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 3, 1999
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 12, 1999 was 61,413,663.
(2)
PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of July 3, 1999, January 2, 1999
and July 4, 1998 ............................................ 3
Consolidated Statements of Income for the Six and Three Month Periods
Ended July 3, 1999 and July 4, 1998 ......................... 4
Consolidated Statements of Cash Flows for the Six Month Periods
Ended July 3, 1999 and July 4, 1998 ......................... 5
Notes to Consolidated Financial Statements ....................... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 14-20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 21-23
Item 4. Submission of Matters to a Vote of Security Holders .............. 23
Item 5. Statement Regarding Forward-Looking Disclosure ................... 23-24
Item 6. Exhibits and Reports on Form 8-K ................................. 24
SIGNATURE ..................................................................... 25
PART I - FINANCIAL INFORMATION (3)
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
July 3, January 2, July 4,
1999 1999 1998
----------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,706 $ 164,659 $ 44,534
Marketable securities -- 65,625 165,077
Accounts receivable - trade 299,290 252,045 250,796
Inventories 403,376 475,077 377,027
Deferred income tax benefits 33,190 35,695 29,610
Other current assets 85,967 82,192 76,100
----------- ----------- -----------
Total current assets 902,529 1,075,293 943,144
PROPERTY AND EQUIPMENT - NET 271,429 257,362 230,401
GOODWILL 124,990 -- --
OTHER ASSETS 59,806 60,136 66,535
----------- ----------- -----------
TOTAL ASSETS $ 1,358,754 $ 1,392,791 $ 1,240,080
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 131,180 $ 223,400 $ 84,851
Accrued expenses 147,410 128,917 139,295
Income taxes payable 11,343 11,034 20,637
----------- ----------- -----------
Total current liabilities 289,933 363,351 244,783
OTHER NON CURRENT LIABILITIES 15,000 -- --
DEFERRED INCOME TAXES 16,954 17,536 10,332
COMMITMENTS AND CONTINGENCIES
PUT WARRANTS 7,782 30,794 21,523
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 88,219
Capital in excess of par value 73,101 50,428 57,054
Retained earnings 1,717,741 1,662,235 1,578,061
Accumulated other comprehensive income(loss) (2,803) (2,721) (3,156)
----------- ----------- -----------
1,876,258 1,798,161 1,720,178
Common stock in treasury, at cost, 25,187,948, 24,267,957
and 22,407,444 shares (847,173) (817,051) (756,736)
----------- ----------- -----------
Total stockholders' equity 1,029,085 981,110 963,442
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,358,754 $ 1,392,791 $ 1,240,080
=========== =========== ===========
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) (Unaudited)
Six Months Ended Three Months Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---------- ---------- --------- ---------
NET SALES $1,308,464 $1,221,224 $ 607,675 $ 565,219
Cost of goods sold 808,821 740,770 370,664 340,303
---------- ---------- --------- ---------
GROSS PROFIT 499,643 480,454 237,011 224,916
Selling, general & administrative expenses 381,224 365,148 188,334 179,198
---------- ---------- --------- ---------
OPERATING INCOME 118,419 115,306 48,677 45,718
Investment and other income-net 1,655 5,643 984 2,945
---------- ---------- --------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES 120,074 120,949 49,661 48,663
Provision for income taxes 43,800 44,100 18,100 17,700
---------- ---------- --------- ---------
NET INCOME $ 76,274 $ 76,849 $ 31,561 $ 30,963
========== ========== ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 63,600 66,017 63,240 65,984
BASIC EARNINGS PER COMMON SHARE $1.20 $1.16 $0.50 $0.47
WEIGHTED AVERAGE COMMON
SHARES AND SHARE EQUIVALENTS
OUTSTANDING 63,777 66,430 63,433 66,439
DILUTED EARNINGS PER COMMON SHARE $1.20 $1.16 $0.50 $0.47
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.
(5)
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Six Months Ended
July 3, July 4,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,274 $ 76,849
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 30,907 27,886
Other - net 2,263 7,211
Change in current assets and liabilities:
(Increase) in accounts receivable (38,043) (69,493)
Decrease in inventories 90,168 19,222
Decrease in deferred income tax benefits 2,573 2,427
(Decrease) increase in other current assets (321) 5,939
(Decrease) in accounts payable (96,778) (88,961)
Increase (decrease) in accrued expenses 5,939 (6,911)
Increase in income taxes payable 309 5,608
---------- ----------
Net cash provided by (used in) operating activities 73,291 (20,223)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments 0 (144,673)
Disposals of investment instruments 65,152 199,891
Purchases of property and equipment (35,438) (36,219)
Purchases of licenses and trademarks 0 (30,000)
Purchases of new businesses and payment of related debt (138,311) 0
Other - net (540) (4,081)
---------- ----------
Net cash used in investing activities (109,137) (15,082)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 2,692 14,230
Dividends paid (14,294) (14,770)
Purchase of common stock, net of put warrant premiums (36,540) (57,043)
---------- ----------
Net cash used in financing activities (48,142) (57,583)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 35 (763)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (83,953) (93,651)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 164,659 138,185
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,706 $ 44,534
========== ==========
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 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. Results
of operations for interim periods are not necessarily indicative of results
for the full year.
2. On February 12, 1999, the Company completed the purchase of 84.5 percent of
the equity interest of Segrets, Inc. whose core business consists of the
Sigrid Olsen sportswear lines. The acquisition was accounted for using the
purchase method of accounting. Excess purchase price over fair market value
of the underlying net assets of $19 million was allocated to goodwill and
property based on preliminary estimates of fair values, and is subject to
adjustment. Goodwill is being amortized on a straight-line basis over 25
years. The total amount of funds required to acquire the interest and
refinance certain indebtedness was approximately $54 million. The fair
value of assets acquired was $25 million and liabilities assumed were $6
million. After a 5 year period, the Company may elect to, or be required
to, purchase the remaining equity interest at an amount equal to its fair
market value. The annual net sales of Segrets, Inc. in 1998 were
approximately $60 million. Unaudited pro forma information related to this
acquisition is not included as the impact of this transaction is not
material to the consolidated results of the Company.
3. On June 8, 1999, the Company completed the purchase of 85 percent of the
equity interest of Lucky Brand Dungarees, Inc. whose core business consists
of the Lucky Brand line of women's and men's denim-based sportswear. The
total purchase price consists of a cash payment made at closing of
approximately $85 million, and an additional payment to be made on March
31, 2003 of at least $15 million, which may be increased to a maximum of
$45 million based on the achievement of certain earnings targets. Excess
purchase price over fair market value of the underlying net assets of $10
million was allocated to goodwill and property based on preliminary
estimates of fair values, and is subject to adjustment. Goodwill is being
amortized on a straight-line basis over 25 years. The fair value of assets
acquired was $16 million and liabilities assumed were $6 million. The
annual net sales of Lucky Brand Dungarees, Inc. in 1998 were approximately
$60 million. Unaudited pro forma information related to this acquisition is
not included as the impact of this transaction is not material to the
consolidated results of the Company.
4. On July 20, 1999, the Company entered into an exclusive license agreement
with Kenneth Cole Productions, Inc. to manufacture, design, market and
distribute women's apparel products under the trademarks "KENNETH COLE",
"KENNETH COLE NEW YORK", "REACTION KENNETH COLE", and "UNLISTED". In
addition, the Company entered into an agreement to purchase one million
shares of Kenneth Cole Productions Class A stock at a price of $29 per
share. Consummation of these transactions is subject to review under the
provisions of the Hart-Scott-Rodino Act and other customary closing
conditions and is expected to close in the third quarter.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. In December 1998, the Company recorded a $27.0 million restructuring
charge. The amount included $14.4 million related to the closure of 30
underperforming specialty retail stores and $12.6 million for the
streamlining of operating and administrative functions. Principal items
included in the charge are estimated contract termination costs, severance
and related benefits for staff reductions and the write-off of certain
assets. This charge reduced net income by $17.1 million, or $.26 per common
share. The remaining balance of the restructuring liability as of July 3,
1999 was $9.6 million. Of the $17.4 million expended for restructuring
costs, $7.2 million was related to severance costs and $10.2 million to
losses on contracts and write-off of certain assets related to the
aforementioned closure of certain specialty retail stores. The majority of
the remaining liabilities should be paid or settled during the 1999 fiscal
year.
6. 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
July 3, July 4, July 3, July 4,
(Dollars in thousands) 1999 1998 1999 1998
-------------------------------------------- ------- ------- ------- -------
Comprehensive income, net of tax:
Net income $76,274 $76,849 $31,561 $30,963
Foreign currency translation 35 (763) 16 (1,048)
Changes in unrealized gains or
losses on securities 183 (217) (32) 281
Reclassification adjustment for gains
or losses included in net income (300) (441) (149) (115)
------- ------- ------- -------
Comprehensive income $76,192 $75,428 $31,396 $30,081
======= ======= ======= =======
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. The following are summaries of available-for-sale marketable
securities and maturities:
(Dollars in thousands)
July 3, 1999
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
--------- --------- -------- ---------
Tax exempt notes and bonds $ 69,569 $ 0 $ -- $ 69,569
Equity securities 7,557 289 -- 7,846
--------- --------- -------- ---------
$ 77,126 $ 289 $ -- $ 77,415
========= ========= ======== =========
(Dollars in thousands)
January 2, 1999
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
--------- --------- -------- ---------
Tax exempt notes and bonds $ 152,104 $ 238 $ -- $ 152,342
Money market preferreds 40,000 -- -- 40,000
Commercial paper 4,001 1 -- 4,002
Equity securities 6,567 234 -- 6,801
--------- --------- -------- ---------
$ 202,672 $ 473 $ -- $ 203,145
========= ========= ======== =========
(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 preferreds 15,080 -- -- 15,080
Commercial paper 9,516 -- -- 9,516
Equity securities 4,014 168 -- 4,182
--------- --------- -------- ---------
$ 186,445 $ 493 $ (7) $ 186,931
========= ========= ======== =========
(Dollars in thousands)
July 3, 1999
Estimated
Fair
Cost Value
--------- ---------
Due in one year or less $ 69,569 $ 69,569
Equity securities 7,557 7,846
--------- ---------
$ 77,126 $ 77,415
========= =========
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At July 3, 1999, January 2, 1999, and July 4, 1998, the above investments
included $77,415,000, $137,520,000 and $21,854,000, respectively, which are
classified as cash equivalents.
For the six month period ended July 3, 1999, gross realized gains on sales
of available-for-sale securities totaled $749,000. For the six month period
ended July 4, 1998, gross realized gains on sales of available-for-sale
securities totaled $705,000. The net adjustment to unrealized holding gains
and losses on available-for-sale securities for the six month periods ended
July 3, 1999 and July 4, 1998, was a credit of $117,000 (net of $68,000 in
deferred income taxes) and a charge of $658,000 (net of $390,000 in
deferred income taxes), respectively, which were included in retained
earnings.
8. 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 3, January 2, July 4,
1999 1999 1998
-------- -------- --------
Raw materials $19,227 $ 18,909 $44,026
Work in process 7,739 8,841 13,034
Finished goods 376,410 447,327 319,967
-------- -------- --------
$403,376 $475,077 $377,027
======== ======== ========
9. Property and equipment - net
(Dollars in thousands)
July 3, January 2, July 4,
1999 1999 1998
-------- --------- --------
Land and buildings $134,097 $131,297 $130,013
Machinery and equipment 230,964 199,769 176,060
Furniture and fixtures 64,196 67,862 61,630
Leasehold improvements 131,046 141,491 141,497
-------- --------- --------
560,303 540,419 505,200
Less: Accumulated depreciation
and amortization 288,874 283,057 274,799
-------- --------- --------
$271,429 $257,362 $230,401
======== ========= ========
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. In the first six months of 1999, in connection with its stock repurchase
program, warrants on 500,000 shares of common stock were exercised and
warrants on 150,000 shares of common stock expired unexercised. The
unexpired warrants on July 3, 1999, if exercised, required the Company to
purchase up to a total of 250,000 shares of its common stock on July 7,
1999, with a strike price of $26.49. The Company has the option to settle
in cash or shares of common stock. The Company's potential $6.6 million
obligation to buy back 250,000 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 3, 1999, warrants on these
remaining 250,000 shares of common stock expired unexercised.
11. On May 21, 1999, 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 3, 1999 to stockholders of record at the close of
business on August 13, 1999.
12. 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
(In thousands) July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998
-------------- ------------ ------------ ------------ ------------
Net income $76,274 $76,849 $31,561 $30,963
------- ------- ------- -------
Weighted average common
shares outstanding 63,600 66,017 63,240 65,984
Effect of dilutive securities:
Stock options 163 413 193 455
Put warrants 14 -- -- --
------ ------ ------ ------
Weighted average common
shares and common share
equivalents 63,777 66,430 63,433 66,439
====== ====== ====== ======
13. During the six months ended July 3, 1999 the Company made income tax
payments of $37,391,000 and interest payments of $263,000. During the six
months ended July 4, 1998 the Company made income tax payments of
$30,584,000.
14. The Company enters into foreign exchange forward contracts to hedge
transactions denominated in foreign currencies for periods of less than one
year. 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 3, 1999, the Company had forward contracts maturing
through December 1999 to sell 25,000,000 Canadian dollars and contracts
maturing through November 1999 to sell 2,500,000 British pounds sterling.
The aggregate U.S. dollar value of the foreign exchange contracts is
approximately $27,200,000. Unrealized gains and losses for outstanding
foreign exchange forward contracts were not material at July 3, 1999.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. The Company has three segments: Wholesale Apparel, Wholesale Non-Apparel
and Retail. The Wholesale Apparel segment consists of women's and men's
apparel designed and marketed under various trademarks owned or licensed by
the Company. The Wholesale Non-Apparel segment consists of accessories,
jewelry and cosmetics designed and marketed under certain of those
trademarks. The Retail segment operates specialty retail and outlet stores
that sell these apparel and non-apparel products to the public.
The Company evaluates segment performance and allocates resources to
segments based on operating profits or losses. Intersegment sales are
recorded at cost. There is no intercompany profit or loss on intersegment
sales, however, the Wholesale Apparel and Wholesale Non-Apparel segments
are credited with their proportionate share of the operating profit
generated by the Retail segment. The profit credited to the wholesale
segments from the Retail segment is eliminated in consolidation.
The Company's segments are business units that offer either different
products or distribute similar products through different distribution
channels. The segments are each managed separately because they either
manufacture and distribute distinct products with different production
processes or distribute similar products through different distribution
channels.
For The Six Months Ended July 3, 1999
Wholesale Wholesale Corporate/
(In thousands) Apparel Non-Apparel Retail Eliminations Total
-------------- ------- ----------- ------ ------------ -----
Revenues from external customers $980,460 $125,238 $198,543 $4,223 $1,308,464
Intercompany sales 90,319 12,629 -- (102,948) --
Segment operating profit (loss) 104,105 5,161 21,302 (12,149) 118,419
For The Six Months Ended July 4, 1998
Wholesale Wholesale Corporate/
(In thousands) Apparel Non-Apparel Retail Eliminations Total
-------------- ------- ----------- ------ ------------ -----
Revenues from external customers $904,106 $118,400 $196,288 $2,430 $1,221,224
Intercompany sales 94,835 11,077 -- (105,912) --
Segment operating profit (loss) 96,871 5,940 15,723 (3,228) 115,306
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For The Second Quarter Ended July 3, 1999
Wholesale Wholesale Corporate
(In thousands) Apparel Non-Apparel Retail Eliminations Total
-------------- ------- ----------- ------ ------------ -----
Revenues from external customers $433,522 $60,241 $111,992 $1,920 $607,675
Intercompany sales 43,150 5,574 -- (48,724) --
Segment operating profit (loss) 43,490 21 20,720 (15,554) 48,677
For The Second Quarter Ended July 4, 1998
Wholesale Wholesale Corporate
(In thousands) Apparel Non-Apparel Retail Eliminations Total
-------------- ------- ----------- ------ ------------ -----
Revenues from external customers $399,066 $51,863 $113,177 $1,113 $565,219
Intercompany sales 40,190 6,156 -- (46,346) --
Segment operating profit (loss) 31,091 4,215 19,727 (9,315) 45,718
The reconciling item to adjust segment operating profit to consolidated
pre-tax income consists of income generated by the Company's investment
portfolio in the amount of $1.7 million and $5.6 million for the first six
months of 1999 and 1998, respectively, and $1.0 million and $2.9 million
for the second quarter of 1999 and 1998, respectively.
16. 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 sought $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. On June 9, 1999, the Court issued a decision and order
dismissing the complaint in its entirety. Mademoiselle's time to appeal has
expired and the dismissal judgment is now final.
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
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 responded
and the matter was fully briefed and submitted to the Court on October 30,
1998. On December 31, 1998, the Court issued an opinion granting reargument
but adhering to its original determination dismissing the contract claims
against the Company and denying plaintiffs' motion for leave to amend. In
that same opinion, the Court granted class certification with respect to
the claims remaining in the case, which are pending only against various of
the union defendants. In June 1999, the remaining union defendants filed a
motion for summary judgment dismissing the claims against them. The motion
was fully briefed on July 2, 1999; no argument has been scheduled.
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
Effective with our 1998 fiscal year, we have adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which requires certain financial statement
footnote disclosure as to our business segments, which are Wholesale
Apparel, Wholesale Non-Apparel and Retail. All discussion with respect to
our specific segments included within this "Management Discussion and
Analysis" is presented before applicable intercompany eliminations. Please
refer to Note 15 of Notes to Consolidated Financial Statements.
Second quarter ended July 3, 1999 compared to second quarter ended
July 4, 1998
Net sales for the second quarter of 1999 were $607.7 million, an increase
of $42.5 million, or 7.5%, over net sales of $565.2 million for the second
quarter of 1998. This increase reflected an 8.5% increase in our Wholesale
Apparel segment to $476.7 million and an increase of 13.4% in Wholesale
Non-Apparel to $65.8 million, partially offset by a 1.0% decrease in Retail
to $112 million.
The increase in net sales of Wholesale Apparel primarily reflected
increases in our Special Markets and DKNY(R) JEANS and DKNY(R) ACTIVE
businesses, as well as the inclusion of sales of our Segrets business
acquired on February 12, 1999, and our Lucky Brand Dungarees business
acquired on June 8, 1999. The Segrets business operates under the
trademarks SIGRID OLSEN SPORT, SIGRID OLSEN COLLECTION and SO BLUE BY
SIGRID OLSEN (See Note 2 of Notes to Consolidated Financial Statements).
The Lucky Brand Dungarees business operates under the trademarks LUCKY
BRAND, HOT PINK, and TRIPLE XXX (See Note 3 of Notes to Consolidated
Financial Statements). The increase also reflected increased sales in our
Casual and Men's businesses, in both cases due primarily to higher unit
volume. These gains were partially offset by sales declines in our DANA
BUCHMAN, Dress and ELISABETH businesses due primarily to lower unit volume,
as well as lower sales in our Career business due primarily to lower
average unit selling prices. The increase in our Wholesale Non-Apparel
segment was due to increased sales in our jewelry business principally
reflecting higher unit volume, as well as promotionally driven sales
increases in our handbag business. The decrease in our Retail segment was
due to a decline in our Specialty Retail store sales resulting from a low
single-digit comparable store sales decline in our ELISABETH stores, a low
double-digit comparable store sales decline in our Liz Claiborne stores,
reflecting weakness in demand for our Career and Dress product, and the
closure of 37 (mostly underperforming) stores. This was partially offset by
a high single-digit sales increase in our Outlet stores, reflecting 20 new
stores on a period-to-period basis, somewhat offset by a slight comparable
store sales decrease.
Gross profit dollars increased $12.1 million, or 5.4%, in 1999 over 1998.
Gross profit as a percent of sales decreased to 39.0% in 1999 from 39.8% in
1998; this result principally reflected higher markdown allowances in our
Wholesale Apparel and Wholesale Non-Apparel segments, a higher percentage
of sales represented by our Special Markets business, which generates a
lower gross profit rate than the Company average, and a lower percentage of
sales represented by our specialty retail division, which generates a
higher gross profit rate than the Company's average. These declines were
mitigated by a significant improvement in our Casual business gross profit
margins, primarily due to higher prices realized on close-out sales and
higher going-in margins.
Selling, general and administrative expenses ("SG&A") increased $9.1
million, or 5.1% in 1999 over 1998. These expenses as a percent of sales
declined to 31.0% in 1999 from 31.7% in 1998. The 1999 dollar increase was
due primarily to additional operating expenses related to our Segrets,
Lucky Brand Dungarees, DKNY(R) JEANS and DKNY(R) ACTIVE businesses, the
expansion of our Outlet business, and increased information systems costs.
These dollar increases were moderated by lower SG&A in our other wholesale
apparel businesses, lower cosmetics marketing costs, and lower Specialty
Retail costs principally due to the store closures mentioned above. The
improvement in SG&A expressed as a percent of sales was primarily driven by
the positive leverage we obtain from adding incremental sales to our
essentially fixed corporate overhead base, lower employee and related costs
as a result of our headcount reductions and increased penetration of our
Special Markets brands, which are supported by lower SG&A.
As a result of the factors described above, operating income in the second
quarter increased $3.0 million, or 6.5%, to $48.7 million in 1999 compared
to 1998, and operating income as a percent of sales declined slightly to
8.0% in 1999 compared to 8.1% in 1998. Segment operating profit in
Wholesale Apparel increased $12.4 million to $43.5 million (9.1% of sales)
in 1999 compared to $31.1 million (7.1% of sales) in 1998, principally
reflecting improved gross profit margins in our Casual business. Operating
profit in our Wholesale Non-Apparel segment decreased $4.2 million to $0.02
million in 1999 compared to 1998. This decline was primarily due to higher
markdowns in our handbag business. Segment operating profit in Retail
increased $1.0 million to $20.7 million and increased to 18.5% of sales in
1999 compared to $19.7 million and 17.4% of sales in 1998. This increase
was principally due to increased profit dollars from our Outlet stores,
reflecting 20 new stores on a period-to-period basis.
Investments and other income-net in the second quarter declined by $1.9
million to $1.0 million in 1999 compared to 1998. This decline resulted
from a decrease in our average cash and marketable securities portfolio due
primarily to the acquisitions of Segrets and Lucky Brand Dungarees, our
ongoing stock repurchase program, and investment in fixed assets.
For the second quarter our effective income tax rate held constant at
36.5%.
Net income increased $0.6 million in 1999 to $31.6 million and declined as
a percent of net sales to 5.2% in 1999 from 5.5% in 1998, due to the
factors described above. Diluted earnings per common share increased 6.4%
to $0.50 in 1999 from $0.47 in 1998, reflecting higher net income and a
lower number of average outstanding common shares and share equivalents in
1999 as a result of our ongoing stock repurchase program.
Our average diluted shares outstanding declined by 3.0 million in the
second quarter to 63.4 million as a result of our ongoing stock repurchase
program. We purchased 0.76 million shares during the second quarter for
$26.5 million. since the end of the second quarter we have purchased an
additional 1.64 million shares for $62.6 million. As of August 12, 1999, we
have $50.8 million remaining in our buyback authorization.
Six months ended July 3, 1999 compared to six months ended July 4, 1998
Net sales for the six months of 1999 were $1,308.5 million, an increase of
$87.2 million, or 7.1%, over net sales of $1,221.2 million for the six
months of 1998. This increase reflected a 7.2% increase in Wholesale
Apparel to $1,070.8 million, an increase of 6.5% in Wholesale Non-Apparel
to $137.9 million, and an increase of 1.1% in Retail to $198.5 million.
The increase in net sales of Wholesale Apparel primarily reflected
increases in our Special Markets and DKNY(R) JEANS and DKNY(R) ACTIVE
businesses, as well as the inclusion of sales of our recently acquired
Segrets and Lucky Brand Dungarees businesses. The increase also reflected
higher sales in our Casual and Men's businesses in both cases due primarily
to higher unit volume. These gains were partially offset by sales declines
in our Career, Dress, and DANA BUCHMAN businesses, in each case reflecting
lower unit volume and lower average unit selling prices. The increase in
our Wholesale Non-Apparel segment was due primarily to increased sales in
our jewelry business principally reflecting higher unit volume, partially
offset by lower sales in our handbag business. The increase in our Retail
segment was due to a 12.1% increase in our Outlet store sales, reflecting
20 new stores on a period-to-period basis. This was partially offset by a
decline in our Specialty Retail store sales resulting primarily from the
closure of 37 (mostly underperforming) stores, and a low double-digit
comparable store sales decline in our Liz Claiborne stores, reflecting
weakness in demand for our Career and Dress product.
Gross profit dollars increased $19.2 million, or 4.0%, in 1999 over 1998.
Gross profit as a percent of sales decreased to 38.2% in 1999 from 39.3% in
1998. The decrease in gross profit as a percent of sales from last year was
primarily due to the aforementioned change regarding the percentages of
sales represented by our Special Markets and Specialty Retail businesses,
as well as higher markdowns in our Wholesale Apparel and Wholesale
Non-Apparel businesses, partially offset again by higher gross margins over
last year in our Casual business primarily due to higher prices realized on
close-out sales and higher going-in margins.
SG&A increased $16.1 million, or 4.4%, in 1999 over 1998. These expenses as
a percentage of sales declined to 29.1% in 1999 from 29.9% in 1998. The
1999 dollar increase was due primarily to additional operating expenses
related to our Segrets, Lucky Brand Dungarees, DKNY(R) JEANS and DKNY(R)
ACTIVE businesses, the expansion of our Special Markets and Outlet
businesses, and increased information systems costs. These dollar increases
were moderated by lower SG&A in the other wholesale apparel businesses,
lower cosmetics marketing costs, and lower specialty retail costs
principally due to the store closures mentioned above. Additionally, the
improvement in the SG&A rate, as mentioned above for the second quarter,
was primarily driven by the positive leverage we obtain from adding
incremental sales to our essentially fixed corporate overhead base, lower
employee and related costs as a result of our headcount reductions and
increased penetration of our Special Markets brands, which are supported by
lower SG&A.
As a result of the factors described above, operating income for the six
months of 1999 increased $3.1 million, or 2.7% to $118.4 million in 1999
compared to 1998 and operating income as a percent of sales declined to
9.1% in 1999 compared to 9.4% in 1998. Segment operating profit in
Wholesale Apparel increased $7.2 million to $104.1 million in 1999 (9.7% of
sales) compared to $96.9 million in 1998 (9.7% of sales). The dollar
increase was principally due to improved profitability in our Casual
business. Operating profit in Wholesale Non-Apparel decreased $0.8 million
to $5.2 million in 1999 (3.7% of sales) compared to $5.9 million in 1998
(4.6% of sales). This decline was due to higher markdowns in our handbag
business. Segment operating profit in Retail increased $5.6 million to
$21.3 million in 1999 (10.7% of sales) compared to $15.7 million in 1998
(8.0% of sales). This increase was principally due to increased profit
dollars from our Outlet stores, reflecting 20 new stores on a
period-to-period basis.
Investments and other income-net for the six months declined by $3.9
million to $1.7 million in 1999 compared to $5.6 million in 1998. This
decline resulted from a decrease in our average cash and marketable
securities portfolio due primarily to the acquisition of Segrets and Lucky
Brand Dungarees, our ongoing stock repurchase program, and investment in
fixed assets.
For the six months our effective income tax rate held constant at 36.5%.
Net income decreased $0.6 million in 1999 to $76.3 million and declined as
a percent of net sales to 5.8% in 1999 from 6.3% in 1998, due to the
factors described above. Diluted earnings per common share increased 3.4%
to $1.20 in 1999 from $1.16 in 1998, reflecting a lower number of average
outstanding common shares and share equivalents in 1999 as a result of our
ongoing stock repurchase program.
Our average diluted shares outstanding declined by 2.7 million for the six
months to 63.8 million as a result of our ongoing stock repurchase program.
We purchased 1.01 million shares during the six months for $36.5 million.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
We ended the second quarter with $81 million in cash and marketable
securities, versus $210 million last year. This reduction is primarily
attributable to our expenditure $138 million for purchase price payments in
connection with the acquisitions of Segrets and Lucky Brand Dungarees, $96
million for the repurchase of common stock, and $88 million for capital
expenditures. We ended the quarter with virtually no debt outstanding.
Net cash provided by operating activities for the six months of 1999 was
$73.3 million, compared to net cash used of $20.2 million in 1998. This
$93.5 million improvement in cash flow reflected significantly improved
working capital; specifically, year over year increases in the amount of
cash generated by changes in our inventory levels and a decrease in cash
needed to fund increased accounts receivable balances. Our accounts
receivable ended the quarter at $299.3 million, up 19.3% over last year.
Approximately 50% of this increase was driven by the assumption of accounts
receivable in the acquisitions of Segrets and Lucky Brands with the balance
reflecting an increase in late-quarter sales as compared to the same period
last year. Our accounts payable balance increased $46.3 million, or 54.5%
to $131.2 million in 1999 compared to 1998.
Inventories increased in 1999 to $403.4 million, up $26.4 million, or 7.0%,
over 1998. This increase reflects growth in our DKNY(R) JEANS and DKNY(R)
ACTIVE and Special Markets stock levels to support sales increases,
increases in stock levels in our Outlet business to support additional
stores, and the additional inventory of the acquired Segrets and Lucky
Brand Dungarees businesses. Inventories in the balance of our wholesale
business declined on a period-to-period basis.
Net cash used in investing activities was $109.1 million in 1999, compared
to net cash used in investing activities of $15.1 million in 1998. The
$94.0 million year over year decrease in cash flow reflected the cost of
the acquisitions in 1999 of an 84.5% interest in Segrets, and an 85%
interest in Lucky Brand Dungarees, compared to the acquisition of the
DKNY(R) JEANS and DKNY(R) ACTIVE license in 1998.
Net cash used in financing activities was $48.1 million in 1999, compared
to $57.6 million in 1998. This $9.5 million year over year improvement in
cash flow reflected a decrease of $20.5 million in the amount expended for
stock purchases, partially offset by a $11.5 million decrease in proceeds
from the exercise of stock options.
Our anticipated capital expenditures for the full year 1999 approximate
$100 million, of which $35.4 million has been expended through July 3,
1999. These expenditures consist primarily of the continued technological
upgrading and expansion of our management information systems and
distribution facilities (including certain building and equipment
expenditures), leasehold improvements at our New York offices and the
opening of an additional 20 outlet stores and 8 ELISABETH specialty retail
stores. In addition, we anticipate spending approximately $25 million on
in-store concept shops in 1999. Capital expenditures, in-store shops and
working capital cash needs will be financed through available cash and
marketable securities, net cash provided by operating activities and bank
lines of credit. Bank lines of credit were $455 million at July 3, 1999 and
$425 million at year end 1998 and are available to finance cash needs and
letters of credit. At July 3, 1999, we had outstanding letters of credit of
$266 million. We expect to be able to continue to adjust these lines as
required.
Year 2000 Issue/Information Systems Upgrade
Many existing computer systems, software products, and other systems using
embedded chips, including many used by us, 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, our date critical functions may be materially adversely affected
unless these computer systems, software products and other systems are or
become able to accept four digit entries ("year 2000 compliant").
In 1996, we commenced a comprehensive upgrade of our management information
systems, which involves substantial changes to our present computer systems
and software, and is expected to provide certain competitive benefits and
result in our information systems being year 2000 compliant upon
completion. Currently, all such systems are in various stages of
implementation. Management currently expects that full implementation of
the changes will involve a commitment of approximately $75-$80 million over
the four year period ending with year end 1999. Approximately $60 million
of such amount is in the form of capital expenditures, while the remaining
$15-$20 million will be expensed as incurred. As of July 3, 1999, capital
expenditures related to the project totaled $48 million and an additional
$13 million was expensed as incurred. Approximately $12 million in capital
expenditures and approximately $5 million in expenses are expected to be
incurred for the remainder of 1999 for this project. Testing and initial
implementation of a significant portion of the systems upgrade are
completed and the remaining components are expected to be completed by the
end of 1999. The third quarter of 1999 marks a critical phase of our
rollout of our order management, allocation and shipping systems. Although
we believe that ultimately the year 2000 issue will not adversely affect
our business, failure to successfully complete and implement our systems
upgrade on a timely basis could have a material adverse affect on our
operations and results. There can be no assurance that our systems and
software will be rendered year 2000 compliant in a timely manner, or that
we will not incur significant unforeseen additional expenses to assure such
compliance.
Formal communications with all major suppliers of goods and services, and
customers to determine the extent to which we are vulnerable to the failure
of their products or their failure to remediate their own year 2000 product
and/or other issues, are well underway. To date, all critical suppliers
have responded, none of which have raised any year 2000 issues which we
believe will have a material adverse effect on us. Additionally, we have
completed an inspection of key factory sites throughout the world to
validate prior supplier compliance statements. We are engaged in the
assessment of the vulnerability to government authorities' failure to
remediate their year 2000 issues. Our estimated project costs and
timetables are based on presently available information, and include our
assessment of the abilities of these third parties to address the issue
effectively. We are currently not aware of any year 2000 issues related to
third parties which we believe would have a material adverse effect on us.
There can be no assurance, however, that the systems and/or products of
other companies or governmental authorities on which we rely will be
converted in a timely manner, or that a failure to successfully convert by
a third party, or a conversion that is incompatible with our systems or
software, would not have a material impact on our operations.
We currently believe that it is difficult to identify our most reasonably
likely worst case year 2000 scenario. However, a reasonable worst case
scenario would be a failure by a significant third party in our supply and
distribution chain (including, without limitation, any governmental
authority, utility or other general service provider) to remediate its year
2000 deficiencies that continue for several days or more. Any such failure
could impair the manufacture and/or delivery of products, and/or the
processing of orders and shipments. In addition, a failure to remediate any
of our internal inventory management systems would adversely affect our
stock allocation program, resulting in mistimed 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.
We continue to develop contingency plans to limit the effect of any year
2000 issues on our operations and results, and we intend to complete all
such plans by the end of 1999. For instance, we are in the process of
identifying alternate service providers and are analyzing the possibility
of using alternate but comparable systems currently in use within the
Company. Our Year 2000 efforts are ongoing and our overall plan, as well as
our development of contingency plans, will continue to evolve as new
information becomes available. While we anticipate continuity of our
business activities, that continuity will be dependent upon our ability,
and the ability of significant third parties with whom we rely on directly
or indirectly, to be year 2000 compliant in a timely fashion.
CERTAIN INTEREST RATE AND FOREIGN CURRENCY RISKS
We have no long-term debt, and we finance our capital needs through
available cash and marketable securities, future earnings and bank lines of
credit. Our exposure to market risk for changes in interest rates is
primarily in our investment portfolio. We, by policy, mitigate our exposure
by limiting maturity and placing our investments with high credit quality
issuers and limiting the amount of credit exposure to any one issuer. To
ensure liquidity, our investment portfolio includes only actively traded
marketable securities. We reduce 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. Gains and losses on contracts which hedge specific foreign
currency denominated commitments are recognized in the period in which the
transaction is completed. The market risks associated with our investment
portfolio and foreign currency exposure has not changed materially since
January 2, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 6, 1998, Mademoiselle Knitwear, Inc. ("Mademoiselle"), a former
knitgoods supplier for the Company, 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
represented 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,
filed in the United States District Court for the Southern District of New
York, asserted 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 included claims against the Company for breach of
contract, fraud, civil RICO, and prima facie tort, and asserted claims
against the Company and the union defendants for conversion of property of
the estate of a debtor-in-bankruptcy. The Mademoiselle action sought $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. On June 9, 1999, the Court issued a decision
and order dismissing the complaint in its entirety. Mademoiselle's time to
appeal has expired and the dismissal judgment is now final.
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 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, 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 responded and
the matter was fully briefed and submitted to the Court on October 30,
1998. On December 31, 1998, the Court issued an opinion granting reargument
but adhering to its original determination dismissing the contract claims
against the Company and denying plaintiffs' motion for leave to amend. In
that same opinion, the Court granted class certification with respect to
the claims remaining in the case, which are pending only against various of
the union defendants. In June, 1999, the remaining union defendants filed a
motion for summary judgment dismissing the claims against them. The motion
was fully briefed on July 2, 1999; no argument has been scheduled.
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. That dismissal order was appealed to the United
States Court of Appeals for the Second Circuit. By order dated July 29,
1999, the Court of Appeals summarily affirmed the dismissal of the second
amended complaint.
The Company believes that the litigations described above in this Item 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. See Note 16 of Notes to
Consolidated Financial Statements.
In January 1999, two actions were filed in California naming as defendants
more than a dozen United States-based apparel companies that source
garments from Saipan (Commonwealth of the Northern Mariana Islands) and a
large number of Saipan-based garment factories. The actions assert that the
Saipan factories engage in unlawful practices relating to the recruitment
and employment of foreign workers and that the apparel companies, by virtue
of their alleged relationships with the factories, have violated various
federal and state laws. One action, filed in California Superior Court in
San Francisco by a union and three public interest groups, alleges unfair
competition and false advertising. It seeks equitable relief, unspecified
amounts for restitution and disgorgement of profits, interest and an award
of attorney's fees. The second, filed in Federal Court for the Central
District of California, is brought on behalf of a purported class
consisting of the Saipan factory workers. It alleges claims under the civil
RICO statute and the Alien Tort Claims Act, premised on supposed violations
of the federal anti-peonage and indentured servitude statutes, as well as
other violations of Saipan and international law, and seeks equitable
relief and unspecified damages, including treble and punitive damages,
interest and an award of attorney's fees. A third action, brought in
Federal Court in Saipan solely against the garment factory defendants on
behalf of a putative class of their workers, alleges violations of federal
and Saipanese wage and employment laws. Although the Company sources
products in Saipan, it has not been named as a defendant in any of these
suits. The Company has, however, received indications from counsel for the
plaintiffs that they are considering adding a number of additional apparel
companies, including the Company, as defendants in one or more of the
actions. The Company is reviewing the allegations in the various actions.
At this preliminary stage it is not in a position to evaluate the
likelihood of its being named as a defendant in one or more of the actions,
or, if it were named, the likelihood of a favorable or unfavorable outcome.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 1999 Annual Meeting of Stockholders held on May 20, 1999,
the stockholders of the Company (i) approved an amendment to the Liz
Claiborne, Inc. 162(m) cash bonus plan ( the number of affirmative votes
cast was 57,215,991, the number of negative votes cast was 1,555,847, and
the number of abstentions was 218,797), (ii) ratified the appointment of
Arthur Andersen LLP as independent public accountants of the Company for
the fiscal year ending January 1, 2000 (the number of affirmative votes
cast was 58,775,414, the number of negative votes cast was 92,573, and the
number of abstentions was 122,648), and (iii) elected the following
nominees to the Company's Board of Directors, to serve until the 2002
annual meeting of stockholders and until their respective successors are
duly elected and qualified.
Votes
Nominee For Withheld
------- --- --------
Paul R. Charron 48,841,353 10,149,282
J. James Gordon 48,847,620 10,143,015
Kay Koplovitz 48,848,541 10,142,094
There were no broker non-votes with respect to any matter acted upon at the
meeting
Item 5. Statement Regarding Forward-Looking Disclosure
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases, and in
oral statements made by or with the approval of authorized personnel that
relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations
or level of business for 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 others, changes in regional, national, and
global economic conditions; risks associated with changes in the
competitive marketplace, including the levels 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 competitors; risks associated with the Company's dependence on
sales to a limited number of large department store customers including
risks related to customer requirements for vendor margin support, and those
related to extending credit to customers; risks associated with the ability
of the Company and third party customers and suppliers to timely and
adequately remediate any Year 2000 issues; risks associated with the
Company's information systems upgrade (See Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Year 2000
Issue/Information System Upgrade); 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 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. 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 2,
1999, 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 July 3, 1999.
(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.
DATE: August 17, 1999
LIZ CLAIBORNE, INC.
By: /s/ Richard F. Zannino By: /s/ Elaine Goodell
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RICHARD F. ZANNINO ELAINE GOODELL
Senior Vice President - Finance & Vice President-Corporate Controller
Administration, Chief Financial Officer and Chief Accounting Officer
(principal financial officer) (principal accounting officer)