we must currently settle in cash;
 
   
general economic conditions in the United States, Europe and other parts of the world;
 
   
levels of consumer confidence, consumer spending and purchases of discretionary items, including fashion apparel and related products, such as ours;
 
   
continued 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;
 
   
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;
 
   
our ability to successfully implement our long-term strategic plans;
 
   
our ability to effect a turnaround of our MEXX Europe business;
 
   
our ability to successfully re-launch our LUCKY BRAND product offering;
 
   
our ability to respond to constantly changing consumer demands and tastes and fashion trends, across multiple product lines, shopping channels and geographies;
 
   
our ability to attract and retain talented, highly qualified executives, and maintain satisfactory relationships with our employees, both union and non-union;
 
   
our ability to adequately establish, defend and protect our trademarks and other proprietary rights;
 
   
our ability to successfully develop or acquire new product lines or enter new markets or product categories, and risks related to such new lines, markets or categories;
 
   
risks associated with the implementation of the licensing arrangements with J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc. and with QVC, Inc. discussed in this report, including, without limitation, our ability to efficiently change our operational model and infrastructure as a result of such licensing arrangements, our ability to continue a good working relationship with these licensees and possible changes in our other brand relationships or relationships with other retailers as a result;
 
   
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 agreement with Li & Fung Limited, which results in a single foreign buying/sourcing agent for a significant portion of our products;
 
   
a variety of legal, regulatory, political and economic risks, including risks related to the importation and exportation of product and tariffs and other trade barriers, to which our international operations are subject;
 
   
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 domestic and foreign currency fluctuations;
 
   
our ability to complete the closure of our LIZ CLAIBORNE branded outlet operations on terms satisfactory to us and the adverse effect such closure may have on our results of operations and cash flows;
 
   
limitations on our ability to utilize all or a portion of our US deferred tax assets if we experience an “ownership change”; and


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the outcome of current and future litigations and other proceedings in which we are involved, which may have a material adverse effect on our results of operations and cash flows.
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 2009 Annual Report on Form 10-K. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition, some factors are beyond our control. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


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4

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
                         
    October 2, 2010             October 3, 2009  
    (Unaudited)     January 2, 2010     (Unaudited)  
Assets
                       
Current Assets:
                       
Cash and cash equivalents
  $ 16,392     $ 20,372     $ 25,173  
Accounts receivable - trade, net
    274,989       263,508       369,724  
Inventories, net
    380,435       319,713       409,964  
Deferred income taxes
    73       769       8,179  
Other current assets
    98,081       267,499       120,375  
Assets held for sale
    7,052       15,070       16,649  
 
                 
Total current assets
    777,022       886,931       950,064  
 
                 
 
                       
Property and Equipment, Net
    386,153       444,688       494,725  
Intangibles, Net
    226,427       231,229       247,285  
Deferred Income Taxes
    6,380       7,565       2,474  
Other Assets
    41,553       35,490       31,066  
 
                 
Total Assets
  $ 1,437,535     $ 1,605,903     $ 1,725,614  
 
                 
 
                       
Liabilities and Stockholders’ Equity
                       
Current Liabilities:
                       
Short-term borrowings
  $ 171,480     $ 70,868     $ 229,066  
Convertible Senior Notes
    73,662       71,137       --  
Accounts payable
    198,969       144,942       188,335  
Accrued expenses
    254,932       343,288       250,053  
Income taxes payable
    2,443       5,167       6,439  
Deferred income taxes
    7,150       7,150       --  
 
                 
Total current liabilities
    708,636       642,552       673,893  
 
                 
 
                       
Long-Term Debt
    491,737       516,146       599,520  
Other Non-Current Liabilities
    196,880       201,027       159,779  
Deferred Income Taxes
    29,212       26,299       39,765  
Commitments and Contingencies (Note 10)
                       
Stockholders’ Equity:
                       
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
    330,786       319,326       315,574  
Retained earnings
    1,447,935       1,669,316       1,711,028  
Accumulated other comprehensive loss
    (62,221 )     (69,371 )     (76,559 )
 
                 
 
    1,892,937       2,095,708       2,126,480  
Common stock in treasury, at cost – 81,961,339, 81,488,984 and 81,420,425 shares
    (1,884,475 )     (1,879,160 )     (1,877,281 )
 
                 
Total Liz Claiborne, Inc. stockholders’ equity
    8,462       216,548       249,199  
Noncontrolling interest
    2,608       3,331       3,458  
 
                 
Total stockholders’ equity
    11,070       219,879       252,657  
 
                 
Total Liabilities and Stockholders’ Equity
  $ 1,437,535     $ 1,605,903     $ 1,725,614  
 
                 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


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5

LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
                                 
    Nine Months Ended   Three Months Ended
    October 2, 2010     October 3, 2009   October 2, 2010     October 3, 2009  
    (39 Weeks)     (39 Weeks)   (13 Weeks)     (13 Weeks)     
 
                               
Net Sales
  $ 1,835,555     $ 2,209,580     $ 658,283     $ 761,716  
 
                               
Cost of goods sold
    933,462       1,197,294       320,633       416,750  
 
                       
 
                               
Gross Profit
    902,093       1,012,286       337,650       344,966  
 
                               
Selling, general & administrative expenses
    1,070,568       1,205,939       357,134       403,948  
 
                               
Goodwill impairment
    --       2,785       --       --  
 
                               
Impairment of other intangible assets
    2,594       --       --       --  
 
                       
 
                               
Operating Loss
    (171,069 )     (196,438 )     (19,484 )     (58,982 )
 
                               
Other income (expense), net
    12,262       (11,471 )     (29,539 )     (10,097 )
 
                               
Interest expense, net
    (47,170 )     (46,862 )     (12,618 )     (17,410 )
 
                       
 
                               
Loss Before Provision (Benefit) for Income Taxes
    (205,977 )     (254,771 )     (61,641 )     (86,489 )
 
                               
Provision (benefit) for income taxes
    6,242       (5,830 )     875       621  
 
                       
 
                               
Loss from Continuing Operations
    (212,219 )     (248,941 )     (62,516 )     (87,110 )
 
                               
Discontinued operations, net of income taxes
    (9,822 )     (15,639 )     (288 )     (3,602 )
 
                       
 
                               
Net Loss
    (222,041 )     (264,580 )     (62,804 )     (90,712 )
 
                               
Net loss attributable to the noncontrolling interest
    (723 )     (554 )     (110 )     (171 )
 
                       
 
                               
Net Loss Attributable to Liz Claiborne, Inc.
  $ (221,318 )   $ (264,026 )   $ (62,694 )   $ (90,541 )
 
                       
 
                               
Earnings per Share:
                               
Basic and Diluted
                               
Loss from Continuing Operations Attributable to Liz Claiborne, Inc.
  $ (2.24 )   $ (2.65 )   $ (0.66 )   $ (0.93 )
Net Loss Attributable to Liz Claiborne, Inc.
  $ (2.35 )   $ (2.81 )   $ (0.67 )   $ (0.96 )
 
                               
Weighted Average Shares, Basic and Diluted
    94,224       93,855       94,259       93,908  
     The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


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6

LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
  Nine Months Ended
  October 2, 2010   October 3, 2009
  (39 Weeks)   (39 Weeks)
Cash Flows from Operating Activities:
               
Net loss
  $ (222,041 )   $ (264,580 )
Adjustments to arrive at loss from continuing operations
    9,822       15,639  
 
           
Loss from continuing operations
    (212,219 )     (248,941 )
 
               
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by
operating activities:
               
Depreciation and amortization
    110,356       119,263  
Impairment of goodwill and other intangible assets
    2,594       2,785  
Loss on asset disposals and impairments, including streamlining initiatives, net
    24,935       23,349  
Share-based compensation
    5,114       6,689  
Foreign currency gains, net
    (11,125 )     --  
Other, net
    (667 )     101  
Changes in assets and liabilities:
               
Increase in accounts receivable – trade, net
    (16,854 )     (19,363 )
(Increase) decrease in inventories, net
    (58,084 )     56,003  
(Increase) decrease in other current and non-current assets
    (7,625 )     26,439  
Increase (decrease) in accounts payable
    55,239       (20,885 )
(Decrease) increase in accrued expenses and other non-current liabilities
    (86,979 )     843  
Net change in income tax assets and liabilities
    172,973       94,615  
Net cash used in operating activities of discontinued operations
    (955 )     (13,917 )
 
           
Net cash (used in) provided by operating activities
    (23,297 )     26,981  
 
           
 
               
Cash Flows from Investing Activities:
               
Purchases of property and equipment
    (48,663 )     (54,451 )
Proceeds from sale of property and equipment
    1,144       --  
Payments for purchases of businesses
    (5,000 )     (8,755 )
Payments for in-store merchandise shops
    (1,436 )     (5,794 )
Investments in and advances to equity investee
    (4,033 )     --  
Other, net
    (257 )     (270 )
Net cash used in investing activities of discontinued operations
    (5,599 )     (564 )
 
           
Net cash used in investing activities
    (63,844 )     (69,834 )
 
           
 
               
Cash Flows from Financing Activities:
               
Short-term borrowings, net
    (6,608 )     (9,541 )
Proceeds from borrowings under revolving credit agreement
    470,295       --  
Repayment of borrowings under revolving credit agreement
    (361,648 )     --  
Proceeds from issuance of Convertible Senior Notes
    --       90,000  
Principal payments under capital lease obligations
    (4,627 )     (3,246 )
Payment of deferred financing fees
    (15,001 )     (39,130 )
 
           
Net cash provided by financing activities
    82,411       38,083  
 
           
 
               
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    750       4,512  
 
           
 
               
Net Change in Cash and Cash Equivalents
    (3,980 )     (258 )
Cash and Cash Equivalents at Beginning of Period
    20,372       25,431  
 
           
Cash and Cash Equivalents at End of Period
  $ 16,392     $ 25,173  
 
           
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


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LIZ CLAIBORNE, 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 Liz Claiborne, 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 2009 Annual Report on Form 10-K. Information presented as of January 2, 2010 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, wholesale apparel, wholesale non-apparel, e-commerce and licensing. The three reportable segments described below represent the Company’s brand-based activities for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying its reportable segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. The Company aggregates its five operating segments to form reportable segments, where applicable. As such, the Company reports its operations in three reportable segments as follows:
   
Domestic-Based Direct Brands segment – consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations of the Company’s three domestic, retail-based operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND.
 
   
International-Based Direct Brands segment – consists of the specialty retail, outlet, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations of MEXX, the Company’s international, retail-based operating segment.
 
   
Partnered Brands segment – consists of one operating segment including the wholesale apparel, wholesale non-apparel, outlet, concession, e-commerce and licensing operations of the Company’s wholesale-based brands including: AXCESS, CLAIBORNE (men’s), DANA BUCHMAN, KENSIE, LIZ CLAIBORNE, LIZ CLAIBORNE NEW YORK, MAC & JAC, MARVELLA, MONET, TRIFARI and the Company’s licensed DKNY® JEANS and DKNY® ACTIVE brands.
During the third quarter of 2010, the Company announced the plan to exit the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico. As of October 2, 2010, the Company completed the closure of five of the 87 planned outlet store closures.
On January 8, 2010, the Company entered into an agreement with Laura’s Shoppe (Canada) Ltd. and Laura’s Shoppe (P.V.) Inc. (collectively, “Laura Canada”), which includes the assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and equipment to Laura Canada in exchange for a net fee of approximately $7.9 million.
During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania distribution center. Certain assets associated with such distribution center were segregated and reported as held for sale on the accompanying Condensed Consolidated Balance Sheets.


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The activities of the Company’s former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C California, Laundry by Design, prAna, Narciso Rodriguez and Enyce brands, the retail operations of the Company’s SIGRID OLSEN brand that were not converted to other brands, the retail operations of the Company’s former Ellen Tracy brand and the Company’s LIZ CLAIBORNE Canada stores and closed LIZ CLAIBORNE outlet stores in the US and Puerto Rico have been segregated and reported as discontinued operations for all periods presented. The SIGRID OLSEN and Ellen Tracy wholesale activities and DANA BUCHMAN operations either did not represent operations and cash flows that could be clearly distinguished operationally and for financial reporting purposes from the remainder of the Company or retain continuing involvement with the Company and therefore have not been presented as discontinued operations.
Summarized financial data for the aforementioned brands that are classified as discontinued operations are provided in Note 2 – Discontinued Operations.
In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year. Management has evaluated events or transactions that have occurred from the balance sheet date through the date the Company issued these financial statements.
NATURE OF OPERATIONS
Liz Claiborne, 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 2010 fiscal year, ending January 1, 2011, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter. The 2009 fiscal year 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 January 2, 2010.
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 2010, there have been no significant changes in the critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 3, 2010, the first day of fiscal year 2010, the Company adopted new accounting guidance on fair value measurements. The new accounting guidance requires (i) an entity to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons for such transfers and (ii) separate presentation of purchases, sales, issuances and settlements for significant unobservable inputs (Level 3). The new accounting guidance also clarifies the disclosure requirements about the inputs and valuation techniques for Level 2 or Level 3 fair value measurements. The adoption of the new accounting guidance did not affect the Company’s condensed consolidated financial statements, but did require additional disclosures, which are provided in Note 9 – Fair Value Measurements.


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OTHER MATTERS
The Company has been greatly impacted by the economic downturn, including a drastic decline in consumer spending that began in the second half of 2008 and which persisted during 2009 and into 2010. Although the decline in consumer spending has moderated, unemployment levels remain high, consumer retail traffic remains depressed and the retail environment remains highly promotional. The Company continues to focus on the execution of its strategic plans and improvements in productivity, with a primary focus on operating cash flow generation, retail execution and international expansion. The Company will also continue to carefully manage liquidity and spending. Projected 2010 capital expenditures are approximately $90.0 million (from $72.6 million in 2009).
The Company’s 6.0% Convertible Senior Notes due June 15, 2014 (the “Convertible Notes”) are convertible during any fiscal quarter if the last reported sale price of the Company’s common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price performance, the Convertible Notes were convertible during the third quarter of 2010 and are convertible during the fourth quarter of 2010. As previously disclosed in connection with the issuance of the Convertible Notes, the Company has not yet obtained stockholder approval under the rules of the NYSE for the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes. Until such approval is obtained, if the Convertible Notes are surrendered for conversion, the Company must pay the $1,000 principal amount of the Convertible Notes in cash and may settle the remaining conversion value in the form of cash, stock or a combination of cash and stock, subject to an overall limit on the number of shares of stock that may be issued.
In May 2010, the Company completed a second amendment to and restatement of its revolving credit facility (as amended, the “Amended Agreement”), as discussed in Note 8 – Debt and Lines of Credit. Under the Amended Agreement, the aggregate commitments were reduced to $350.0 million from $600.0 million, and the maturity date was extended from May 2011 to August 2014, subject to certain early termination provisions which provide for earlier maturity dates if the Company’s 5.0% 350.0 million euro Notes due July 2013 and the Convertible Notes are not repaid or refinanced by certain agreed upon dates. The Company is subject to various covenants and other requirements, such as financial requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment, the Company is required to maintain minimum aggregate borrowing availability of not less than $45.0 million and must apply substantially all cash collections to reduce outstanding borrowings under the Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of the then-applicable aggregate commitments. The Company’s borrowing availability under the Amended Agreement is determined primarily by the level of its eligible accounts receivable and inventory balances. In addition, the Amended Agreement removes the springing fixed charge coverage covenant that was a condition of the prior amended and restated revolving credit agreement.
During the first nine months of 2010, the Company received $171.1 million of net income tax refunds on previously paid taxes primarily due to a Federal law change in 2009 allowing 2008 or 2009 domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable income. The Company repaid amounts outstanding under its amended and restated revolving credit facility with the amount of such refunds.
Based on its forecast of borrowing availability under the Amended Agreement, the Company currently anticipates that cash flows from operations and the projected borrowing availability under its Amended Agreement will be sufficient to fund its liquidity requirements for at least the next 12 months. There can be no certainty that availability under the Amended Agreement will be sufficient to fund the Company’s liquidity needs. Should the Company be unable to comply with the requirements in the Amended Agreement, the Company would be unable to borrow under such agreement, and any amounts outstanding would become immediately due and payable unless the Company were able to secure a waiver or an amendment under the Amended Agreement. The sufficiency and availability of the Company’s projected sources of liquidity may be adversely affected by a variety of factors, including, without limitation: (i) the level of the Company’s operating cash flows, which will be impacted by retailer and consumer acceptance of the Company’s products, general economic conditions and the level of consumer discretionary spending; (ii) the status of, and any further adverse changes in, the Company’s credit ratings; (iii) the Company’s ability to maintain required levels of borrowing availability and to comply with applicable covenants (as amended) and other covenants included in its debt and credit facilities; (iv) the financial wherewithal of the Company’s larger department store and specialty store customers; (v) the Company’s ability to successfully execute on the licensing arrangements with J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc. (collectively, “JCPenney”) and with QVC, Inc. (“QVC”) with respect to the LIZ CLAIBORNE family of brands (see Note 13 – Additional Financial Information); (vi) interest rate and exchange rate fluctuations; and (vii) whether holders of the Convertible Notes, if and when such notes are convertible, elect to convert a substantial portion of such notes, the par value of

 


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which the Company must currently settle in cash. An acceleration of amounts outstanding under the Amended Agreement would likely cause cross-defaults under the Company’s other outstanding indebtedness, including the Convertible Notes and the Company’s 350.0 million euro Notes.
2.    DISCONTINUED OPERATIONS
Since 2007, the Company has completed various disposal transactions including (i) its former Emma James, Intuitions, J.H. Collectibles and Tapemeasure brands in a single transaction on October 4, 2007; (ii) certain assets and liabilities of its former C&C California and Laundry by Design brands on February 4, 2008; (iii) substantially all of the assets and liabilities of its former prAna brand on April 4, 2008; (iv) the assets and liabilities of its former Ellen Tracy brand on April 10, 2008; (v) certain assets related to its interest in the Narciso Rodriguez brand and the termination of certain agreements entered in connection with the acquisition of such brand on October 7, 2008; and (vi) certain assets and liabilities of its former Enyce brand on October 20, 2008.
On January 8, 2010, the Company entered into an agreement with Laura Canada, which includes the assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and equipment to Laura Canada in exchange for a net fee of approximately $7.9 million.
During the third quarter of 2010, the Company announced the plan to exit the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico. As of October 2, 2010, the Company completed the closure of five of the planned outlet store closures.
The Company recorded pretax losses of $9.8 million ($6.2 million, net of income taxes) and $4.1 million during the nine months ended October 2, 2010 and October 3, 2009, respectively, and pretax income (loss) of $0.6 million and $(1.5) million during the three months ended October 2, 2010 and October 3, 2009, respectively, to reflect the estimated difference between the carrying value of the net assets sold and their estimated fair value, less costs to dispose, including estimated transaction costs. The net loss on disposal of discontinued operations in the nine months ended October 2, 2010 included a $3.6 million benefit for an expected refund of previously paid taxes.
The charges recorded in 2009 do not result in a tax benefit as the Company recorded valuation allowances for substantially all deferred tax assets during 2009 (see Note 7 – Income Taxes). Accordingly, the pretax and after tax amounts of such charges are equal.
Assets held for sale on the accompanying Condensed Consolidated Balance Sheets consisted of Property and equipment associated with the Company’s closed Mt. Pocono, Pennsylvania distribution center.
Summarized Condensed Consolidated Statement of Operations data for discontinued operations are as follows:
                                 
    Nine Months Ended     Three Months Ended  
In thousands   October 2, 2010   October 3, 2009   October 2, 2010   October 3, 2009
    (39 Weeks)   (39 Weeks)   (13 Weeks)   (13 Weeks)
                 
Net sales
  $ 17,867     $ 23,589     $ 3,682     $ 7,557  
 
                       
 
                               
Loss before benefit for income taxes
  $ (4,369 )   $ (11,506 )   $ (899 )   $ (2,082 )
 
                               
Benefit for income taxes
    (762 )     --       (34 )     --  
 
                       
 
                               
Loss from discontinued operations, net of income taxes
  $ (3,607 )   $ (11,506 )   $ (865 )   $ (2,082 )
 
                       
 
                               
(Loss) income on disposal of discontinued operations, net of income taxes
  $ (6,215 )   $ (4,133 )   $ 577     $ (1,520 )
 
                       


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3.    STOCKHOLDERS’ EQUITY
Activity for the nine months ended October 2, 2010 in the Capital in excess of par value, Retained earnings, Common stock in treasury, at cost and Noncontrolling interest accounts was as follows:
                                 
                    Common        
    Capital in             Stock in        
    Excess of Par     Retained     Treasury, at     Noncontrolling  
In thousands   Value     Earnings     Cost     Interest  
         
Balance as of January 2, 2010
  $ 319,326     $ 1,669,316     $ (1,879,160 )   $ 3,331  
Net loss
    --       (221,318 )     --       (723 )
Restricted shares issued, net of cancellations and shares withheld for taxes
    6,377       --       (5,383 )     --  
Share-based compensation
    5,114       --       --       --  
Dividend equivalent units vested
    (31 )     (63 )     68       --  
 
                       
Balance as of October 2, 2010
  $ 330,786     $ 1,447,935     $ (1,884,475 )   $ 2,608  
 
                       
Activity for the nine months ended October 3, 2009 in the Capital in excess of par value, Retained earnings, Common stock in treasury, at cost and Noncontrolling interest accounts was as follows:
                                 
                    Common        
    Capital in             Stock in        
    Excess of Par     Retained     Treasury, at     Noncontrolling  
In thousands   Value     Earnings     Cost     Interest  
         
Balance as of January 3, 2009
  $ 292,144     $ 1,975,082     $ (1,873,300 )   $ 4,012  
Net loss
    --       (264,026 )     --       (554 )
Issuance of Convertible Senior Notes, net
    11,992       --       --       --  
Restricted shares issued, net of cancellations and shares withheld for taxes
    4,778       --       (4,027 )     --  
Share-based compensation
    6,689       --       --       --  
Dividend equivalent units vested
    (29 )     (28 )     46       --  
 
                       
Balance as of October 3, 2009
  $ 315,574     $ 1,711,028     $ (1,877,281 )   $ 3,458  
 
                       


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Comprehensive loss is comprised of net loss, the effects of foreign currency translation, changes in the net investment hedge, changes in unrealized gains (losses) on available-for-sale securities and changes in the fair value of cash flow hedges. Total comprehensive loss, net of income taxes for interim periods was as follows:
                                 
  Nine Months Ended   Three Months Ended
 
                               
    October 2, 2010     October 3, 2009     October 2, 2010     October 3, 2009  
In thousands   (39 Weeks)     (39 Weeks)     (13 Weeks)     (13 Weeks)  
           
 
                               
Net loss
  $ (222,041 )   $ (264,580 )   $ (62,804 )   $ (90,712 )
Other comprehensive income (loss), net of income taxes:
                               
Change in cumulative translation adjustment
    16,586       (2,307 )     (10,216 )     (2,335 )
Change in cumulative translation adjustment on Eurobond and other instruments, net of income taxes of $2,435, $2,116, $344 and $1,083, respectively
    (12,851 )     913       14,050     4,223  
Change in unrealized gains (losses) on available-for-sale securities, net of income taxes of $0, $0, $0 and $0, respectively
    (30 )     196       (8 )     19  
Change in fair value of cash flow hedges, net of income taxes of $1,760, $(1,007), $(302) and $(699), respectively
    3,445       (8,645 )     (9,002 )     (3,410 )
 
                       
 
                               
Comprehensive loss
    (214,891 )     (274,423 )     (67,980 )     (92,215 )
 
                               
Comprehensive loss attributable to the noncontrolling interest
    723       554       110       171  
 
                       
Comprehensive loss attributable to Liz Claiborne, Inc.
  $ (214,168 )   $ (273,869 )   $ (67,870 )   $ (92,044 )
 
                       
Accumulated other comprehensive loss consisted of the following:
                         
In thousands October 2, 2010 January 2, 2010 October 3, 2009
       
Cumulative translation adjustment, net of income taxes of $4,694, $7,129 and $15,999, respectively
  $ (60,413 )   $ (64,148 )   $ (64,416 )
Unrealized gains (losses) on cash flow hedging derivatives, net of income taxes of $73, $1,833 and $2,325, respectively
    (2,119 )     (5,564 )     (11,792 )
Unrealized gains (losses) on available-for-sale securities, net of income taxes of $0, $0 and $0, respectively
    311       341       (351 )
 
                 
Accumulated other comprehensive loss, net of income taxes
  $ (62,221 )   $ (69,371 )   $ (76,559 )
 
                 
4.    INVENTORIES, NET
Inventories, net consisted of the following:
                         
In thousands October 2, 2010   January 2, 2010   October 3, 2009  
       
Raw materials
  $ 3,019     $ 5,896     $ 10,964  
Work in process
    309       773       2,028  
Finished goods
    377,107       313,044       396,972  
 
                 
Total inventories, net
  $ 380,435     $ 319,713     $ 409,964  
 
                 


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5.    PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
                         
In thousands   October 2, 2010   January 2, 2010   October 3, 2009  
       
Land and buildings
  $ 67,662     $ 69,235     $ 69,300  
Machinery and equipment
    318,215       312,444       334,147  
Furniture and fixtures
    258,705       274,235       291,107  
Leasehold improvements
    494,748       529,281       566,100  
 
                 
 
    1,139,330       1,185,195       1,260,654  
Less: Accumulated depreciation and amortization
    753,177       740,507       765,929  
 
                 
Total property and equipment, net
  $ 386,153     $ 444,688     $ 494,725  
 
                 
Depreciation and amortization expense on property and equipment for the nine months ended October 2, 2010 and October 3, 2009 was $82.5 million and $94.1 million, respectively, which includes depreciation for property and equipment under capital leases of $3.7 million and $4.5 million, respectively. Depreciation and amortization expense on property and equipment for the three months ended October 2, 2010 and October 3, 2009 was $27.2 million and $30.4 million, respectively, which includes depreciation for property and equipment under capital leases of $1.1 million and $1.3 million, respectively. Machinery and equipment under capital leases was $30.6 million, $36.1 million and $36.2 million as of October 2, 2010, January 2, 2010 and October 3, 2009, respectively.
6.    GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all intangible assets:
                                 
    Weighted                  
    Average                  
    Amortization                  
In thousands   Period   October 2, 2010     January 2, 2010     October 3, 2009  
         
 
                               
Amortized intangible assets:
                               
Gross carrying amount:
                               
Licensed trademarks (a)
    --     $ --     $ --     $ 32,154  
Owned trademarks
    4 years       1,350       1,000       1,000  
Customer relationships
    13 years       12,274       12,220       12,159  
Merchandising rights (b)
    4 years       27,758       35,025       48,024  
Other
    4 years       2,322       2,322       2,322  
 
                         
Subtotal
    7 years       43,704       50,567       95,659  
 
                         
Accumulated amortization:
                               
Licensed trademarks
            --       --       (22,125 )
Owned trademarks
            (667 )     (517 )     (466 )
Customer relationships
            (4,187 )     (3,426 )     (3,161 )
Merchandising rights
            (20,682 )     (23,488 )     (30,346 )
Other
            (1,604 )     (1,487 )     (1,419 )
 
                         
Subtotal
            (27,140 )     (28,918 )     (57,517 )
 
                         
Net:
                               
Licensed trademarks
            --       --       10,029  
Owned trademarks
            683       483       534  
Customer relationships
            8,087       8,794       8,998  
Merchandising rights
            7,076       11,537       17,678  
Other
            718       835       903  
 
                         
Total amortized intangible assets, net
            16,564       21,649       38,142  
 
                         
 
                               
Unamortized intangible assets:
                               
Owned trademarks
            209,863       209,580       209,143  
 
                         
Total intangible assets
          $ 226,427     $ 231,229     $ 247,285  
 
                         


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(a)  
The decrease in the balance compared to October 3, 2009 reflected a non-cash impairment charge of $9.5 million recorded in the fourth quarter of 2009 within the Company’s Partnered Brands segment related to the Company’s licensed trademark intangible asset associated with its licensed DKNY® JEANS and DKNY® ACTIVE brands.
 
(b)  
The decrease in the balance compared to October 3, 2009 included non-cash impairment charges of $2.6 million recorded in the second quarter of 2010 primarily within the Company’s Partnered Brands segment related to merchandising rights of its LIZ CLAIBORNE and licensed DKNY® JEANS brands and a non-cash impairment charge of $4.7 million recorded in the fourth quarter of 2009 within the Company’s Partnered Brands segment primarily related to LIZ CLAIBORNE merchandising rights.
Amortization expense of intangible assets was $5.3 million and $11.6 million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $1.7 million and $4.2 million for the three months ended October 2, 2010 and October 3, 2009, respectively.
The estimated amortization expense for intangible assets for the next five fiscal years is as follows:
         
    (In millions)
Fiscal Year   Amortization Expense  
 
2010
  $ 6.3  
2011
    4.5  
2012
    3.1  
2013
    1.9  
2014
    1.3  
In the second quarter of 2009, the Company recorded $2.8 million of additional purchase price and an increase to goodwill related to its contingent payment to the former owners of Mac & Jac. The Company performed a step two goodwill impairment assessment, concluded that the goodwill recorded as a result of the settlement of the contingency was impaired and recorded an impairment charge of $2.8 million in its Partnered Brands segment.
7.    INCOME TAXES
As of the fourth quarter of 2008, the Company recorded valuation allowances for substantially all deferred tax assets due to the combination of (i) its history of pretax losses; (ii) the Company’s ability to carry forward or carry back tax losses or credits and (iii) then current general economic conditions. During the third quarter of 2010, the Company continues to provide a full valuation allowance on deferred tax assets in most jurisdictions.
The Company’s provision for income taxes for the nine and three months ended October 2, 2010 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 Company’s benefit for income taxes during the nine and three months ended October 3, 2009 primarily resulted from the allocation of a tax benefit to continuing operations. Amounts credited to capital in excess of par value, other comprehensive income or discontinued operations during the year are considered sources of income that enable a company to recognize a tax benefit on its loss from continuing operations. The issuance of the Convertible Notes in June of 2009 resulted in the recognition of a credit to the Capital in excess of par value account of $20.6 million (see Note 8 – Debt and Lines of Credit), which caused the allocation of a tax benefit to continuing operations of approximately $8.0 million. The benefit for income taxes for the nine months ended October 3, 2009 is net of tax expense related primarily to an increase in deferred tax liabilities for indefinite-lived intangible assets. The Company’s provision for income taxes for the three months ended October 3, 2009, primarily resulted from an increase in deferred tax liabilities for indefinite-lived intangible assets.
The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax jurisdictions include the US and the Netherlands. 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 2005. As a result of the US Federal tax law change in 2009 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 has been reviewed by the IRS for 2004 and 2005. The Company is no longer subject to income tax examination by the Dutch tax authorities for years before 2005.


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The Company expects a reduction in the liability for unrecognized tax benefits by an amount between $1.6 million and $2.9 million within the next 12 months due to the expiration of the statute of limitations and various tax settlements. As of October 2, 2010, uncertain tax positions of $85.5 million exist, which would provide an effective rate impact in the future if subsequently recognized.
8.    DEBT AND LINES OF CREDIT
Long-term debt consisted of the following:
                         
In thousands    October 2, 2010   January 2, 2010   October 3, 2009
         
 
                       
5.0% Notes, due July 2013 (a)
  $ 481,838     $ 501,827     $ 510,182  
6.0% Convertible Senior Notes, due June 2014 (b)
    73,662       71,137       70,323  
Revolving credit facility
    167,327       66,507       228,109  
Capital lease obligations
    14,052       18,680       19,729  
Other
    --       --       243  
 
                 
Total debt
    736,879       658,151       828,586  
Less: Short-term borrowings (c)
    171,480       70,868       229,066  
Convertible Notes (d)
    73,662       71,137       --  
 
                 
Long-term debt
  $ 491,737     $ 516,146     $ 599,520  
 
                 
 
(a)  
The change in the balance of these euro-denominated notes reflected the impact of changes in foreign currency exchange rates.
 
(b)  
The balance at October 2, 2010, January 2, 2010 and October 3, 2009 represented principal of $90.0 million and an unamortized debt discount of $16.3 million, $18.9 million and $19.7 million, respectively.
 
(c)  
At October 2, 2010, the balance primarily consisted of outstanding borrowings under the Company’s amended and restated revolving credit facility and obligations under capital leases.
 
(d)  
The Convertible Notes were reflected as a current liability since they were convertible at October 2, 2010 and January 2, 2010.
5.0% Notes
On July 6, 2006, the Company completed the issuance of 350.0 million euro (or $446.9 million based on the exchange rate in effect on such date) 5.0% Notes (the “Notes”) due July 8, 2013. The net proceeds of the offering were used to refinance the Company’s then outstanding 350.0 million euro 6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Notes are listed on the Luxembourg Stock Exchange and bear interest from and including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. A portion of the Notes is designated as a hedge of the Company’s net investment in certain of the Company’s euro-denominated functional currency subsidiaries (see Note 15 – Derivative Instruments).
6.0% Convertible Senior Notes
On June 24, 2009, the Company issued $90.0 million Convertible Notes. The Convertible Notes bear interest at a rate of 6.0% per year and mature on June 15, 2014. The Company used the net proceeds from this offering to repay $86.6 million of outstanding borrowings under its amended and restated revolving credit facility.
The Convertible Notes are convertible at an initial conversion rate of 279.6421 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes (representing an initial conversion price of $3.576 per share of common stock), subject to adjustment in certain circumstances. Upon conversion, a holder will receive cash up to the aggregate principal amount of the Convertible Notes converted and cash, shares of common stock or a combination thereof (at the Company’s election) in respect of the conversion value above the Convertible Notes’ principal amount, if any. The conversion rate is subject to a conversion rate cap of 211.2064 shares per $1,000 principal amount. Holders may convert the Convertible Notes at their option prior to the close of business on the business day immediately preceding March 15, 2014 only under the following circumstances: (i) during any fiscal quarter commencing after October 3, 2009, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 120% of the applicable conversion price on each applicable trading day; (ii) during the five business day period after any 10 consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on


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each such day; or (iii) upon the occurrence of specified corporate events. In addition, on or after March 15, 2014 until the close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. As of October 2, 2010, none of the Convertible Notes were converted although they were convertible at the option of the holder.
The Company separately accounts for the liability and equity components of the Convertible Notes in a manner that reflects the Company’s nonconvertible debt borrowing rate when interest is recognized in subsequent periods. The Company allocated $20.6 million of the $90.0 million principal amount of the Convertible Notes to the equity component and to debt discount. The debt discount will be amortized into interest expense through June 2014 using the effective interest method. The Company’s effective interest rate on the Convertible Notes is 12.25%. The non-cash interest expense that will be recorded will increase as the Convertible Notes approach maturity and accrete to face value. Interest expense associated with the semi-annual interest payment and non-cash amortization of the debt discount was $6.6 million and $2.4 million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $2.3 million and $2.2 million for the three months ended October 2, 2010 and October 3, 2009, respectively.
Amended and Restated Revolving Credit Facility
In May 2010, the Company completed a second amendment to and restatement of its revolving credit facility. Availability under the Amended Agreement shall be the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of its eligible accounts receivable and inventory. A portion of the funds available under the Amended Agreement not in excess of $200.0 million is available for the issuance of letters of credit, whereby standby letters of credit may not exceed $65.0 million. The amended and restated revolving credit facility is secured by a first priority lien on substantially all of the Company’s assets and includes a $200.0 million multi-currency revolving credit line and a $150.0 million US Dollar credit line. The Amended Agreement 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 Agreement, with a spread based on the aggregate availability under the Amended Agreement.
The Amended Agreement restricts the Company’s ability to, among other things, incur indebtedness, grant liens, repurchase stock, issue cash dividends, make investments and acquisitions and sell assets, in each case subject to certain designated exceptions. In addition, the Amended Agreement (i) requires the Company to maintain minimum aggregate borrowing availability of not less than $45.0 million; (ii) requires the Company to apply substantially all cash collections to reduce outstanding borrowings under the Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of the then-applicable aggregate commitments; (iii) adjusts certain interest rate spreads based upon availability; (iv) provides for the inclusion of an intangible asset value of $30.0 million in the borrowing base which declines in value over two years; (v) permits the incurrence of liens and sale of assets in connection with the grant and exercise of the JCPenney purchase option under the JCPenney license agreement; and (vi) permits the acquisition of certain joint venture interests and the indebtedness and guarantees by certain parties arising in connection with such acquisition, subject to certain capped amounts and meeting certain borrowing availability tests.
The funds available under the Amended Agreement may be used to refinance or repurchase certain existing debt, provide for working capital and for general corporate purposes, and back both trade and standby letters of credit in addition to the Company’s synthetic lease. The Amended Agreement contains customary events of default clauses and cross-default provisions with respect to the Company’s other outstanding indebtedness, including the Notes and the Convertible Notes. The Amended Agreement will expire in August 2014, provided that in the event that the Company’s 350.0 million euro Notes are not refinanced, purchased or defeased prior to April 8, 2013, then the maturity date shall be April 8, 2013, and in the event that the Convertible Notes are not refinanced, purchased or defeased prior to March 15, 2014, then the maturity date shall be March 15, 2014. In both circumstances, if any such refinancing or extension provides for a maturity date that is earlier than 91 days following August 6, 2014, then the maturity date shall be the date that is 91 days prior to the maturity date of such notes.
The Company currently believes that the financial institutions under the Amended Agreement 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.
Prior to the execution of the Amended Agreement, during the first quarter of 2010, the Company was required to and did repay amounts outstanding under the previous amended and restated revolving credit facility with the receipt


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of tax refunds, which aggregated $164.1 million. Such repayments did not reduce future borrowing capacity or alter the maturity date of the facility.
As of October 2, 2010, availability under the Company’s amended and restated revolving credit facility was as follows:
                                                 
    Total   Borrowing   Outstanding   Letters of   Available   Excess
In thousands   Facility (a)   Base (a)   Borrowings   Credit Issued   Capacity   Capacity (b)
     
 
Revolving credit facility (a)
  $ 350,000     $ 428,023     $ 167,327     $ 25,992     $ 156,681     $ 111,681  
 
 
(a)  
Availability under the Amended Agreement is the lesser of $350.0 million or a borrowing base comprised primarily of eligible accounts receivable and inventory.
 
(b)  
Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the Amended Agreement of $45.0 million.
Capital Lease
On November 21, 2006, the Company entered into a seven year capital lease with a financial institution totaling $30.6 million. The purpose of the lease was to finance the equipment associated with its distribution facilities in Ohio and Rhode Island, which had been previously financed through the Company’s 2001 synthetic lease, which matured in 2006 (see Note 10 – Commitments and Contingencies). On June 15, 2010, the Company prepaid $1.5 million principal of the capital lease due to the closure of its former distribution center in Rhode Island.
9.     FAIR VALUE MEASUREMENTS
The Company utilizes the following three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value:
  Level 1 –  
Quoted market prices in active markets for identical assets or liabilities;
 
  Level 2 –  
Inputs other than Level 1 inputs that are either directly or indirectly observable; and
 
  Level 3 –  
Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.
The following table presents the financial assets and liabilities the Company measures at fair value on a recurring basis, based on such fair value hierarchy:
                         
    Level 2
In thousands      October 2, 2010   January 2, 2010   October 3, 2009   
     
Financial Assets:
                       
Derivatives
    $ 774     $ 586     $ 2  
Financial Liabilities:
                       
Derivatives
    $ (5,531 )   $ (3,781 )   $ (8,415 )
The fair values of the Company’s Level 2 derivative instruments are primarily based on observable forward exchange rates. Unobservable quantitative inputs used in the valuation of the Company’s derivative instruments include 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 2010, based on such fair value hierarchy:
                                                 
                                    Total Losses
            Fair Value Measured and Recorded at     Nine Months     Three Months  
    Net Carrying     Reporting Date Using:     Ended     Ended  
    Value as of           October 2,     October 2,  
  In thousands   October 2, 2010     Level 1     Level 2     Level 3     2010     2010  
 
  Property and equipment
        $ 2,646     $ --     $ --     $ 2,646          $ 17,027          $ 2,477    
  Intangible assets
    --       --       --       --       2,594       --    
  Assets held for sale
    7,052       --       --       7,052       8,018       8,018    


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As a result of the decisions to exit the LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico and certain LUCKY BRAND retail locations, cease use of certain corporate and European concession assets and close a distribution center in 2010, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges of $17.0 million, which were recorded in Selling, general and administrative expenses (“SG&A”) on the accompanying Condensed Consolidated Statement of Operations.
In the third quarter of 2010, the Company determined that the carrying value of the assets held for sale related to its closed Mt. Pocono distribution center exceeded the estimated fair value and recorded an impairment charge of $8.0 million.
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2009, based on such fair value hierarchy:
                                                 
                                    Total Losses
    Net Carrying     Fair Value Measured and     Nine Months     Three Months  
    Value as of     Recorded at Reporting Date Using:   Ended     Ended  
    October 3,           October 3,     October 3,  
  In thousands   2009     Level 1     Level 2     Level 3     2009     2009  
 
  Property and equipment
   $ 1,835     $ --     $ --     $ 1,835        $ 13,351       $ 9,767  
As a result of the decision to exit certain operational retail formats, related to (i) KATE SPADE; (ii) LUCKY BRAND; (iii) Partnered Brands; and (iv) JUICY COUTURE, as well as cease use of certain corporate and MEXX software, impairment analyses were performed on the associated property and equipment. The Company determined that a portion of such assets exceeded their fair value, resulting in impairment charges of $13.4 million, which were recorded in SG&A on the accompanying Condensed Consolidated Statement of Operations.
The fair values of the Company’s Level 3 Property and equipment and Assets held for sale are based on either a market approach or an income approach using the Company’s forecasted cash flows over the estimated useful lives of such assets, as appropriate.
The fair values and carrying values of the Company’s debt instruments are detailed as follows:
                                                 
    October 2, 2010     January 2, 2010     October 3, 2009  
            Carrying             Carrying             Carrying  
In thousands   Fair Value     Value     Fair Value     Value     Fair Value     Value  
       
5.0% Notes, due July 2013 (a)
  $ 398,546     $ 481,838     $ 392,615     $ 501,827     $ 356,619     $ 510,182  
6.0% Convertible Senior Notes, due June 2014 (a)
    167,245       73,662       160,738       71,137       144,149       70,323  
Revolving credit facility (b)
    167,327       167,327       66,507       66,507       228,109       228,109  
 
 
(a)  
Carrying values include unamortized debt discount.
 
(b)  
Borrowings under the revolving credit facility bear interest based on a 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, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments.
10.     COMMITMENTS AND CONTINGENCIES
Buying/Sourcing
During the first quarter of 2009, the Company entered into an agreement with 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). 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


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associated with the transaction. The 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 sale or discontinuation 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 licensing arrangements with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under the agreement with Li & Fung, the Company refunded $24.3 million of the closing payment received from Li & Fung during the second quarter of 2010. 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.
Acquisitions
On January 26, 2006, the Company acquired 100% of the equity of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie and Kensiegirl apparel lines (“Mac & Jac”). The purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which included the retirement of debt at closing and fees, but excluded contingent payments to be determined based upon a multiple of Mac & Jac’s earnings in fiscal years 2006, 2008, 2009 and 2010. In May 2009, the Company paid the former owners of Mac & Jac $3.8 million based on 2008 fiscal year earnings. The Company estimates that the contingent payment based on 2010 earnings will be in the range of approximately $0-$5.0 million, which will be accounted for as additional purchase price when paid.
On June 8, 1999, the Company acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. (“Lucky Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s denim-based sportswear. The total purchase price consisted of aggregate cash payments of $126.2 million and additional payments made from 2005 to 2009 totaling $65.0 million for 12.3% of the remaining equity of Lucky Brand. The Company acquired 0.4% of the equity of Lucky Brand in January of 2010 for a payment of $5.0 million. The remaining 2.3% of the original shares outstanding will be settled for an aggregate purchase price composed of the following two installments: (i) a payment made in 2008 of $15.7 million that was based on a multiple of Lucky Brand’s 2007 earnings, which the Company has accounted for as additional purchase price and (ii) a 2011 payment that will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment, which the Company estimates will be in the range of approximately $0-$5.0 million.
Other
On November 21, 2006, the Company entered into an off-balance sheet financing arrangement with a financial institution (commonly referred to as a “synthetic lease”) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May 31, 2011 and replaced the previous synthetic lease arrangement, which expired on November 22, 2006. The lessor is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose ownership interest is without limitation as to profits, losses and distribution of the lessor’s assets. The Company’s lease represents less than 1.0% of the lessor’s assets. The lease includes guarantees by the Company for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum initial guarantee was approximately $27.0 million. The lessor’s risk included an initial capital investment in excess of 10.0% of the total value of the lease, which is at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to the Company through a seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a variable interest entity and therefore consolidation by the Company is not required.
The Company continued further consolidation of its warehouse operations with the closure of its Rhode Island distribution facility in May 2010. In June 2010, the Company paid $4.8 million and received $2.8 million of proceeds, each in connection with its former Rhode Island distribution center, which was financed under the synthetic lease. The Company estimates its present obligation under the terms of the synthetic lease will be $5.2 million for the Ohio distribution facility. That amount is being recognized in SG&A over the remaining lease term. However, pursuant to the terms of the lease, in September 2010, the Company communicated its intent to purchase the underlying assets of such facility and expects to close the purchase for $28.0 million in the second quarter of 2011.
In May 2010, the terms of the synthetic lease were amended to make the applicable financial covenants under the synthetic lease consistent with the terms of the Amended Agreement. The Company has not entered into any other off-balance sheet arrangements.


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In connection with the disposition of the LIZ CLAIBORNE Canada retail stores (see Note 2 – Discontinued Operations), 38 store leases were assigned to Laura Canada, of which the Company remains secondarily liable for the remaining obligations on 31 such leases. As of October 2, 2010, the future aggregate payments under these leases amounted to $35.3 million and extended to various dates through 2020.
11.     STREAMLINING INITIATIVES
2010 Actions
The Company continued to consolidate its warehouse operations, an initiative that began in 2009. These actions included the closure of its Marcel Laurin, Canada and Vernon, California distribution facilities in August and September 2010, respectively.
In April 2010, the Company completed an agreement with an affiliate of Donna Karan International, Inc. (“DKI”) to terminate its licensed DKNY® MENS Sportswear operations and close, transfer or repurpose its DKNY® JEANS outlet stores (see Note 13 – Additional Financial Information). These actions include contract terminations, staff reductions and consolidation of office space and are expected to be completed by the end of 2010.
In July 2010, the Company initiated actions to exit the Company’s LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico, which will result in charges for lease terminations, impairments of property and equipment and severance. These actions are expected to be completed in early 2011.
2009 Actions
In the first quarter of 2009, the Company completed its long-term, buying/sourcing agency agreement with Li & Fung. As a result, the Company’s international buying offices were integrated into Li & Fung or reduced to support functions. The Company’s streamlining initiatives related to this action included lease terminations, property and equipment disposals and employee terminations and relocation and were completed during 2009. Expenses associated with this action were partially offset by a payment of $8.0 million received from Li & Fung during the second quarter of 2009.
During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania distribution center, including staff eliminations and initiated actions to sell the facility.
Also, during the first quarter of 2009, the Company committed to a plan to close or repurpose its Lucky Brand kids stores, although the Company will continue to offer associated merchandise through other channels. The action included lease terminations and staff reductions and was completed in the fourth quarter of 2009.
In August 2009, the Company initiated additional streamlining initiatives that will continue to impact all of its reportable segments, including store closures principally within its International-Based Direct Brands segment, staff reductions, including consolidation of certain support and production functions and outsourcing certain corporate functions.
In connection with the license agreements with JCPenney and QVC (see Note 13 – Additional Financial Information), the Company initiated certain actions including consolidation of office space and reduction of staff in certain support functions. As a result, the Company incurred charges related to the reduction of leased space, impairments of property and equipment and other assets, severance and other restructuring costs. These actions were completed in the second quarter of 2010.
The Company also initiated actions to consolidate certain warehouse operations, with the closure of its leased Santa Fe Springs, California distribution facility in January 2010 and the closure of its Lincoln, Rhode Island distribution facility in May 2010.
For the nine months ended October 2, 2010, the Company recorded pretax charges totaling $70.7 million related to these initiatives. The Company expects to pay approximately $20.6 million of accrued streamlining costs in the next 12 months. For the nine months ended October 3, 2009, the Company recorded pretax charges of $73.7 million related to these initiatives, including $34.2 million of payroll and related costs, $16.4 million of lease termination costs, $17.9 million of fixed asset write-downs and disposals and $5.2 million of other costs. Approximately $22.4 million and $17.9 million of these charges were non-cash during the nine months ended October 2, 2010 and October 3, 2009, respectively.


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For the nine and three months ended October 2, 2010 and October 3, 2009, expenses associated with the Company’s streamlining actions were primarily recorded in SG&A in the Condensed Consolidated Statements of Operations and impacted reportable segments as follows:
                                 
    Nine Months Ended     Three Months Ended  
    October 2, 2010     October 3, 2009     October 2, 2010     October 3, 2009  
In thousands   (39 Weeks)     (39 Weeks)     (13 Weeks)     (13 Weeks)  
             
Domestic-Based Direct Brands
    $ 20,068       $ 23,738     $ 8,677     $ 11,383  
International-Based Direct Brands
    6,249       18,315       3,163       3,892  
Partnered Brands
    44,348       31,632       11,607       11,230  
 
                       
Total
    $ 70,665       $ 73,685      $ 23,447     $ 26,505  
 
                       
A summary rollforward of the liability for streamlining initiatives is as follows:
                                         
            Contract                    
    Payroll and     Termination     Asset              
In thousands   Related Costs     Costs     Write-Downs     Other Costs     Total  
   
 
                                       
Balance at January 2, 2010
  $ 32,696     $ 22,821     $ --     $ 7,204     $        62,721  
2010 provision
    12,609       26,448       22,428       9,180       70,665  
2010 asset write-downs
    --       --       (22,428 )     --       (22,428 )
Translation difference
    (784 )     (93 )     --       (199 )     (1,076 )
2010 spending
    (41,764 )     (22,877 )     --       (9,729 )     (74,370 )
 
                             
Balance at October 2, 2010
  $ 2,757     $ 26,299     $ --     $ 6,456     $ 35,512  
 
                             


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12.     EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share.
                                   
  Nine Months Ended     Three Months Ended
    October 2, 2010     October 3, 2009     October 2, 2010   October 3, 2009
In thousands   (39 Weeks)     (39 Weeks)     (13 Weeks)     (13 Weeks)  
Loss from continuing operations
  $ (212,219 )   $ (248,941 )   $ (62,516 )   $ (87,110 )
Net loss attributable to the noncontrolling interest
    (723 )     (554 )     (110 )     (171 )
 
                       
Loss from continuing operations attributable to Liz Claiborne, Inc.
    (211,496 )     (248,387 )     (62,406 )     (86,939 )
Loss from discontinued operations, net of income taxes
    (9,822 )     (15,639 )     (288 )     (3,602 )
 
                       
Net loss attributable to Liz Claiborne, Inc.
  $ (221,318 )   $ (264,026 )   $ (62,694 )   $ (90,541 )
 
                       
 
                               
Basic weighted average shares outstanding
    94,224       93,855       94,259       93,908  
Stock options and nonvested shares(a)(b)
    --       --       --       --  
Convertible Notes(c)
    --       --       --       --  
 
                       
Diluted weighted average shares outstanding
    94,224       93,855       94,259       93,908  
 
                       
 
                               
Earnings per share:
                               
Basic and diluted
                               
Loss from continuing operations attributable to Liz Claiborne, Inc.
  $ (2.24 )   $ (2.65 )   $ (0.66 )   $ (0.93 )
 
                       
Loss from discontinued operations attributable to Liz Claiborne, Inc.
  $ (0.11 )   $ (0.16 )   $ (0.01 )   $ (0.03 )
 
                       
Net loss attributable to Liz Claiborne, Inc.
  $ (2.35 )   $ (2.81 )   $ (0.67 )   $ (0.96 )
 
                       
 
 
(a)  
Because the Company incurred a loss from continuing operations for the nine and three months ended October 2, 2010 and October 3, 2009, all outstanding stock options and nonvested shares are antidilutive for such periods. Accordingly, for the nine and three months ended October 2, 2010 and October 3, 2009, approximately 6.8 million and 6.9 million outstanding stock options, respectively, and approximately 0.9 million and 1.1 million outstanding nonvested shares, respectively, were excluded from the computation of diluted loss per share.
 
(b)  
Excludes approximately 0.1 million and 0.4 million nonvested shares for the nine and three months ended October 2, 2010 and October 3, 2009, respectively, 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 October 2, 2010, approximately 9.8 million and 7.1 million potentially dilutive shares issuable upon conversion of the Convertible Notes were considered antidilutive for such periods, and were excluded from the computation of diluted loss per share. The Convertible Notes were not dilutive for the nine and three months ended October 3, 2009 as they were not convertible for such periods.
13.     ADDITIONAL FINANCIAL INFORMATION
Licensing-Related Transactions
In October 2009, the Company entered into a multi-year license agreement with JCPenney, which granted JCPenney an exclusive right and license (subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and includes the worldwide manufacturing of the licensed products and the sale, marketing, merchandising, advertising and promotion of the licensed products in the US and Puerto Rico. Under the agreement, JCPenney may only use designs provided or approved by the Company. The agreement has a term that may remain in effect up to July 31, 2020. Sales by JCPenney under the agreement commenced in August 2010. At the end of year five, JCPenney will have the option to acquire the trademarks and other Liz Claiborne brands for use in the US


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and Puerto Rico. JCPenney will also have the option to take ownership of the trademarks in the same territory at the end of year 10. The license agreement provides for the payment to the Company of royalties based on net sales of licensed products by JCPenney and a portion of the related gross profit when the gross profit percentage exceeds a specified rate, subject to a minimum annual payment.
The Company also entered into a multi-year license agreement with QVC, granting rights (subject to pre-existing licenses) to certain of the Company’s trademarks and other intellectual property rights. QVC has the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any apparel, accessories, or home categories in its US and international markets. QVC merchandises and sources the product and the Company provides brand management oversight. The agreement provides for the payment to the Company of a royalty based on net sales.
In April 2010, the Company entered into an agreement with DKI, which includes the termination of the DKNY® MENS Sportswear license and the transfer of certain outlet stores of its licensed DKNY® JEANS brand to DKI, subject to landlord consent. In connection with the termination of the DKNY® MENS Sportswear license, the Company recorded a pretax charge of $9.9 million in the nine months ended October 2, 2010.
Condensed Consolidated Statements of Cash Flows Supplementary Disclosures
During the nine months ended October 2, 2010 and October 3, 2009, the Company received net income tax refunds of $171.1 million and $98.5 million, respectively and made interest payments of $30.7 million and $32.7 million, respectively. As of October 2, 2010 and October 3, 2009, the Company accrued capital expenditures totaling $8.2 million and $5.0 million, respectively.
During the nine months ended October 2, 2010 and October 3, 2009, the Company paid $24.3 million to Li & Fung and received a payment of $75.0 million from Li & Fung related to a buying/sourcing agreement, respectively, which are included within (Decrease) increase in accrued expenses and other non-current liabilities on the accompanying Condensed Consolidated Statements of Cash Flows.
During the nine months ended October 2, 2010 and October 3, 2009, the Company made business acquisition payments of $5.0 million related to the Lucky Brand acquisition and $8.8 million related to the Lucky Brand and Mac & Jac acquisitions.
Related Party Transactions
On November 20, 2009, the Company and Sanei International Co., LTD established a joint venture under the name of Kate Spade Japan Co., Ltd. (“KSJ”). The joint venture is a Japanese corporation and its purpose is to market and distribute small leather goods and other fashion products and accessories in Japan under the Kate Spade brand. The Company accounts for its 49.0% interest in KSJ under the equity method of accounting. As of October 2, 2010 and January 2, 2010, the Company recorded $13.1 million and $7.4 million, respectively, related to its investments in and advances to the equity investee, which is included in Other non-current assets in the accompanying Condensed Consolidated Balance Sheets. In the first quarter of 2010, the Company advanced $4.0 million to KSJ. The Company’s equity in the earnings of KSJ was $0.7 million and $0.1 million in the nine and three months ended October 2, 2010.
14.     SEGMENT REPORTING
The Company’s segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing. The three reportable segments described below represent the Company’s brand-based activities for which separate financial information is available and which is utilized on a regular basis by its CODM to evaluate performance and allocate resources. In identifying its reportable segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. The Company aggregates its five operating segments to form reportable segments, where applicable. As such, the Company reports its operations in three reportable segments as follows:
   
Domestic-Based Direct Brands segment – consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations

 


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of the Company’s three domestic, retail-based operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND.
   
International-Based Direct Brands segment – consists of the specialty retail, outlet, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations of MEXX, the Company’s international, retail-based operating segment.
   
Partnered Brands segment – consists of one operating segment including the wholesale apparel, wholesale non-apparel, outlet, concession, e-commerce and licensing operations of the Company’s wholesale-based brands including: AXCESS, CLAIBORNE (men’s), DANA BUCHMAN, KENSIE, LIZ CLAIBORNE, LIZ CLAIBORNE NEW YORK, MAC & JAC, MARVELLA, MONET, TRIFARI and the Company’s licensed DKNY® JEANS and DKNY® ACTIVE brands.
The Company’s Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources based primarily on the operating income of each reportable segment. The accounting policies of the Company’s reportable segments are the same as those described in Note 1 – Basis of Presentation. There are no inter-segment sales or transfers. The Company also presents its results on a geographic basis based on selling location, between Domestic (wholesale customers, Company-owned retail and outlet stores located in the United States and e-commerce sites) and International (wholesale customers and Company-owned specialty retail, outlet and concession stores located outside of the United States). The Company, as licensor, also licenses to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.
                                 
                    Operating    
Dollars in thousands   Net Sales   % to Total   Loss   % of Sales  
 
Nine Months Ended October 2, 2010 (39 weeks)
                               
Domestic-Based Direct Brands
  $ 773,273       42.1 %   $ (18,323 )     (2.4 )%
International-Based Direct Brands
    531,159       29.0 %     (69,632 )     (13.1 )%
Partnered Brands
    531,123       28.9 %     (83,114 )     (15.6 )%
 
                           
Totals
  $ 1,835,555       100.0 %   $ (171,069 )     (9.3 )%
 
                           
 
                               
Nine Months Ended October 3, 2009 (39 weeks)
                               
Domestic-Based Direct Brands
  $ 780,895       35.4 %   $ (37,659 )     (4.8 )%
International-Based Direct Brands
    621,449       28.1 %     (69,471 )     (11.2 )%
Partnered Brands
    807,236       36.5 %     (89,308 )     (11.1 )%
 
                           
Totals
  $ 2,209,580       100.0 %   $ (196,438 )     (8.9 )%
 
                           
 
                                 
                    Operating      
                    Income    
Dollars in thousands   Net Sales   % to Total   (Loss)   % of Sales  
 
Three Months Ended October 2, 2010 (13 weeks)
                               
Domestic-Based Direct Brands
  $ 290,501       44.1 %   $ 4,701       1.6 %
International-Based Direct Brands
    187,456       28.5 %     (13,999 )     (7.5 )%
Partnered Brands
    180,326       27.4 %     (10,186 )     (5.6 )%
 
                           
Totals
  $ 658,283       100.0 %   $ (19,484 )     (3.0 )%
 
                           
 
                               
Three Months Ended October 3, 2009 (13 weeks)
                               
Domestic-Based Direct Brands
  $ 270,496       35.5 %   $ (7,365 )     (2.7 )%
International-Based Direct Brands
    224,353       29.5 %     (19,167 )     (8.5 )%
Partnered Brands
    266,867       35.0 %     (32,450 )     (12.2 )%
 
                           
Totals
  $ 761,716       100.0 %   $ (58,982 )     (7.7 )%
 
                           


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GEOGRAPHIC DATA:
                                 
                    Operating    
Dollars in thousands   Net Sales   % to Total   Loss   % of Sales  
 
Nine Months Ended October 2, 2010 (39 weeks)
                               
Domestic
  $ 1,206,569       65.7 %   $ (95,094 )     (7.9 )%
International
    628,986       34.3 %     (75,975 )     (12.1 )%
 
                           
Totals
  $ 1,835,555       100.0 %   $ (171,069 )     (9.3 )%
 
                           
 
                               
Nine Months Ended October 3, 2009 (39 weeks)
                               
Domestic
  $ 1,490,434       67.5 %   $ (100,334 )     (6.7 )%
International
    719,146       32.5 %     (96,104 )     (13.4 )%
 
                           
Totals
  $ 2,209,580       100.0 %   $ (196,438 )     (8.9 )%
 
                           
 
                                 
                    Operating        
Dollars in thousands   Net Sales   % to Total   Loss   % of Sales  
 
Three Months Ended October 2, 2010 (13 weeks)
                               
Domestic
  $ 437,689       66.5 %   $ (4,850 )     (1.1 )%
International
    220,594       33.5 %     (14,634 )     (6.6 )%
 
                           
Totals
  $ 658,283       100.0 %   $ (19,484 )     (3.0 )%
 
                           
 
                               
Three Months Ended October 3, 2009 (13 weeks)
                               
Domestic
  $ 506,871       66.5 %   $ (29,133 )     (5.7 )%
International
    254,845       33.5 %     (29,849 )     (11.7 )%
 
                           
Totals
  $ 761,716       100.0 %   $ (58,982 )     (7.7 )%
 
                           
Domestic-Based Direct Brands segment assets increased to $671.0 million at October 2, 2010 from $640.2 million at January 2, 2010. International-Based Direct Brands segment assets decreased to $346.7 million at October 2, 2010 from $403.8 million at January 2, 2010. Partnered Brands segment assets decreased to $372.8 million at October 2, 2010 from $533.7 million at January 2, 2010.
15.     DERIVATIVE INSTRUMENTS
The Company’s operations are exposed to risks associated with fluctuations in foreign currency exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates, the Company uses foreign currency collars and forward contracts for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by the Company’s European and Canadian entities. As of October 2, 2010, the Company had forward contracts maturing through December 2011 to sell 37.0 million Canadian dollars for $35.8 million and to sell 78.5 million euro for $103.5 million.


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The following table summarizes the fair value and presentation in the condensed consolidated financial statements for derivatives designated as hedging instruments and derivatives not designated as hedging instruments:
                                                 
    Foreign Currency Contracts Designated as Hedging Instruments  
In thousands   Asset Derivatives     Liability Derivatives  
    Balance Sheet     Notional             Balance Sheet     Notional        
Period   Location     Amount     Fair Value     Location     Amount     Fair Value  
 
October 2, 2010
  Other current assets            $ 14,565            $ 774     Accrued expenses       $ 124,739         $ 5,531  
January 2, 2010
  Other current assets     26,408       586     Accrued expenses     74,634       3,091  
October 3, 2009
  Other current assets     --       --     Accrued expenses     116,669       7,827  
                                                 
    Foreign Currency Contracts Not Designated as Hedging Instruments  
In thousands   Asset Derivatives     Liability Derivatives  
    Balance Sheet     Notional             Balance Sheet     Notional        
Period   Location     Amount     Fair Value     Location     Amount     Fair Value  
 
October 2, 2010
  Other current assets            $ --            $ --     Accrued expenses       $ --         $ --  
January 2, 2010
  Other current assets     --       --     Accrued expenses     12,015       690  
October 3, 2009
  Other current assets     1,938       2     Accrued expenses     11,979       588  
The following table summarizes the effect of foreign currency exchange contracts on the condensed consolidated financial statements:
                                 
            Location of Gain or             Amount of Gain or  
    Amount of Gain or     (Loss) Reclassified     Amount of Gain or     (Loss) Recognized  
    (Loss) Recognized     from Accumulated     (Loss) Reclassified     in Operations on  
    in Accumulated     OCI into Operations     from Accumulated     Derivative  
    OCI on Derivative     (Effective and     OCI into Operations     (Ineffective  
In thousands   (Effective Portion)   Ineffective Portion)     (Effective Portion)   Portion)  
 
Nine months ended
October 2, 2010
  $ 1,174     Cost of goods sold   $ (4,031   $ (277)    
Nine months ended
October 3, 2009
    (6,886   Cost of goods sold     2,766       (1,003)    
Three months ended
October 2, 2010
    (7,787   Cost of goods sold     1,517       (153)    
Three months ended
October 3, 2009
    (7,246   Cost of goods sold     (3,137     (879)    
As of October 2, 2010, approximately $0.4 million of unrealized losses in Accumulated other comprehensive loss relating to cash flow hedges will be reclassified into earnings in the next twelve months as the inventory is sold.
The Company hedges its net investment position in certain euro-denominated functional currency subsidiaries by designating a portion of the 350.0 million euro-denominated bonds as the hedging instrument in a net investment hedge. To the extent the hedge is effective, related foreign currency translation gains and losses are recorded within Other comprehensive loss. Translation gains and losses related to the ineffective portion of the hedge are recognized in current operations.
The related translation gains (losses) recorded within Other comprehensive loss were $8.2 million and $(14.4) million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $(17.3) million and $(12.5) million for the three months ended October 2, 2010 and October 3, 2009, respectively. During the first


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quarter of 2009, the Company dedesignated 143.0 million of the euro-denominated bonds as a hedge of its net investment in certain euro functional currency subsidiaries due to a decrease in the carrying value of the hedged item below 350.0 million euro. During the first quarter of 2010, the Company dedesignated an additional 66.0 million of the euro-denominated bonds as a hedge of its net investment in certain euro functional currency subsidiaries due to a further decline in the carrying value of the hedged item. The associated foreign currency translation gains (losses) of $12.1 million and $(9.9) million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $(25.7) million and $(8.6) million for the three months ended October 2, 2010 and October 3, 2009, respectively, are reflected within Other income (expense), net on the accompanying Condensed Consolidated Statements of Operations.
16.     SHARE-BASED COMPENSATION
The Company recognizes the cost of all employee share-based awards on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures.
The Company issues stock options and restricted shares as well as shares with performance features to employees under share-based compensation plans. Stock options are issued at the current market price, have a three-year vesting period and a contractual term of 7-10 years. As of October 2, 2010, the Company has not changed the terms of any outstanding awards.
Compensation expense for restricted shares, including shares with performance features, is measured at fair value on the date of grant based on the number of shares granted and the quoted market price of the Company’s common stock.
Compensation expense related to the Company’s share-based payment awards totaled $5.1 million and $6.7 million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $1.5 million and $2.3 million during the three months ended October 2, 2010 and October 3, 2009, respectively.
Stock Options
The Company utilizes the Binomial lattice pricing model to estimate the fair value of options granted. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates and to allow for actual exercise behavior of option holders.
         
    Nine Months Ended
Valuation Assumptions:   October 2, 2010   October 3, 2009
Weighted-average fair value of options granted
  $3.00   $2.06
Expected volatility
  56.9% to 58.8%   48.7% to 74.8%
Weighted-average volatility
  58.4%   65.9%
Expected term (in years)
  5.0   5.2
Dividend yield
   
Risk-free rate
  0.3% to 5.3%   0.5% to 5.0%
Expected annual forfeiture
  12.6%   11.8%
Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option. The Company utilizes historical optionee behavioral data to estimate the option exercise and termination rates that are used in the valuation model. The expected term represents an estimate of the period of time options are expected to remain outstanding. The expected term provided in the above table represents an option weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2010 and 2009. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.


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A summary of award activity under stock option plans as of October 2, 2010 and changes therein during the nine month period then ended are as follows:
                                 
            Weighted   Weighted Average   Aggregate
            Average Exercise   Remaining   Intrinsic Value
    Shares     Price   Contractual Term   (In thousands)
     
Outstanding at January 2, 2010
    4,918,630       $  19.27       4.9     $ 4,736  
Granted
    2,550,000          5.97                  
Cancelled
    (653,534 )     16.56                  
 
                             
Outstanding at October 2, 2010
    6,815,096       $  14.55       5.1     $ 7,161  
 
                             
 
                               
Vested or expected to vest at October 2, 2010
    6,004,109       $  15.79       4.9     $ 5,942  
 
                             
                                 
Exercisable at October 2, 2010
    2,232,346       $  32.24       3.1     $ 39  
 
                             
As of October 2, 2010, there were approximately 4.6 million nonvested stock options. The weighted average grant date fair value per award for nonvested stock options was $2.71.
As of October 2, 2010, there was $9.2 million of total unrecognized compensation cost related to nonvested stock options granted under the Company’s stock option plans. That expense is expected to be recognized over a weighted average period of 1.9 years. The total fair value of shares vested during the nine month periods ended October 2, 2010 and October 3, 2009 was $3.4 million and $2.9 million, respectively.
Restricted Stock
A summary of award activity under restricted stock plans as of October 2, 2010 and changes therein during the nine month period then ended are as follows:
                   
            Weighted
            Average Grant
    Shares     Date Fair Value
Nonvested stock at January 2, 2010 (a)
    1,132,856       $ 16.58  
Granted
    373,000         6.91  
Vested
    (270,926 )       30.23  
Cancelled
    (253,645 )       9.28  
 
             
Nonvested stock at October 2, 2010 (a)
    981,285       $ 11.03  
 
             
 
                 
Expected to vest as of October 2, 2010
    618,877       $ 10.77  
 
             
 
(a)  
In the second and third quarters of 2008, performance shares were granted to a group of key executives. These shares are subject to certain service and performance conditions, a portion of which were measured as of fiscal 2008 year-end and the remainder will be measured at fiscal 2010 year-end. The shares which were contingently issuable based on 2008 performance were deemed not earned and were cancelled. The ultimate amount of earned shares measured at fiscal 2010 year-end will be determined by the extent of achievement of the performance criteria set forth in the performance share agreements and will range from 0 – 200% of target.
As of October 2, 2010, there was $2.5 million of total unrecognized compensation cost related to nonvested stock awards granted under restricted stock plans. That expense is expected to be recognized over a weighted average period of 1.7 years. The total fair value of shares vested during the nine month periods ended October 2, 2010 and October 3, 2009 was $8.2 million and $8.6 million, respectively.
17.     LEGAL PROCEEDINGS
A complaint captioned The Levy Group, Inc. v. L.C. Licensing, Inc. and Liz Claiborne, Inc. was filed in the New York Supreme Court in New York County on January 21, 2010. The complaint alleged claims for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel and tortious interference against L.C. Licensing, Inc. and the Company in connection with a trademark licensing agreement between L.C. Licensing, Inc. and its licensee, The Levy Group, Inc. The Levy Group, Inc.’s alleged claims purportedly arose from


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the Company’s decision to sign a long-term licensing agreement with JCPenney. The complaint sought an award of $100.0 million in compensatory damages plus punitive damages. On March 4, 2010, the Company moved to dismiss the complaint for failure to state a claim. On October 12, 2010, the Court issued an order granting the motion and dismissing all of The Levy Group, Inc.’s claims with prejudice. The Levy Group, Inc. has until November 18, 2010 to file a notice of appeal with respect to this order.
The Company is a party to several other pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business / Segments
Our segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing. The three reportable segments described below represent our brand-based activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to evaluate performance and allocate resources. In identifying our reportable segments, we consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. We aggregate our five operating segments to form reportable segments, where applicable. As such, we report our operations in three reportable segments as follows:
   
Domestic-Based Direct Brands segment – consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations of our three domestic, retail-based operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND.
   
International-Based Direct Brands segment – consists of the specialty retail, outlet, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags), e-commerce and licensing operations of MEXX, our international, retail-based operating segment.
   
Partnered Brands segment – consists of one operating segment including the wholesale apparel, wholesale non-apparel, outlet, concession, e-commerce and licensing operations of our wholesale-based brands including: AXCESS, CLAIBORNE (men’s), DANA BUCHMAN, KENSIE, LIZ CLAIBORNE, LIZ CLAIBORNE NEW YORK, MAC & JAC, MARVELLA, MONET, TRIFARI and our licensed DKNY® JEANS and DKNY® ACTIVE brands.
We also present our results on a geographic basis based on selling location:
   
Domestic (wholesale customers, licensing, Company-owned specialty retail and outlet stores located in the US and e-commerce sites); and
   
International (wholesale customers, licensing, Company-owned specialty retail and outlet stores and concession stores located outside of the US and e-commerce sites).
We, as licensor, also license to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.
Market Environment / Global Economic Uncertainty
The industries in which we operate have historically been subject to cyclical variations, including recessions in the general economy. Our results are dependent on a number of factors impacting consumer spending, including but not limited to, general economic and business conditions; consumer confidence; wages and employment levels; the housing market; levels of perceived and actual consumer wealth; consumer debt levels; availability of consumer credit; credit and interest rates; fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the performance of the financial equity and credit markets; tariffs and other trade barriers; taxes; general political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping and selling environments.
We have been greatly impacted by the economic downturn, including a drastic decline in consumer spending that began in the second half of 2008 and which persisted during 2009 and into 2010. Although the decline in consumer spending has moderated, unemployment levels remain high, consumer retail traffic remains depressed and the retail environment remains highly promotional. We continue to focus on the execution of our strategic plans and improvements in productivity, with a primary focus on operating cash flow generation, retail execution and international expansion. We will also continue to carefully manage liquidity and spending.


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Competitive Profile
We operate in global fashion markets that are intensely competitive and subject to, among other things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As we anticipate that the global economic uncertainty will continue into the foreseeable future, we are focusing on carefully managing those factors within our control, most importantly spending. We will continue our streamlining efforts to drive cost out of our operations through initiatives that are discussed in “Recent Initiatives — Cost Reduction Initiatives,” below. These initiatives are aimed at driving efficiencies as well as improvements in working capital and operating cash flows. We remain cautious about the near-term retail environment.
In summary, the measure of our success in the future will depend on our ability to continue to navigate through an uncertain macroeconomic environment with challenging market conditions, execute on our strategic vision, including attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve, sourcing the manufacture and distribution of our products on a competitive and efficient basis and evolving our retail capabilities.
Reference is also made to the other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices as are set forth in this report, including, without limitation, under “Statement Regarding Forward-Looking Statements” and “Item 1A – Risk Factors” in this Form 10-Q and in our 2009 Annual Report on Form 10-K.
Recent Initiatives
Following a comprehensive review, on July 14, 2010, our Board of Directors approved plans to exit our LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico. As a result of this decision, we expect the meaningful operating losses related to this business to be eliminated in early 2011 when this action is anticipated to be completed. Our other outlet stores in the US and Puerto Rico for our JUICY COUTURE, LUCKY BRAND, KATE SPADE and KENSIE brands are not impacted by this decision. As of October 2, 2010, we completed the closure of five of the 87 planned outlet store closures.
In April 2010, we completed an agreement with an affiliate of Donna Karan International, Inc. to terminate our licensed DKNY® MENS Sportswear operations and close, transfer or repurpose our DKNY® JEANS outlet stores (see Note 13 of Notes to Condensed Consolidated Financial Statements). These actions include contract terminations, staff reductions and consolidation of office space and are expected to be completed by the end of 2010.
Distribution of Our Liz Claiborne Brands
On October 7, 2009, in an effort to revitalize our LIZ CLAIBORNE brand franchise, reduce working capital needs and increase earnings and profitability, we entered into licensing arrangements with J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc. (collectively, “JCPenney”) and with QVC, Inc. (“QVC”) for such brands.
Our multi-year license agreement with JCPenney granted JCPenney an exclusive right and license (subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and includes the worldwide manufacturing of the licensed products and the sale, marketing, merchandising, advertising and promotion of the licensed products in the United States and Puerto Rico. Under the agreement, JCPenney may only use designs provided or approved by us. The agreement has a term that may remain in effect up to July 31, 2020. Sales by JCPenney under the agreement commenced in August 2010. At the end of year five, JCPenney will have the option to acquire the trademarks and other Liz Claiborne brands for use in the US and Puerto Rico. JCPenney will also have the option to take ownership of the trademarks in the same territory at the end of year 10. The license agreement provides for the payment to us of royalties based on net sales of licensed products by JCPenney and a portion of the related gross profit when the gross profit percentage exceeds a specified rate, subject to a minimum annual payment.
We also entered into a multi-year license agreement with QVC, granting rights (subject to pre-existing licenses) to certain of our trademarks and other intellectual property rights. QVC has the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any apparel, accessories, or home categories in its US and international markets. QVC merchandises and sources the product and we provide brand management oversight. The agreement provides for the payment to us of a royalty based on net sales.


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Cost Reduction Initiatives
Our cost reduction efforts have included tighter controls surrounding discretionary spending and streamlining initiatives that have included rationalization of distribution centers and office space, store closures and staff reductions, including consolidation of certain support and production functions and outsourcing certain corporate functions. These actions, in conjunction with more extensive use of direct shipments and third party arrangements have enabled us to significantly reduce our reliance on owned or leased distribution centers. With the closure of four distribution centers in 2010, we have closed ten distribution centers since 2007.
In connection with the license agreements with JCPenney and QVC discussed above, we initiated actions to consolidate office space and reduce staff in certain support functions. These actions were completed in the second quarter of 2010. We will also continue to closely manage spending, with projected 2010 capital expenditures of approximately $90.0 million, compared to $72.6 million in 2009.
Liquidity
In May 2010, we completed a second amendment to and restatement of our revolving credit facility (as amended, the “Amended Agreement”). Under the Amended Agreement, the aggregate commitments were reduced to $350.0 million from $600.0 million, and the maturity date was extended from May 2011 to August 2014, subject to certain early termination provisions which provide for earlier maturity dates if our 5.0% 350.0 million euro Notes due July 2013 (the “Notes”) and our 6.0% Convertible Senior Notes due June 2014 (the “Convertible Notes”) are not repaid or refinanced by certain agreed upon dates. We are subject to various covenants and other requirements, such as financial requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment, we are required to maintain minimum aggregate borrowing availability of not less than $45.0 million and must apply substantially all cash collections to reduce outstanding borrowings under the Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of the then-applicable aggregate commitments. Our borrowing availability under the Amended Agreement is determined primarily by the level of our eligible accounts receivable and inventory balances. In addition, the Amended Agreement removes the springing fixed charge coverage covenant that was a condition of the prior amended and restated revolving credit agreement.
For further information concerning our debt and credit facilities, see Note 8 of Notes to Condensed Consolidated Financial Statements and “Financial Position, Liquidity and Capital Resources,” below.
During the first nine months of 2010, we received $171.1 million of net income tax refunds on previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009 domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable income. We repaid amounts outstanding under our amended and restated revolving credit facility with the amount of such refunds.
Based on our forecast of borrowing availability under the Amended Agreement, we anticipate that cash flows from operations and the projected borrowing availability under the Amended Agreement will be sufficient to fund our liquidity requirements for at least the next 12 months. For a discussion of risks related to our liquidity, see “Item 1A – Risk Factors” and “Financial Position, Liquidity and Capital Resources,” below.
Discontinued Operations
In connection with actions initiated in July 2007, we disposed of certain assets and/or liabilities of our former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C California, Laundry by Design, prAna and Ellen Tracy brands and closed our SIGRID OLSEN brand, which included the closure of its wholesale operations and the closure or conversion of its retail locations and entered into an exclusive license agreement with Kohl’s Corporation (“Kohl’s”), whereby Kohl’s sources and sells products under the DANA BUCHMAN brand.
We also sold certain assets related to our interest in the Narciso Rodriguez brand and terminated certain agreements entered in connection with the acquisition of such brand in 2007 and disposed of certain assets of our former Enyce brand.
In January 2010, we entered into an agreement with Laura’s Shoppe (Canada) Ltd. and Laura’s Shoppe (P.V.) Inc. (collectively, “Laura Canada”), which includes the assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and equipment to Laura Canada in exchange for a net fee of approximately $7.9 million.


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As discussed above, our Board of Directors approved plans to exit our LIZ CLAIBORNE outlet stores in the US and Puerto Rico.
The activities of our former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C California, Laundry by Design, prAna, Narciso Rodriguez and Enyce brands, the retail operations of our SIGRID OLSEN brand that were not converted to other brands and the retail operations of our former Ellen Tracy brand, and our LIZ CLAIBORNE Canada stores and closed LIZ CLAIBORNE outlet stores in the US and Puerto Rico have been segregated and reported as discontinued operations for all periods presented. The SIGRID OLSEN and Ellen Tracy wholesale activities and DANA BUCHMAN operations either did not represent operations and cash flows that could be clearly distinguished operationally and for financial reporting purposes from the remainder of the Company or retain continuing involvement with the Company and therefore have not been presented as discontinued operations.
Overall Results for the Nine Months Ended October 2, 2010
Net Sales
Net sales for the first nine months of 2010 were $1.836 billion, a decrease of $374.0 million, or 16.9%, compared to net sales for the first nine months of 2009. A total of $167.4 million, or 7.8%, of the overall decline in net sales is associated with our LIZ CLAIBORNE family of brands as we transitioned from the legacy department store model to the licensing model under the JCPenney and QVC arrangements.
The remaining decrease in net sales of $206.6 million, or 9.1%, reflected (i) sales declines in the ongoing operations of our Partnered Brands segment and (ii) sales declines in our International-Based Direct Brands segment due to decreased wholesale volume and reduced average selling prices, and to a lesser extent, our Domestic-Based Direct Brands segment, principally due to decreased wholesale volume. The effect of fluctuations in foreign currency exchange rates increased net sales by $1.4 million.
Gross Profit and Loss from Continuing Operations
Gross profit in the first nine months of 2010 was $902.1 million, a decrease of $110.2 million compared to the first nine months of 2009, primarily due to reduced sales in our Partnered Brands and International-Based Direct Brands segments, partially offset by an increase in gross profit in our Domestic-Based Direct Brands segment. Gross profit as a percentage of net sales increased to 49.1% in 2010 from 45.8% in 2009, reflecting improved gross profit rates in all of our segments and an increased proportion of sales from the retail operations of our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the company average. We recorded a loss from continuing operations of $212.2 million in the first nine months of 2010, as compared to a loss from continuing operations of $249.0 million in 2009. The reduced loss from continuing operations primarily reflected the impact of a reduction in Selling, general & administrative expenses (“SG&A”) and an increase in Other income (expense), primarily due to a period-over-period increase of $22.0 million in foreign currency translation gains related to our euro Notes (see “Financial Position, Liquidity and Capital Resources – Hedging Activities”), partially offset by the impact of decreased gross profits.
Balance Sheet
We ended the first nine months of 2010 with a net debt position of $719.9 million as compared to $803.0 million at the end of the first nine months of 2009. Including the receipt of $172.4 million of net income tax refunds, we generated $159.9 million in cash from continuing operations over the past twelve months, which enabled us to fund $61.9 million of capital and in-store shop expenditures, a $24.3 million refund paid to Li & Fung Limited (“Li & Fung”) related to a buying/sourcing arrangement, $11.3 million of investments in and advances to Kate Spade Japan Co. Ltd. (“KSJ”), an equity method investee and $5.0 million of acquisition related payments, while decreasing our net debt by $83.1 million. The effect of foreign currency translation on our euro Notes decreased our debt balance by $28.7 million at October 2, 2010 compared to October 3, 2009.
International Operations
In the first nine months of 2010, international sales represented 34.3% of our overall sales, as compared to 32.5% in the first nine months of 2009. Accordingly, our overall results can be greatly impacted by changes in foreign currency exchange rates, which increased net sales in the first nine months of 2010 by $1.4 million. The period-over-period fluctuations of the euro and Canadian dollar against the US dollar during 2010 compared to 2009 has


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positively impacted sales in our Canadian businesses and has negatively impacted sales in our European businesses. Although we use foreign currency forward contracts and options to hedge against our exposure to exchange rate fluctuations affecting the actual cash flows of our international operations, unanticipated shifts in exchange rates could have an impact on our financial results.
RESULTS OF OPERATIONS
As discussed above, we present our results based on three reportable segments and on a geographic basis.
NINE MONTHS ENDED OCTOBER 2, 2010 COMPARED TO NINE MONTHS ENDED OCTOBER 3, 2009
The following table sets forth our operating results for the nine months ended October 2, 2010 (comprised of 39 weeks) compared to the nine months ended October 3, 2009 (comprised of 39 weeks):
                                           
    Nine Months Ended     Variance
    October 2, 2010     October 3, 2009              
Dollars in millions   (39 Weeks)     (39 Weeks)     $     %  
 
 
                               
Net Sales
  $ 1,835.6     $ 2,209.6     $ (374.0 )     (16.9 )%
 
                               
Gross Profit
    902.1       1,012.3       (110.2 )     (10.9 )%
 
                               
Selling, general & administrative expenses
    1,070.6       1,205.9       135.3       11.2 %
 
                               
Impairment of goodwill and other intangible assets
    2.6       2.8       0.2       7.1 %
 
                       
 
                               
Operating Loss
    (171.1 )     (196.4 )     25.3       12.9 %
 
                               
Other income (expense), net
    12.3       (11.5 )     23.8       *  
 
                               
Interest expense, net
    (47.2 )     (46.9 )     (0.3 )     (0.6 )%
 
                               
Provision (benefit) for income taxes
    6.2       (5.8 )     (12.0 )     *  
 
                       
 
                               
Loss from Continuing Operations
    (212.2 )     (249.0 )     36.8       14.8 %
 
                               
Discontinued operations, net of income taxes
    (9.8 )     (15.6 )     5.8       37.2 %
 
                       
 
                               
Net Loss
    (222.0 )     (264.6 )     42.6       16.1 %
 
                               
Net loss attributable to the noncontrolling interest
    (0.7 )     (0.6 )     0.1       16.7 %
 
                       
 
                               
Net Loss Attributable to Liz Claiborne, Inc.
  $ (221.3 )   $ (264.0 )   $ 42.7       16.2 %
 
                       
 
   
*   Not meaningful.
Net Sales
Net sales for the first nine months of 2010 were $1.836 billion, a decrease of $374.0 million, or 16.9%, when compared to the first nine months of 2009. This reduction primarily reflected sales declines in our Partnered Brands and International-Based Direct Brands segments. The decrease in our Partnered Brands segment included a $167.4 million decrease in our LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the JCPenney and QVC arrangements. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $1.4 million in the first nine months of 2010. The decrease in net sales also


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reflected the continuing challenges of turning around certain underperforming businesses and the continued adverse economic conditions in the markets in which we operate.
Net sales results for our segments are provided below:
 
Domestic-Based Direct Brands net sales were $773.3 million, a decrease of $7.6 million, or 1.0%, reflecting the following:
  -  
Net sales for JUICY COUTURE were $376.8 million, flat compared to 2009, reflecting an increase in wholesale non-apparel and outlet operations, offset by a decrease in wholesale apparel operations.
 
     
We ended the first nine months of 2010 with 70 specialty stores and 40 outlet stores, reflecting the net addition over the last 12 months of 5 specialty stores and 7 outlet stores. Key operating metrics for our JUICY COUTURE retail operations included the following:
   
Average retail square footage in the first nine months of 2010 was approximately 340 thousand square feet, a 6.2% increase compared to 2009;
 
   
Sales productivity was $519 per average square foot as compared to $536 for the first nine months of 2009; and
 
   
Comparable store net sales in our Company-owned stores decreased by 0.2% in the first nine months of 2010. Comparable direct-to-consumer net sales are equivalent to comparable store sales, as 12 months have not elapsed from the launch of the Company-owned website.
  -  
Net sales for LUCKY BRAND were $275.8 million, a 10.3% decrease compared to 2009, reflecting decreases in specialty retail, partially resulting from reduced average selling prices due to the aggressive liquidation of inventory, in addition to decreases in wholesale apparel and wholesale non-apparel operations.
 
     
We ended the first nine months of 2010 with 189 specialty stores and 37 outlet stores, reflecting the net closure over the last 12 months of 4 specialty stores and 9 outlet stores. Key operating metrics for our LUCKY BRAND retail operations included the following:
   
Average retail square footage in the first nine months of 2010 was approximately 579 thousand square feet, a 0.8% decrease compared to 2009;
 
   
Sales productivity was $254 per average square foot as compared to $290 for the first nine months of 2009;
 
   
Comparable store net sales in our Company-owned stores decreased by 13.9% in the first nine months of 2010; and
 
   
Comparable e-commerce net sales increased by 1.5%; inclusive of e-commerce net sales, comparable direct-to-consumer sales decreased 12.7%.
  -  
Net sales for KATE SPADE were $120.7 million, a 24.1% increase compared to 2009, driven by increases in retail and wholesale operations.
 
     
We ended the first nine months of 2010 with 40 specialty stores and 29 outlet stores, reflecting the net closure over the last 12 months of 7 specialty stores. Key operating metrics for our KATE SPADE retail operations included the following:
   
Average retail square footage in the first nine months of 2010 was approximately 138 thousand square feet, a 10.5% decrease compared to 2009;
 
   
Sales productivity was $418 per average square foot as compared to $331 for the first nine months of 2009;
 
   
Comparable store net sales in our Company-owned stores increased by 17.7% in the first nine months of 2010; and
 
   
Comparable e-commerce net sales increased by 91.6%; inclusive of e-commerce net sales, comparable direct-to-consumer sales increased 30.9%.


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International-Based Direct Brands, comprised of our MEXX retail-based lifestyle brand, net sales were $531.2 million, a decrease of $90.3 million, or 14.5%, compared to 2009, primarily due to decreases in our MEXX Europe wholesale and retail operations, partially offset by an increase in our MEXX Canada retail operations.
 
   
We ended the first nine months of 2010 with 171 specialty stores, 93 outlet stores and 149 concessions, reflecting the net addition over the last 12 months of 14 specialty stores and the net closure of 7 outlet stores and 53 concessions (inclusive of the conversion of 3 concessions to specialty retail formats). Key operating metrics for our MEXX retail operations included the following:
  -  
Average retail square footage in the first nine months of 2010 was approximately 1.553 million square feet, a 3.7% increase compared to 2009;
 
  -  
Sales productivity was $194 per average square foot as compared to $221 for the first nine months of 2009;
 
  -  
Comparable store net sales in our Company-owned stores decreased by 6.2% in the first nine months of 2010; and
 
  -  
Comparable e-commerce and concession net sales increased by 2.0%; inclusive of e-commerce and concession net sales, comparable direct-to-consumer sales decreased 5.0%.
 
Partnered Brands net sales were $531.1 million, a decrease of $276.1 million, or 34.2%, reflecting:
  -  
A $176.8 million, or 21.9%, decrease related to brands that have been licensed or exited, primarily due to a $167.4 million decrease in sales in our LIZ CLAIBORNE family of brands as we transitioned from the legacy department store model to the licensing model under the JCPenney and QVC arrangements;
 
  -  
A net $75.8 million, or 9.4%, decrease related to reduced sales of our ongoing Partnered Brands business, primarily related to our licensed DKNY® JEANS brand and our AXCESS and MONET brands; and
 
  -  
A $23.5 million, or 2.9%, decrease related to reduced sales in our outlet operations.
Comparable direct-to-consumer net sales are calculated as follows:
  -  
New stores become comparable after 14 full fiscal months of operations (on the 1st day of the 15th full fiscal month);
 
  -  
Except in unusual circumstances, closing stores become non-comparable one full fiscal month prior to the scheduled closing date;
 
  -  
A remodeled store will be changed to non-comparable when there is a 20.0% or more increase/decrease in its selling square footage (effective at the start of the fiscal month when construction begins). The store becomes comparable again after 14 full fiscal months from the re-open date;
 
  -  
A store that relocates becomes non-comparable when the new location is materially different from the original location (in respect to selling square footage and/or traffic patterns);
 
  -  
Stores that are acquired are not comparable until they have been reflected in our results for a period of 12 months; and
 
  -  
E-commerce sales are comparable after 12 full fiscal months from the website launch date (on the 1st day of the 13th full fiscal month).
Net sales per average square foot is defined as net sales divided by the average of beginning and end of period gross square feet.
Viewed on a geographic basis, Domestic net sales decreased by $284.0 million, or 19.0%, to $1.207 billion, primarily reflecting the declines within our Partnered Brands segment, JUICY COUTURE wholesale operations and LUCKY BRAND retail and wholesale operations, partially offset by an increase in our KATE SPADE retail and wholesale operations and JUICY COUTURE retail operations. International net sales decreased by $90.2 million, or 12.5%, to $629.0 million, primarily due to declines in our MEXX Europe wholesale and retail operations, partially offset by an increase in our MEXX Canada retail operations. The impact of fluctuations in foreign currency exchange rates increased international sales by $1.4 million.
Gross Profit
Gross profit in the first nine months of 2010 was $902.1 million (49.1% of net sales), compared to $1.012 billion (45.8% of net sales) in the first nine months of 2009. The decrease in gross profit is primarily due to reduced sales in all of our segments. Fluctuations in foreign currency exchange rates in our international businesses increased gross profit by $0.8 million. However, our gross profit rate increased due to an increased proportion of sales from retail operations in our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the Company average. Gross profit rates improved in our Domestic-Based Direct Brands segment, despite reduced average selling


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prices in our LUCKY BRAND retail operations due to the aggressive liquidation of inventory, in addition to improved gross profit rates in our Partnered Brands segment and our International-Based Direct Brands segment.
Selling, General & Administrative Expenses
SG&A decreased $135.3 million, or 11.2%, to $1.071 billion in the first nine months of 2010 from $1.206 billion in the first nine months of 2009. The decrease in SG&A reflected the following:
 
A $112.9 million decrease in our Partnered Brands segment and corporate SG&A, inclusive of a decrease associated with our LIZ CLAIBORNE family of brands as we transition to the licensing model under the JCPenney and QVC arrangements;
 
 
A $30.6 million decrease in our International-Based Direct Brands segment, including a $14.9 million decrease in shipping and handling expenses, a $9.3 million decrease in concession fees and a $5.3 million decrease in payroll related expenses;
 
 
A $1.5 million decrease in our Domestic-Based Direct Brands segment;
 
 
A $1.3 million decrease due to the impact of fluctuations in foreign currency exchange rates in our international operations; and
 
 
An $11.0 million increase in expenses associated with our streamlining initiatives and brand-exiting activities.
SG&A as a percentage of net sales was 58.3%, compared to 54.6% in the first nine months of 2009, primarily reflecting increases in our Partnered Brands and International-Based Direct Brands segments due to the decline in sales, which exceeded the proportionate reduction in SG&A, partially offset by an improved SG&A rate in our Domestic-Based Direct Brands segment.
Impairment of Goodwill and Other Intangible Assets
In the first nine months of 2010, we recorded non-cash impairment charges of $2.6 million primarily within our Partnered Brands segment principally related to merchandising rights of our LIZ CLAIBORNE and licensed DKNY® JEANS brands.
In the first nine months of 2009, we recorded $2.8 million of additional purchase price and an increase to goodwill related to our contingent earn-out payment to the former owners of Mac & Jac in the second quarter of 2009. Based on economic circumstances and other factors, we concluded that the goodwill recorded as a result of the settlement of the contingency was impaired and recorded an impairment charge in our Partnered Brands segment.
Operating Loss
Operating loss for the first nine months of 2010 was $171.1 million ((9.3)% of net sales) compared to $196.4 million ((8.9)% of net sales) in 2009. The impact of fluctuations in foreign currency exchange rates in our international operations decreased operating loss by $2.1 million in 2010. Operating loss by segment is provided below:
 
Domestic-Based Direct Brands operating loss in the first nine months of 2010 was $18.4 million ((2.4)% of net sales), compared to an operating loss of $37.6 million ((4.8)% of net sales) in 2009. The decreased operating loss reflected a decrease in SG&A, including reduced payroll related expenses of $12.9 million and increased gross profit.
 
 
International-Based Direct Brands operating loss in the first nine months of 2010 was $69.6 million ((13.1)% of net sales), compared to an operating loss of $69.5 million ((11.2)% of net sales) in 2009. Compared to the prior year period, the operating loss reflected: (i) decreased gross profit; (ii) a $14.9 million reduction in shipping and handling expenses; (iii) a $9.3 million reduction in concession fees; (iv) a $5.3 million decrease in payroll related expenses; and (v) a $3.1 million decrease in the operating loss resulting from fluctuations in foreign currency exchange rates.
 
 
Partnered Brands operating loss in the first nine months of 2010 was $83.1 million ((15.6)% of net sales), compared to an operating loss of $89.3 million ((11.1)% of net sales) in 2009. The decreased operating loss reflected reduced SG&A, including a reduction related to the LIZ CLAIBORNE transition to the licensing model under the JCPenney and QVC arrangements, partially offset by reduced gross profit.
On a geographic basis, Domestic operating loss decreased by $5.2 million to an operating loss of $95.1 million, which reflected reduced losses in our Domestic-Based Direct Brands segment and, to a lesser extent, our Partnered Brands segment. The International operating loss was $76.0 million in the first nine months of 2010 compared to an operating loss of $96.1 million in the first nine months of 2009. This change reflected decreased losses in our Partnered Brands operations in Canada and Europe. The impact of fluctuations in foreign currency exchange rates in our international operations decreased the operating loss by $2.1 million.


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Other Income (Expense), Net
Other income (expense), net amounted to $12.3 million and $(11.5) million for the nine months ended October 2, 2010 and October 3, 2009, respectively. Other income (expense), net consisted primarily of (i) the impact of the partial dedesignation of the hedge of our investment in certain euro functional currency subsidiaries, which resulted in the recognition of non-cash foreign currency translation gains (losses) of $12.1 million and $(9.9) million on our euro-denominated notes within earnings in the first nine months of 2010 and 2009, respectively, and (ii) foreign currency transaction gains and (losses) in the first nine months of 2010 and 2009.
Interest Expense, Net
Interest expense, net increased $0.3 million, or 0.6%, to $47.2 million in the nine months ended October 2, 2010, as compared to $46.9 million in the nine months ended October 3, 2009, primarily reflecting (i) a $6.9 million write-off of debt issuance costs in 2010 as a result of a reduction in the size of our amended and restated revolving credit facility; (ii) increased interest expense related to the Convertible Notes, which were issued in June of 2009; and (iii) reduced interest expense due to decreased levels of borrowings under our amended and restated revolving credit facility.
Provision (Benefit) for Income Taxes
During the nine months ended October 2, 2010, we recorded a provision for income taxes of $6.2 million, compared to a benefit for income taxes of $5.8 million during the nine months ended October 3, 2009. We did not record income tax benefits for substantially all losses incurred during the first nine months of 2010 and 2009, as it is not more likely than not that we will utilize such benefits due to the combination of (i) our history of pretax losses; (ii) our ability to carry forward or carry back tax losses or credits and (iii) current general economic conditions. The income tax provision for the nine months ended October 2, 2010 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 income tax benefit for the nine months ended October 3, 2009 consisted principally of (i) a tax benefit of $8.0 million that offset tax expenses recorded in Stockholders’ equity and (ii) tax expense related to additional accruals associated with indefinite-lived intangible assets and uncertain tax positions.
Loss from Continuing Operations
Loss from continuing operations in the first nine months of 2010 decreased to $212.2 million, or (11.6)% of net sales, from $249.0 million in the first nine months of 2009, or (11.3)% of net sales. Earnings per share, Basic and Diluted, (“EPS”) from continuing operations attributable to Liz Claiborne, Inc. increased to $(2.24) in 2010 from $(2.65) in 2009.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in the first nine months of 2010 was $9.8 million compared to a loss of $15.6 million in the first nine months of 2009. The results in the first nine months of 2010 include a loss on disposal of discontinued operations of $6.2 million primarily associated with the LIZ CLAIBORNE Canada stores and a $3.6 million loss from discontinued operations as compared to a $4.1 million loss on disposal of discontinued operations and an $11.5 million loss from discontinued operations in 2009. EPS from discontinued operations attributable to Liz Claiborne, Inc. was $(0.11) in 2010 and $(0.16) in 2009.
Net Loss Attributable to Liz Claiborne Inc.
Net loss attributable to Liz Claiborne, Inc. in the first nine months of 2010 decreased to $221.3 million from $264.0 million in the first nine months of 2009. EPS increased to $(2.35) in 2010, from $(2.81) in 2009.


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THREE MONTHS ENDED OCTOBER 2, 2010 COMPARED TO THREE MONTHS ENDED OCTOBER 3, 2009
The following table sets forth our operating results for the three months ended October 2, 2010 (comprised of 13 weeks) compared to the three months ended October 3, 2009 (comprised of 13 weeks):
                                 
    Three Months Ended     Variance
    October 2, 2010     October 3, 2009              
Dollars in millions   (13 Weeks)     (13 Weeks)     $     %  
 
 
                               
Net Sales
  $ 658.3     $ 761.7     $ (103.4 )     (13.6 )%
 
                               
Gross Profit
    337.7       345.0       (7.3 )     (2.1 )%
 
                               
Selling, general & administrative expenses
    357.2       404.0       46.8       11.6 %
 
                       
 
                               
Operating Loss
    (19.5 )     (59.0 )     39.5       66.9 %
 
                               
Other expense, net
    (29.5 )     (10.1 )     (19.4 )     *  
 
                               
Interest expense, net
    (12.6 )     (17.4 )     4.8       27.6 %
 
                               
Provision for income taxes
    0.9       0.6       (0.3 )     (50.0 )%
 
                       
 
                               
Loss from Continuing Operations
    (62.5 )     (87.1 )     24.6       28.2 %
 
                               
Discontinued operations, net of income taxes
    (0.3 )     (3.6 )     3.3       91.7  
 
                       
 
                               
Net Loss
    (62.8 )     (90.7 )     27.9       30.8 %
 
                               
Net loss attributable to the noncontrolling interest
    (0.1 )     (0.2 )     (0.1 )     (50.0 )%
 
                       
 
                               
Net Loss Attributable to Liz Claiborne, Inc.
  $ (62.7 )   $ (90.5 )   $ 27.8       30.7 %
 
                       
 
   
*   Not meaningful.
Net Sales
Net sales for the third quarter of 2010 were $658.3 million, a decrease of $103.4 million, or 13.6%, when compared to the third quarter of 2009. This reduction reflected (i) a decline in sales of our Partnered Brands segment, including an $82.5 million decrease in sales in our LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the JCPenney and QVC arrangements; (ii) a sales decline in our International-Based Direct Brands segment; (iii) an increase in sales in our Domestic-Based Direct Brands segment; and (iv) the impact of changes in foreign currency exchange rates in our international businesses, which decreased net sales by $12.8 million in the third quarter of 2010. The decrease in net sales also reflected the continuing challenges of turning around certain underperforming businesses and the continued adverse economic conditions in the markets in which we operate.
Net sales results for our segments are provided below:
 
Domestic-Based Direct Brands net sales were $290.5 million, an increase of $20.0 million, or 7.4%, reflecting the following:
  -  
Net sales for JUICY COUTURE were $148.1 million, an 11.3% increase compared to 2009, reflecting increases in wholesale non-apparel and outlet operations.
 
     
Key operating metrics for our JUICY COUTURE retail operations included the following:
   
Average retail square footage in the third quarter of 2010 was approximately 342 thousand square feet, a 6.2% increase compared to 2009;
 
   
Sales productivity was $192 per average square foot as compared to $191 for the third quarter of


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2009; and
 
   
Comparable store net sales in our Company-owned stores increased by 1.3% in the third quarter of 2010. Comparable direct-to-consumer net sales are equivalent to comparable store sales, as 12 months have not elapsed from the launch of the Company-owned website.
  -  
Net sales for LUCKY BRAND were $97.8 million, a 5.5% decrease compared to 2009, reflecting decreases in specialty retail, outlet and wholesale non-apparel operations, partially offset by increases in wholesale apparel and e-commerce operations.
 
     
Key operating metrics for our LUCKY BRAND retail operations included the following:
   
Average retail square footage in the third quarter of 2010 was approximately 564 thousand square feet, a 4.2% decrease compared to 2009;
 
   
Sales productivity was $87 per average square foot as compared to $95 for the third quarter of 2009;
 
   
Comparable store net sales in our Company-owned stores decreased by 10.2% in the third quarter of 2010; and
 
   
Comparable e-commerce net sales increased by 29.0%; inclusive of e-commerce net sales, comparable direct-to-consumer sales decreased 7.5%.
  -  
Net sales for KATE SPADE were $44.6 million, a 31.2% increase compared to 2009, primarily driven by increases in wholesale non-apparel, e-commerce and specialty retail operations.
 
     
Key operating metrics for our KATE SPADE retail operations included the following:
   
Average retail square footage in the third quarter of 2010 was approximately 139 thousand square feet, a 10.6% decrease compared to 2009;
 
   
Sales productivity was $151 per average square foot as compared to $121 for the third quarter of 2009;
 
   
Comparable store net sales in our Company-owned stores increased by 18.6% in the third quarter of 2010; and
 
   
Comparable e-commerce net sales increased by 97.1%; inclusive of e-commerce net sales, comparable direct-to-consumer sales increased 31.8%.
 
International-Based Direct Brands net sales were $187.5 million, a decrease of $36.9 million, or 16.4%, compared to 2009, primarily due to decreases in our MEXX Europe wholesale and retail operations, partially offset by an increase in our MEXX Canada retail and wholesale operations. Excluding the impact of fluctuations in foreign currency exchange rates, net sales were $198.8 million, an 11.4% decrease as compared to 2009.
 
   
Key operating metrics for our MEXX retail operations included the following:
  -  
Average retail square footage in the third quarter of 2010 was approximately 1.562 million square feet, a 3.1% increase compared to 2009;
 
  -  
Sales productivity was $63 per average square foot as compared to $72 for the third quarter of 2009;
 
  -  
Comparable store net sales in our Company-owned stores decreased by 2.6% in the third quarter of 2010; and
 
  -  
Comparable e-commerce and concession net sales increased by 4.0%; inclusive of e-commerce and concession net sales, comparable direct-to-consumer sales decreased 1.7%.
 
Partnered Brands net sales were $180.3 million, a decrease of $86.5 million, or 32.4%, reflecting:
  -  
An $82.3 million, or 30.8%, decrease related to brands that have been licensed or exited, substantially all of which was due to a decrease in sales in our LIZ CLAIBORNE family of brands as we transitioned from the legacy department store model to the licensing model under the JCPenney and QVC arrangements, inclusive of a $3.6 million increase in our licensing operations;
 
  -  
A $5.6 million, or 2.1%, decrease related to reduced sales in our outlet operations; and
 
  -  
A net $1.4 million, or 0.5%, increase related to increased sales of our ongoing Partnered Brands business, primarily related to our licensed DKNY® JEANS brand, partially offset by a decrease in our AXCESS brand.


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Viewed on a geographic basis, Domestic net sales decreased by $69.2 million, or 13.6%, to $437.7 million, primarily reflecting the declines within our Partnered Brands segment and LUCKY BRAND retail and wholesale non-apparel operations, partially offset by increases in our KATE SPADE retail and wholesale operations and our JUICY COUTURE wholesale non-apparel and retail operations. International net sales decreased by $34.3 million, or 13.4%, to $220.6 million primarily due to declines in our MEXX Europe wholesale and retail operations, partially offset by increases in our MEXX Canada retail and wholesale operations. The impact of fluctuations in foreign currency exchange rates decreased international sales by $12.8 million.
Gross Profit
Gross profit in the third quarter of 2010 was $337.7 million (51.3% of net sales), compared to $345.0 million (45.3% of net sales) in the third quarter of 2009. The decrease in gross profit is primarily due to reduced sales in our Partnered Brands and International-Based Direct Brands segments, partially offset by increased sales in our Domestic-Based Direct brands segment. Fluctuations in foreign currency exchange rates in our international businesses decreased gross profit by $7.2 million. However, our gross profit rate increase reflected improved gross profit rates in all segments and an increased proportion of sales from retail operations in our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the Company average.
Selling, General & Administrative Expenses
SG&A decreased $46.8 million, or 11.6%, to $357.2 million in the third quarter of 2010 from $404.0 million in the third quarter of 2009. The decrease in SG&A reflected the following:
 
A $47.7 million decrease in our Partnered Brands segment and corporate SG&A, inclusive of a decrease associated with our LIZ CLAIBORNE family of brands as we transition to the licensing model under the JCPenney and QVC arrangements;
 
 
An $8.6 million decrease due to the impact of fluctuations in foreign currency exchange rates in our international operations;
 
 
A $3.9 million decrease in our International-Based Direct Brands segment, including a $7.1 million decrease in shipping and handling expenses and a $2.8 million decrease in concession fees, partially offset by a $6.9 million increase in marketing expenses;
 
 
A $7.5 million increase in expenses associated with our streamlining initiatives and brand-exiting activities; and
 
 
A $5.9 million increase in our Domestic-Based Direct Brands segment.
SG&A as a percentage of net sales was 54.3%, compared to 53.0% in the third quarter of 2009, primarily reflecting increases in our International-Based Direct Brands and Partnered Brands segments due to the decline in sales, which exceeded proportionate reductions in SG&A, partially offset by an improved SG&A rate in our Domestic-Based Direct Brands segment.
Operating Loss
Operating loss for the third quarter of 2010 was $19.5 million ((3.0)% of net sales) compared to $59.0 million ((7.7)% of net sales) in 2009. The impact of fluctuations in foreign currency exchange rates in our international operations decreased operating loss by $1.4 million in 2010. Operating loss by segment is provided below:
 
Domestic-Based Direct Brands operating income was $4.7 million (1.6% of net sales), compared to an operating loss of $7.4 million ((2.7)% of net sales) in 2009. The period-over-period change reflected an increase in gross profit, in addition to a $2.8 million decrease in expenses associated with our streamlining initiatives and brand exiting activities.
 
 
International-Based Direct Brands operating loss was $14.0 million ((7.5)% of net sales), compared to an operating loss of $19.2 million ((8.5)% of net sales) in 2009. The decreased operating loss reflected (i) a $7.1 million reduction in shipping and handling expenses; (ii) a $1.7 million decrease resulting from fluctuations in foreign currency exchange rates; (iii) decreased gross profit; and (iv) a $6.9 million increase in marketing expenses.
 
 
Partnered Brands operating loss in the third quarter was $10.2 million ((5.6)% of net sales), compared to an operating loss of $32.4 million ((12.2)% of net sales) in 2009. The decreased operating loss reflected reduced SG&A, as discussed above, partially offset by reduced gross profit and a $4.5 million increase in expenses associated with our streamlining initiatives and brand exiting activities.
On a geographic basis, Domestic operating loss decreased by $24.3 million to a loss of $4.9 million, which reflected the generation of operating income in our Domestic-Based Direct Brands segment compared to an operating loss in 2009 and decreased losses in our Partnered Brands segment. The International operating loss was $14.6 million in the third quarter of 2010, compared to an operating loss of $29.8 million in the third quarter of 2009. This change


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reflected the decreased losses in the international operations of our Partnered Brands segment and in our International-Based Direct Brands segment discussed above. The impact of fluctuations in foreign currency exchange rates in our international operations decreased the operating loss by $1.4 million.
Other Expense, Net
Other expense, net amounted to $29.5 million and $10.1 million in the three months ended October 2, 2010 and October 3, 2009, respectively. Other expense, net consisted primarily of (i) the impact of the partial dedesignation of the hedge of our investment in certain euro functional currency subsidiaries, which resulted in the recognition of non-cash foreign currency translation losses of $25.7 million and $8.6 million for the third quarter of 2010 and 2009, respectively, on our euro-denominated notes within earnings and (ii) foreign currency transaction gains and losses in the third quarter of 2010 and 2009.
Interest Expense, Net
Interest expense, net decreased $4.8 million, or 27.6%, to $12.6 million for the three months ended October 2, 2010, as compared to $17.4 million for the three months ended October 3, 2009, primarily reflecting reduced expense due to decreased levels of outstanding borrowings under our amended and restated revolving credit facility.
Provision for Income Taxes
During the three months ended October 2, 2010 we recorded a provision for income taxes of $0.9 million, compared $0.6 million during the three months ended October 3, 2009. We did not record income tax benefits for substantially all losses incurred during the third quarter of 2010 and 2009, as it is not more likely than not that we will utilize such benefits due to the factors discussed above. The income tax provision for the three months ended October 2, 2010 and October 3, 2009 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.
Loss from Continuing Operations
Loss from continuing operations in the third quarter of 2010 decreased to $62.5 million, or (9.5)% of net sales, from $87.1 million in the third quarter of 2009, or (11.4)% of net sales. EPS from continuing operations attributable to Liz Claiborne, Inc. increased to $(0.66) in 2010 from $(0.93) in 2009.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in the third quarter of 2010 was $0.3 million, including a $0.6 million gain on disposal of discontinued operations and a $0.9 million loss from discontinued operations. Loss from discontinued operations was $3.6 million in the third quarter of 2009, including a $1.5 million loss on disposal of discontinued operations and a $2.1 million loss from discontinued operations. EPS from discontinued operations attributable to Liz Claiborne, Inc. was $(0.01) in 2010 and $(0.03) in 2009.
Net Loss Attributable to Liz Claiborne Inc.
Net loss attributable to Liz Claiborne, Inc. in the third quarter of 2010 decreased to $62.7 million from $90.5 million in the third quarter of 2009. EPS increased to $(0.67) in 2010, from $(0.96) in 2009.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements. Our primary ongoing cash requirements are to (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores, normal maintenance activities and the purchase of our Ohio distribution facility in the second quarter of 2011 (see “Off-Balance Sheet Arrangements,” below); (iii) fund remaining efforts associated with our streamlining initiatives, which include consolidation of office space, store closures and reductions in staff; (iv) invest in our information systems; and (v) fund operational and contractual obligations. We expect that our streamlining initiatives will provide long-term cost savings. We also require cash to fund payments related to outstanding earn-out provisions of certain of our previous acquisitions.
Sources of Cash. Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents and securities on hand, as well as borrowings through our lines of credit.
In May 2010, we completed the Amended Agreement. Under the Amended Agreement, the aggregate commitments were reduced to $350.0 million from $600.0 million, and the maturity date was extended from May 2011 to August


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2014, provided that in the event that our 350.0 million euro Notes due July 2013 are not refinanced, purchased or defeased prior to April 8, 2013, then the maturity date shall be April 8, 2013, and in the event that the Convertible Notes due 2014 are not refinanced, purchased or defeased prior to March 15, 2014, then the maturity date shall be March 15, 2014. In both circumstances, if any such refinancing or extension provides for a maturity date that is earlier than 91 days following August 6, 2014, then the maturity date shall be the date that is 91 days prior to the maturity date of such notes. We are subject to various covenants and other requirements, such as financial requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment, we are required to maintain minimum aggregate borrowing availability of not less than $45.0 million and must apply substantially all cash collections to reduce outstanding borrowings under the Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of the then-applicable commitments. Our borrowing availability under the Amended Agreement is determined primarily by the level of our eligible accounts receivable and inventory balances. In addition, the Amended Agreement removes the springing fixed charge coverage covenant that was a condition of the prior amended and restated revolving credit agreement.
The Convertible Notes enhance flexibility by allowing us to utilize shares to repay a portion of the notes. The Convertible Notes are convertible during any fiscal quarter if the last reported sale price of our common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price performance, the Convertible Notes were convertible during the third quarter of 2010 and are convertible during the fourth quarter of 2010. As previously disclosed in connection with the issuance of the Convertible Notes, we have not yet obtained stockholder approval under the rules of the NYSE for the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes. Until such approval is obtained, if the Convertible Notes are surrendered for conversion, we must pay the $1,000 principal amount of the conversion value of the Convertible Notes in cash and may settle the remaining conversion value in the form of cash, stock or a combination of cash and stock, subject to an overall limit on the number of shares of stock that may be issued.
During the first nine months of 2010, we received $171.1 million of net income tax refunds on previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009 domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable income. We repaid amounts outstanding under our amended and restated revolving credit facility with the amount of such refunds.
As discussed above, under our Amended Agreement, we are subject to minimum borrowing availability levels. Based on our forecast of borrowing availability under the Amended Agreement, we anticipate that cash flows from operations and the projected borrowing availability under our Amended Agreement will be sufficient to fund our liquidity requirements for at least the next 12 months.
There can be no certainty that availability under the Amended Agreement will be sufficient to fund our liquidity needs. Should we be unable to comply with the requirements in the Amended Agreement, we would be unable to borrow under such agreement and any amounts outstanding would become immediately due and payable, unless we were able to secure a waiver or an amendment under the Amended Agreement. Should we be unable to borrow under the Amended Agreement, or if outstanding borrowings thereunder become immediately due and payable, our liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations. In addition, an acceleration of amounts outstanding under the Amended Agreement would likely cause cross-defaults under our other outstanding indebtedness, including the Convertible Notes and the 5.0% Notes.
The sufficiency and availability of our projected sources of liquidity may be adversely affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which will be impacted by retailer and consumer acceptance of our products, general economic conditions and the level of consumer discretionary spending; (ii) the status of, and any further adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing availability and to comply with other covenants included in our debt and credit facilities; (iv) the financial wherewithal of our larger department store and specialty store customers; (v) our ability to successfully execute on the licensing arrangements with JCPenney and QVC with respect to the LIZ CLAIBORNE family of brands; (vi) interest rate and exchange rate fluctuations; and (vii) whether holders of the Convertible Notes, if and when such notes are convertible, elect to convert a substantial portion of such notes, the par value of which we must currently settle in cash.
Although we consider the conversion of a material amount of the Convertible Notes in the near future to be unlikely, if all or a substantial portion of the outstanding Convertible Notes were converted and we were required to settle all


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of the principal of the converted Convertible Notes in cash, then we might not have sufficient liquidity to meet our obligations to pay the amounts required upon conversion of the Convertible Notes and maintain the requisite levels of availability required under the Amended Agreement.
Because of the continuing uncertainty and risks relating to future economic conditions, we may, from time to time, explore various initiatives to improve our liquidity, including issuance of debt securities, sales of various assets, additional cost reductions and other measures. In addition, where conditions permit, we may also, from time to time, seek to retire, refinance, extend, exchange or purchase our outstanding debt in privately negotiated transactions or otherwise. We may not be able to successfully complete any such actions, if necessary.
Cash and Debt Balances. We ended the first nine months of 2010 with $17.0 million in cash and marketable securities, compared to $25.6 million at the end of the first nine months of 2009 and with $736.9 million of debt outstanding at the end of the first nine months of 2010, compared to $828.6 million at the end of the first nine months of 2009. The $83.1 million decrease in our net debt position (total debt less cash and marketable securities) over the last twelve months is primarily attributable to cash flows from continuing operations for the last twelve months of $159.9 million, which includes the receipt of $172.4 million of net income tax refunds, partially offset by $61.9 million in capital and in-store shop expenditures, a $24.3 million payment to Li & Fung related to a buying/sourcing arrangement, $11.3 million of investments in and advances to KSJ and $5.0 million in acquisition related payments. The effect of foreign currency translation on our euro-denominated 5.0% Notes decreased our debt balance by $28.7 million, compared to October 3, 2009.
Accounts Receivable decreased $94.7 million, or 25.6%, at October 2, 2010 compared to October 3, 2009, primarily due to: (i) decreased wholesale sales in all of our segments; (ii) the impact of brands that have been licensed or exited; and (iii) the impact of fluctuations in foreign currency exchange rates, which decreased accounts receivable by $3.6 million, or 1.0%. Accounts receivable increased $11.5 million, or 4.4% at October 2, 2010 compared to January 2, 2010, primarily due to seasonal timing of wholesale shipments.
Inventories decreased $29.5 million, or 7.2% at October 2, 2010 compared to October 3, 2009, primarily reflecting: (i) improved inventory turns; (ii) the year-over-year impact of decreased sales in our International-Based Direct Brands segment; (iii) the impact of brands that have been licensed or exited and (iv) an increase in Domestic-Based Direct Brands inventory to support growth initiatives, including retail store expansion. The impact of changes in foreign currency exchange rates decreased inventories by $2.4 million, or 0.6% at October 2, 2010 compared to October 3, 2009. Inventories increased by $60.7 million, or 19.0% compared to January 2, 2010 primarily due to the factors noted above and seasonal timing of wholesale shipments.
Borrowings under our revolving credit facility peaked at $190.1 million during the first nine months of 2010. Our borrowings under this facility totaled $167.3 million at October 2, 2010, compared to $228.1 million at October 3, 2009.
Net cash (used in) provided by operating activities of our continuing operations was $(22.3) million in the first nine months of 2010, compared to net cash provided by operating activities of $40.9 million in the first nine months of 2009. This $63.2 million decrease was primarily due to a period-over-period decrease related to working capital items of $157.3 million, which includes a $24.3 million refund paid to Li & Fung in 2010 compared to a $75.0 million payment received from Li & Fung in 2009, each related to a buying/sourcing agreement. This decrease was partially offset by a $72.6 million increase in net income tax refunds in 2010 compared to 2009 and reduced losses in 2010 compared to 2009 (excluding foreign currency gains and losses, impairment charges and other non-cash items). The operating activities of our discontinued operations used $1.0 million and $13.9 million of cash in the nine months ended October 2, 2010 and October 3, 2009, respectively.
Net cash used in investing activities of our continuing operations was $58.2 million in the first nine months of 2010, compared to $69.3 million in the first nine months of 2009. Net cash used in investing activities in the nine months ended October 2, 2010 primarily reflected the use of $50.1 million for capital and in-store shop expenditures, $5.0 million for acquisition related payments primarily related to our previous acquisition of LUCKY BRAND and $4.0 million for investments in and advances to KSJ. Net cash used in investing activities in the nine months ended October 3, 2009 primarily reflected the use of $60.2 million for capital and in-store shop expenditures and the use of $8.8 million for acquisition related payments for our previous acquisitions of LUCKY BRAND and MAC & JAC. In addition, the investing activities of our discontinued operations used $5.6 million and $0.6 million of cash in the nine months ended October 2, 2010 and October 3, 2009, respectively.
Net cash provided by financing activities was $82.4 million in the first nine months of 2010, compared to $38.1 million in the first nine months of 2009. The $44.3 million period-over-period increase primarily reflected a


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decrease of $24.1 million in cash paid for deferred financing fees and a $21.6 million increase in net cash provided by borrowing activities, primarily due to increased cash requirements for current year operating activities.
Commitments and Capital Expenditures
During the first quarter of 2009, we entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as our buying/sourcing agent for all of our brands and products (other than jewelry) and we received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction. Our agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the sale or discontinuation of any current brand, or certain termination events. We are also obligated to use Li & Fung as our buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The licensing arrangements with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we refunded $24.3 million of the closing payment received from Li & Fung in the second quarter of 2010. In addition, our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.
We may be required to make the following additional payments in connection with our acquisitions. If paid in cash, these payments will be funded with cash provided by operating activities or through availability under our amended and restated revolving credit facility:
   
On January 26, 2006, we acquired 100% of the equity of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie and Kensiegirl apparel lines (“Mac & Jac”). The purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which included the retirement of debt at closing and fees, but excluded contingent payments to be determined based upon a multiple of Mac & Jac’s earnings in fiscal years 2006, 2008, 2009 and 2010. In May of 2009, we paid the former owners of Mac & Jac $3.8 million based on 2008 fiscal year earnings. We estimate that the remaining contingent payment based on 2010 earnings will be in the range of approximately $0-$5.0 million, which will be accounted for as additional purchase price when paid.
 
   
On June 8, 1999, we acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. (“Lucky Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s denim-based sportswear. The total purchase price consisted of aggregate cash payments of $126.2 million and additional payments made from 2005 to 2009 totaling $65.0 million for 12.3% of the remaining equity of Lucky Brand. We acquired 0.4% of the equity of Lucky Brand in January of 2010 for a payment of $5.0 million. The remaining 2.3% of the original shares outstanding will be settled for an aggregate purchase price composed of the following two installments: (i) a payment made in 2008 of $15.7 million that was based on a multiple of Lucky Brand’s 2007 earnings, which we have accounted for as additional purchase price and (ii) a 2011 payment that will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment, which we estimate will be in the range of approximately $0-$5.0 million.
In connection with the disposition of the LIZ CLAIBORNE Canada retail stores discussed above, 38 store leases were assigned to Laura Canada, of which we remain secondarily liable for the remaining obligations on 31 such leases. As of October 2, 2010, the future aggregate payments under these leases amounted to $35.3 million and extended to various dates through 2020.
Projected 2010 capital expenditures are approximately $90.0 million, compared to $72.6 million in 2009. These expenditures primarily relate to our plan to open 35-40 retail stores globally, the continued technological upgrading of our management information systems and costs associated with the refurbishment of selected specialty and outlet stores. Capital expenditures and working capital cash needs will be financed with cash provided by operating activities and our amended and restated revolving credit facility.

 


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As discussed below in “Off-Balance Sheet Arrangements,” we communicated out intent to purchase the underlying assets of our Ohio distribution facility in the second quarter of 2011.
Debt consisted of the following:
                                   
  In thousands      October 2, 2010           January 2, 2010             October 3, 2009        
       
 
                       
  5.0% Notes (a)
  $   481,838     $ 501,827     $ 510,182  
  6.0% Convertible Senior Notes(b)
    73,662       71,137       70,323  
  Revolving credit facility
    167,327       66,507       228,109  
  Capital lease obligations
    14,052       18,680       19,729  
  Other
    --       --       243  
 
                 
  Total debt
  $ 736,879     $ 658,151     $ 828,586  
 
                 
 
(a)   The change in the balance of these euro-denominated notes reflected the impact of changes in foreign currency exchange rates.
(b)   The balance at October 2, 2010, January 2, 2010 and October 3, 2009, represented principal of $90.0 million and an unamortized debt discount of $16.3 million, $18.9 million and $19.7 million, respectively.
For information regarding our debt and credit instruments, refer to Note 8 of Notes to Condensed Consolidated Financial Statements.
As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements, in May 2010, we completed a second amendment to and restatement of our revolving credit agreement. Availability under the Amended Agreement shall be the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of our eligible accounts receivable and inventory. A portion of the funds available under the Amended Agreement not in excess of $200.0 million is available for the issuance of letters of credit, whereby standby letters of credit may not exceed $65.0 million.
As of October 2, 2010, availability under our amended and restated revolving credit facility was as follows:
                                                 
    Total   Borrowing   Outstanding   Letters of   Available   Excess
In thousands   Facility (a)   Base (a)   Borrowings   Credit Issued   Capacity   Capacity (b)
 
                                               
Revolving credit facility (a)
  $ 350,000     $ 428,023     $ 167,327     $ 25,992     $ 156,681     $ 111,681  
 
 
(a)  
Availability under the Amended Agreement is the lesser of $350.0 million or a borrowing base comprised primarily of eligible accounts receivable and inventory.
(b)  
Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the Amended Agreement of $45.0 million.
Off-Balance Sheet Arrangements
On November 21, 2006, we entered into an off-balance sheet financing arrangement with a financial institution (commonly referred to as a “synthetic lease”) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May 31, 2011 and replaced the previous synthetic lease arrangement, which expired on November 22, 2006. The lessor is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose ownership interest is without limitation as to profits, losses and distribution of the lessor’s assets. Our lease represents less than 1.0% of the lessor’s assets. The lease includes our guarantees for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum initial guarantee was approximately $27.0 million. The lessor’s risk included an initial capital investment in excess of 10.0% of the total value of the lease, which is at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to us through a seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a variable interest entity and therefore consolidation by the Company is not required.
We continued further consolidation of our warehouse operations with the closure of our Rhode Island distribution facility in May 2010. In June 2010, we paid $4.8 million and received $2.8 million of proceeds, each in connection with our former Rhode Island distribution center, which was financed under the synthetic lease. We estimate our present obligation under the terms of the synthetic lease will be $5.2 million for the Ohio distribution facility. That


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amount is being recognized in SG&A over the remaining lease term. However, pursuant to the terms of the lease, in September 2010, we communicated our intent to purchase the underlying assets of such facility and expect to close the purchase for $28.0 million in the second quarter of 2011.
In May 2010, the terms of the synthetic lease were amended to make the applicable financial covenants under the synthetic lease consistent with the terms of the Amended Agreement. We have not entered into any other off-balance sheet arrangements.
Hedging Activities
Our operations are exposed to risks associated with fluctuations in foreign currency exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates, we use foreign currency collars and forward contracts for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by our European and Canadian entities. As of October 2, 2010, we had forward contracts maturing through December 2011 to sell 37.0 million Canadian dollars for $35.8 million and to sell 78.5 million euro for $103.5 million.
The following table summarizes the fair value and presentation in the condensed consolidated financial statements for derivatives designated as hedging instruments and derivatives not designated as hedging instruments:
                                                 
    Foreign Currency Contracts Designated as Hedging Instruments
In thousands   Asset Derivatives     Liability Derivatives
    Balance                   Balance            
    Sheet   Notional             Sheet   Notional        
Period   Location   Amount     Fair Value     Location   Amount     Fair Value
 
                                               
October 2, 2010
  Other current
assets
     $   14,565        $    774     Accrued
expenses
       $   124,739        $   5,531
 
                                               
January 2, 2010
  Other current
assets
    26,408       586     Accrued
expenses
      74,634       3,091
 
                                               
October 3, 2009
  Other current
assets
    --       --     Accrued
expenses
      116,669       7,827
 
                                               
    Foreign Currency Contracts Not Designated as Hedging Instruments
In thousands   Asset Derivatives     Liability Derivatives
    Balance                   Balance            
    Sheet   Notional             Sheet   Notional        
Period   Location   Amount     Fair Value     Location   Amount     Fair Value
 
                                               
October 2, 2010
  Other current
assets
     $   --        $   --     Accrued
expenses
       $   --        $   --
 
                                               
January 2, 2010
  Other current
assets
    --       --     Accrued
expenses
      12,015       690
 
                                               
October 3, 2009
  Other current
assets
    1,938       2     Accrued
expenses
      11,979       588


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The following table summarizes the effect of foreign currency exchange contracts on the condensed consolidated financial statements:
                                 
                            Amount of Gain  
            Location of Gain or   Amount of Gain   or (Loss)
    Amount of Gain or   (Loss) Reclassified   or (Loss)   Recognized in
    (Loss) Recognized   from Accumulated   Reclassified from   Operations on
    in Accumulated   OCI into Operations   Accumulated OCI   Derivative
    OCI on Derivative   (Effective and   into Operations   (Ineffective
In thousands   (Effective Portion)   Ineffective Portion)   (Effective Portion)   Portion)
 
                               
Nine months ended October 2, 2010
     $   1,174       Cost of goods sold        $   (4,031 )      $   (277 )
 
                               
Nine months ended October 3, 2009
    (6,886 )   Cost of goods sold     2,766       (1,003 )
 
                               
Three months ended October 2, 2010
    (7,787 )   Cost of goods sold     1,517     (153 )
 
                               
Three months ended October 3, 2009
    (7,246 )   Cost of goods sold     (3,137 )     (879 )
As of October 2, 2010, approximately $0.4 million of unrealized losses in Accumulated other comprehensive loss relating to cash flow hedges will be reclassified into earnings in the next twelve months as the inventory is sold.
We hedge our net investment position in certain euro-denominated functional currency subsidiaries by designating a portion of the 350.0 million euro-denominated bonds as the hedging instrument in a net investment hedge. To the extent the hedge is effective, related foreign currency translation gains and losses are recorded within Other comprehensive loss. Translation gains and losses related to the ineffective portion of the hedge are recognized in current operations.
The related translation gains (losses) recorded within Other comprehensive loss were $8.2 million and $(14.4) million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $(17.3) million and $(12.5) million for the three months ended October 2, 2010 and October 3, 2009, respectively. During the first quarter of 2009, we dedesignated 143.0 million of the euro-denominated bonds as a hedge of our net investment in certain euro functional currency subsidiaries due to a decrease in the carrying value of the hedged item below 350.0 million euro. During the first quarter of 2010, we dedesignated an additional 66.0 million of the euro-denominated bonds as a hedge of our net investment in certain euro functional currency subsidiaries due to a further decline in the carrying value of the hedged item. The associated foreign currency translation gains (losses) of $12.1 million and $(9.9) million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $(25.7) million and $(8.6) million for the three months ended October 2, 2010 and October 3, 2009, respectively, are reflected within Other income (expense), net on the accompanying Condensed Consolidated Statements of Operations.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses.
Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, each included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010. There were no significant changes in our critical accounting policies during the nine months ended October 2, 2010. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Due to the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.


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Estimates by their nature are based on judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.
ACCOUNTING PRONOUNCEMENTS
For a discussion of recently adopted accounting pronouncements, see Note 1 of Notes to Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We finance our capital needs through available cash and marketable securities, operating cash flows, letters of credit, our synthetic lease and our amended and restated revolving credit facility. Our floating rate revolving credit facility exposes us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates.
We do not speculate on the future direction of interest rates. As of October 2, 2010, January 2, 2010 and October 3, 2009, our exposure to changing market rates was as follows:
                         
In millions   October 2, 2010   January 2, 2010   October 3, 2009
     
Variable rate debt
    $167.3       $66.5       $228.1  
Average interest rate
    4.55%       6.87%       6.85%  
A ten percent change in the average rate would have resulted in a $0.4 million change in interest expense during the nine months ended October 2, 2010.
As of October 2, 2010, we have not employed interest rate hedging to mitigate such risks with respect to our floating rate facility. We believe that our euro Notes and the Convertible Notes, which are fixed rate obligations, partially mitigate the risks with respect to our variable rate financing.
We transact business in multiple currencies, resulting in exposure to exchange rate fluctuations. We mitigate the risks associated with changes in foreign currency exchange rates through the use of foreign exchange forward contracts and collars to hedge transactions denominated in foreign currencies for periods of generally less than one year. Gains and losses on contracts which hedge specific foreign currency denominated commitments are recognized in the period in which the underlying hedged item affects earnings.
At October 2, 2010, January 2, 2010 and October 3, 2009, we had forward contracts aggregating to $139.3 million, $97.4 million and $119.5 million, respectively. We had outstanding foreign currency collars with net notional amounts aggregating to $15.7 million and $11.1 million at January 2, 2010 and October 3, 2009, respectively. Unrealized gains (losses) for outstanding foreign currency options and foreign exchange forward contracts were $(2.2) million at October 2, 2010, $(2.5) million at January 2, 2010 and $(7.8) million at October 3, 2009. A sensitivity analysis to changes in the foreign currencies when measured against the US dollar indicated that if the US dollar uniformly weakened by 10.0% against all of the hedged currency exposures, the fair value of these instruments would decrease by $12.8 million at October 2, 2010. Conversely, if the US dollar uniformly strengthened by 10.0% against all of the hedged currency exposures, the fair value of these instruments would increase by $14.9 million at October 2, 2010. Any resulting changes in the fair value of the hedged instruments would be partially offset by changes in the underlying balance sheet positions. The sensitivity analysis assumes a parallel shift in foreign currency exchange rates. The assumption that exchange rates change in a parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in foreign currency. We do not hedge all transactions denominated in foreign currency.
We hedge our net investment position in certain euro functional currency subsidiaries by designating a portion of the 350.0 million euro-denominated bonds as the hedging instrument in a net investment hedge. As discussed above (see “Hedging Activities”), we dedesignated 209.0 million of the euro-denominated bonds as a hedge of our net investment in certain euro functional currency subsidiaries. A sensitivity analysis to changes in the US dollar when measured against the euro indicated if the US dollar weakened by 10.0% against the euro, a translation loss of $28.8 million associated with the ineffective portion of the hedge would be recorded in Other income (expense), net.


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Conversely, if the US dollar strengthened by 10.0% against the euro, a translation gain of $28.8 million associated with the ineffective portion of the hedge would be recorded in Other income (expense), net.
We are exposed to credit related losses if the counterparties to our derivative instruments fail to perform their obligations. We systemically measure and assess such risk as it relates to the credit ratings of these counterparties, all of which currently have satisfactory credit ratings and therefore we do not expect to realize losses associated with counterparty default.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures at the end of our third fiscal quarter. Our Chief Executive Officer and Chief Financial Officer concluded that, as of October 2, 2010, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 2, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A complaint captioned The Levy Group, Inc. v. L.C. Licensing, Inc. and Liz Claiborne, Inc. was filed in the New York Supreme Court in New York County on January 21, 2010. The complaint alleged claims for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel and tortious interference against L.C. Licensing, Inc. and the Company in connection with a trademark licensing agreement between L.C. Licensing, Inc. and its licensee, The Levy Group, Inc. The Levy Group, Inc.’s alleged claims purportedly arose from the Company’s decision to sign a long-term licensing agreement with JCPenney. The complaint sought an award of $100.0 million in compensatory damages plus punitive damages. On March 4, 2010, the Company moved to dismiss the complaint for failure to state a claim. On October 12, 2010, the Court issued an order granting the motion and dismissing all of The Levy Group, Inc.’s claims with prejudice. The Levy Group, Inc. has until November 18, 2010 to file a notice of appeal with respect to this order.
A purported class action complaint captioned Angela Tyler (individually and on behalf of all others similarly situated) v. Liz Claiborne, Inc, Trudy F. Sullivan and William L. McComb, was filed in the United States District Court in the Southern District of New York on April 28, 2009 against the Company, its Chief Executive Officer, William L. McComb and Trudy Sullivan, a former President of the Company. The complaint alleges certain violations of the federal securities laws, claiming misstatements and omissions surrounding the Company’s wholesale business. The Company believes that the allegations contained in the complaint are without merit, and the Company intends to defend this lawsuit vigorously. The Company moved to dismiss Plaintiffs’ Second Amended Complaint on October 4, 2010.
The Company is a party to several other pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows.


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ITEM 1A. RISK FACTORS
You should carefully consider the risk factors included in our Annual Report on Form 10-K for the year ended January 2, 2010, in addition to other information included in this Quarterly Report on Form 10-Q and in other documents we file with the SEC, in evaluating the Company and its business. If any of the risks occur, our business, financial condition and operating results could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or to the extent which any factor or combination of factors may impact our business.
There have not been any material changes during the quarter ended October 2, 2010 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended January 2, 2010, other than the following:
Our ability to continue to have the liquidity necessary, through cash flows from operations and availability under our second 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 other covenants included in, our second 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 accounts receivable and inventory; 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 and whether holders of our Convertible Notes issued in June 2009 will, if and when such notes are convertible, elect to convert a substantial portion of such notes, the par value of which we must currently settle in cash.
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty and outlet stores, normal maintenance activities and the purchase of our Ohio distribution facility in the second quarter of 2011; (iii) fund remaining efforts associated with our streamlining initiatives, which include consolidation of office space, store closures and reductions in staff; (iv) invest in our information systems; and (v) fund operational and contractual obligations. We also require cash to fund payments related to outstanding earn-out provisions of certain of our previous acquisitions.
In May 2010, we completed a second amendment to and restatement of our revolving credit facility (as amended, the “Amended Agreement”). Under the Amended Agreement, our aggregate commitments under the facility were reduced to $350.0 million from $600.0 million, and the maturity date was extended from May 2011 to August 2014, provided that in the event that our existing 350.0 million 5.0% Notes due July 2013 are not refinanced, purchased or defeased prior to April 8, 2013, then the maturity date shall be April 8, 2013, and in the event that our 6.0% Convertible Senior Notes due June 2014 (the “Convertible Notes”) are not refinanced, purchased or defeased prior to March 15, 2014, then the maturity date shall be March 15, 2014. In both circumstances, if any such refinancing or extension provides for a maturity date that is earlier than 91 days following August 6, 2014, then the maturity date shall be the date that is 91 days prior to the maturity date of such notes. We are subject to various covenants and other requirements, such as financial requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment, we are required to maintain minimum aggregate borrowing availability of not less than $45.0 million and must apply substantially all cash collections to reduce outstanding borrowings under the Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of the then-applicable aggregate commitments. Our borrowing availability under the Amended Agreement is determined primarily by the level of our eligible accounts receivable and inventory balances. In addition, the Amended Agreement removes the springing fixed charge coverage covenant that was a condition of the prior amended and restated revolving credit agreement.
During the first nine months of 2010, we received $171.1 million of net income tax refunds on previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009 domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable income. We repaid amounts outstanding under our amended and restated revolving credit facility with the amount of such refunds. As a result of the US Federal tax law change extending the carryback period from two to five years and our carryback of our 2009 tax loss to 2004 and 2005, the IRS has the ability to re-open its past examinations of 2004 and 2005.


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As discussed above, under our Amended Agreement, we are subject to minimum borrowing availability levels and various other covenants and other requirements, such as financial requirements, reporting requirements and various negative covenants. There can be no certainty that availability under the Amended Agreement will be sufficient to fund our liquidity needs. Based upon our current projections, we currently anticipate that our borrowing availability will be sufficient for at least the next 12 months. The sufficiency and availability of our sources of liquidity may be affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which will be impacted by retailer and consumer acceptance of our products, general economic conditions and the level of consumer discretionary spending; (ii) the status of, and any further adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing availability and other covenants included in our debt and credit facilities; (iv) the financial wherewithal of our larger department store and specialty store customers; (v) our ability to successfully execute on the licensing arrangements with JCPenney and QVC with respect to the LIZ CLAIBORNE family of brands; (vi) interest rate and exchange rate fluctuations; and (vii) whether holders of the Convertible Notes, if and when such notes are convertible, elect to convert a substantial portion of such notes, the par value of which we must currently settle in cash. Also, our agreement with Li & Fung provides for a refund of a portion of the $75.0 million closing payment in certain limited circumstances, including a change in control of our Company, the sale or discontinuation of any of our current brands, or certain termination events. The licensing arrangements with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we refunded $24.3 million of the closing payment received from Li & Fung during the second quarter of 2010. Our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.
In addition, our Amended Agreement contains a borrowing base that is determined primarily by the level of our eligible accounts receivable and inventory. If we do not have a sufficient borrowing base at any given time, borrowing availability under our Amended Agreement may trigger the requirement to apply substantially all cash collections to reduce outstanding borrowings or default and also may not be sufficient to support our liquidity needs. Insufficient borrowing availability under our Amended Agreement would likely have a material adverse effect on our business, financial condition, liquidity and results of operations. Furthermore, a breach of the minimum aggregate availability covenant would trigger an immediate Event of Default. An acceleration of amounts outstanding under the Amended Agreement would likely cause cross-defaults under the Company’s other outstanding indebtedness, including the Convertible Notes and our 5.0% 350.0 million euro Notes due 2013. We currently believe that the financial institutions under the Amended Agreement are able to fulfill their commitments, although such ability to fulfill commitments will depend on the financial condition of our lenders at the time of borrowing.
The Convertible Notes are convertible during any fiscal quarter if the last reported sale price of our common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price performance during the quarter ended October 2, 2010, the Convertible Notes are convertible during the fourth quarter of 2010. As previously disclosed in connection with the issuance of the Convertible Notes, we have not yet obtained stockholder approval under the rules of the New York Stock Exchange for the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes. Until such approval is obtained, if the Convertible Notes are surrendered for conversion, we must pay the $1,000 principal amount of the Convertible Notes in cash and may settle the remaining conversion value in the form of cash, stock or a combination of cash and stock. Although we consider the conversion of a material amount of the Convertible Notes in the near future to be unlikely, if all or a substantial portion of the outstanding Convertible Notes were so converted and we were required to settle all of the converted Convertible Notes in cash, then we might not have sufficient liquidity to meet our obligations to pay the amounts required upon conversion of the Convertible Notes and maintain the requisite levels of availability required under the Amended Agreement.
Compliance with the minimum aggregate borrowing availability covenant is dependent on the results of our operations, which are subject to a number of factors including current economic conditions and levels of consumer spending. The recent economic environment has resulted in significantly lower employment levels, disposable income and actual and/or perceived wealth, significantly lower consumer confidence and significantly reduced retail sales. Further reductions in consumer spending, as well as a failure of consumer spending levels to rise to previous levels, or a continuation or worsening of current economic conditions would adversely impact our net sales and cash flows. Should we be unable to comply with the requirements in the Amended Agreement, we would be unable to borrow under such agreement, and any amounts outstanding would become immediately due and payable unless we were able to secure a waiver or an amendment under the Amended Agreement. Should we be unable to borrow under the Amended Agreement, or if outstanding borrowings thereunder become immediately due and payable, our


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liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations. In addition, an acceleration of amounts outstanding under the Amended Agreement would likely cause cross-defaults under our other outstanding indebtedness, including the Convertible Notes and the 5.0% Notes.
Because of the continuing uncertainty and risks relating to future economic conditions, including consumer spending in particular, we may, from time to time, explore various initiatives to improve our liquidity, including issuance of debt securities, sales of various assets, additional cost reductions and other measures. In addition, where conditions permit, we may also, from time to time, seek to retire, exchange or purchase our outstanding debt in privately negotiated transactions or otherwise. We may not be able to successfully complete any of such actions if necessary.
We may not be able to complete the closure of our Liz Claiborne branded outlet operations on terms satisfactory to us, and such closure may have an adverse effect on our results of operations and cash flows.
On July 14, 2010, our Board of Directors approved plans to exit our 87 LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico. These closings are consistent with the capital efficient, licensing-oriented model for the LIZ CLAIBORNE brand that is reflected in our licensing agreements with JCPenney and QVC. We expect the exit process to be completed in early 2011. Although we expect that the completion of the exit process would eliminate the material operating losses of the LIZ CLAIBORNE branded outlet business, some of the affected stores are subject to long-term leases. We may not be able to terminate our outlet store leases on satisfactory economic terms or, if permissible under the leases, convert the stores to another use or assign such leases to one or more third parties. In addition, we face the risk of liquidating our current inventory on an abbreviated time frame and at reduced prices. As a result, we may incur a loss on such current inventory at such outlets and inventory on order that is destined for such outlets. We may also incur lease termination, severance and other costs related to this action. The reduction in the visibility of the LIZ CLAIBORNE brands resulting from the closure or conversion of the current 87 locations may limit or impair the LIZ CLAIBORNE brands’ awareness and recognition, which may negatively impact the sales of those LIZ CLAIBORNE brands made by JCPenney and QVC, and our potential revenue from such licensing arrangements may also be negatively impacted.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information about purchases by the Company during the three months ended October 2, 2010 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
                                 
                            Maximum  
                            Approximate  
                    Total Number of     Dollar Value of  
                    Shares Purchased as     Shares that May  
    Total Number             Part of Publicly     Yet Be Purchased  
    of Shares             Announced Plans or     Under the Plans or  
    Purchased     Average Price     Programs     Programs  
Period   (In thousands) (a)     Paid Per Share     (In thousands)     (In thousands) (b)  
July 4, 2010 - July 31, 2010
    3.8     $ 4.74       --     $ 28,749  
August 1, 2010 - September 4, 2010
    11.4       4.48       --       28,749  
September 5, 2010 - October 2, 2010
    --       --       --       28,749  
 
                             
Total -13 Weeks Ended October 2, 2010
    15.2     $ 4.54       --     $ 28,749  
 
                             
 
(a)  
Includes shares withheld to cover tax-withholding requirements relating to the vesting of restricted stock issued to employees pursuant to the Company’s shareholder-approved stock incentive plans.
(b)  
The Company initially announced the authorization of a share buyback program in December 1989. Since its inception, the Company’s Board of Directors has authorized the purchase under the program of an aggregate of $2.275 billion of the Company’s stock. The Amended Agreement currently restricts the Company’s ability to repurchase stock.
ITEM 5. OTHER INFORMATION
None.


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ITEM 6. EXHIBITS
     
10.1
  Form of Award for Liz Claiborne, Inc. 2010 Profitability Incentive Awards.
 
   
31(a)
  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31(b)
  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32(a)*
  Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32(b)*
  Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*  
A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and forwarded to the SEC or its staff upon request.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
                 
DATE:                 November 4, 2010    
 
               
 
               
 
               
    LIZ CLAIBORNE, INC.   LIZ CLAIBORNE, INC.
 
               
 
               
 
               
 
  By:   /s/ Andrew Warren   By:   /s/ Elaine H. Goodell
 
               
 
      ANDREW WARREN       ELAINE H. GOODELL
 
      Chief Financial Officer       Vice President - Corporate Controller and
 
      (Principal financial officer)       Chief Accounting Officer
 
              (Principal accounting officer)