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 July 4, 1998
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: 0-9831
LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2842791
(State or other jurisdiction (I.R.S. Employer
of incorporation) 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)
Indicate by check 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
.
The number of shares of Registrant's Common Stock, par value $1.00
per share, outstanding at August 14, 1998 was 65,423,674.
(2)
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of July 4, 1998 and
January 3, 1998 ............................................. 3
Consolidated Statements of Income for the Six and Three Month Periods
Ended July 4, 1998 and July 5, 1997 ......................... 4
Consolidated Statements of Cash Flows for the Six Month Periods
Ended July 4, 1998 and July 5, 1997 ......................... 5
Notes to Consolidated Financial Statements ....................... 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 12-15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 15-17
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 6. Exhibits and Reports on Form 8-K ................................. 17
SIGNATURE ..................................................................... 18
(3)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited)
July 4, January 3,
ASSETS 1998 1998
CURRENT ASSETS:
Cash and cash equivalents $ 44,534 $ 138,185
Marketable securities 165,077 221,343
Accounts receivable - trade 250,796 181,303
Inventories 377,027 396,249
Deferred income tax benefits 29,610 31,647
Other current assets 76,100 88,693
Total current assets 943,144 1,057,420
PROPERTY AND EQUIPMENT - NET 230,401 214,624
OTHER ASSETS 66,535 33,241
$1,240,080 $ 1,305,285
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 84,851 $ 173,812
Accrued expenses 139,295 138,816
Income taxes payable 20,637 15,029
Total current liabilities 244,783 327,657
DEFERRED INCOME TAXES 10,332 10,542
COMMITMENTS AND CONTINGENCIES
PUT WARRANTS 21,523 45,459
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized shares - 50,000,000,
issued shares - none -- --
Common stock, $1 par value, authorized shares - 250,000,000,
issued shares - 88,218,617 88,219 88,219
Capital in excess of par value 57,054 30,731
Retained earnings 1,578,341 1,541,894
Cumulative translation adjustment (3,436) (2,673)
1,720,178 1,658,171
Common stock in treasury, at cost, 22,407,444 shares and
22,120,305 shares (756,736) (736,544)
Total stockholders' equity 963,442 921,627
$1,240,080 $ 1,305,285
The accompanying notes to consolidated financial statements are an
integral part of these statements.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Six Months Ended Three Months Ended
(26 Weeks) (27 Weeks)
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
NET SALES $1,221,224 $1,134,456 $ 565,219 $ 537,900
Cost of goods sold 740,770 691,296 340,303 326,061
GROSS PROFIT 480,454 443,160 224,916 211,839
Selling, general & administrative expenses 365,148 338,094 179,198 169,595
OPERATING INCOME 115,306 105,066 45,718 42,244
Investment and other income-net 5,643 7,787 2,945 3,688
INCOME BEFORE PROVISION
FOR INCOME TAXES 120,949 112,853 48,663 45,932
Provision for income taxes 44,100 41,800 17,700 17,000
NET INCOME $ 76,849 $ 71,053 $ 30,963 $ 28,932
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 66,017 70,778 65,984 70,616
BASIC EARNINGS PER COMMON SHARE $1.16 $1.00 $0.47 $0.41
WEIGHTED AVERAGE COMMON
SHARES AND SHARE EQUIVALENTS
OUTSTANDING 66,430 71,275 66,439 71,151
DILUTED EARNINGS PER COMMON SHARE $1.16 $1.00 $0.47 $0.41
DIVIDENDS PAID PER COMMON SHARE $0.23 $0.23 $0.11 $0.11
The accompanying notes to consolidated financial statements are an
integral part of these statements.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Six Months Ended
(26 Weeks) (27 Weeks)
July 4, July 5,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,849 $ 71,053
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 27,886 23,994
Other - net 7,211 2,726
Change in current assets and liabilities:
(Increase) in accounts receivable (69,493) (46,368)
Decrease in inventories 19,222 21,620
Decrease (increase) in deferred income tax benefits 2,427 (317)
Decrease (increase) in other current assets 5,939 (1,872)
(Decrease) in accounts payable (88,961) (49,547)
(Decrease) in accrued expenses (6,911) (25,506)
Increase (decrease) in income taxes payable 5,608 (6,423)
Net cash used in operating activities (20,223) (10,640)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments (144,673) (281,998)
Disposals of investment instruments 199,891 165,678
Purchases of property and equipment (36,219) (12,021)
Purchases of licenses and trademarks (30,000) (3,750)
Other - net (4,081) (1,666)
Net cash used in investing activities (15,082) (133,757)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 14,230 7,602
Dividends paid (14,770) (15,827)
Purchase of common stock, net of put warrant premiums (57,043) (33,747)
Net cash used in financing activities (57,583) (41,972)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (763) 1,218
NET CHANGE IN CASH AND CASH EQUIVALENTS (93,651) (185,151)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 138,185 322,881
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,534 $ 137,730
The accompanying notes to consolidated financial statements are an
integral part of these statements.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted from this report, as is permitted by such rules and
regulations; however, the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's latest
annual report.
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. Certain items previously reported in specific captions in the
accompanying financial statements have been reclassified to conform
with the current year's classifications. Results of operations for
interim periods are not necessarily indicative of results for the full
year.
2. In January 1998, the Company consummated a license agreement with an
affiliate of Donna Karan International, Inc. to design, produce, market and
sell men's and women's sportswear, jeanswear and activewear products under
the "DKNY JEANS" and "DKNY ACTIVE" marks and logos. Under the agreement,
the Company is obligated to pay a royalty equal to a percentage of net
sales of the "DKNY JEANS" and "DKNY ACTIVE" products. The initial term of
the license agreement is for 15 years through December 31, 2012, with an
option to renew for an additional 15 year period, if certain sales
thresholds are met. Subject to the terms of the license agreement,
aggregate minimum royalties for the initial 15 year term total $152
million.
3. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999, and it establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
its fair value. The Statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. Management has determined that the effect of
adopting SFAS No. 133 will not be material.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report all changes in equity
during a period, except those resulting from investment by and
distribution to owners, in a financial statement for the period in
which they are recognized. The Company has elected to disclose
Comprehensive Income, which includes net income, the effects of foreign
currency translation and changes in unrealized gains and losses on
securities, in the Notes to Consolidated Financial Statements for
interim periods, as follows:
Six Months Ended Three Months Ended
(26 Weeks) (27 Weeks)
July 4, July 5, July 4, July 5,
(Dollars in thousands) 1998 1997 1998 1997
Comprehensive income, net of tax:
Net income $76,849 $71,053 $30,963 $28,932
Foreign currency translation (763) 1,218 (1,048) 194
Changes in unrealized gains or
losses on securities 95 992 899 2,094
Reclassification adjustment for gains
or losses included in net income (441) 24 (115) 147
Comprehensive income $75,740 $73,287 $30,699 $31,367
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. The following are summaries of available-for-sale marketable
securities and maturities:
(Dollars in thousands)
July 4, 1998
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
Tax exempt notes and bonds $ 157,835 $ 325 $ (7) $ 158,153
Money market securities 15,080 -- -- 15,080
Commercial paper 9,516 -- -- 9,516
182,431 325 (7) 182,749
Equity securities 4,014 168 -- 4,182
$ 186,445 $ 493 $ (7) $ 186,931
(Dollars in thousands)
January 3,1998
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
Tax exempt notes and bonds $ 291,659 $ 863 $ -- $ 292,522
Commercial paper 52,676 -- -- 52,676
344,335 863 -- 345,198
Equity securities 3,567 670 -- 4,237
$ 347,902 $ 1,533 $ -- $ 349,435
(Dollars in thousands)
July 4, 1998
Estimated
Fair
Cost Value
Due in one year or less $ 39,075 $ 39,110
Due after one year through three years 143,356 143,639
182,431 182,749
Equity securities 4,014 4,182
$ 186,445 $ 186,931
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At July 4, 1998 and January 3, 1998, the above investments included
$21,854,000 and $128,092,000, respectively, which are classified as
cash equivalents.
For the six month period ended July 4, 1998, gross realized gains on
sales of available-for-sale securities totaled $705,000. For the six
month period ended July 5, 1997, gross realized gains and (losses) on
sales of available-for-sale securities totaled $327,000 and ($721,000),
respectively. The net adjustment to unrealized holding gains and losses
on available-for-sale securities for the six month periods ended July
4, 1998 and July 5, 1997, was a charge of $658,000 (net of $390,000 in
deferred income taxes) and a credit of $947,000 (net of $561,000 in
deferred income taxes), respectively, which were included in retained
earnings.
6. Inventories are stated at the lower of cost (using the first-in,
first-out method) or market and consist of the following:
(Dollars in thousands)
July 4, January 3,
1998 1998
Raw materials $ 44,026 $ 27,924
Work in process 13,034 16,020
Finished goods 319,967 352,305
$377,027 $396,249
7. Property and equipment - net
(Dollars in thousands)
July 4, January 3,
1998 1998
Land and buildings $130,013 $125,538
Machinery and equipment 172,060 153,040
Furniture and fixtures 61,630 59,869
Leasehold improvements 141,497 131,730
505,200 470,177
Less: Accumulated depreciation
and amortization 274,799 255,553
$230,401 $214,624
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. In the first half of 1998, in connection with its stock repurchase program,
the Company sold put warrants on 350,000 shares of common stock in
privately negotiated transactions based on the then-current market prices
of the common stock. In addition, warrants on 580,000 shares of common
stock were exercised, and warrants on 170,000 shares of common stock
expired unexercised. The unexpired warrants on July 4, 1998, if exercised,
will require the Company to purchase up to a total of 500,000 shares of its
common stock at various dates ranging from July 17 through November 16,
1998, with strike prices ranging from $41.35 to $47.94. The Company has the
option to settle in cash or shares of common stock. The proceeds of
$1,301,000 from the sale of the new put warrants have been credited to
capital in excess of par value. The Company's potential $21.5 million
obligation to buy back 500,000 shares of common stock has been charged to
capital in excess of par value and reflected as put warrants on the
consolidated balance sheet. Subsequent to July 4, 1998, warrants on 400,000
shares of common stock were exercised and new warrants on 500,000 shares of
common stock, expiring in March and May 1999,with strike prices ranging
from $37.07 to $39.97, were sold with total proceeds of $1,987,000. The net
effect of the subsequent items is an increase in the Company's potential
obligation to buy back common stock to $24.1 million.
9. On June 26, 1998, the Company's Board of Directors declared a quarterly
cash dividend on the Company's common stock at the rate of $.1125 per
share, to be paid on September 4, 1998 to stockholders of record at the
close of business on August 7, 1998.
10. The following is an analysis of the differences between basic and
diluted earnings per share in accordance with SFAS No. 128 "Earnings
per Share."
Six Months Ended Three Months Ended
(26 Weeks) (27 Weeks)
(In thousands) July 4, 1998 July 5, 1997 July 4, 1998 July 5, 1997
Net income $76,849 $71,053 $30,963 $28,932
Weighted average common
shares outstanding 66,017 70,778 65,984 70,616
Effect of dilutive securities:
Stock options 413 490 455 535
Put warrants -- 7 -- --
Weighted average common
shares and common share
equivalents 66,430 71,275 66,439 71,151
11. During the six months ended July 4, 1998 and July 5, 1997, the Company
made income tax payments of $30,584,000 and $52,834,000, respectively.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. The Company enters into foreign exchange forward contracts to hedge
transactions denominated in foreign currencies for periods of less than one
year and to hedge expected payment of intercompany transactions with its
non-U.S. subsidiaries. Gains and losses on contracts which hedge specific
foreign currency denominated commitments are recognized in the period in
which the transactions are completed and are accounted for as part of the
underlying transaction. As of July 4, 1998, the Company had forward
contracts maturing through August 1998 to sell 6,000,000 Canadian dollars
and contracts maturing through October 1998 to sell 2,100,000 British
pounds sterling. The aggregate U.S. dollar value of the foreign exchange
contracts is approximately $7,548,000. Unrealized gains and losses for
outstanding foreign exchange forward contracts were not material at July 4,
1998.
13. On May 6, 1998, Mademoiselle Knitwear, Inc. ("Mademoiselle"), a former
knitgoods supplier for the Company, filed suit against the Company and
three labor unions. The suit seeks $30 million in compensatory damages,
trebling under civil RICO, and $50 million in punitive damages for a
variety of claims against the Company related to an alleged commitment by
the Company to supply orders to Mademoiselle for a certain number of
knitwear goods during the period June 1992 through June 1998. On June 26,
1998, the Company and the union defendants moved to dismiss the complaint
for failure to state a claim for relief. The court has stayed discovery in
the action pending oral argument on the motion to dismiss, currently
scheduled for October 1998.
On September 30, 1997, a related putative class action, Chun Hua Mui v. Union of
Needletrades Industrial and Textile Employees (UNITE), et. al., was filed
against the Company and the three unions who are defendants in the Mademoiselle
lawsuit noted above. The employee complaint seeks on behalf of a class of
current and former Mademoiselle employees $30 million in damages, an injunction
requiring the Company to provide knitwear orders to Mademoiselle through June
1998, and a constructive trust on certain liquidated damage payments paid by the
Company to UNITE in May 1997. The Company and the unions have moved to dismiss
the complaint for failure to state a claim for relief. Those motions were argued
on July 16, 1998. Plaintiffs have moved to certify the action as a class action.
Defendants have opposed the motion.
The Company believes that these claims are without merit and intends to defend
these actions vigorously. Although the outcome of any such litigation cannot be
determined with certainty, management is of the opinion that the final outcome
of these litigations should not have a material adverse effect on the Company's
financial position or results of operations.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On a period to prior year comparable period ("period-to-period") basis, net
sales for the second quarter of 1998 increased $27 million, or 5.1%, over the
second quarter of 1997, and net sales for the first half of 1998 (26 weeks)
increased $87 million, or 7.6%, over the first half of 1997 (27 weeks). The
second quarter net sales result principally reflected sales of the Company's
DKNY JEANS product (initially shipped in January 1998) and increased net sales
of Special Markets product and the Company's outlet operations. The first half
net sales result principally reflected increased net sales of better casual
women's sportswear, Special Markets product and the Company's outlet operations,
and the introduction of DKNY JEANS product, partially offset by slightly lower
net sales in certain other divisions.
New product offerings accounted for $23 million of the 1998 second quarter net
sales increase: $14 million of DKNY JEANS, $4 million of Crazy Horse apparel
(shipped by the Special Markets Unit commencing June 1998), and $5 million of
the Company's latest fragrances Lizsport and Claiborne Sport (initially shipped
in July 1997). On a period-to-period basis, net sales of the outlet operations
increased 17%, to $68 million, during the second quarter, principally reflecting
additional stores (107 at 1998 second quarter end as compared with 89 a year
earlier).
The 1998 first half increase in women's sportswear sales principally reflected
an 8% increase in sales of the Casual Unit, to $377 million, and an 8% increase
in sales of Petite product, to $141 million, due in each case to increases in
unit volume. New product offerings accounted for $48 million of the 1998 first
half net sales increase: $34 million of DKNY JEANS, $10 million of the Lizsport
and Claiborne Sport fragrances and $4 million of Crazy Horse. On a
period-to-period basis, sales of Special Markets product (including Crazy Horse)
increased 40%, to $61 million, reflecting higher unit volume, and sales of the
outlet operations increased 11%, to $114 million, principally reflecting
additional stores. These increases were moderated by slightly lower sales of the
Company's domestic retail operations as well as the dress and Dana Buchman
Divisions.
Gross profit margins increased in 1998 on a period-to-period basis to 39.8% from
39.4% in the second quarter, and to 39.3% from 39.1% in the first half. These
results principally reflected higher initial gross margins primarily due to a
larger proportion of product shipped by ocean vessel transport as compared to
more costly air transport as well as a higher proportion of sales represented by
the Cosmetics Division (which is a higher margin business). The increase in
gross margin percentage was moderated by a higher proportion of close-out sales
within the wholesale apparel operations (primarily Casual, Collection, Elisabeth
and Petite product), and lower margins realized on close-out sales. The
improvement in first half margins was also moderated by lower margins within the
Company's domestic retail store operations due to higher store markdowns in the
first quarter.
Legislation which would further restrict the importation and/or increase the
cost of textiles and apparel produced abroad has periodically been introduced in
Congress. Although it is unclear whether any new legislation will be enacted
into law, it appears likely that various new legislative or executive
initiatives will be proposed. These initiatives may include a reevaluation of
the trading status of certain countries, including Normal Trade Relations("NTR")
treatment for the People's Republic of China ("PRC") and/or retaliatory duties,
quotas or other trade sanctions, which, if enacted, would increase the cost of
products purchased from suppliers in such countries. The PRC's NTR treatment was
renewed in July 1998 for an additional year. In light of the very substantial
portion of the Company's products which are manufactured by foreign suppliers,
the enactment of new legislation or the administration of current international
trade regulations, or executive action affecting international textile
agreements, could adversely affect the Company's operations.
The period-to-period increases in selling, general and administrative ("SG&A")
expenses were $10 million, or 5.7%, and $27 million, or 8.0%, for the second
quarter and first half of 1998, respectively. SG&A expenses expressed as a
percentage of net sales were 31.7% and 31.5% for the second quarter, and 29.9%
and 29.8% for the first half, of 1998 and 1997, respectively. The dollar
increases principally reflected additional operating expenses related to the
DKNY JEANS business and marketing expenses related to the Company's new Sport
fragrances. Also contributing to the increases were additional costs associated
with the technological upgrading of the Company's distribution centers and
information systems, moderated by continuing expense reduction initiatives.
The period-to-period decreases in investment and other income-net principally
reflected decreases in the Company's investment portfolio, reflecting the
ongoing stock repurchase program, partially offset by higher rates of return
realized on the investment portfolio.
As a result of the factors described above, the Company's income before
provision for income taxes increased on a period-to-period basis 5.9% for the
second quarter, and 7.2% for the first half, of 1998. These results included
start-up operating losses within the DKNY JEANS business. The provisions for
income taxes reflected the changes in pre-tax income and a slight decrease in
the effective tax rate in 1998. As a result of the foregoing, net income
increased 7.0% and 8.2% for the second quarter and first half of 1998,
respectively.
The earnings per common share computations reflected a lower number of
outstanding shares on a period-to-period basis as a result of the Company's
ongoing stock repurchase program.
The retail environment remains intensely competitive and highly promotional, and
the tone of business continues to be challenging. The Company is currently
implementing the second three year phase of a comprehensive business
transformation program which includes goals relating to cost reduction,
improvements in operating margins and return on operating capital as well as
enhanced customer and consumer responsiveness. The Company has previously
announced that while management continues to expect the Company's rate of sales
and earnings growth to slow in the remaining quarters of 1998, principally
reflecting lower than expected holiday bookings and lower than anticipated
average unit selling prices realized on close-out sales, management remains
optimistic about the Company's ability to report improvement in sales and
earnings per share for the full year 1998.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities was $20 million through July 4, 1998,
compared to $11 million through July 5, 1997, primarily due to a larger decrease
in accounts payable and a higher increase in accounts receivable, partially
offset by a smaller decrease in accrued expenses and an increase in income taxes
payable compared to a decrease in the prior period as well as higher net income.
Net cash used in investing activities was $15 million in 1998, compared to $134
million in 1997. The fluctuations in net cash used in investing activities were
primarily related to the net increase or decrease in marketable securities on a
period-to-period basis. Also contributing to the net cash used in investing
activities was the increase in the amount expended on property and equipment and
purchases of licenses and trademarks. Net cash used in financing activities was
$58 million in 1998, compared to $42 million in 1997, principally reflecting an
increase in the amount expended in the Company's stock repurchase program,
partially offset by higher proceeds from the exercise of stock options. As of
August 14, 1998, the Company had expended, or committed to expend through the
sale of put warrants (see Note 8 of Notes to Consolidated Financial Statements),
approximately $910 million of the $975 million authorized under its stock
repurchase program, covering an aggregate of 28 million shares.
Inventories at July 4, 1998 were $377 million, compared to $396 million at 1997
year end and $328 million at July 5, 1997. The period-to-period increase in
inventory principally reflected higher ongoing inventory levels across
substantially all of the Company's wholesale apparel divisions, higher levels of
prior season merchandise, as well as earlier receipt of fall merchandise,
partially offset by lower domestic retail inventory levels. The increase also
reflected the addition of the DKNY JEANS business.
The Company's anticipated capital expenditures for 1998 currently approximate
$80 million, of which $36 million has been expended through July 4, 1998. These
expenditures consist primarily of the information systems upgrade discussed
below, the technological upgrading and expansion of the Company's distribution
facilities (including certain building and equipment expenditures) and the
expansion of the outlet and Dana Buchman retail operations. Capital expenditures
will be financed through available capital and future earnings. Any increased
working capital needs will be met by current funds. Bank lines of credit, which
are available to finance import transactions through the issuance of letters of
credit, were $420 million as of July 4, 1998. The Company expects to be able to
adjust these lines as required.
YEAR 2000/INFORMATION SYSTEMS UPGRADE
Many existing computer systems and software products, including many used by the
Company, accept only two digit entries in the date code field. Beginning in the
year 2000, and in certain instances prior to the year 2000, these date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, the Company's date critical functions may
be materially adversely affected unless these computer systems and software
products are or become able to accept four digit entries ("year 2000
compliant").
In 1996, the Company commenced a comprehensive upgrade of its management
information systems, which involves substantial changes to the Company's present
hardware and software, and is expected to provide certain competitive benefits
and also result in the Company's information systems being year 2000 compliant
upon completion. The planning stage of this project has been completed and the
systems development and pilot implementation stages are in progress. Management
currently expects that full implementation of the project will involve a
commitment of approximately $50-$60 million over the four year period ending
with year end 1999. Approximately $40-$45 million of such amount is in the form
of capital expenditures, while the remaining $10-$15 million is being expensed
as incurred. As of July 4, 1998, capital expenditures related to the project
totaled $22 million and an additional $4 million had been expensed as incurred.
The Company's financial systems were upgraded for year 2000 compliance in 1997.
Project purchases of approximately $20 million are included in the anticipated
1998 capital expenditures, and approximately $5 million in project associated
expenses are expected to be incurred in 1998. The testing and the initial
implementation phases of a significant portion of the project were completed
during the first six months of 1998. The Company expects that with the
completion of the project, the year 2000 issue will not pose significant
operational problems. There can be no assurance, however, that the Company's
systems will be rendered year 2000 compliant in a timely manner, or that the
Company will not incur significant unforeseen additional expenses to assure such
compliance. Failure to successfully complete and implement the upgrade project
on a timely basis could have a material adverse effect on the Company's
operations.
The Company has begun formal communications with all of its suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own year 2000 issues. The Company's
estimated project costs and timetables are based on presently available
information, and include the Company's assessment of the abilities of third
parties to address the issue effectively. There can be no assurance, however,
that the systems of other companies on which the Company's processes rely will
be timely converted, or that a failure to successfully convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have an impact on the Company's operations.
CERTAIN INTEREST RATE AND FOREIGN CURRENCY RISKS
The Company has no long-term debt, and finances its capital needs through
available capital and current earnings. The Company's exposure to market risk
for changes in interest rates relates primarily to the Company's investment
portfolio. The Company, by policy, mitigates its exposure by limiting
maturities, placing its investments with high quality issuers and limiting the
amount of credit exposure to any one issuer. The Company reduces the risks
associated with changes in foreign currency rates by entering into foreign
exchange forward contracts to hedge transactions denominated in foreign
currencies for periods of less than one year and to hedge expected payment of
intercompany transactions with its non-U.S. subsidiaries. The market risks
associated with the Company's investment portfolio and foreign currency exposure
has not changed materially since January 3, 1998.
**************************************
Statements contained herein that relate to the Company's future performance,
including, without limitation, statements with respect to the Company's
anticipated results for any portion of the remainder of fiscal 1998, shall be
deemed forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, as a number of factors
affecting the Company's business and operations could cause actual results to
differ materially from those contemplated by the forward-looking statements.
Those factors include the overall level of consumer spending and the performance
of the Company's products within the prevailing retail environment, as well as
such other factors as are set forth in the Company's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998, including, without limitation, those
set forth under the heading "Business-Competition; Certain Risks".
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 6, 1998, Mademoiselle Knitwear, Inc. ("Mademoiselle"), a former knitgoods
supplier for the Company, now operating as a debtor-in-possession pursuant to
Chapter 11 of the United States Bankruptcy Code, filed suit against the Company
and three labor unions -- the Union of Needletrades, Industrial and Textile
Employees ("UNITE"), UNITE Local 23-25, which represents a substantial number of
the Company's employees, and UNITE Local 155, which represents Mademoiselle's
employees. The suit, Mademoiselle Knitwear, Inc. v. Liz Claiborne, Inc., et al.,
98 Civ. 3252, pending in the United States District Court for the Southern
District of New York, asserts a variety of claims against the Company, all
stemming from an alleged commitment by the Company to supply orders to
Mademoiselle for a certain number of knitwear goods for the period June 1992
through June 1998. The complaint includes claims against the Company for breach
of contract, fraud, civil RICO, and prima facie tort, and asserts claims against
the Company and the union defendants for conversion of property of the estate of
a debtor-in-bankruptcy. The Mademoiselle action seeks $30 million in
compensatory damages from the Company, trebling of those damages under the
provisions of the civil RICO statute, and $50 million in punitive damages. On
June 26, 1998 the Company and the union defendants moved to dismiss the
complaint for failure to state a claim for relief. The court has stayed
discovery in the action pending oral argument on the motion to dismiss,
currently scheduled for October 1998.
On September 30, 1997, a related putative class action, Chun Hua Mui v. Union of
Needletrades Industrial and Textile Employees, 97 Civ. 7270, was filed by three
current and former employees of Mademoiselle in the United States District Court
for the Southern District of New York against the Company and the same three
unions. An amended complaint (the "employee complaint") was filed on October 15,
1997. The employee complaint, brought on behalf of a purported class of 600
current and former Mademoiselle employees, seeks $30 million in damages
supposedly owed to the employees as alleged third-party beneficiaries of either
the 1992-1998 alleged production agreement on which Mademoiselle has also sued,
or of a supposed parallel agreement with Local 23-25; an injunction requiring
the Company to provide orders for knitgoods to Mademoiselle through June 1998;
and the imposition of "a constructive trust" on certain liquidated damage
payments made by the Company to UNITE in May 1997 -- payments the employee
complaint, like the Mademoiselle action, contends violated Section 302 of the
National Labor Relations Act. The Company and the union defendants have moved to
dismiss the employee complaint for failure to state a claim for relief. Those
motions were argued on July 16, 1998. All but certain preliminary document
discovery and discovery related to whether class certification is proper has
been stayed pending resolution of the motions to dismiss. The plaintiffs have
moved to certify the action as a class action; the defendants have opposed the
motion. The plaintiffs have not sought preliminary injunctive relief. See Note
13 of Notes to Consolidated Financial Statements.
The Company and certain of its present and former officers and directors were
named as defendants in an action styled Ressler et al. vs. Liz Claiborne, Inc.,
et al., filed in the United States District Court for the Eastern District of
New York. The plaintiffs sought compensatory damages on behalf of a class of
purchasers of the Company's Common Stock during the period commencing September
21, 1992 through and including July 16, 1993, and alleged that the defendants
violated the federal securities laws by, among other things, making
misrepresentations or omissions of material facts that artificially inflated the
market price of the Common Stock during the class period. An earlier-filed
lawsuit before the same court as Ressler, styled Fishbaum vs. Chazen, et. al.,
made allegations similar to the Ressler complaint and sought damages on behalf
of a class of purchasers of the Company's Common Stock for the period commencing
March 30, 1993, through and including July 16, 1993. An amended complaint was
filed in the Ressler action in May 1994 to add Fishbaum as a plaintiff. In June
1994, the court granted the Company's motion to dismiss the Fishbaum complaint,
with leave to amend, on the grounds that the complaint did not adequately set
forth the requisite element of scienter. In July 1994, the Company moved to
dismiss the Ressler complaint. In August 1995, the Court granted that motion,
again with leave to amend, on the grounds that the Ressler complaint failed to
comply with pleading requirements of the Federal Rules of Civil Procedure.
However, the Court rejected the contention that scienter had not been adequately
pled. In response to the Company's motion for reconsideration of that latter
point, the Court indicated that the Company could present the scienter issue
again in moving to dismiss a new amended complaint. In October 1995, a second
amended complaint was filed. The Company then moved to dismiss that complaint.
By memorandum and order dated August 14, 1998, the Court granted defendants'
motion to dismiss the second amended complaint.
In April 1994, two stockholder derivative actions, which contain substantially
similar allegations, styled Goldberg Family Trust vs. Chazen, et al. and Liz
Claiborne, Inc., nominal defendant, and Laz Schneider vs. Chazen, et al. and Liz
Claiborne, Inc., nominal defendant, were brought in the Court of Chancery of the
State of Delaware against certain of the Company's former and present directors
and two of its former Vice Chairmen. The complaints contain allegations that the
individual defendants breached their fiduciary obligations to the Company and
its stockholders, committed corporate mismanagement and wasted corporate assets
in connection with the Company's stock repurchase program and the defense of
pending legal proceedings, and were unjustly enriched in connection with the
sale of shares of the Company's Common Stock between September 1992 and July
1993 by certain of its present and former officers and directors. In July 1994,
the Laz Schneider action was consolidated with the Goldberg action. In August
1994, the defendants moved to dismiss the consolidated complaint. The motion is
pending.
The Company believes that the litigations described above are without merit and
intends to vigorously defend these actions. Although the outcome of any such
litigation or claim cannot be determined with certainty, management is of the
opinion that the final outcome of these litigations should not have a material
adverse effect on the Company's results of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 1998 Annual Meeting of Stockholders held on May 14, 1998, the
stockholders of the Company (i) approved an amendment to the Liz Claiborne, Inc.
1992 Stock Incentive Plan (the number of affirmative votes cast was 55,618,932,
the number of negative votes cast was 4,297,401 and the number of abstentions
was 136,518), (ii) ratified the appointment of Arthur Andersen LLP as
independent public accountants of the Company for the fiscal year ending January
2, 1999 (the number of affirmative votes cast was 59,942,921, the number of
negative votes cast was 59,861 and the number of abstentions was 50,069), and
(iii) elected the following nominees to the Company's Board of Directors, to
serve until the 2001 annual meeting of stockholders and until their respective
successors are duly elected and qualified.
Votes
Nominee For Withheld
Eileen H. Bedell 59,005,320 1,047,531
Kenneth P. Kopelman 58,857,651 1,195,200
There were no broker non-votes with respect to any matter acted upon at the
Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule as of July 4, 1998.
(b) The Company did not file any reports on Form 8-K in the quarter.
SIGNATURE
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.
LIZ CLAIBORNE, INC.
DATE: August 17, 1998 BY /s/ Samuel M. Miller
SAMUEL M. MILLER
Senior Vice President - Finance
Chief Financial and Accounting Officer