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 3, 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 November 13, 1998 was 64,577,683.
(2)
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of October 3, 1998 and
January 3, 1998 ............................................. 3
Consolidated Statements of Income for the Nine and Three Month Periods
Ended October 3, 1998 and October 4, 1997 ................... 4
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended October 3, 1998 and October 4, 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 5. Statement Regarding Forward-Looking Disclosure.................... 17-18
Item 6. Exhibits and Reports on Form 8-K ................................. 18
SIGNATURE ..................................................................... 19
(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)
October 3, January 3,
ASSETS 1998 1998
CURRENT ASSETS:
Cash and cash equivalents $ 62,862 $ 138,185
Marketable securities 22,071 221,343
Accounts receivable - trade 426,548 181,303
Inventories 407,979 396,249
Deferred income tax benefits 30,613 31,647
Other current assets 70,032 88,693
Total current assets 1,020,105 1,057,420
PROPERTY AND EQUIPMENT - NET 244,006 214,624
OTHER ASSETS 65,209 33,241
$1,329,320 $ 1,305,285
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 142,277 $ 173,812
Accrued expenses 132,679 138,816
Income taxes payable 32,373 15,029
Total current liabilities 307,329 327,657
DEFERRED INCOME TAXES 9,675 10,542
COMMITMENTS AND CONTINGENCIES
PUT WARRANTS 35,588 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 46,040 30,731
Retained earnings 1,641,356 1,541,894
Cumulative translation adjustment (3,543) (2,673)
1,772,072 1,658,171
Common stock in treasury, at cost, 23,599,972 shares and
22,120,305 shares (795,344) (736,544)
Total stockholders' equity 976,728 921,627
$1,329,320 $ 1,305,285
The accompanying notes to consolidated financial statements are an
integral part of these statements.
(4)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Nine Months Ended Three Months Ended
(39 Weeks) (40 Weeks)
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
NET SALES $1,925,128 $1,820,376 $ 703,904 $ 685,920
Cost of goods sold 1,167,700 1,093,487 426,930 402,191
GROSS PROFIT 757,428 726,889 276,974 283,729
Selling, general & administrative expenses 545,074 520,400 179,926 182,306
OPERATING INCOME 212,354 206,489 97,048 101,423
Investment and other income-net 7,392 11,968 1,749 4,181
INCOME BEFORE PROVISION
FOR INCOME TAXES 219,746 218,457 98,797 105,604
Provision for income taxes 80,200 80,800 36,100 39,000
NET INCOME $ 139,546 $ 137,657 $ 62,697 $ 66,604
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 65,782 70,476 65,319 69,847
BASIC EARNINGS PER COMMON SHARE $2.12 $1.95 $0.96 $0.95
WEIGHTED AVERAGE COMMON
SHARES AND SHARE EQUIVALENTS
OUTSTANDING 66,088 70,990 65,557 70,403
DILUTED EARNINGS PER COMMON SHARE $2.11 $1.94 $0.96 $0.95
DIVIDENDS PAID PER COMMON SHARE $0.34 $0.34 $0.11 $0.11
The accompanying notes to consolidated financial statements are an
integral part of these statements.
(5)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Nine Months Ended
(39 Weeks) (40 Weeks)
October 3, October 4,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 139,546 $ 137,657
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 41,743 35,120
Other - net 8,161 5,253
Change in current assets and liabilities:
(Increase) in accounts receivable (245,245) (205,739)
(Increase) decrease in inventories (11,730) 6,033
Decrease (increase) in deferred income tax benefits 1,733 (5,620)
Decrease (increase) in other current assets 18,661 (4,160)
(Decrease) in accounts payable (31,535) (30,948)
(Decrease) increase in accrued expenses (6,138) 5,123
Increase in income taxes payable 17,344 22,525
Net cash used in operating activities (67,460) (34,756)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments (167,608) (317,808)
Disposals of investment instruments 364,985 276,411
Purchases of property and equipment (60,227) (17,872)
Purchases of licenses and trademarks (30,000) (3,750)
Other - net (12,865) (3,105)
Net cash provided by (used in) investing activities 94,285 (66,124)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 14,691 10,840
Dividends paid (22,107) (23,676)
Purchase of common stock, net of put warrant premiums (93,522) (138,573)
Net cash used in financing activities (100,938) (151,409)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,210) 2,217
NET CHANGE IN CASH AND CASH EQUIVALENTS (75,323) (250,072)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 138,185 322,881
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,862 $ 72,809
The accompanying notes to consolidated financial statements are an
integral part of these statements.
(6)
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." 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 also 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 or losses to offset related results on the hedged item
in the income statement, and requires that a company 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:
Nine Months Ended Three Months Ended
(39 Weeks) (40 Weeks)
Oct. 3, Oct. 4, Oct. 3, Oct. 4,
(Dollars in thousands) 1998 1997 1998 1997
Comprehensive income, net of tax:
Net income $139,546 $137,657 $62,697 $66,604
Foreign currency translation (1,210) 2,217 (447) 999
Changes in unrealized gains or
losses on securities (680) 781 (775) (211)
Reclassification adjustment for gains
or losses included in net income (523) 408 (82) 384
Comprehensive income $137,133 $141,063 $61,393 $67,776
(8)
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)
October 3, 1998
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
Tax exempt notes and bonds $ 69,193 $ 124 $ -- $ 69,317
Commercial paper 4,001 1 -- 4,002
73,194 125 -- 73,319
Equity securities 6,030 -- (487) 5,543
$ 79,224 $ 125 $ (487) $ 78,862
(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)
October 3, 1998
Estimated
Fair
Cost Value
Due in one year or less $ 62,756 $ 62,774
Due after one year through three years 10,438 10,545
73,194 73,319
Equity securities 6,030 5,543
$ 79,224 $ 78,862
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At October 3, 1998 and January 3, 1998, the above investments included
$56,791,000 and $128,092,000, respectively, which are classified as
cash equivalents.
For the nine month period ended October 3, 1998, gross realized gains
on sales of available-for-sale securities totaled $1,209,000. For the
nine month period ended October 4, 1997, gross realized gains and
(losses) on sales of available-for-sale securities totaled $543,000 and
($1,108,000), respectively. The net adjustment to unrealized holding
gains and losses on available-for-sale securities for the nine month
periods ended October 3, 1998 and October 4, 1997, was a charge of
$1,196,000 (net of $699,000 in deferred income taxes) and a credit of
$1,185,000 (net of $701,000 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)
October 3, January 3,
1998 1998
Raw materials $ 14,470 $ 27,924
Work in process 14,170 16,020
Finished goods 379,339 352,305
$407,979 $396,249
7. Property and equipment - net
(Dollars in thousands)
October 3, January 3,
1998 1998
Land and buildings $132,288 $125,538
Machinery and equipment 181,564 153,040
Furniture and fixtures 63,528 59,869
Leasehold improvements 150,850 131,730
528,230 470,177
Less: Accumulated depreciation
and amortization 284,224 255,553
$244,006 $214,624
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. In the first nine months of 1998, in connection with its stock repurchase
program, the Company sold put warrants on 1,250,000 shares of its common
stock in privately negotiated transactions based on the then-current market
prices of the common stock. In addition, warrants on 730,000 shares of
common stock were exercised, and warrants on 420,000 shares of common stock
expired unexercised. The unexpired warrants on October 3, 1998, if
exercised, will require the Company to purchase up to a total of 1,000,000
shares of its common stock at various dates ranging from November 16, 1998
through July 7, 1999, with strike prices ranging from $26.49 to $47.94. The
Company has the option to settle in cash or shares of common stock. The
proceeds of $4,748,000 from the sale of the new put warrants have been
credited to capital in excess of par value. The Company's potential $35.6
million obligation to buy back 1,000,000 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 October 3, 1998, warrants on
100,000 shares of common stock were exercised. The effect of the subsequent
transactions is a decrease in the Company's potential obligation to buy
back common stock to $30.8 million.
9. On October 15, 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 December 4, 1998 to stockholders of
record at the close of business on November 12, 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."
Nine Months Ended Three Months Ended
(39 Weeks) (40 Weeks)
(In thousands) Oct. 3, 1998 Oct. 4, 1997 Oct. 3, 1998 Oct. 4, 1997
Net income $139,546 $137,657 $62,697 $66,604
Weighted average common
shares outstanding 65,782 70,476 65,319 69,847
Effect of dilutive securities:
Stock options 297 491 160 551
Put warrants 9 23 78 5
Weighted average common
shares and common share
equivalents 66,088 70,990 65,557 70,403
11. During the nine months ended October 3, 1998 and October 4, 1997, the
Company made income tax payments of $56,129,000 and $60,539,000,
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 October 3, 1998, the Company had forward
contracts maturing through December 1998 to sell 18,500,000 Canadian
dollars and contracts maturing through February 1999 to sell 2,750,000
British pounds sterling. The aggregate U.S. dollar value of the foreign
exchange contracts is approximately $16,679,000. Unrealized gains and
losses for outstanding foreign exchange forward contracts were not material
at October 3, 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 heard oral argument on
the motion on October 1, 1998. At the conclusion of the argument, the court
indicated that it would dismiss the RICO and prima facie tort claims
against the Company and would issue a later decision on the remainder of
the claims. Discovery remains stayed.
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 moved to dismiss the
complaint for failure to state a claim for relief. On August 18, 1998, the court
issued an opinion dismissing all of the claims against the Company, including
the claim under Section 302 of the NLRA brought jointly against the Company and
the unions. On September 2, 1998, plaintiffs moved for reargument of the
dismissal of the contract claims against the Company or, alternatively, for
leave to amend the complaint. The Company has responded and the matter was fully
briefed and submitted to the court on October 30, 1998. This motion as well as
the motion for class certification are pending.
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
Net sales for the third quarter of 1998 increased $18 million, or 2.6%, over
the comparable 1997 quarter, and net sales for the nine months of 1998 (39
weeks) increased $105 million, or 5.8%, over the nine months of 1997 (40 weeks).
Excluding the extra week in 1997, comparable net sales for the nine months of
1998 increased 6.2%. The third quarter typically represents the Company's
highest sales quarter in each year, reflecting normal seasonal fluctuations.
New product offerings (DKNY JEANS licensed product and the Special Markets
Unit's Crazy Horse product) accounted for $34 million of the 1998 third quarter
net sales increase. The quarterly results also reflected increases of $4
million in the retail operations (including outlet stores), $3 million of Men's
sportswear and furnishings, $2 million of Elisabeth product and $2 million of
accessories and other non-apparel. The increase in the retail operations was
due primarily to additional outlet stores and the increase in the wholesale
divisions was due primarily to higher unit volume. These increases were offset
by decreases (due primarily to lower average unit selling prices) of $9 million
in better casual women's sportswear, $10 millon in better career (Collection
apparel in missy and petite sizes and dresses) product and $6 million in Dana
Buchman product.
The new product offerings referred to above accounted for $73 million of the
1998 nine month net sales increase. The nine month results also reflected an
increase of $32 million in better casual women's sportswear, $12 million
(excluding new product offerings) of Special Markets product, $10 million in
the retail operations, $8 million in Men's sportswear and furnishings, $5
million of Elisabeth product and $2 million in accessories and other
non-apparel. The increase in the retail operations was due primarily to
additional outlet stores and the increase in the wholesale divisions was due
primarily to higher unit volume. These increases were partially offset by
decreases (due primarily to lower unit volume) of $16 million in better career
product and $12 million in Dana Buchman product.
Gross profit margins decreased in 1998 to 39.3% from 41.4% in the third quarter,
and to 39.3% from 39.9% in the nine months. These results principally reflected
lower prices realized on close-out sales within the wholesale apparel
operations, and a higher proportion of sales represented by the Special Markets
Division (which is a lower gross margin business), offset by higher initial
gross margins partially as a result of a larger proportion of product shipped
by ocean vessel transport as compared to more costly air transport. The
decrease in the third quarter also reflected a lower proportion of sales
represented by the Cosmetics and Dana Buchman Divisions (which are higher gross
margin businesses) as well as lower margins within those divisions. The
decrease for the nine month period also reflected a higher proportion of
close-out sales within the wholesale apparel operations.
Selling, general and administrative ("SG&A") expenses decreased $2 million,
or 1.3%, in the third quarter, and increased $25 million, or 4.7%, for the
nine months. SG&A expenses as a percentage of net sales declined to 25.6%
from 26.6% for the third quarter, and to 28.3% from 28.6% for the nine months,
reflecting the Company's ongoing cost reduction initiatives. The third quarter
decrease principally reflected lower salary and related expenses and the
absence of a fragrance launch, partially offset by additional operating expenses
related to the DKNY JEANS business and the upcoming DKNY ACTIVE launch. The
nine month increase principally reflected the DKNY JEANS operating expenses
and the technological upgrading of the Company's distribution centers and
information systems, moderated by lower salary and related expenses.
As a result of the factors described above, operating income decreased $4
million, or 4.3%, for the third quarter of 1998 to 13.8% of sales in 1998 as
compared to 14.8% in 1997 and increased $6 million, or 2.8% for the nine
months of 1998 to 11.0% of sales in 1998 as compared to 11.3% in 1997.
Investment and other income-net declined $2 million in the third quarter and
$5 million in the nine months, principally reflecting decreases in the
Company's investment portfolio, as a result of the ongoing stock repurchase
program, partially offset by higher rates of return.
Net income for the 1998 third quarter was $63 million compared to $67 million
in 1997. The 1998 nine month net income was $140 million compared to $138
million in 1997. The diluted earnings per common share increased 1.1% to $0.96
from $0.95 for the quarter and increased 8.8% to $2.11 from $1.94 for the nine
months. The earnings per common share computations relfected a lower number
of average outstanding shares on a period-to-period basis as a result of the
Company's ongoing stock repurchase program and lower investment income.
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
enchanced 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, principally reflecting lower than originally
expected holiday bookings and lower than originally anticipated average unit
selling prices realized on close-out sales, management remains optimistic
about the Company's ability to report improvements in sales and earnings per
share for the full year 1998. The Company has also previously announced that
it envisions modest sales and earnings growth for the 1999 fiscal year as a
whole. See Part II. Other Information. Item 5. - "Statement Regarding
Forward-Looking Disclosure."
FINANCIAL POSIITON, CAPITAL RESOURCES AND LIQUIDITY
As a result of the following the Company's net change in cash and cash
equivalents for the nine months was a decrease of $75 million in 1998 compared
to a decrease of $250 million in 1997. Net cash used in operating activities
was $67 million for the nine months ended October 3, 1998, compared to $35
million for the nine months ended October 4, 1997, primarily due to a larger
increase in accounts receivable due to the later timing of sales, a larger
decrease in current liabilities and an increase in inventory compared to a
decrease in 1997, partially offset by a decrease in other current assets
compared to an increase in 1997. Net cash provided by investing activities
was $94 million in 1998, compared to a usage of $66 million in 1997. The
increase in net cash provided by investing activities was primarily related
to a decrease in marketable securities as the Company liquidated more
marketable securities to fund cash flow needs, partially offset by an increase
in the amount expended on property and equipment primarily for information
systems upgrade, the technological upgrading and expansion of the Company's
distribution facilities and the expansion of the retail operations and
purchases of licenses and trademarks (DKNY JEANS). Net cash used in financing
activities was $101 million in 1998, compared to $151 million in 1997,
principally reflecting a decrease in the amount expended in the Company's
stock repurchase program, partially offset by higher proceeds from the exercise
of stock options. As of November 13, 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 $941 million of the $975
million authorized under its stock repurchase program, covering an aggregate
of 28 million shares.
Inventories at October 3, 1998 were $408 million, compared to $396 million
at 1997 year end and $343 million at October 4, 1997. The increase in
inventory principally reflected higher ongoing and replenishment inventory
levels across substantially all of the Company's wholesale apparel divisions
and outlet operations, higher level of prior season merchandise, as well as
earlier receipt of holiday season 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
$85 million, of which $60 million has been expended through October 3, 1998.
These expenditures consist primarily of the items mentioned above. Capital
expenditures will be financed through available capital and future earnings.
Any increased working capital needs will be met by current funds or bank lines
of credit. Bank lines of credit are available to finance import transactions
through the issuance of letters of credit, to a maximum amount of $425 million
as of October 3, 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 the 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 October 3, 1998, capital expenditures related to the project
totaled $34 million and an additional $5 million had been expensed as incurred.
The Company's financial systems were upgraded for year 2000 compliance in 1997.
Project purchases of approximately $30 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 pilot
implementation of a significant portion of the project were completed in 1998 as
planned. The Company expects to install these systems in all divisions during
1999. With the completion of the project, the year 2000 issue should 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. To date,
approximately one-half of those contacted have responded, none of which have
raised any year 2000 issues which the Company believes would have a material
adverse effect on the Company. The Company is in the process of sending
follow-up inquiries to third parties and expects to complete the survey in the
Spring of 1999. 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 a material impact on the Company's operations.
The company currently believes that it is difficult to identify its most
reasonably likely worst case year 2000 scenario. However, a reasonable worst
case scenario would be a failure by a significant third party in the Company's
supply chain (including, without limitation, any utility or other general
service provider) to remediate its Year 2000 deficiencies that continues for
several days. Any such failure could impair the manufacture of products, the
processing of customer orders and shipments. In addition, a failure to timely
remediate any of the Company's internal inventory management operating systems
would adversely affect the Company's stock allocation program, resulting in
mis-timed shipments and potential order cancellations. These scenarios would
likely have a material adverse effect on the Company's results of operations,
although the extent of such effect cannot be reasonably estimated at this time.
The Company is in the process of developing contingency plans to limit the
effect of any Year 2000 issues on the Company's operations and results, and
intends to finalize its contingency plans by no later than 1998 year end. For
instance, the Company is in the process of exploring, where possible, alternate
service providers and is analyzing the possibility of using alternate but
comparable systems currently in use within the Company. The Company's Year 2000
efforts are ongoing and its overall plan, as well as its development of
contingency plans, will continue to evolve as new information becomes available.
While the Company anticipates continuity of its business activities, that
continuity will be dependent upon its ability, and the ability of third parties
with whom the Company relies on directly or indirectly, to be Year 2000
complaint. See Part II. Other Information. Item 5. - "Statement Regarding
Forward-Looking Disclosure. 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 in 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.
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 heard oral argument
on the motion on October 1, 1998. At the conclusion of the argument, the court
indicated that it would dismiss the RICO and prima facie tort claims against the
Company and would issue a later decision on the remainder of the claims.
Discovery remains stayed.
On Septemper 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 allaged third party beneficiaries of either
the 1992-1998 alledged 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 moved to
dismiss the employee complaint for failure to state a claim for relief. On
August 18, 1998, the court issued an opinion dismissing all of the claims
against the Company, including the claim under Section 302 of the NLRA brought
jointly against the Company and the unions. On September 2, 1998, plaintiffs
moved for reargument of the dismissal of the contract claims against the Company
or. alternatively, for leave to amend the complaint. The Company has responded
and the matter was fully briefed and submitted to the court on October 30, 1998.
This motion, as well as the motion for class certification, are pending. See
Note 13 of Notes to Consolidatd 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
ommisions of material facts that artificially inflated the market price of
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 defendant's motion
to dismiss the second amended complaint. That order has been appealed to the
United States Court of Appeals for the Second Circuit.
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 litigation's 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 5. Statement Regarding Forward-Looking Disclosure
Statements contained herein and in the future filings by the Company with the
Securities and Exchange Commission, in the Company's pres releases, and in oral
statements made by or with the approval of authorized personnel that relate to
the Company's future performance, including, without limitation, statements with
respect to the Company's anticipated results of operations or level of business
for 1999 or any other future period, 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. Such statements are based on
current expectations and involve known and unknown risks and uncertainties and
certain assumptions, referred to below, and are indicated by words or phrases
such as "anticipate," "estimate," "project," "management expects," "the Company
believes," "is or remains optimistic" or "currently envisions" and similar words
or phrases. These factors include, among other, changes in regional, and global
economic conditions; risks associated with changes in the competitive
marketplace, including the level of consumer confidence and spending, and the
financial condition of the apparel industry and the retail industry, as well as
adverse changes in retailer or consumer acceptance of the Company's products as
a result of fashion trends or otherwise and the introduction of new products or
pricing changes by the Company's competitions; risks associated with the
Company's dependence on sales to a limited number of large department store
customers including risks related to customer requirements for vendor margin
support, and those related to extending credit to customers; risks associated
with consolidations, restructurings and other ownership changes in the retail
industry; uncertainties relating to the Company's ability to implement its
growth strategies; risks associated with the ability of the Company and third
party customers and suppliers to timely and adequately remediate any Year 2000
issues; risks associated with the possible inability of the company's
unaffiliated manufacturers to manufacture and deliver products in a timely
manner, to meet quality standards or to comply with the Company's policies
regarding labor practices; and risks associated with changes in social,
political, economic and other conditions affecting foreign operations and
sourcing. With respect to foreign sourcing, the Company notes that legislation
with 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. Reference is also
made to the other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices as
are set forth in 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". The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 27 Financial Data Schedule as of October 3,1998.
(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: November 16,1998 BY /s/ Richard F. Zannino
RICHARD F. ZANNINO Senior Vice President -
Finance and Administration
Chief Financial and Accounting Officer